2012 (2) TMI 322 - AT - Income Tax

TDS - Held That - When Conversion Charges and Administrative expenses were paid without any formal agreement and the actual expenses were reimbursed or shared on the basis of turnover and cost without including any profit element. Such payments are not subject to TDS under 194C. Dis allowance of Conversion charges and Administrative charges under 40A(2) - No additions by AO as entire amount is dis-allowed under 40a(ii) - Held That - Case remanded back to CIT(A) to decide afresh. Claim for Bad debt - Held That - Assessee has filed no evidence to show that debt have been accounted in earlier year. Even at this stage, the assessee has filed no material on record to show that the assessee has issued bills/debit notes to the party and has duly accounted for the corresponding income in the relevant A.Y. Case referred back to CIT(A).

Summary

Issues Involved:

1. Applicability of Section 40(a)(ia) to conversion and administrative charges.
2. Disallowance under Section 40A(2) for conversion and administrative charges.
3. Disallowance of bad debts under Section 36(1)(vii).

Issue-wise Detailed Analysis:

1. Applicability of Section 40(a)(ia) to Conversion and Administrative Charges:

The Revenue contended that the conversion charges (Rs. 12,29,860) and administrative charges (Rs. 3,60,000) paid by the assessee were subject to Tax Deducted at Source (TDS) as per Section 40(a)(ia). The Assessing Officer (A.O.) disallowed these expenses due to non-deduction of TDS. The assessee argued that these payments were reimbursements without any profit element and thus did not attract TDS provisions. The CIT(A) accepted the assessee's argument, holding that the payments were reimbursements and not subject to TDS. The Tribunal upheld the CIT(A)'s decision, noting that similar issues in previous years were decided in favor of the assessee by the Tribunal and upheld by the High Court.

2. Disallowance under Section 40A(2) for Conversion and Administrative Charges:

The A.O. disallowed 50% of the conversion charges (Rs. 6,14,930) and administrative expenses (Rs. 3,60,000) under Section 40A(2), arguing that the payments were not proportionate to sales and lacked proper documentation. The CIT(A) deleted the disallowance, observing that the A.O. had not provided comparative figures to show that the payments were above arm's length price. The Tribunal found contradictions in the facts and remanded the issue back to the CIT(A) for fresh examination in light of Section 40A(2).

3. Disallowance of Bad Debts under Section 36(1)(vii):

The A.O. disallowed the claim of bad debts amounting to Rs. 1,18,753, arguing that the assessee had regular business with the debtor and failed to provide evidence of irrecoverability. The CIT(A) deleted the disallowance, relying on the ledger extracts and the provisions of Section 36(1)(vii). The Tribunal noted that the CIT(A) did not verify the evidence and remanded the issue back to the CIT(A) for verification of bills and debit notes to ensure that the debts were accounted for in earlier years.

Conclusion:

The Tribunal upheld the CIT(A)'s decision on the non-applicability of Section 40(a)(ia) to conversion and administrative charges, rejected the disallowance under Section 40A(2), and remanded the issues of disallowance under Section 40A(2) and bad debts under Section 36(1)(vii) for fresh examination by the CIT(A). The appeal was partly allowed for statistical purposes.