2015 (2) TMI 547 - AT - Income Tax

Non-deduction oF TDS u/s 40(a)(ia) - ECB interest and royalty payment - Held that - Merely because, accounts are closed on that date and the computation of profit and loss is to be judged with reference to such date, does not mean that whether an amount is payable or not must be ascertained on the strength of the position emerging on March 31. This Tribunal is of the considered opinion that the Commissioner of Income-tax (Appeals) has rightly confirmed the disallowance since the assessee has not admittedly deducted tax at the time of making payment. Coming to the alternative contention of learned counsel for the assessee that it has to be allowed in the year in which the tax was paid, this Tribunal is of the considered opinion that in view of provisos to section 40(a)(ia) and 40(a)(i) the deduction claimed by the assessee has to be allowed in the year in which the tax was actually paid by the assessee. The learned Departmental representative also has no objection to allow the claim of the assessee in the year in which the tax was actually paid by the assessee. In view of the above, the Assessing Officer shall verify the actual payment of tax by the assessee on the expenditure claimed and thereafter allow the claim in the year in which the tax was actually paid. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Disallowance of ECB interest and royalty payment for non-deduction of tax under section 40(a)(ia) of the Act.
2. Alternative contention regarding allowance of deduction in the year tax was paid.

Issue 1: Disallowance of ECB Interest and Royalty Payment for Non-Deduction of Tax Under Section 40(a)(ia) of the Act:

The appellant's counsel argued that the disallowance under section 40(a)(ia) should only apply to amounts remaining payable at the end of the financial year, referencing the Allahabad High Court's decision in CIT v. Vector Shipping Services (P) Ltd. The counsel also contended that the provisions of section 40(a)(ia) are not applicable to amounts already paid. However, the Tribunal noted that the Special Bench in Merilyn Shipping and Transports v. Addl. CIT had determined that section 40(a)(ia) applies only to amounts payable at the end of the financial year. This decision was referenced by the Allahabad High Court but was not upheld as law by the Supreme Court. Furthermore, the Gujarat High Court in CIT v. Sikandarkhan N. Tunvar and the Calcutta High Court in CIT v. Crescent Export Syndicate rejected the Special Bench's view, affirming that section 40(a)(ia) applies to amounts payable at any time during the year. The Tribunal concluded that the Commissioner of Income-tax (Appeals) correctly confirmed the disallowance since the tax was not deducted at the time of payment.

Issue 2: Alternative Contention Regarding Allowance of Deduction in the Year Tax Was Paid:

The appellant's counsel alternatively argued that the deduction should be allowed in the year the tax was paid, citing the provisos to sections 40(a)(ia) and 40(a)(i). The Departmental representative conceded that if the tax was paid in a subsequent year, the deduction should be allowed in that year. The Tribunal agreed with this contention, stating that the deduction should be allowed in the year the tax was actually paid. The Assessing Officer was directed to verify the actual payment of tax by the assessee and allow the claim accordingly.

Conclusion:

The Tribunal partly allowed the appeal, confirming the disallowance for non-deduction of tax at the time of payment but agreeing to allow the deduction in the year the tax was actually paid, subject to verification by the Assessing Officer. The order was pronounced in open court on December 12, 2014.