2025 (5) TMI 735 - AT - Income Tax

Reimbursement expenses to third party without TDS deduction allowed under Section 40(a)(ia) when recipient declares income

CRISIL Limited (Successor in interest of erstwhile CRISIL Risk and Infrastructure Mumbai Solutions Limited Versus The Assistant Commissioner of Income Tax-15 (1) (2), Mumbai

ITAT Mumbai allowed the assessee's appeal against disallowance u/s 40(a)(ia) for reimbursement of expenses to Crisil Limited without TDS deduction. The ... Disallowance u/s. 40(a)(ia) - reimbursement of expenses made to Crisil Limited on account of non-deduction of tax at source - HELD THAT:- Perusal of the expenditures it can be seen that, on none of the payments, the provision of TDS would apply because they are directly incurred for the purpose of business. Nowhere, any such expenses entail provision for deduction of TDS under the Act, therefore, no disallowance can be made with respect to expenditure which has been reimbursed by the assessee to Crisil Limited. In so far as service tax component with respect to reimbursement of expenditure there is a CBDT Circular No.1 of 2024 dated 13/01/2014 wherein, it has been stated that no taxes are required to be deducted on the service tax component. Thus, no TDS is required to be deducted on the service tax component and the same is deleted. Reimbursement of expenditure - Primafacie, no tax is deductible at source on most of the payments. At the most TDS is deductible on these payments/ expenses relating to rent expenses and salary expenses however it has been stated that, firstly, it is reimbursement of expenses; and secondly, Crisil Ltd., has considered such receipts in its total income and has paid the tax due thereof and furnished the return of income. For this purpose, copy of certification of Chartered Accountant in Form 26A confirming that Crisil Limited has considered such receipts in its total income, paid the tax thereon and furnished the return of income, then no disallowance can be made u/s. 40(a)(ia). We find that this Form 26A was also filed before the ld. CIT(A) alongwith the submission dated 30/10/2019. Once Form 26A has been filed and Chartered Accountant has confirmed that M/s. Crisil Limited has considered the said receipts in total income and has paid the tax thereof and furnished the return of income, then no disallowance u/s. 40(a)(ia) can be made in view of the proviso to Section 201 - Appeal of the assessee is allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Appellate Tribunal (AT) in this appeal are:Whether disallowance under section 40(a)(ia) of the Income Tax Act is justified for reimbursement of expenses made to Crisil Limited due to non-deduction of tax at source (TDS).Whether TDS provisions apply to various categories of reimbursed expenses such as common business expenses (rent, electricity, repairs, postage, printing, staff welfare, telephone, internet charges, etc.) which do not contain any markup.Whether the assessee can be held an assessee in default under section 201 of the Act when Crisil Limited has included the receipts in its income, paid tax thereon, and furnished the return of income.Whether service tax components included in reimbursements attract TDS deduction under the Act.Whether the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming and enhancing the disallowance without providing opportunity of hearing and without properly considering the submissions and evidence filed by the assessee, including Form 26A certifying tax payment by Crisil Limited.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Applicability of Section 40(a)(ia) to Reimbursement of ExpensesRelevant Legal Framework and Precedents: Section 40(a)(ia) mandates disallowance of any expenditure where tax is deductible at source but not deducted or paid. However, the proviso to Section 201 provides that an assessee shall not be deemed to be an assessee in default if the payee has included the amount in its income, paid tax, and filed return. CBDT Circular No.1 of 2014 clarifies that TDS is not required on service tax components when separately indicated.Court's Interpretation and Reasoning: The Tribunal analyzed the nature of reimbursed expenses and categorized them into three groups: (i) expenses where TDS provisions do not apply even if directly incurred by the assessee, (ii) service tax component of reimbursements, and (iii) balance reimbursements including rent and salary components.Key Evidence and Findings: The Tribunal examined the detailed breakup of Rs. 1,07,51,004/- disallowance. It noted that Rs. 32,93,383/- pertained to expenses such as bank charges, books, conveyance, electricity, staff welfare, telephone, etc., which do not attract TDS provisions. The service tax component of Rs. 10,03,947/- was separately identified and held exempt from TDS under the CBDT Circular. The balance Rs. 64,53,674/- related to common expenses including rent and salaries, for which the assessee submitted Form 26A certified by a Chartered Accountant confirming that Crisil Limited had included these receipts in its income and paid tax thereon.Application of Law to Facts: Applying the proviso to Section 201, the Tribunal held that since Crisil Limited had paid tax and filed returns on the amounts received, the assessee cannot be treated as an assessee in default and hence no disallowance under Section 40(a)(ia) is warranted. The Tribunal also relied on the CBDT Circular to exclude service tax components from TDS applicability.Treatment of Competing Arguments: The AO and CIT(A) had confirmed and enhanced the disallowance without giving the assessee opportunity to be heard and without considering Form 26A and other submissions. The Tribunal criticized this approach, emphasizing the failure to apply the proviso to Section 201 and the absence of any mark-up in reimbursements that would trigger TDS liability.Conclusions: The Tribunal concluded that no disallowance under Section 40(a)(ia) was justified on the reimbursed expenses, including the service tax component, and that the entire disallowance confirmed by the CIT(A) was to be deleted.Issue 2: Procedural Fairness and Opportunity of HearingRelevant Legal Framework: Principles of natural justice require that an assessee be given a reasonable opportunity of hearing before adverse orders are passed. The AO and CIT(A) are expected to consider all submissions and evidence before confirming disallowances.Court's Interpretation and Reasoning: The Tribunal observed that the AO confirmed part of the disallowance without considering the assessee's submissions and without providing any hearing. Similarly, the CIT(A) enhanced the disallowance without giving notice or hearing and without addressing the key submissions, including the Form 26A evidence.Key Evidence and Findings: The Tribunal noted that the assessee had filed detailed replies, including Form 26A, and that the CIT(A) failed to even elaborate on how the reimbursed expenses could be considered payments in the nature of income attracting TDS.Application of Law to Facts: The Tribunal held that the failure to provide opportunity of hearing and to consider relevant evidence constituted a procedural lapse, rendering the disallowance unsustainable.Treatment of Competing Arguments: The Revenue did not dispute the absence of hearing or consideration of submissions but relied on a strict interpretation of TDS provisions. The Tribunal rejected this rigid approach in light of the facts and procedural irregularities.Conclusions: The Tribunal found the procedural lapses fatal to the Revenue's case and set aside the disallowance confirmed by the AO and CIT(A).3. SIGNIFICANT HOLDINGS'Nowhere, any such expenses entail provision for deduction of TDS under the Act, therefore, no disallowance can be made with respect to expenditure of Rs. 32,93,383/- which has been reimbursed by the assessee to Crisil Limited.''No TDS is required to be deducted on the service tax component and the same is deleted.''Once Form 26A has been filed and Chartered Accountant has confirmed that M/s. Crisil Limited has considered the said receipts in total income and has paid the tax thereof and furnished the return of income, then no disallowance u/s. 40(a)(ia) can be made in view of the proviso to Section 201.''The entire disallowances confirmed by the ld.CIT(A) is deleted.'The Tribunal established the core principle that where the payee has included the receipts in income, paid tax, and filed return, the payer cannot be treated as an assessee in default under Section 201, and consequently, no disallowance under Section 40(a)(ia) is warranted.The Tribunal also clarified that service tax components separately indicated in reimbursements do not attract TDS deduction as per CBDT Circular No.1 of 2014.Finally, the Tribunal emphasized the necessity of procedural fairness, holding that disallowances confirmed or enhanced without opportunity of hearing and without considering material evidence are liable to be set aside.