2011 (4) TMI 1164 - AT - Income Tax

Disallowance u/s. 14A - Held that - Rule 8D should not be applied and the AO has to adopt a reasonable basis or method consistent with all relevant facts and circumstances and after affording reasonable opportunity to the assessee to place all germane material on the record. We, therefore, remit the issue to the A.O for fresh consideration as stated above whether CIT(A) erred in confirming the disallowance u/s.40(a)(ia) by treating society maintenance charges as being akin to rent whether CIT(A) failed to appreciate that payments towards common expenses are not subject to TDS hence the question of disallowance u/s. 40(a)(ia) does not arise - According to the AO the assessee ought to have deducted tax at source on the payment of maintenance charges to the society as the payment by the assessee to the society was in the nature of contract and, therefore, the provisions of section 194C was applicable. Under section 40(a)(ia) of the Act where assessee has an obligation to deduct tax at source before making payment and payment of maintenance charges to the society by the assessee was in the nature of payment to contractor for carrying out any work attracting the provisions of section 194C of the Act Held that - payment of maintenance charges by the owner of the premises to the society can by no stretch of imagination be said to be a payment to contractor for carrying out work on behalf of the owner of the premises. These payments were made to defray common cause. There is no contract for maintenance between the society and the owner of the premises. It is a payment to common fund to be used for the benefit of the owners of the premises. The payment by the member of the society is governed by the principle of mutuality and the society does not derive any income, impugned addition cannot be sustained and the same is directed to be deleted, ground accordingly allowed, appeal of the assessee is partly allowed

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act, 1961.
2. Disallowance under section 40(a)(ia) of the Income Tax Act, 1961.

Issue 1: Disallowance under section 14A of the Income Tax Act, 1961:
The appellant, a company engaged in clearing and forwarding services, earned dividend income which did not form part of its total income. The Assessing Officer (AO) disallowed a sum of Rs. 4,57,895/- under section 14A, applying Rule 8D of the IT Rules, 1962. The CIT (A) upheld this disallowance, relying on the decision of the Special Bench of ITAT, Mumbai. The Tribunal noted the decision of the Bombay High Court in a related matter, emphasizing that no deduction should be allowed for expenditure incurred in relation to income not forming part of the total income. The Tribunal remitted the issue back to the AO for fresh consideration in line with the High Court's principles, stating that Rule 8D should not be applied, and a reasonable basis must be adopted.

Issue 2: Disallowance under section 40(a)(ia) of the Income Tax Act, 1961:
The appellant, as the owner of business premises, paid maintenance charges to a society of Apartment Owners. The AO contended that tax should have been deducted at source under section 194C on these payments, treating them as payments to a contractor. Consequently, the AO disallowed Rs. 1,72,455/- under section 40(a)(ia) for non-deduction of tax at source. The CIT (A) upheld this disallowance. However, the Tribunal disagreed, stating that payments to the society were not akin to payments to a contractor for work. The Tribunal held that these payments were for common cause and governed by the principle of mutuality, directing the deletion of the disallowance. Thus, ground No.2 was allowed, and the appeal was partly allowed.

In conclusion, the Tribunal's judgment addressed two key issues: disallowance under section 14A and section 40(a)(ia) of the Income Tax Act, 1961. The Tribunal remitted the section 14A disallowance issue back to the AO for reconsideration in line with the principles laid down by the Bombay High Court. Additionally, the Tribunal allowed the appellant's appeal regarding the disallowance under section 40(a)(ia), emphasizing that the payments to the society for maintenance charges were not subject to TDS and were governed by the principle of mutuality.