2019 (10) TMI 1620 - AT - Income Tax

Adhoc purchase disallowance deleted; TDS disallowance u/s 40(a)(ia) remitted for assessing officer verification u/s 133(6) and 194A

Satish Arora Versus ACIT, Circle 22 (2), New Delhi

ITAT allowed the challenge to an adhoc disallowance for purchases, finding that books and vouchers were produced, trading results accepted and the AO ... Adhoc disallowance on account of purchases - HELD THAT:- As stated that the assessee has never given any explanation that any bills or vouchers has been missing. If the books of accounts along with all the bills have been produced and trading account has been accepted, then such an adhoc disallowance on account of purchases cannot be made based on general observations. If there were discrepancies and defects, then A.O. could have rejected the books of account and trading result. Here, it is not a case where any evidence has not been produced and even the AO has failed to specify or point out any defect in the books of account produced by the assessee. Accordingly, we do not find any reason as to why such adhoc disallowance on account of purchases can be made. Thus, ground No. 2 is allowed and the addition is deleted. Disallowance u/s. 40(a)(ia) - TDS u/s 194A - non-deduction of TDS on interest paid to PNB Housing Finance Ltd. made - HELD THAT:- As we are unable to agree with the contention of the ld. counsel that the interest payment on housing loan paid to PNB Housing Finance Ltd. fall within the category of payment as specified u/s. 194A(3)(iii) because it not a Nationalized Bank albeit it is merely a subsidiary of Punjab National Bank. Therefore, the interest paid by the assessee was liable for deduction of tax at source. However, we agree with the alternate contention of the ld. counsel that if the PNB Housing Finance Ltd. has offered interest income in its return of income, then no disallowance can be made in terms of proviso to section 40(a)(ia) read with first proviso to section 201(1). Accordingly, the issue is restored back to the file of the AO to examine whether said interest payment has been offered to tax in the return of income filed by PNB Housing Finance Ltd. AO shall call for the certificate by issuing notice u/s. 133(6) to PNB Housing Finance Ltd. and the assessee shall also make endeavor to place the certificate in prescribed form for the said purpose. ISSUES PRESENTED AND CONSIDERED 1. Whether an adhoc disallowance on account of unverifiable purchases can be sustained where the assessee produced books of account and bills/vouchers and the Assessing Officer did not pinpoint or requisition specific missing vouchers. 2. Whether interest paid to a housing finance company (a subsidiary of a nationalized bank) is exempt from TDS under the exception in section 194A(3)(iii) and, alternatively, whether disallowance under section 40(a)(ia) is avoidable if the payee has offered the interest in its return of income and/or produced the prescribed certificate (and the effect of retrospective applicability of the proviso introduced by Finance Act, 2012). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of adhoc disallowance for unverifiable purchases Legal framework: Assessing Officer may disallow expenses/ purchases if not substantiated by books/evidence; rejection or disallowance requires identification of defects or non-production of evidence. Trading account acceptance and production of books/bills are relevant in determining verifiability. Precedent Treatment: The Tribunal relied on well-established principle that adhoc additions cannot be made on mere suspicion or general observations where books and vouchers are produced and not specifically shown to be defective; specific case law not cited in text but treated consistent with settled practice. Interpretation and reasoning: The Assessing Officer had the books of account and bills/vouchers on record but failed to (a) supply a list of missing vouchers, (b) point out particular defects, or (c) reject the books/trading results. The Assessing Officer's conclusion relied on general observations and some bills being 'missing or self-generated' without pinpointing. Where accounts and vouchers are produced and trading account accepted, making an adhoc disallowance on a general basis is impermissible; any discrepancies ought to have led to rejection of books or specific identification of unreliable items. Ratio vs. Obiter: Ratio - An adhoc disallowance for unverifiable purchases is impermissible where the assessee has produced books and vouchers and the Assessing Officer has not specifically identified missing or defective vouchers or rejected the books. Obiter - Remarks on what the Assessing Officer could have done (e.g., reject books) are ancillary. Conclusion: The adhoc addition of Rs. 10,00,000 was deleted; the ground challenging the adhoc disallowance is allowed (ratio applied to facts). Issue 2 - Applicability of section 194A(3)(iii) exception and proviso to section 40(a)(ia) where interest paid to housing finance company Legal framework: Section 194A requires deduction of tax on interest payments except as provided in section 194A(3)(iii) (exception for certain banking companies/nationalized banks). Section 40(a)(ia) disallows expenditure where tax required to be deducted at source is not deducted; proviso to section 40(a)(ia) and first proviso to section 201(1) operate to protect the payer if the payee has offered the income and paid tax (with procedural/formal certificate requirements). Precedent Treatment: The appellant relied on a High Court judgment holding retrospective application of the proviso introduced by Finance Act, 2012 (referred to, but not reproduced). The Tribunal did not accept the contention that a housing finance subsidiary of a nationalized bank qualifies as a 'nationalized bank' under section 194A(3)(iii). Interpretation and reasoning: The Tribunal held that a housing finance company merely because it is a subsidiary of a nationalized bank does not qualify as a nationalized bank for the exception under section 194A(3)(iii). Therefore, the payer was prima facie liable to deduct TDS on interest paid. However, the Tribunal accepted the alternative contention that if the recipient (housing finance company) has offered the interest in its return of income, then the disallowance under section 40(a)(ia) may not be warranted in view of the proviso to section 40(a)(ia) read with the first proviso to section 201(1). The Tribunal noted the assessee's assertion that the payee had offered the income, but the Assessing Officer/CIT(A) found no supporting proof in the prescribed form; thus, factual verification was necessary. Procedure/Remand: The Tribunal restored the issue to the file of the Assessing Officer to verify whether the recipient had offered the interest in its return. The Assessing Officer was directed to obtain a certificate by issuing notice under section 133(6) to the payee (PNB Housing Finance Ltd.) and the assessee was directed to endeavour to place the prescribed form/certificate on record. Ratio vs. Obiter: Ratio - A subsidiary housing finance company does not qualify as a nationalized bank under section 194A(3)(iii) merely by being a subsidiary; consequently TDS obligation prima facie arises. Ratio - Disallowance under section 40(a)(ia) can be avoided if the payee has offered the interest income and requisite proof in prescribed form is furnished or confirmed by the payee (procedural requirement and factual verification). Obiter - Reliance on retrospective application of the Finance Act, 2012 proviso (not finally resolved on merits; issue was treated via remand for factual inquiry rather than a definitive pronouncement on retrospective effect). Conclusion: The Tribunal rejected the contention that the payment fell under the section 194A(3)(iii) exception and held the payer was prima facie liable for TDS; but allowed the plea that no disallowance should be made if the payee has offered the income and appropriate proof/certificate is furnished. The matter was remanded to the Assessing Officer to verify offer of income by the payee via notice under section 133(6) and to consider any prescribed-form certificate tendered by the assessee; the ground was partly allowed for statistical purposes.