2014 (4) TMI 904 - AT - Income Tax

Disallowance of hire charges u/s 40(a)(ia) of the Act Whether it is interest or not on hire purchase contract The decision in CIT Vs. M/s M.G. Brothers Finance Ltd. 2014 (1) TMI 1590 - ANDHRA PRADESH HIGH COURT followed - the payment made by the assessee on account of hire purchase transaction and payment of finance charges/hire charges cannot be construed as interest so as to deduct TDS u/s 194A of the IT Act - to that extent, the CIT(A) justified in observing that section 40(a)(ia) is not applicable - but, the insertion of Explanation 1 to section after amendment of section 194A by Taxation Laws (Amendment) Act, 2006, with effect from 13/07/2006, payment by the assessee towards hire charges on hire purchase agreement to be liable for TDS u/s 194I of the Act thus, the AO is directed to recomputed the disallowance u/s 40(a)(ia) in the light of the amended provisions, which came into effect from 13/07/2006 Decided partly in favour of Revenue. Disallowance of mobilization advance paid to JV Held that - The payment of interest is the income of the JV and if this included as income in the JV as income, assessee has not deducted the tax in view of the amended provisions of section 40(a)(ia) of the Act, wherein it was held that second proviso to section 40(a)(ia) inserted by the Finance Act, 2012 with effect from 01/04/2013, which is clarificatory in nature and the benefit of the same should be applied restrospectively Relying upon as held by the Cochin Bench in the case of Antony D. Mundackal Vs. ACIT 2013 (12) TMI 67 - ITAT COCHIN thus, the AO is directed to see whether JV has paid tax on the income or not on this income and decide the issue in accordance with law Decided in favour of Revenue.

Summary

Issues Involved:
1. Disallowance of 'Hire Charges' and interest on mobilisation advance under Section 40(a)(ia) of the Income Tax Act.
2. Liability of the assessee for TDS on payments of 'Hire Charges' and 'interest' on mobilisation advance.

Issue-wise Detailed Analysis:

1. Disallowance of 'Hire Charges' and Interest on Mobilisation Advance under Section 40(a)(ia):

The Revenue appealed against the CIT(A)'s order, which favored the assessee by nullifying the disallowance of Rs. 58,42,152/- under Section 40(a)(ia). The Assessing Officer had disallowed this amount on the grounds that the assessee failed to deduct tax on hire charges paid under hire purchase agreements to L&T Finance and SREI Finance, invoking Sections 194A and 194I.

The CIT(A) accepted the assessee's argument that the payments were hire charges and not interest, thus not attracting Section 194A. The CIT(A) also countered the Assessing Officer's alternative measure, which treated the payments as rent under Section 194I, by clarifying that the assets were owned by the appellant, not rented.

The Tribunal referred to the Hon'ble AP High Court's decision in CIT Vs. M/s M.G. Brothers Finance Ltd., which distinguished hire purchase agreements from loan transactions, concluding that hire charges are not interest. Consequently, Section 194A does not apply. However, the Tribunal noted the amendment to Section 194I effective from 13/07/2006, which could render hire charges liable for TDS. The Tribunal directed the Assessing Officer to recompute the disallowance under Section 40(a)(ia) in light of the amended provisions.

2. Liability of the Assessee for TDS on Payments of 'Hire Charges' and 'Interest' on Mobilisation Advance:

The second issue involved the disallowance of Rs. 39,72,000/- representing interest on mobilisation advance paid to a Joint Venture (JV). The Assessing Officer disallowed this amount under Section 40(a)(ia) for non-deduction of TDS under Section 194A, as the interest was paid to a separate legal entity, the JV.

The CIT(A) accepted the assessee's contention that the interest was paid to the Irrigation Department of Maharashtra through the JV, a government body, thus not requiring TDS deduction. The CIT(A) also referenced the Supreme Court's decision in Hindustan Coca Cola Beverages Private Limited, which held that if the tax has been paid by the deductee, no liability for deduction arises.

The Tribunal, however, noted that the second proviso to Section 40(a)(ia), inserted by the Finance Act, 2012, which is clarificatory and should be applied retrospectively, mandates that if the recipient has paid the tax, the disallowance should not apply. The Tribunal directed the Assessing Officer to verify whether the JV had paid tax on the interest income and decide accordingly.

Conclusion:

The Tribunal partly allowed the Revenue's appeal for statistical purposes, directing the Assessing Officer to recompute disallowances considering the amendments to Section 194I and the retrospective application of the second proviso to Section 40(a)(ia). The Tribunal upheld the CIT(A)'s decision that the payments were not interest and thus not subject to Section 194A, but required verification regarding the applicability of Section 194I and the tax payment by the JV.