Expenses to non-residents allowed despite no TDS deduction when recipients declared income under section 40(a)(i)

The ITAT Chennai allowed the assessee's appeal regarding disallowance of expenses paid to non-resident parties under section 40(a)(i) for non-deduction of TDS. The Tribunal held that when recipient parties have declared the income in their respective returns and complete details were provided, no disallowance should be made under the second proviso to section 40(a)(i). Following the SC precedent in Vegetable Products Ltd., the Tribunal applied the beneficial decision from Delhi HC over contrary Kerala HC rulings, allowing the deduction claim.

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Issues:
1. Disallowance of expenses paid to non-resident parties for non-deduction of TDS under section 40(a)(i) of the Income Tax Act.
2. Proper opportunity provided to the assessee during the assessment process.

Analysis:
1. The appeal before the ITAT Chennai centered on the disallowance of expenses paid to non-resident parties due to the non-deduction of TDS under section 40(a)(i) of the Income Tax Act. The AO disallowed a sum of Rs. 2,26,73,426/- for payments made to non-residents without TDS deduction. The Tribunal remanded the matter back to the AO to examine the applicability of the second proviso to section 40(a)(ia) in light of the decision of the Delhi High Court. The AO, in the giving effect order, confirmed the disallowance citing the Finance Act, 2012, and the pending appeal at the Supreme Court. The CIT(A)-NFAC upheld the disallowance, citing divergent views on the retrospective operation of the proviso and judicial precedents from the Kerala High Court.

2. The assessee raised concerns regarding proper opportunity during the assessment process. The Tribunal noted that despite multiple remands, the authorities did not consider the details provided by the assessee regarding the income disclosure by the non-resident parties. The assessee contended that once the recipient parties had declared the income in their returns, no disallowance under section 40(a)(i) should be made. The Tribunal considered conflicting decisions of non-jurisdictional High Courts and applied the principle favoring the assessee as per the Supreme Court decision in CIT vs. Vegetable Products Ltd. Consequently, the Tribunal allowed the claim of the assessee and reversed the order of the CIT(A)-NFAC.

3. Since the Tribunal adjudicated the main issue on merits, other jurisdictional issues raised by the assessee were not addressed as they had become academic. The appeal filed by the assessee was allowed, and the order was pronounced in an open court on 27th June 2024 at Chennai.

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