2010 (9) TMI 661 - AT - Income Tax

Disallowance of expenditure - payments were made by the assessee for services rendered by the foreign non residents and disallowance has been made under section 40(a)(i)on the ground that no tax had been deducted at source - payments could not be disallowed in case of the assessee in view of the Article 26(3) of the Indo US Double Taxation Avoidable Agreement - provisions of section 40(a)(i) applicable for the relevant year no disallowance could be made respect of payments to the residents on the ground of non deduction of tax at source - no disallowance can be made in case of payments to the non residents also even if the amount is found taxable in India in their hands - claim of the assessee allowed

Summary

Issues:
1. Disallowance of bad debt under section 36(1) of the Income Tax Act.
2. Disallowance of deduction on payments to Master Card and VISA Card under section 40(a)(i) of the Income Tax Act.

Issue 1: Disallowance of Bad Debt
The appeals by the assessee were related to the disallowance of expenditure on payments to Master Card and VISA, USA, and bad debt for assessment years 1997-98 to 1999-2000. The dispute primarily focused on the disallowance of bad debt under section 36(1) of the Income Tax Act. The AO disallowed the bad debt claim as he considered both rural and non-rural advances for the purpose of the provision. The CIT(A) upheld the AO's decision. However, the tribunal referred to a previous case where it was established that the provision of clause (viia) applied only to rural advances by a bank. As the amount of bad debt written off only related to non-rural advances, the tribunal set aside the CIT(A)'s order and remanded the matter to the AO for further examination.

Issue 2: Disallowance of Deduction on Payments to Master Card and VISA Card
The second dispute in the appeals concerned the disallowance of deduction on payments made to Master Card and VISA Card under section 40(a)(i) of the Income Tax Act. The AO disallowed the deduction as tax had not been deducted at the source for these payments. The CIT(A) upheld this decision, stating that the international agencies had a permanent establishment in India. However, the tribunal considered Article 26(3) of the Double Taxation Avoidance Agreement between India and the USA, which protects non-residents against discrimination. It was argued that even if the income of Master Card and VISA was taxable in India, no tax was required to be deducted based on this agreement. The tribunal agreed that the payments were not taxable in the hands of non-residents and allowed the deduction claimed by the assessee, overturning the CIT(A)'s decision.

In conclusion, the tribunal allowed all the appeals of the assessee concerning the disallowance of bad debt and deduction on payments to Master Card and VISA Card, based on the provisions of the Income Tax Act and the Double Taxation Avoidance Agreement between India and the USA.