2023 (5) TMI 117 - AT - Income Tax

Assessee's Appeal Partially Allowed on Income Tax Disallowances

The appeal by the assessee was partially allowed regarding the disallowance under section 40(a)(ia) of the Income Tax Act, with the addition on transport ... Disallowance of transport expense - HELD THAT:- As assessee has provided PAN of the transporter and the details of transport expenses. The genuineness of said expense is not doubted either by Assessing Officer or Ld. CIT(A). As per Section 194C(6) that the assessee has provided PAN of the transporter and the transaction is not disputed and no disallowances of such transport expense is warranted. Similarly, the view taken in the case of South India Freight Carriers [2019 (12) TMI 363 - ITAT BANGALORE]. Interest disallowance on account of interest paid to three parties - As find that assessee has filed copy of ITR of recipients of the interest along with certificate of Chartered Accountant as required Rule 31ACB in Form 26A. Therefore, this part of ground is allowed subject to verification by Assessing Officer. This part ground of assessee is allowed in above terms. Disallowance of machines salary expense - assessee submits that Assessing Officer disallowed 20% of machine salary expenses, which was restricted to 10% by Ld. CIT(A) - assessee further submits that lower authorities disallowed the expense without doubting genuineness of such expenses and assessee filed cash book for such expense - HELD THAT:- As assessee has shown expense of Rs.24.69 lakh, which was paid in cash and no justification was given before AO. AO reasonably disallowed only 20%. The Ld. CIT(A) further reduced it to 10%, thereby granted further relief of 50%. Entire expense assessee has shown in cash. Therefore, no reason to interfere with the finding of Ld. CIT(A). This ground of assessee’s appeal is dismissed. Disallowance of interest expense u/s 57 - assessee submits that Assessing Officer made addition by taking view that assessee has not furnished any details and Ld. CIT(A) confirmed the action of Assessing Officer by holding that no certificate as per Rule 31ACB in Form 26A is furnished - HELD THAT:- As the assessee failed to prove the nexus between the interest income offered in the return of interest expense made. Thus, this ground of appeal is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether payments made without deduction of tax at source are liable to disallowance under section 40(a)(ia) when taxpayer furnishes recipient PAN and evidence that recipient included the receipts in their taxable income (including the effect of proviso to section 40(a)(ia) read with section 201(1) and Rule 31ACB/Form 26A). 2. Whether transport payments to a transporter are disallowable under section 40(a)(ia) where PAN and vouchers are produced and the payer relies on the exception in section 194C(6). 3. Whether cash payments shown as 'machinery salary' are susceptible to disallowance by percentage (20% as AO; 10% by appellate authority) in absence of satisfactory particulars, and whether further reduction or deletion is justified. 4. Whether interest claimed as deduction under section 57 (other sources) is allowable where the assessee fails to demonstrate nexus between interest paid and interest income offered, and whether production of confirmations/Form 26A suffices to establish allowability. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Disallowance under section 40(a)(ia) for payments without TDS: legal framework Legal framework: Section 40(a)(ia) disallows expenditure where tax is required to be deducted at source and has not been deducted; proviso to section 40(a)(ia) (read with section 201(1)) permits relief where the recipient has included the receipt in his income and tax, interest and penalty thereon have been paid, subject to conditions; Rule 31ACB and Form 26A relate to certificate requirements for compliance evidencing recipient's tax treatment. Precedent Treatment: The Tribunal considered a coordinate-bench decision applying section 194C(6) and related principles to exclude TDS obligation where transporter in business of hiring goods carriage furnished PAN. Interpretation and reasoning: The Court examined two components grouped under this issue - transport payments and interest payments to three persons. For transport payments the Court accepted that PAN and vouchers were produced, the genuineness of expenditure was not disputed, and that section 194C(6) exempts TDS obligation where the transporter furnishes PAN and is in the business of hiring goods carriage. For interest payments the Court noted production of recipients' ITRs showing inclusion of interest and production of accountant certificate/Form 26A; relief was allowed subject to verification by the AO that recipients had indeed included the receipt and necessary conditions under the proviso were met. Ratio vs. Obiter: Ratio - where PAN and supporting documentary evidence are furnished and the transaction is genuine, disallowance under section 40(a)(ia) is not warranted (transport payments under section 194C(6)). Ratio - production of recipients' ITRs and required certificate/Form 26A can meet conditions of proviso to section 40(a)(ia), permitting relief subject to verification. Obiter - reliance on a coordinate-bench decision was persuasive but not treated as a binding precedent beyond the facts. Conclusion: Part of the section 40(a)(ia) disallowance relating to transport payments is deleted (PAN + vouchers + section 194C(6) exception). Part relating to interest payments is allowed subject to AO's verification of recipients' inclusion of income and compliance with proviso/Form 26A requirements. Issue 2 - Transport payments and section 194C(6) Legal framework: Section 194C(6) relieves the payer from TDS where the transporter (engaged in business of hiring or leasing goods carriage) furnishes PAN to the payer and other conditions are met. Precedent Treatment: A coordinate-bench ruling applying section 194C(6) to similar facts was relied upon in support of relief. Interpretation and reasoning: The Tribunal found no doubt as to genuineness, saw production of PAN and vouchers, and held that the statutory exception applies so no disallowance under section 40(a)(ia) is warranted for those payments. Ratio vs. Obiter: Ratio - compliance with section 194C(6) (PAN furnished by transporter engaged in hiring goods carriage) negates TDS liability and thus eliminates basis for disallowance under section 40(a)(ia). Conclusion: Disallowance of transport expense under section 40(a)(ia) is not sustainable and is deleted. Issue 3 - Machinery salary paid in cash: percentage disallowance Legal framework: Where cash payments are made and particulars are not satisfactorily explained, assessing authorities may disallow a reasonable proportion of cash payments; the extent of disallowance depends on the record and explanations. Precedent Treatment: No specific authority was overruling prior practice; the appellate authority reduced the disallowance from 20% to 10% on review of records. Interpretation and reasoning: The Tribunal noted that the entire machinery salary (Rs.24.69 lakh) was paid in cash and that no adequate justification was furnished before the AO. The AO reasonably applied a 20% disallowance; the CIT(A) reduced same to 10% (granting 50% of the relief). Without further evidence to eliminate suspicion caused by cash payments, the Tribunal found no reason to interfere with the appellate authority's moderation and therefore upheld the 10% disallowance. Ratio vs. Obiter: Ratio - in absence of satisfactory particulars and where payments are in cash, a percentage disallowance (as a reasoned exercise of discretion) is permissible; appellate moderation from 20% to 10% did not warrant further interference absent additional proof. Obiter - the Court noted genuineness was not impugned but stressed need for particulars when payments are in cash. Conclusion: Disallowance on account of machinery salary is sustained at 10% as upheld by the appellate authority; the assessee's ground for full deletion is dismissed. Issue 4 - Interest claimed under section 57 (other sources): nexus and evidentiary proof Legal framework: Section 57 permits deduction of expenditure incurred for the purpose of earning income under 'income from other sources'; claimant must show nexus between expenditure and income sought to be matched; production of confirmations or Form 26A may be relevant but are not per se decisive without proof of nexus. Precedent Treatment: Lower authorities required production of certificates (Rule 31ACB/Form 26A) and evidence demonstrating that interest expense was incurred for earning the interest income disclosed; absence of nexus justifies disallowance. Interpretation and reasoning: The Tribunal found the assessee failed to establish the required nexus between interest paid and the interest income offered under 'other sources.' Although confirmations and Form 26A were claimed to have been filed, the Tribunal accepted the AO/CIT(A) finding that nexus and justification were not proved on record. Consequently the disallowance under section 57 was sustained. Ratio vs. Obiter: Ratio - deduction under section 57 requires demonstrable nexus between expenditure and income; production of confirmations/Form 26A must be accompanied by evidence that the expenditure was incurred for earning the reported income, otherwise disallowance is justified. Obiter - procedural suggestions that production of further documentary evidence on remand or AO verification could cure deficiency. Conclusion: The disallowance of interest expense under section 57 (Rs.3,95,466) is upheld for failure to prove nexus; the assessee's ground is dismissed. Cross-References and Result 1. Issue 1 and Issue 2 interrelate: transport payments resolved under section 194C(6) and section 40(a)(ia) proviso/Form 26A principles; interest-payment component of section 40(a)(ia) relief contingent on verification of recipients' tax treatment (cross-reference to Issue 4 evidentiary principles). 2. Issue 3 stands independent: cash-payment risk justifies proportionate disallowance absent adequate particulars. 3. Final disposition: partial allowance of appeal - deletion of transport-related 40(a)(ia) disallowance and conditional allowance of interest-related 40(a)(ia) disallowance subject to AO verification; machinery-salary and section 57 interest disallowances sustained as affirmed by lower authority.