2012 (7) TMI 731 - AT - Income Tax

Disallowance of expenses - invoking provisions of Section 40(a)(ia)on non deduction of TDS - Held that - To reject the contention of the assessee that there was no liability for deducting TDS on payment to one of the main recipient was a sick unit and was under BIFR as there is no such provision under the Income Tax Act to give a different treatment to the companies, who are under BIFR, thus disallowance on account of weaving charges is confirmed in toto - the matter relating to processing charges and service charges are sent back to AO to verify as to whether the payment on each occasion was less than Rs. 20,000/- and it did not exceed Rs. 50,000/- in that year - partly in favour of assessee. Disallowance of expenses - invoking provisions of Section 40A(2)(b) - Held that - On concluding that payment of Rs. 1,20,000/- paid towards hiring of cars was within the terms of contract which again comes within the purview of work in pursuance of a contract as defined under Section 194(C). Since the payment is above Rs. 50,000/-, the assessee was liable to deduct the TDS - against assessee. Disallowance of expenses - invoking provisions of Section 68 - Held that - From the perusal of the record, it is seen that Rs. 3,33,000/- has been withdrawn from the cash book on 29-5-2004 and the same has been deposited in the bank account on 18-6-2004. Thus, there is a direct nexus between the withdrawals from the cash book and the deposits made in the bank account - thus addition made u/s.68 are deleted as no point of unexplained cash credit arise here - in favour of assessee.

Summary

Issues Involved:
1. Disallowance of expenses under Section 40(a)(ia) of the Income Tax Act, 1961.
2. Disallowance of expenses under Section 40A(2)(b) of the Income Tax Act, 1961.
3. Addition under Section 68 of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Disallowance of Expenses under Section 40(a)(ia)
The assessee, a partnership firm engaged in wholesale trading and manufacturing of cloths, appealed against the disallowance of expenses amounting to Rs. 64,52,061/- by the Assessing Officer (AO) under Section 40(a)(ia) for non-deduction of TDS on processing charges, packing charges, weaving charges, and service charges. The CIT(A) partly allowed the appeal, reducing the disallowed amount by Rs. 1,35,494/-.

Relevant Facts:
- The AO noted non-deduction of TDS on payments exceeding Rs. 50,000/- for various charges.
- The assessee argued that bills for processing and packing charges were below Rs. 20,000/- and no TDS was required for rent and service charges as they were below the prescribed limits.
- For weaving charges, the assessee claimed no TDS was deducted for payments to M/s Santogen Silk Mills Limited (a sick unit) and Hiren Textiles Private Limited (no contract).

Findings:
- The CIT(A) held that all payments were contractual in nature, requiring TDS deduction.
- The ITAT confirmed the disallowance of weaving charges, rejecting the argument that BIFR status exempts TDS deduction.
- The ITAT remitted the matter of processing and service charges back to the AO for verification of payment amounts.

Issue 2: Disallowance of Expenses under Section 40A(2)(b)
The AO disallowed Rs. 1,88,152/- under Section 40A(2)(b), including Rs. 1,20,000/- paid to a partner for car hiring charges, citing non-deduction of TDS.

Relevant Facts:
- The CIT(A) upheld the disallowance of Rs. 1,20,000/- under Section 40(a)(ia) for car hiring charges, treating it as a contractual payment requiring TDS deduction.

Findings:
- The ITAT agreed with the CIT(A), confirming the disallowance as the payment exceeded Rs. 50,000/- and required TDS deduction under Section 194C.

Issue 3: Addition under Section 68
The AO added Rs. 3,60,000/- as unexplained cash credit under Section 68, noting discrepancies in cash deposits in the assessee's bank account.

Relevant Facts:
- The assessee explained that Rs. 3,30,000/- was withdrawn from the cash book on 29-5-2004 and deposited on 8-6-2004.
- An additional Rs. 30,000/- was deposited by M/s Omkar International directly into the bank account.

Findings:
- The ITAT found a direct nexus between the cash withdrawals and deposits, verifying the source of funds.
- The addition under Section 68 was deleted, setting aside the CIT(A)'s findings.

Conclusion:
The appeal was partly allowed. The ITAT confirmed the disallowance of weaving charges and car hiring charges due to non-deduction of TDS. The matter of processing and service charges was remitted back to the AO for verification, and the addition under Section 68 was deleted.