2014 (10) TMI 492 - AT - Income Tax

Non-deduction of TDS on interest payment u/s 40(a)(ia) Held that - The underlying objective of section 40(a)(ia) was to disallow deduction in respect of expenditure in a situation in which the income embedded in related payments remains untaxed due to non-deduction of tax at source by the assessee relying upon Commissioner of Income Tax XIII Versus Rajinder Kumar 2013 (7) TMI 454 - DELHI HIGH COURT section 40(a)(ia) cannot be seen as intended to be a penal provision to punish the lapses of non-deduction of tax at source from payments for expenditure- particularly when the recipients have taken into account income embedded in these payments, paid due taxes thereon and filed income tax returns in accordance with the law - declining deduction in respect of expenditure relating to the payments of this nature cannot be treated as an intended consequence of Section 40(a)(ia). The view cannot be subscribe that it could have been an intended consequence to punish the assessees for non-deduction of tax at source by declining the deduction in respect of related payments, even when the corresponding income is duly brought to tax - That will be going much beyond the obvious intention of the section - the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004 thus, the matter is required to be remitted back to the AO for fresh adjudication Decided in favour of assessee. Cash payment for purchase of land u/s 40A(3) disallowed Held that - Following the decision in Mr. Jamir Mondal Versus Assistant Commissioner of Income-tax 2014 (6) TMI 245 - ITAT KOLKATA - Rule 6DD of the Rules clearly lays down the conditions or exceptions under which the rigor of the provisions of section 40A(3) of the Act may be relaxed and there is no discretion on either of the parties to extend the condition or relax the condition at will - Even the existence, demand or necessity or business expediency does not fall under the provisions of Rule 6DD of the Rules - it cannot be said that the assessee has immunity from the provisions of section 40A(3) of the act - the lower authorities have rightly invoked the provisions of section 40A(3) of the Act and made the disallowance Decided against assessee.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961 for non-deduction of TDS on interest payments.
2. Disallowance under Section 40A(3) of the Income Tax Act, 1961 for cash payments exceeding the prescribed limit for the purchase of land used as stock-in-trade.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS on Interest Payments:

The assessee challenged the disallowance of Rs. 7,26,585 under Section 40(a)(ia) due to non-deduction of TDS on interest payments. The representatives agreed that the decision on an identical issue from the 2006-07 case would apply here. The Tribunal upheld the assessee's grievance, referencing the Finance Act 2012's second proviso to Section 40(a)(ia), which mitigates the disallowance if the recipient has included the income in their tax returns and paid the due taxes.

The Tribunal noted that the second proviso to Section 40(a)(ia) should be given retrospective effect from 1st April 2005, as it is declaratory and curative in nature. This interpretation aligns with the Delhi High Court's judgment in CIT Vs Rajinder Kumar, emphasizing that the provision should ensure that no revenue loss occurs due to non-deduction of TDS. The Tribunal remitted the matter back to the Assessing Officer for verification of the recipients' tax compliance and directed a fresh adjudication based on these observations.

2. Disallowance under Section 40A(3) for Cash Payments Exceeding the Prescribed Limit:

The assessee contested the disallowance of Rs. 1,15,275, which is 20% of Rs. 5,76,370 paid in cash for the purchase of land used as stock-in-trade. The Assessing Officer disallowed the amount under Section 40A(3), which was upheld by the CIT(A). The CIT(A) referenced decisions from the Kolkata and Indore ITAT benches, which supported the disallowance for cash payments exceeding the limit, even if the land was treated as stock-in-trade.

The Tribunal agreed with the CIT(A), noting that the considerations of business expediency are not relevant under the amended Rule 6DD, which exhaustively lists exceptions to Section 40A(3). The Tribunal found no legally sustainable reasons to delete the disallowance and upheld the CIT(A)'s decision.

Conclusion:

The appeal was partly allowed for statistical purposes. The Tribunal remitted the matter regarding the disallowance under Section 40(a)(ia) back to the Assessing Officer for fresh adjudication, while it dismissed the appeal concerning the disallowance under Section 40A(3). The order was pronounced in the open court on 29th May 2014.