2012 (11) TMI 802 - AT - Income Tax

Disallowance of salary u/s 40A(2)(b) - Reimbursements made to two sister concerns, who had deputed their employees for carrying out the work of the assessee Held that - As concluded from the facts of the case there is no whisper, much less any material on record, to suggest that the assessee has made payments for any consideration extraneous to the cost of the employees deputed to the assessee. It is quite apparent from the orders of the authorities below that there is no allegation to say that the assessee has paid to sister concerns anything over and above salaries due to the employees who were on assignment to the assessee company. Issue decides in favour of assessee Disallowance of salary for non-deduction of TDS u/s 40(a)(ia) - Held that - Sec. 40(a)(ia) does not include expenditure on salaries. AO erred in invoking Sec 40(a)(ia) to disallow the impugned payment. Issue decides in favour of assessee Disallowance of interest Interest expenditure in relation of giving interest free advances Held that - The AO has not pointed out to any instance of giving away interest free loan for non-business purpose either to relative or to sister concerns. Therefore, there cannot be any disallowance of interest u/s 36(1)(iii). Issue decides in favour of assessee

Summary

Issues:
1. Disallowance of salaries paid to employees deputed from sister concerns under section 40A(2)(b) and section 40(a)(ia) of the Income-tax Act, 1961.
2. Disallowance of interest expenditure under section 36(1)(iii) of the Act.

Analysis:
1. Issue 1 - Disallowance of salaries paid to employees deputed from sister concerns:
The assessee's appeal contested the disallowance of Rs 16,86,619 paid as salaries to employees deputed from sister concerns under section 40A(2)(b) and section 40(a)(ia) of the Act. The Commissioner of Income-tax (Appeals) upheld the disallowance based on tax evasion concerns and applicability of section 40A(2)(b). However, the ITAT Pune disagreed with the Commissioner's reasoning. The ITAT found that the payments were reimbursement for services rendered by the employees, with no evidence of tax evasion or payments beyond actual salaries. Thus, the ITAT ruled in favor of the assessee, setting aside the disallowance under section 40A(2)(b) and section 40(a)(ia) of the Act.

2. Issue 2 - Disallowance of interest expenditure:
The Revenue's appeal challenged the deletion of the disallowance of interest expenditure of Rs 14,65,416 under section 36(1)(iii) of the Act. The Assessing Officer disallowed the amount due to interest-free advances given by the assessee. However, the Commissioner of Income-tax (Appeals) reversed this decision, citing the availability of interest-free owned funds and no evidence of non-business advances. The ITAT Pune upheld the Commissioner's decision, emphasizing the absence of proof of interest-free loans for non-business purposes. As a result, the ITAT dismissed the Revenue's appeal, affirming the deletion of the disallowance of interest expenditure.

In conclusion, the ITAT Pune allowed the assessee's appeal regarding the disallowance of salaries paid to employees deputed from sister concerns and dismissed the Revenue's appeal concerning the interest expenditure disallowance, based on detailed analysis and legal interpretations of the relevant sections of the Income-tax Act, 1961.