2012 (4) TMI 495 - AT - Income Tax

Assessee firm of solicitors and advocates- in reassessment proceedings AO noted that the assessee has made payments to various lawyers for their professional services, but has not deducted tax at source under section 194J such payments are to be disallowed under section 40(a)(ia) - assessee s contention that the amounts paid to the lawyers were reimbursed by assessee s clients, and, therefore, the amounts paid to the lawyers were never claimed as a deduction in the first place - It was then contended that when deduction is not claimed in respect of these amounts, there cannot be any occasion to invoke section 40(a)(ia)- It appears from the copy of TDS certificates that the appellant had raised the composite bills for entire work on its clients and was accordingly paid after deduction of tax Held that - As a corollary to this position, unless a deduction is claimed in respect of the said amount, under sections 30 to 38, the disallowance under section 40(a)(ia) cannot come into play at all - the manner in which taxes have been deducted by the end user of the legal services cannot be determinative of whether the assessee has claimed it as reimbursement or no - restored to the file of the Assessing Officer for necessary verifications on this factual aspect.

Summary

Issues:
Challenge to correctness of CIT(A)'s order under section 143(3) for assessment year 2006-07 regarding addition to total income under Section 40(a)(ia) and Section 194J of the Income Tax Act.

Analysis:

Issue 1: Disallowance under Section 40(a)(ia) and Section 194J
The appellant contested the correctness of the CIT(A)'s decision to uphold the disallowance of Rs 28,05,085 made by the Assessing Officer under Section 40(a)(ia) r.w.s. 194 J of the Act. The Assessing Officer disallowed the amount as the appellant failed to deduct tax at source under Section 194 J from payments made to various lawyers for professional services. The CIT(A) rejected the appellant's arguments that the disallowance should not apply since the expenditure was not claimed in the profit and loss account. The CIT(A) concluded that the appellant violated Section 194 J by not deducting tax at source on the payments to lawyers, upholding the Assessing Officer's decision. The ITAT noted that the disallowance under Section 40(a)(ia) can only arise when an amount is claimed as a deduction, and reimbursements are not claimed as deductions. The ITAT remitted the matter to the Assessing Officer for further examination in light of these observations and directed a fair hearing for the appellant.

Conclusion:
The ITAT allowed the appeal for statistical purposes, emphasizing the need for a detailed assessment by the Assessing Officer regarding the disallowance under Section 40(a)(ia) and Section 194J. The judgment highlighted the distinction between claimed deductions and reimbursements, underscoring the importance of factual verification in determining the applicability of disallowances under the Income Tax Act.