2009 (9) TMI 981 - AT - Income Tax

Summary

Issues involved: Disallowance of transport charges u/s 40(a)(ia) and disallowance of interest paid on deposits u/s 40(a)(ia).

Issue 1: Disallowance of transport charges u/s 40(a)(ia)

The Appellate Tribunal ITAT Ahmedabad addressed the disallowance of transport charges amounting to Rs. 1,72,200 paid by the assessee for the assessment year 2005-2006. The Assessing Officer disallowed the transport charges invoking section 40(a)(ia) of the Income Tax Act, stating that tax was not deducted at source as required by section 194C. The assessee contended that there was no transport contract between them and the transporters, as the transporters were engaged by agents in Calcutta. The Tribunal examined the bills and found no evidence of a transport contract between the assessee and the transporters. Referring to Circular No.715 and precedents, the Tribunal held that the assessee was not liable to deduct tax under section 194C, and thus section 40(a)(ia) did not apply. Consequently, the disallowed transport charges were directed to be allowed.

Issue 2: Disallowance of interest on deposits u/s 40(a)(ia)

The second issue pertained to the disallowance of interest amounting to Rs. 1,09,165 paid on deposits made by an individual, Jitendra R. Patel. The Assessing Officer disallowed the interest payment under section 40(a)(ia) for failure to deduct tax as required by section 194A. The assessee argued that Jitendra Patel, a partner in the firm, received the interest in his individual capacity, not as a representative of the Hindu Undivided Family (HUF). However, the Tribunal upheld the disallowance, stating that any interest payable to a resident must have tax deducted as per section 194A for it to be allowed as a deduction. Since the tax was not deducted, the interest payment could not be claimed as a deduction. The Tribunal found no provision exempting the interest payment from tax deduction and upheld the decision of the income tax authorities.

The appeal of the assessee was partly allowed by the Appellate Tribunal ITAT Ahmedabad, with the disallowance of transport charges under section 40(a)(ia) being overturned, while the disallowance of interest on deposits under the same section was upheld.