2013 (5) TMI 100 - AT - Income Tax

Addition u/s 40(a)(ia) - TDS on the chit dividend paid to the subscribers. - Held that - the payment of dividend to the subscribers of a chit towards dividend does not partake the character of interest and accordingly, the assessee is not liable to deduct TDS under S.194A - Decided in favor of assessee. Restricting the proportionate disallowance of expenses on collection made by the assessee on behalf of its subsidiary companies - Held that - The CIT(A) has rightly observed that it is only the staff in certain branches which would be collecting subscription on behalf of the subsidiary companies. In the aforesaid view of the matter, the order passed by the CIT(A) in restricting the disallowance appears to be reasonable and calls for no interference. Accordingly, we uphold the order of the CIT(A). - Decided against the assessee. TDS u/s 194C - composite contract - division of work order - addition u/s 40(a)(ia) - Held that - the payments have been artificially broken up to avoid the TDS provisions. If the payments have been made in terms with the MoU for carrying out certain work then certainly the TDS provisions are attracted and the assessee was obliged under the Act to deduct tax at source. Even as per the break up given by the assessee certain payments have been made towards hire charges of plants, generators, and other equipment which certainly attract TDS provisions. As the assessee has not deducted at source from the payments made to M/s Ushakiran Movies Ltd., in our view, the disallowance made u/s 40(a)(ia) was justified. - Decided against the assessee.

Summary

Issues:
1. Disallowance of addition under section 40(a)(ia) for non-deduction of tax at source on chit dividend.
2. Challenge to the restriction of proportionate expenses disallowance.
3. Disallowance under section 40(a)(ia) for non-deduction of tax at source on payments to a company.
4. Challenge to the sustenance of proportionate disallowance of expenses.

Issue 1 - Disallowance of addition under section 40(a)(ia) for non-deduction of tax at source on chit dividend:
The ITAT Hyderabad upheld the CIT(A)'s order based on a previous decision that chit dividend does not qualify as interest under the Income Tax Act. Therefore, no disallowance can be made under section 40(a)(ia) for failure to deduct tax at source on chit dividend payments.

Issue 2 - Challenge to the restriction of proportionate expenses disallowance:
The ITAT Hyderabad found that the Assessing Officer incorrectly considered the entire expenditure for proportionate disallowance instead of focusing on specific branches where collections for subsidiary companies were made. The CIT(A) restricted the disallowance to Rs. 1.00 lakh, considering only a small portion of the expense was related to collections for other group companies. The ITAT upheld the CIT(A)'s decision, stating that the restriction was reasonable.

Issue 3 - Disallowance under section 40(a)(ia) for non-deduction of tax at source on payments to a company:
The ITAT upheld the CIT(A)'s decision to sustain the disallowance under section 40(a)(ia) for failure to deduct tax at source on payments made to a company. The payments were considered part of a composite contract for marketing services, and the nature of the payments did not change even when broken down into various components. The ITAT agreed that the disallowance was justified as the assessee failed to deduct tax at source on the payments.

Issue 4 - Challenge to the sustenance of proportionate disallowance of expenses:
The ITAT upheld the CIT(A)'s decision to sustain the proportionate disallowance of expenses, as the nature of the payments made under the composite contract did not change based on how they were categorized. The ITAT dismissed the challenge raised by the assessee against this decision.

In conclusion, the ITAT Hyderabad dismissed both the revenue's and the assessee's appeals, upholding the decisions made by the CIT(A) regarding the disallowances and restrictions on expenses and tax deductions at source.