2015 (5) TMI 110 - AT - Income Tax

Revision of assessment order - Dis-allowance of rental income due to non deduction of TDS - Dis-allowance of Securities transaction tax (STT) & Brokerage expenses as related to exempted income - Rent received by a charitable trust registered u/s 12A of Income Tax Act,1961 - Held that - We are of the view that exercise of power u/s 263 of the Act in the present case is justified. In fact, the assessee has also accepted such position by only contesting the direction of the CIT in respect of disallowance to be made u/s 40(a)(ia) of the Act. So far as the direction of the CIT in respect of disallowance of deduction claimed towards STT and brokerage and considering the issue of proportionate disallowance of finance charges the assessee has accepted the view of the CIT. Therefore, CIT's observation that the assessment order passed is erroneous and prejudicial to the interests of the revenue and consequent exercise of power u/s 263 has to be upheld. Even so far as the issue of disallowance u/s 40(a)(ia) is concerned, on a perusal of the assessment order as well as other materials on record, we are of the view that the AO has not at all examined the issue of applicability of section 194-I to the expenditure claimed towards rent paid and consequential disallowance whether to be made u/s 40(a)(ia) of the Act. Hence, to that extent, there is not only failure to make any enquiry by the AO, but, also total non-application of mind on the part of the AO. Therefore, the CIT was correct in holding that the assessment order passed u/s 143(3) is erroneous and prejudicial to the interests of the revenue for not considering the applicability of section 194-I and issue of disallowance u/s 40(a)(ia) of the Act. However, we are of the view that CIT was not correct in straightaway directing the AO to make disallowance u/s 40(a)(ia) of the Act without properly considering the contentions raised by the assessee. It is a fact on record that the payee Kamma Sangham at the relevant time was a charitable trust registered u/s 12A of the Act. It is also a fact on record that it has filed its return for the AY 2008-09 claiming exemption u/s 11 of the Act though it has shown the rental income. It is also an uncontroverted fact that no order has been passed u/s 201(1) of the Act treating the assessee as a assessee in default. Therefore, in the aforesaid perspective it needs to be examined whether tax at all was required to be deducted at source when the payee was not having taxable income or in other words payee's income is exempt. In this context, the provisions contained u/s 201 and section 40(a)(ia) have to be read together to come to a appropriate conclusion. We modify the order of the CIT by directing the AO to examine the issue of disallowance u/s 40(a)(ia) of the Act in so far as the payment of rent to Kamma Sangham is concerned after carefully considering assessee's submissions and keeping in view the relevant statutory provisions as well as ratio laid down in the PEC Electricals Ltd. 2015 (2) TMI 889 - ANDHRA PRADESH HIGH COURT & Thomas Muthoot 2012 (12) TMI 641 - ITAT COCHIN , which assessee may rely upon. The AO must decide the issue independently without being influenced by the observations of the CIT. Accordingly, we set aside the order of the CIT on the issue of disallowance u/s 40(a)(ia) of rent paid to Kamma Sangham and remit the matter back to the file of the AO for deciding afresh and in accordance with law after affording a reasonable opportunity of being heard to the assessee. - Decided in favour of assessee.

Summary

Issues:
1. Revision of assessment order u/s 263 of the Act for AY 2008-09.
2. Disallowance of deduction claimed towards STT and brokerage.
3. Disallowance of rental income paid to Kamma Sangham under section 40(a)(ia) of the Act.

Revision of Assessment Order u/s 263:
The appeal was against the CIT's order revising the assessment order passed under section 143(3) for AY 2008-09. The CIT found the original assessment erroneous and prejudicial to revenue interests due to disallowed deductions claimed for STT and brokerage, and rental income paid to Kamma Sangham without tax deduction. The assessee argued that STT expenditure was for statutory compliance and rent to Kamma Sangham, a charitable trust, was exempt under section 11. The CIT directed the AO to disallow the deductions and examine finance charges under Rule 8D of IT Rules. The Tribunal upheld the revision, noting the AO's failure to consider section 194-I's applicability to rent payments, agreeing on the STT and brokerage disallowance, but remitted the rental income disallowance issue back to the AO for proper examination.

Disallowance of Deduction Claimed for STT and Brokerage:
The CIT directed disallowance of deductions claimed for STT and brokerage. The assessee argued STT was a business expenditure for statutory compliance. The Tribunal upheld this disallowance as the CIT's direction was accepted by the assessee.

Disallowance of Rental Income Paid to Kamma Sangham:
The CIT directed disallowance of rental income paid to Kamma Sangham under section 40(a)(ia) as tax was not deducted. The assessee contended Kamma Sangham's exemption under section 11 made tax deduction unnecessary. The Tribunal found the CIT's order correct in considering the applicability of section 194-I and disallowance under section 40(a)(ia but remitted the issue back to the AO for proper examination, emphasizing the need to analyze the entire issue thoroughly.

In conclusion, the Tribunal upheld the revision of the assessment order under section 263, agreed with the disallowance of deductions for STT and brokerage, but remitted the disallowance of rental income paid to Kamma Sangham back to the AO for a detailed examination in accordance with relevant statutory provisions and arguments presented by the assessee. The appeal was allowed for statistical purposes.