2011 (3) TMI 353 - AT - Income Tax

Disallowance u/s. 40(a)(ia) - TDS u/s 194C - Circular No. 723 dated 19-9-1995 - The assessee specifically explained that he is proprietor of chemical manufacturing concern and also exports the material for sale. In the course of the export, the assessee has to pay shipping freight charges to the shipping agent who acts on behalf of the non-resident shipping companies - Similarly, the provisions of section 194C of the IT Act apply to the area of operation of TDS which is confined to payments made to any residents - A special procedure is provided u/s 172 of the IT Act for payment of taxes in case of any ship belonging to or chartered by a non-resident which carries passenger, livestock, material or goods shipped at a port in India. It has nothing to do with the activity carried out by the assessee - The AO has also not made out any case that the assessee has paid any amount to the residents - Therefore, provisions of section 194C of the IT Act have been wrongly applied in the case of the assessee - Appeal is allowed

Summary

Issues Involved:
Departmental appeal and Cross Objection against CIT(A)'s order for assessment year 2006-07.

Analysis:
1. The revenue's appeal contested the CIT(A)'s decision to allow a deduction of Rs.8,72,188, which was disallowable under section 40(a)(ia) of the IT Act. The appeal also criticized the lack of a clear finding under section 251(1)(a) of the IT Act.
2. The assessee's Cross Objections challenged the disallowance under section 40(a)(ia) for payments to foreign shipping companies, citing Circular No. 723 dated 19-9-1995 exempting such payments from TDS. The CIT(A) directed the assessee to provide proof of taxes paid by the shipping company, which the assessee argued was unnecessary under section 172.
3. The case involved the disallowance of expenses for non-deduction of TDS on payments to a shipping agent. The CIT(A) allowed the appeal subject to verification, emphasizing the applicability of section 172 over section 194C in the context of non-resident shipping companies.

4. The Appellate Tribunal found that the authorities below failed to understand the nature of the payments made by the assessee to the shipping agent. The Tribunal noted that the payments were reimbursement of freight charges, not subject to TDS under section 194C due to Circular No. 723 and section 172's provisions for non-resident shipping businesses.
5. The Tribunal highlighted the specific provisions of section 172 and Circular No. 723, emphasizing that TDS was not required for payments to shipping agents of non-resident companies. The AO's application of section 40(a)(ia) and 194C was deemed incorrect, leading to the dismissal of the departmental appeal and allowance of the assessee's Cross Objection.

6. The Tribunal's decision rested on the clear distinction between reimbursement payments to non-resident shipping agents and TDS obligations under section 194C. By referencing Circular No. 723 and section 172, the Tribunal upheld the assessee's position and quashed the orders of the lower authorities, ultimately deleting the addition made by the AO.

7. In conclusion, the departmental appeal was dismissed, and the assessee's Cross Objection was allowed based on the correct interpretation of the law regarding TDS obligations for payments to non-resident shipping companies through agents. The Tribunal's decision emphasized adherence to Circular No. 723 and section 172 provisions, leading to the deletion of the disallowance.