2015 (4) TMI 370 - AT - Income Tax

Non deduction of tax at source on conversion charges under section 194C - CIT (A) deleting the disallowance made under section 40(a)(ia) - Held that - Contention of the Department, that the ratio laid down by the ITAT Visakhapatnam Special Bench in case of Merilyn Shipping & Transports vs. ACIT 2012 (4) TMI 290 - ITAT VISAKHAPATNAM is not applicable, cannot be accepted. Since the Department has not controverted the fact that the entire amount of ₹ 5,98,13,357 was paid by the assessee during the relevant previous year and nothing remained payable on the last day of the previous year, in our view, as per the ratio laid down in case of Merilyn Shipping & Transports vs. ACIT (Supra), no disallowance under section 40(a)(ia) can be made. Accordingly, the CIT (A) s order on this issue deserves to be upheld. Since we have held that no disallowance can be made under section 40(a)(ia) as the assessee has paid the amount during relevant previous year, we do not find it necessary to go into the issue whether or not provisions of section 194C is at all applicable to the payments made by assessee claimed to be in the nature of reimbursements. - Decided against revenue. Revision u/s 263 - non consideration of applicability of section 40(a)(ia) to payment made to M/s. Aditya Spinners Ltd. has made the assessment order erroneous and prejudicial to the interests of the Revenue - Held that - in the impugned assessment year also, no disallowance can be made under section 40(a)(ia) of the Act as the entire payment, as claimed by the assessee was made during the relevant previous year and nothing remained payable. Therefore, as there cannot be any disallowance under section 40(a)(ia) of the Act, assessment order cannot be held to be erroneous and prejudicial to the interest of the Revenue. Moreover on a perusal of the assessment order, it appears the Assessing Officer after conducting enquiry and applying his mind to the materials brought on record, as far as it relates to conversion expenses, has passed the assessment order. Whether provisions of section 194C will be applicable to conversion expenses claimed to be in the nature of reimbursement, in our view, is a debatable issue on which more than one view is possible. That being the case, assessment order passed cannot be considered to be erroneous and prejudicial to the interests of the Revenue so as to empower learned CIT to revise it under section 263 - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(ia) for non-deduction of TDS under Section 194C.
2. Applicability of Section 194C to reimbursement of expenses.
3. Validity of assessment order under Section 263 of the Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(ia) for non-deduction of TDS under Section 194C:
The Department appealed against the CIT (A)'s decision to delete the disallowance of Rs. 5,98,13,357 under Section 40(a)(ia) for non-deduction of TDS under Section 194C. The Assessing Officer (AO) found that the assessee had paid conversion charges and expenses to M/s Aditya Spinners Ltd without deducting TDS on the conversion expenses. The CIT (A) concluded that the payment was a repayment of debt and not for job work, hence Section 194C was not applicable. Additionally, the CIT (A) noted that since the entire amount was paid during the financial year, Section 40(a)(ia) was not applicable based on the ITAT Special Bench decision in Merilyn Shipping & Transports vs. ACIT. The ITAT upheld the CIT (A)'s decision, noting that since the entire amount was paid during the year, no disallowance under Section 40(a)(ia) could be made.

2. Applicability of Section 194C to reimbursement of expenses:
The assessee argued that the payments to M/s Aditya Spinners Ltd were reimbursements for expenses incurred on its behalf and not for any work done under a contract, thus not attracting Section 194C. The CIT (A) agreed, finding that the payments were reimbursements and not for job work. The ITAT, however, did not delve into this issue further, as it held that no disallowance under Section 40(a)(ia) could be made since the payments were made during the financial year.

3. Validity of assessment order under Section 263 of the Act:
The CIT exercised power under Section 263, finding the assessment order erroneous and prejudicial to the interests of the Revenue due to the AO's failure to apply Section 40(a)(ia) to payments made by the assessee. The assessee argued that the payments were reimbursements and not liable for TDS under Section 194C, and that the entire amount was paid during the financial year, thus Section 40(a)(ia) was not applicable. The ITAT held that no disallowance under Section 40(a)(ia) could be made as the entire amount was paid during the financial year, and the assessment order was not erroneous or prejudicial to the interests of the Revenue. Consequently, the ITAT set aside the CIT's order under Section 263 and restored the original assessment order.

Conclusion:
The ITAT dismissed the Department's appeal, upheld the CIT (A)'s order deleting the disallowance under Section 40(a)(ia), and allowed the assessee's appeal against the CIT's order under Section 263. The ITAT found that no disallowance under Section 40(a)(ia) could be made as the entire amount was paid during the financial year, and the assessment order was neither erroneous nor prejudicial to the interests of the Revenue.