2012 (7) TMI 943 - AT - Income Tax

Non-deduction of tax - Held that - As the amount already paid before 31st March of the relevant accounting period there cannot be any disallowance under s. 40(a)(ia) of the Act. Accordingly the orders of authorities below are set aside and the addition made by the AO is deleted. Disallowance of rent paid by the assessee - Held that - As the rent claimed was already paid before 31st March. Therefore in view of the decision of the Special Bench of this Tribunal at Visakhapatnam in Merilyn Shipping and Transports (2012 (4) TMI 290 - ITAT VISAKHAPATNAM ) there cannot be any disallowance. Expenses disallowed by the AO towards penalty imposed by the police - Held that - As the assessee has paid the penalty for violating provisions of law. The police authorities levied penalty in the course of regulating the traffic. Therefore whatever may be the reason for paying penalty it is paid for violation of traffic rules. Therefore it is against the public policy and hence such payment cannot be allowed as business expenditure. Accordingly the order of the CIT(A) is confirmed on this ground.

Summary

Issues:
1. Disallowance of Rs. 2,42,27,428 for non-deduction of tax.
2. Disallowance of rent paid by the assessee.
3. Disallowance of expenses towards penalty imposed by the police.

Issue 1: Disallowance of Rs. 2,42,27,428 for non-deduction of tax:
The appeal concerns the disallowance of a substantial amount for non-deduction of tax by the assessee. The representative for the assessee argued that the franchisees, through whom the payments were made, operated independently without any agency relationship with the assessee. The representative contended that the amount retained by the franchisees was not commission but expenses incurred by them. Referring to a Special Bench decision, it was highlighted that the provisions of s. 40(a)(ia) are applicable only to amounts payable as of 31st March and not to those already paid during the previous year. The Tribunal concurred, noting that the disallowance was unjustified as the payments were made before 31st March, and no amount remained unpaid by that date. The decision of the Special Bench was followed, and the addition made by the AO was deleted.

Issue 2: Disallowance of rent paid by the assessee:
Another issue involved the disallowance of rent paid by the assessee. The representative argued that the rent had been paid before 31st March, and thus, there should be no disallowance. Citing the same Special Bench decision, it was emphasized that if the rent had been paid before the end of the accounting year, no disallowance should occur. The Tribunal agreed, stating that since the rent had been paid in full before 31st March, there was no basis for disallowance, and directed the AO to delete the disallowance.

Issue 3: Disallowance of expenses towards penalty imposed by the police:
The final issue pertained to the disallowance of expenses related to penalties imposed by the police. The AO disallowed a specific amount as penalty imposed by the police on various occasions. The CIT(A) upheld the disallowance, stating that such penalties were for violating traffic rules and against public policy, hence not allowable as business expenditure. The Tribunal concurred with the CIT(A), affirming that the penalties were incurred due to violations of traffic rules and were not legitimate business expenses. Consequently, the disallowance of these expenses was upheld.

In conclusion, the appeal of the assessee was partly allowed, with the disallowance related to tax deduction and rent payment being overturned, while the disallowance of expenses towards police-imposed penalties was upheld.