2013 (2) TMI 14 - AT - Income Tax

Addition u/s 40(a)(ia) - TDS on reimbursement of expense Held that - It is not disputed that M/s Mercator Lines Limited had deducted TDS on salaries paid by it on behalf of assessee. Under such circumstances assessee was not required to deduct TDS on reimbursement being made by it to M/s Mercator Lines Limited. Also following the decision in case of Merilyn Shipping & Transports (2012 (4) TMI 290 - ITAT VISAKHAPATNAM) that no amount remained payable at the year-end, provisions of section 40(a)(ia) are not applicable In favour of assessee Deemed income from sale of books - Disallowance of technical books written off Assessee claimed short term capital loss on the technical books - no sale proceeds had been shown by the assessee Held that - The AO was not justified in making addition on account of deemed income from sale of books without any adverse material evidence on record and without rejecting the books of account. And also the short term capital loss claimed u/s 50 was justified, does not appear to be correct. AY 2008-09 also the issue regarding depreciation is in dispute before the Tribunal. To decide the issue taking into consideration for AY 2008-09 - Remand back to A.O.

Summary

Issues:
1. Disallowance of expenses under section 40(a)(ia) of the Income Tax Act, 1961.
2. Treatment of technical books as short term capital loss.

Issue 1: Disallowance of expenses under section 40(a)(ia) of the Income Tax Act, 1961:
The appellant, a company involved in technical and operational management of ships, declared nil income but declared book profit at Rs. 2,02,228. The Assessing Officer (AO) disallowed an amount of Rs. 1,17,68,621 under section 40(a)(ia) for not deducting TDS on payments made to another company, Mercator Lines Limited. The appellant argued that Mercator Lines Limited had already deducted tax on salaries paid on its behalf, hence no TDS was required. The Commissioner of Income Tax (Appeals) (CIT(A)) deleted the disallowance, stating that the provisions of section 194C were not applicable and since the amount was fully paid during the year, section 40(a)(ia) did not apply. The ITAT upheld the CIT(A)'s decision, citing a Special Bench decision emphasizing the disallowance of expenses in case of non-deduction of TDS.

Issue 2: Treatment of technical books as short term capital loss:
The AO observed a discrepancy in the treatment of technical books by the appellant, noting a write-off of Rs. 17,58,976 as short term capital loss. The AO questioned the huge investment in books followed by a claim of capital loss without showing any sale proceeds. The appellant explained the investment was for maintaining international standards and later shifted its business to another company. The AO added Rs. 13,82,714 as deemed income from the sale of books. The CIT(A) disagreed with the AO's conclusion and allowed the short term capital loss claimed by the appellant. However, the ITAT found the CIT(A)'s decision on short term capital loss not entirely correct, as the block of assets still existed. The matter was remanded back to the AO for fresh consideration in light of previous year's findings.

In conclusion, the ITAT partly allowed the Department's appeal for statistical purposes, upholding the disallowance under section 40(a)(ia) while remanding the issue of short term capital loss treatment back to the AO for further examination.