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TaxTMI 
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2026 (4) TMI 1034
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....umstances of the case, the Ld. CIT(A) has erred in allowing the claim of Rs. 3,30,00,000/- out of professional fees paid. 4. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the claim of Rs. 49,32,507/- on account of fees paid to JV company as reimbursement of expenses. 5. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the claim of Rs. 5,00,000/- made u/s 14A. 6. Whether on the facts and in the circumstances of the case, the Ld. CIT(A has erred in allowing the claim of Rs. 1,10,487/- out of reimbursement of fuel expenses and telephone expenses." "AY : 2006-07 "On the facts and in the circumstances of the case the Ld. CIT(A) has erred in :- 1. The order of the Ld. CIT(A) is not correct in law and facts. 2. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the claim of Rs. 3,63,66,000/- out of professional fees paid. 3. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing the claim of Rs. 4.70,04,390/- on account of fees paid to JV company as reim....
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....essment order, identified the following factual and legal deficiencies: a) Book-entry nature: The entire claim rests on two journal entries passed on 31.03.2005 (voucher nos. 1390 and 1601), with no supporting invoices, service bills, or commercial papers from SITV showing that SITV actually incurred advertisement expenses or paid vendors. b) Shifting pleadings: When queried for details of advertisement expenses and publicity vouchers, the assessee initially responded (dated 18.12.2007) that "expenses have been shared" with SITV on the basis of "mutual understanding." Subsequently (reply dated 20.12.2007), the assessee contradicted itself by asserting "there is no sharing of expenses" but only "reimbursement of actual expenses" without any written or oral agreement. c) TDS non-compliance: The assessee admitted to the AO that no TDS was deducted u/s 194C on the Rs. 1,34,94,094 reimbursed to SITV, claiming SITV had deducted TDS at the vendor level when it initially incurred the expenses. d) Absence of agency documentation: The assessee offered no contemporaneous evidence (agency letter, authorization, or agreement) showing that SITV was authorized ....
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....mmercial documentation are insufficient. See also Sumati Banerjee v. CIT (1997) 227 ITR 475 SC. Proposition C: The Assessee Cannot Unilaterally Recharacterize Another Entity's Expense as Its Own The fundamental defect in the assessee's claim is the absence of any prior authorization or agreement for SITV to incur advertisement expenses on the assessee's behalf. If the transaction is genuine reimbursement, the following must be established: * Prior authorization: The assessee authorized SITV to incur the expenses * Agency relationship: SITV acted as the assessee's agent * Actual incurrence: SIT V actually incurred the expenses at the assessee's direction * Contemporaneous documentation: The agency arrangement was documented contemporaneously None of these elements are present here. Instead, the assessee claims that SITV "incurred" expenses and later debited them to the assessee, and the assessee is now seeking to treat these as its own for deduction purposes. This is not reimbursement; it is a post-facto claim to appropriate another company's expenditure by crediting its account. Under established....
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....y claim: If SITV was acting as agent, the assessee would have known of the expenses as they were incurred and would have been in continuous communication with SITV. Yet the assessee has no documentation of the agency arrangement, prior authorization, or progress updates. The year-end debit note suggests SITV simply lumped together its advertisement expenditure and debited the assessee without prior agreement. Proposition E: Distinguishing the Case Law Relied Upon by Assessee On Expeditors International: The assessee relies on the tribunal's observation that reimbursement of global accounts manager costs does not attract TDS because no "income element" is involved. However, Expeditors involved a structured transfer of a manager function within a corporate group, where the managing entity was neither in the business of providing management services nor receiving payment as compensation. Here, SITV is performing an advertising intermediation function (connecting with advertising agencies, negotiating costs, etc.), which is service-like in nature. The distinction is material. On Cairn Energy: The assessee relies on Cairn Energy's holding that reimburs....
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....t any mark-up thereon. Assessee Submission It is respectfully submitted that the genuineness of the expenditure is not disputed by the assessing officer/CIT(A). SITV network was a group company with whom the assessee had an understanding that the expenditure incurred by SITV network for movie promotion shall be reimbursed by the assessee on cost-to-cost basis. An expenditure is allowable as a deduction under section 37 of the Act if the same is incurred wholly and exclusively for the purposes of business. It is respectfully submitted that entering into a formal agreement is not a requirement of allowability of any expenditure under section 37 of the Act. The debit notes raised by SITV Network for reimbursement of expenditure was submitted before the assessing officer.(Page no. 83-84 of the Paperbook) Further, it is submitted that the assessing officer failed to appreciate that the said payments, not being in the nature of income in the hands of the SITV Network on account of absence of element of income therein, did not call for deduction of tax at source. Reliance in this regard is placed on the decision of Supreme Court in the case of ....
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....ted that the payee therein had already deducted tax on the various payments made by it to third parties (such as towards transport charges and other charges). Since the payments made by the assessee therein were only for the reimbursement of expenses incurred by the payee on behalf of the assessee, the court held that no TDS was required to be deducted by the assessee. A special leave petition preferred by the Revenue against the High Court's decision was dismissed by the Supreme Court on January 17, 2014 (in SLP CC No. 175 of 2014). This court is also supported in its reasoning by the text of section 194C (TDS for "work") and section 194J (TDS of income from "professional services"-the latter expression defined expansively by section 194J(3) Explanation (a)). Neither the provision obliges the person making the payment to deduct anything from contractual payments such as those made for reimbursement of expenses, other than what is defined as "income". The law thus obliges only amounts which fulfil the character of "income" to be subject to TDS in such cases ; for other payments towards expenses, the deduction to those entitled (to be made by the payee) the obligation to carry o....
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....eing any markup. The entities function in the group concept, these kinds of arrangements are common and it is not illegal. It is fact on record that the assessee has produced a movie and it needs promotion, the relevant promotion expenses are incurred, it shows that it is for the purpose of its own business. The lower authorities had not raised any doubt on the aspect of genuineness but raised only the procedural aspect that it should have been under specific agreement and TDS provisions should have been followed. We noticed that Ld CIT(A) had addressed both the above aspects and gave the relief, therefore we do not see any reason to disturb the same. In the result, ground raised by the revenue is dismissed. 7. With regard to Ground No.3 of AY 2005-06, Ground No.2 of AYs 2006-07 & 2007-08 regarding deletion of professional fees claim of Rs. 3,30,00,000/- by the ld. CIT (A), in this regard, ld. DR submitted as under:- 1. AO's Findings: The AO, in para 4 of the assessment order, identified the following critical deficiencies in the retainership fee claim: 2. Vague and incomplete MOU terms: The MOU dated 16.08.2004 lacked essential terms, particularly: ....
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....ed on. "The operative word is "real nexus." An expenditure must have actual, demonstrable connection to the business. In Walchand, the Court upheld the assessee's deduction because the expenditure, though heavy, was shown to be incurred for a genuine business purpose with documentary support.Here, the assessee has failed to establish "real nexus": 1. The JVC was never materially operationalized in the relevant year 2. No identifiable services were rendered by Percept as retainer 3. No corresponding revenue or loss emerged in the P&L 4. The MOU itself lacks clear terms defining the retainership arrangement Proposition B: Vague and Incomplete Contractual Terms Negate Allowability: Section 37(1) requires expenditure to be laid out "wholly and exclusively for the purposes of the business." This requires: 1. Clear identification of the expenditure's purpose 2. Documentary evidence of agreement 3. Evidence of actual service delivery or consideration provided The Percept MOU fails all three criteria: (a) Undefined fee basis: The MOU states Sahara would pay Percept a "retainer of Rs. 3.30 cror....
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....of carrying on the business. Isolated or contingent expenditures not relatable to the normal functioning of the business cannot be allowed.'' The Percept fee is precisely such an isolated expenditure: large in quantum, vague in purpose, and devoid of performance documentation. Proposition D: The Absence of Revenue Correlation Is a Damaging Admission The AO highlighted a critical fact: despite paying Rs. 3.30 crores, the assessee's P&L reflected zero corresponding revenue or loss from the Percept engagement or JVC. This is not merely evidentiary weakness; it is substantive evidence of the transaction's lack of business purpose: * If Percept genuinely supervised the JVC for the assessee's operational benefit, there should have been corresponding accounting entries reflecting the benefit * If the JVC was supposed to increase market share (as per the MOU), the assessee's revenue or profit should have reflected improvement * The fact that a Rs. 3.30 crore expense was booked without any correlating operational impact suggests the expense was not driven by business necessity In CIT v. Anisminic Ltd. (1969) 72 IT....
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....ted party), for media management and marketing services. iii. Assessee to reimburse the sum of operating cost of the JVC. Thus, according to the aforesaid terms of the MOU, the assessee made the following payment: (i) retainership fees of Rs. 3.3 crores to Percept Finserve P Ltd.(unrelated party), for media management and marketing services. (ii) reimbursed the operating expenses of SIEMCL amounting to Rs. 49,32,507/-. Assessing officer's Contention Re: Retainership Fees: The assessing officer disallowed the payment of Rs. 3,63,66,000/- on the following observations: - If JVC is floated all the payments/receipts with respect to the income/expenditure should be incorporated through joint venture only - The terms of MOU are arbitrary, confusing and incomplete. Basis of expenditure has not been stated properly one time, monthly, yearly based on certain percentage of income. - It is not clear that the purpose of paying such huge fees to Percept would be in the interest of JVC or the assessee company. If benefit is for JVC then expenditure should be booked in JVC. On the other hand, if expense is for ex....
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....e payment made to Percept. - The payment made to M/s Percept Finserve Pvt Ltd. ha direct nexus with the business of the assessee company - The expenditure is incurred as per business decision of the assessee which cannot be challenged by the Assessing Officer.[Reliance placed on : CIT vs. Dhanrajigirji Narasingirji 91 ITR 544 (SC),Walchand & Co. Pvt Ltd. 65 ITR 381 (SC), JK Woollen Manufacturers V. CIT 72 ITR 612. Re Reimbursement of expenses: CIT(A) deleted the disallowance observing as under: (i) The entire expenditure is relatable to business activities of the assessee and has been incurred during the course thereof (ii) the expenditure booked by the assessee is reimbursement of actual expense only without any element of profit. Therefore, there was no liability for deduction of tax at source on reimbursement. Assessee Submission Re Retainership Fees: It is respectfully submitted that the assessing officer failed to appreciate the terms of MOU, objective of joint venture and the nature of business of assessee. During the year under consideration, the assessee was in the business of producin....
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....see. The assessing officer has also alleged the terms of the MOU are arbitrary and confusing without understanding the nature of business, the business of the parties of the MOU, the objectives of the joint venture company and have held that the expense is dubious and unjustifiable. Assessing Officer has not challenged the payment made or genuineness of the parrty but have merely stepped into the shoes of the assessee and decided whether the expenditure is in the benefit of the assessee and whether the assessee should have incurred the expenditure or whether assessee should have entered into JVC or not. We respectfully submit that assessing officer has no jurisdiction to decide what expenditure a business shall make for its business. Reliance is placed on the decision of Hon'ble Supreme court in case of CIT vs Dhanrajigiriji Narasingirji 91 ITR 544 (SC) wherein, the court held that " it is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure, every business man knows his interest best." Further reliance is placed on decision of Hon'ble Supreme Court in the case of Walchand& Co. ....
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.... the claim of Rs. 49,32,507/- on account of fees paid to JV company as reimbursement of expense by the ld. CIT (A), ld. DR submitted as under :- I. AO's Findings: The AO, in para 5, disallowed this claim on the following grounds: 1. No statutory' head for "reimbursement": The AO noted that the Income-tax Act does not contain a specific section allowing deduction of "reimbursement of expenses." Any expenditure must fall within Section 37 (business expenses) or another statutory head. 2. Vague apportionment: The MOU states JVC shall receive "mutually agreed fees" equal to operating costs, but no clear methodology for apportioning costs between Sahara and Percept (the JVC partners) is documented. 3. TDS non-compliance: The assessee failed to produce evidence of TDS deduction on the reimbursement payment to JVC. 4. Unreconciled difference: A massive difference of Rs. 58,85,443 existed between the assessee's booking of reimbursement (Rs. 49,32,507) and the JVC's recording of receipt of these funds (Rs. 10,39,2583 [sic in original document]). The assessee's explanation (differing finalization dates) was unsatisfactory. ....
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....ing costs. However, the assessee has not provided: * JVC's cost invoices or statements * Breakdown of operating costs (staff, premises, utilities, etc.) * Evidence of actual incurrence of these costs * Apportionment formula used to determine assessee's share Section 37 requires the assessee to establish that the underlying expenditure was "wholly and exclusively laid out for the purposes of the business." A vague claim of "JVC operating costs" without itemization or documentation does not satisfy this requirement. Proposition D: Transfer Pricing Principles Apply-The reimbursement to JVC (a related party controlled 51% by Sahara) must satisfy transfer pricing principles under Section 40A(2) and Chapter X-A. The assessee must establish: (a) The operating costs were arm's length (b) The apportionment to assessee was arm's length (c) Documentation was contemporaneously maintained The assessee has failed on all three counts. The vague "mutually agreed" language in the MOU, the absence of detailed cost accounting, and the unreconciled difference all suggest the transaction was not do....
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....CIT(A)'s correct analysis of Section 14A's retrospective applicability, the disallowance is justified on principle. Proposition A: Section 14A(1) Still Applied; CIT(A) Overcorrected-The CIT(A) correctly held that Section 14A (2) (inserted w.e.f. 01.04.2007) did not apply retrospectively to A.Y. 2005-06. Under the predecessor Section 14A (1), the provision required disallowance of "any expenditure incurred for the purpose of making or earning any income not included in total income."However, the CIT(A) then held that the AO could not make a disallowance absent specific identification of expenditure. This interpretation is overly rigid. Section 14A (1) required disallowance of identifiable expenditure related to exempt income. However, where an assessee holds investments and earns dividend income, some administrative expense necessarily accrues: board deliberation on investment strategy, portfolio monitoring, communication with custodians, dividend recordation, etc. These expenses may not be separately invoiced, but they are incurred nonetheless. Proposition B: The Assessee Failed to Prove Zero Expenditure-The assessee claimed: * i Shares w....
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....s and conjectures. Assessee Submission: During the year under consideration, no fresh investments were made by the assessee and no expenditure was incurred for earning dividend income. The observations of the assessing officer are based on surmises and conjectures. Further, assessing officer has not shown any nexus between expenses incurred by the assessee and the exempt income earned by it. Re: Absence of proximate nexus between expenses disallowed and exempt income The provision of section 14A postulates disallowance of expenditure only in a case where it is proved that the expenses incurred have a real relationship with the income which does not form part of the total income. It is the respectful submission of the assessee, on the facts of the case, the apportionment of the expenses made by the assessing officer as relatable to earning of exempt income is erroneous. The assessing officer has made disallowance under section 14A of the Act on a hypothetical basis without realizing that the mandate of the Legislature is to correlate the expenses incurred to the earning of exempt income. In fact, as submitted above, there is no correlatio....
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....ce such a proximate relationship exists, the disallowance has to be effected. All expenditure incurred in the earning of income which does not form part of the total income has to be disallowed subject to compliance with the test adopted by the Supreme Court in Walfort and it would not be permissible to restrict the provisions of Section 14A by an artificial method of interpretation. ....... Hence, the intention of Section 14A is clearly to disallow all expenses relating to the non taxable income, and to curb the practice of claiming allowances for expenditures on exempt income. All that is required is to show that there is a 'proximate cause' between the expenditure incurred and the exempt income. A 'proximate cause' connotes a relationship between the expense and the exempt income (Walfort). ......" (emphasis supplied) Your Honour's kind attention, in this regard, is further invited to the decision of the Delhi High Court in the case of Maxopp Investment Ltd: 203 Taxman 364 wherein the High Court, while approving the contention raised by the assessee that the term "expenditure incurred" appearing in section 14A(1) of the Act would mean "actual" expendit....
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.... "10. We have heard both the parties and perused all the relevant material available on record. From the perusal of records, it can be seen that the Assessing Officer accepted the contention of the assessee that no expenditure has been incurred for earning the dividend income and therefore no disallowance under section14A was called for. Without appreciating this aspect, the Assessing Officer disallowed Rs. 3 lacs under section 14A of the Act on an ad-hoc basis, and while doing so the Assessing Officer has not established any nexus between the expenditure and earning of dividend income. The CIT(A) also failed to look into this aspect. Thus, Ground No. 2 is allowed." Further reliance is also placed on the following decisions, wherein it has been held that where no expenditure was actually incurred to earn dividend income, disallowance under section 14A cannot be made on the basis of mere presumption: * CIT v. Hero Cycles : 323 ITR 518(P&H) * CIT v. Metalman Auto P. Ltd.: 336 ITR 434 (P&H) * CIT v. Reliance Utilities and Power Ltd.: 313 ITR 340 (Bom) * CIT v. Reliance Industries Ltd.: 339 ITR 632 (Bom) * CIT Vs Ms.Sushma Kapoor: 3....
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....t. It is our respectful submission that merely presuming that the assessee must have incurred expenditure for earning exempt income, without specifying the nature of expenses, leave alone its quantification, does not tantamount to recording of satisfaction as referred to in section 14A of the Act. Further, the assessing officer cannot, it is submitted, apply the provisions of section 14A of the Act, automatically once the assessee is found to have earned exempt income. In this regard, it is submitted that the assessing officer has proceeded on the following fallacious premise: (a) Exempt income cannot be earned without incurring any expenditure, accordingly, disallowance has to be made under section 14A of the Act; (b) Invocation of section 14A is automatic and comes into operation as soon as exempt income is earned. It is further respectfully submitted that this issue stands covered in assessee's favour by the decision of the Hon'ble Delhi Bench of the Tribunal in the case of Gujarat Guardian Limited ITA No.3554/Del/2014 and 3596 & 3595/Del/2014. The relevant findings of the Tribunal are reproduced hereunder for your Honour's reference: ....
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....rt of the day to day accounting work. Since the first appellate order on the issue is reasoned one and supported with the ratio laid down by the Hon'ble Jurisdictional High Court of Delhi in the case of CIT Vs. Maxopp Investment Ltd. (supra), we are not inclined to interfere therewith. The same is upheld. The ground no. 1 of the appeal (ITA No. 3595) and the ground of the appeal (ITA No.3596) of the revenue are accordingly rejected." (emphasis supplied) The Hon'ble Delhi High Court, while dismissing Revenue's appeal (ITA No. 1106/2017) against the aforesaid order of the Tribunal, relied on the decision of the Apex Court in the case of Godrej & Boyce Manufacturing Co. Ltd. v. DCIT: 394 ITR 449 (SC) and held as under: "The Revenue's appeal in this case concerns with the correctness of the ITAT's order in regard to disallowance under Section 14A (2). The Assessing Officer (AO) disallowed certain amounts after rejecting the assessee's explanation with respect to the statutory disallowance on an application of Rule 8D of the Income Tax Rules. The appellate Commissioner granted the relief which was confirmed by the ITAT. The issue in the opinion of this Court i....
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....penditure is relatable for earning of dividend income. The CIT (A) calculated the disallowance at 0.05% of the average value of investments in shares (2,534.21X.05%)which works out to Rs. 1,26,710/-. This estimation of administrative expenses relatable to the earning of dividend income is reasonable and justifiable on the facts and circumstances of this case. Therefore, we find no infirmity in the order of the CIT (A), warranting our interference. It is ordered accordingly." Further, reliance can be placed on the decision of Hon'ble Delhi High Court in the case of CIT vs. Oriental Structural Engineers (P.) Ltd: 216 Taxman 92 (Del.) wherein the High Court affirmed the order of the CIT(A) in disallowing reasonable proportion, being 2% of dividend income earned when expenses were not incurred towards earning exempt income. The relevant extract of the decision is as below: "2. It was the contention of the revenue that Rule 8D of the Income Tax Rules, 1962 had not been applied properly in respect of the assessment year 2008-09. This aspect has been considered by the Tribunal in detail and it has observed as under: - "6.3 We have carefully considered the submis....
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....h effect from AY 2008-09. In our view, section 14A was introduced from Finance Act 2001, the operative part was always in existence in the year under consideration. Therefore, AO is justified making disallowance but the charge of 20% of the exempt income is too high, considering the fact that the assessee had invested in the Preference shares of the Group entity in the past, not during the year under consideration. We are not inclined to accept the submissions of the assessee that there is no involvement in expenses towards it. There is involvement of administrative expenses, we observed that prior to introduction of rule 8D, the courts held that 1% of the investment which had earned exempt income. Therefore, we are inclined to direct the AO disallow 1% of the investment in preference shares. Fortunately, we noticed that the assessee had invested Rs. 5 crores, the relevant disallowance would be Rs. 5 lakhs only. Therefore, we are inclined to sustain the addition. In the result, ground no 5 raised by the revenue is allowed. Similarly, the ground no 4 raised by the revenue in other years also allowed. 16. With regard to Ground No.6 of AY 2005-06 and Ground No.5 of AYs 2006- 07 & 2....
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....sonable. Proposition C: The Assessee's Failure to Segregate Use-If the assessee's claim that 100% of fuel and telephone expense was for business use is correct, it should have: * Maintained vehicle logs segregating business and personal mileage * Documented call records segregating business and personal calls * Provided evidence of restricted access to company vehicles/phones * Provided alternative evidence of business-only use The assessee's mere assertion (without documentation) that the company is artificial and therefore has no personal use is insufficient to discharge its burden of proof." 17. On the other hand, ld. AR of the assessee submitted as under :- "During the year assessee claimed miscellaneous expenses of Rs. 31,79,426. Out of such expenses Rs. 22,09,749 was towards reimbursement of fuel expenses and telephone expenses to various employees and professional working for the business of the assessee. Assessing officer's Contention: Assessing officer made disallowance of Rs. 1,10,487 (5% of Rs 22,09,749) an ad hoc basis with a view that personal element in the fuel expense....
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....ness promotion expense for a watch given to the Director of the film "Malamal Weekly" as a token of appreciation. The AO disallowed the amount, finding that the assessee failed to prove that the watch was related to business purposes and that it constituted "unexplained expenditure," The assessee argued that the watch was an incentive for the director's creative effort on a super-hit film and was wholly business-related. The CIT(A) accepted the assessee's argument, finding that the AO did not doubt the incurrence of the expense or its relation to a film produced by the assessee, and therefore the disallowance was unjustified. Revenue's Position: 1. Admissibility of "Gifts" as Business Expenditure Under Section 37: Section 37(1) of the Act provides that an expenditure is allowable if it is "wholly laid out for the purpose of the business." The term "gift" is not a recognized category of business expenditure in Indian tax jurisprudence. Gifts are generally considered personal in nature or gratuitous transfers. The fact that a gift is rendered to someone connected with the assessee's business does not automatically convert it into a business expense. ....
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....he line of cases beginning with CIT v. Goenka Group of Companies, which holds that gifts, donations (unless specifically mandated by section 37 or other sections), and gratuitous payments are not business expenses. Counter to CIT(A)'s Reasoning: The CIT(A) stated: "The Assessing Officer has not doubted the incurring of the expenditure a) The incurring of the expenditure. b) the fact that the expenditure relates to giving of gift to a Director of a movie which movie was produced by the appellant under its own banner and c) the fact that the movie generated substantial revenue for the appellant." However, the CIT(A) conflated three separate inquiries: * Incurrence: Yes, the watch was given (factual). But this does not make it a business expense. * Connection to a film: Yes, the film was produced by the assessee. But this does not convert a gift into a business expense; many expenditures are incurred in relation to business activities without being deductible. * Revenue generation: The assessee claims the film was profitable. But gifts are not made contingent on profit, nor are they measured against profit. The causal ....
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..................................... 21. Considered the rival submissions and material placed on record. We observed that the assessee had given an expensive watch to the director on success of the movie. It is towards appreciation of the art and success of the movie, therefore, there is direct link to the business carried on by the assessee. Therefore, the contention of the AO is wrong and we are inclined to dismiss the ground raised by the revenue. 22. With regard to Ground No.7 of AY 2007-08 regarding disallowance of TDS default of Rs. 13,29,988/-, ld. DR of the Revenue submitted as under :- "Statutory Framework & Issue: The AO, based on the tax audit report, noted two categories of payments without TDS or with short TDS: (a) Rs. 1,58,365 to Vibzap Soft Solutions with no TDS deducted, and (b) Rs. 11,71,623 (proportionate disallowance on Rs. 62,04,815 to Vibzap and Arjun Punji with short TDS deduction). The AO added both back under section 40(a)(ia). The assessee objected that (i) Rs. 1,58,365 was already voluntarily added back in its return (double addition), and (ii) the TDS deducted and deposited was adequate when surcharge rates are considered, and the proportiona....
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....hat surcharge was also deductible (at 0.04 on section 194C and 0.244 if exceeding Rs. 10 lacs, etc.) and that when the assessee's deposits are viewed inclusively of surcharge, the amount is adequate. However, surcharge is not part of "TDS" under section 194; surcharge is an additional levy on the tax itself under section 1 IB. The fact that the assessee deposited surcharge does not reduce the TDS liability on the principal amount. The assessee's conflation of TDS and surcharge is a fundamental error in understanding the statutory scheme. The AO correctly disallowed the proportionate amount based on the TDS shortfall alone. 3. Verification of Rs. 9,72,000 Component-CIT(A)'s Conditional Direction; The CIT(A) accepted the assessee's claim that Rs. 9,72,000 (out of the Rs. 14,13,315 Vibzap payment) was made on behalf of another group company (Sahara India Commercial Corporation Limited) and "transferred" to that company's account, and therefore was not claimed in the assessee's P&L. If this is true, section 40(a)(ia) does not apply because the assessee did not claim that amount as an expense. However, the CIT(A) merely directed verification; the order i....
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.... 17(f) read with annexure VI of the Form 3CD, mentioned that Rs. 1,58,365/- the amount paid to professional was inadmissible under section 40(a)(ia) of the Act. The assessee suo-moto disallowed the same at the time of filing its return of income. Assessing officer's Contentions The assessing officer referred to the tax audit report (Annexure-XIG), and observed there were instances of non-deduction of TDS and short deduction of TDS with respect to the payments mentioned above. - On payments totalling to Rs. 62,04,815/- TDS of Rs. 3,48,090/- should have been deducted but the assessee deducted only Rs. 2,82,362. Short fall in deducting TDS of Rs. 65,728. - Proportionate disallowance of Rs. 11,71,623 (62,04,815 X 65,728/3,48,090) and Rs. 1,58,365,aggregating to Rs. 13,29,988 is disallowed. CIT(A) Observations CIT(A) deleted the disallowance of Rs. 13,29,988/- on the following basis: - The assessing officer has only referred the tax audit report and has not made any query to the assessee - The tax has been deducted and deposited was fully justified. Assessee's Submission At the outset the provision....
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....without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax : ......." It may be observed that the language of section 201(1) of the Act, specifically mentions "as required by or under this Act". Such specific language covers the case where the assessee has deducted the short TDS. Hence, on such cases section 201 of the Act applies. Such specific language as provided in section 201 is not provided in section 40(a)(ia) of the Act. Absence of such language clearly indicates that in the case of short TDS section 40(a)(ia) of the Act is not applicable. Revenue can only invoke section 201 of the Act in such cases. Reliance is placed on the decision of Hon'ble Delhi High Court in the case of Principal Commissioner of Income-tax v. Future First Info Services (P.) Ltd.: 447 ITR 299 (Delhi) wherein the court has held that the disallowance under section 40(a)(ia) cannot be made in a case of short deduction of TDS. The relevant extract of decision is as below: "5. Further, this Court is of the opinion that in cases of short deduction of TDS, disallowance under section40a(ia) of the Act c....
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.... the Government account. We are of the view that the provisions of section 40(a)(ia) of the Act has two limbs one is where, inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into Government Account. There is nothing in the said section to treat, interalia, the assessee as defaulter where there is a shortfall in deduction. With regard to the shortfall, it cannot be assumed that there is a default as the deduction is not as required by or under the Act, but the facts is that this expression, 'on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in sub-section (1) of section 139'. This section 40(a)(ia) of the Act refers only to the duty to deduct tax and pay to government account. If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default u/s. 201 of the Act and no disallowance can be made by invoking the provisions of section40(a)(ia) of the Act....
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.... Payment of Rs. 62,04,815 to the above referred parties where, as alleged by the assessing officer, short TDS was deducted was out of the purview of section 40(a)(ia) of the Act. Therefore, the entire disallowance of Rs, 11,71,623/-, related to the payment of Rs. 62,04,815,made by the assessing officer is bad in law and ought to be deleted." 24. Considered the rival submissions and material placed on record. We observed that the assessee had paid Rs. 158,365/- without deducting TDS and the assessee suo moto disallowed the same in the computation of income. The next payment of Rs. 972,000/-, which was not claimed as an expenditure during the year under consideration. In our view, which is not part of expenses claimed by the assessee, the same cannot be disallowed. With regard to disallowance of Rs. 158,365/-, since the assessee claimed that it had disallowed suo moto in the computation of income, the same may be allowed by the AO after due verification as set out by the Ld CIT(A). With regard to proportionate disallowance of Rs. 11,71, 623/-, we noticed that the assessee had deducted TDS but short deducted. The consequential provisions applicable is section 201(1) and not the pro....
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....se the TDS assessment was disputed and the assessee won on appeal, the interest paid was related to a "disputed demand" and should therefore be deductible. However, this confuses the status of the underlying TDS assessment with the deductibility of interest on non-compliance. Even if the assessee's TDS assessment is later set aside on appeal (meaning the AO was wrong to demand TDS), the assessee's failure to deposit TDS timely remains a fact. Interest on late payment is levied on the delay, not on the correctness of the demand. The fact that the demand was ultimately reversed does not retroactively convert the interest into a deductible expense. 4. CIT(A)'s Direction on Non-Taxing Refund-Correct But Symptomatic of Weakness: The CIT(A) confirmed the disallowance of the interest but directed that if a refund is received on the disputed TDS assessment, it should not be taxed. This is a correct and benevolent direction, and the assessee's actual remedy lies there: the refund will arrive without tax, offsetting the interest cost. However, the fact that the CIT(A) felt compelled to provide this "relief" (directing that refunds not be taxed) suggests that the asse....