2015 (7) TMI 612 - AT - Income Tax

Revision proceedings under section 263 by CIT(A) - assessee has not deducted TDS on management service fee and royalty, the debit to the profit and loss account, within the time frame prescribed u/s 40(a)(ia) of the Act, the expenses should have been disallowed - The assessee submits that as it had deducted and deposited TDS before the due date of filing of return, the provision of section 40(a)(ia) of the Act are not attracted - Held that - We are not in agreement with the contentions raised by the assessee. The amendment made by the Finance Act 2010 extended the time of payment of tax deducted to the due date of filing of return u/s 139(1) of the Act. The tax had to be deducted only in the previous year only to avail the benefit of the amendment. Admittedly in the present case, tax had not been deducted by the assessee during the previous year and therefore disallowances ought to have been made for the payments made for management service fee as well as for royalty. The reasons stated by the assessee that the company was going through the process of demerger does not impress us at all. The provision of deduction on TDS are mandatory and strict in nature and cannot be given a go-by as done by the assessee. We are in agreement with the reasoning given in the impugned order of the ld. CIT that the assessee had failed to deduct TDS during the previous year on payments of management service fee and royalty debited to the profit and loss account. The order passed by the AO is therefore erroneous and prejudicial to the interest of the revenue. The twin conditions as laid down by the Hon ble Supreme Court in the case of Malabar Industrial Co.Ltd vs CIT (2000 (2) TMI 10 - SUPREME Court) and the Hon ble Delhi High Court in the case of CIT vs Vikash Polymers (2010 (8) TMI 745 - Delhi High Court ) are satisfied simultaneously in the present case. The Order passed by the AO suffers from non application of mind in as much as the mandatory statutory provision of section 40(a)(ia) of the Act were ignored. The ld. CIT was within its jurisdiction to invoke powers u/s 263 of the Act. The object of the provision is to correct the erroneous order which is prejudicial to the interest of the revenue, as the department has no right to file an appeal against the order of AO. Whether the ingradients of the section are satisfied will depend on the facts of each case. - Decided against assessee.

Issues Involved:
1. Validity of the order issued by the CIT under section 263 of the IT Act.
2. Conditions governing the initiation of proceedings under section 263 of the Act.
3. Deduction and deposit of TDS on management service fees and royalty expenses.
4. Erroneous and prejudicial nature of the Assessing Officer's order.
5. Deduction of taxes on management service fees during the demerger process.
6. Non-claim of deduction towards management service fees and royalty in the subsequent assessment year.
7. Allowance of deductions in the subsequent assessment year if disallowed in the current year.

Detailed Analysis:

1. Validity of the Order Issued by the CIT:
The assessee contended that the order issued by the CIT under section 263 of the IT Act was "bad in law and void ab initio." The Tribunal examined the grounds and found that the CIT had clearly stated the reasons for considering the assessment order erroneous and prejudicial to the interest of the revenue. Therefore, the Tribunal did not accept the assessee's submission to set aside the impugned order on this ground alone.

2. Conditions Governing the Initiation of Proceedings Under Section 263:
The CIT initiated proceedings under section 263, stating that the assessment order dated 29th December 2011, was erroneous and prejudicial to the interest of the revenue concerning the deductions for management service fees and royalty expenses. The Tribunal noted that the CIT had recorded specific reasons for revising the assessment order, thus satisfying the conditions for initiating proceedings under section 263.

3. Deduction and Deposit of TDS on Management Service Fees and Royalty Expenses:
The CIT observed that the assessee had not deducted TDS from the payment of management service fees and royalty during the previous year. The TDS was deducted and deposited only in September 2009, which was in contravention of section 40(a)(ia) of the Act. The Tribunal agreed with the CIT's view that the expenses should have been disallowed due to the non-compliance with the TDS provisions.

4. Erroneous and Prejudicial Nature of the Assessing Officer's Order:
The Tribunal noted that the CIT had provided clear grounds for considering the assessment order erroneous and prejudicial to the interest of the revenue. The Assessing Officer had failed to disallow the expenses related to management service fees and royalty, which were claimed without deducting TDS during the previous year. This failure resulted in an underassessment of income.

5. Deduction of Taxes on Management Service Fees During the Demerger Process:
The assessee argued that it could not deduct taxes on management service fees during the previous year due to the demerger process. The Tribunal did not accept this reasoning, emphasizing that the TDS provisions are mandatory and strict. The assessee's failure to deduct TDS during the previous year warranted disallowance of the expenses.

6. Non-Claim of Deduction Towards Management Service Fees and Royalty in the Subsequent Assessment Year:
The assessee contended that it had not claimed any deduction for management service fees and royalty in the subsequent assessment year 2010-11. The Tribunal did not find this argument sufficient to override the mandatory requirement of deducting TDS during the previous year.

7. Allowance of Deductions in the Subsequent Assessment Year if Disallowed in the Current Year:
The assessee argued that if the expenses were disallowed in the current assessment year, they should be allowed as deductions in the subsequent year. The Tribunal noted that the provisions of section 40(a)(ia) were clear and mandatory, and the failure to deduct TDS during the previous year justified the disallowance of the expenses in the current year.

Conclusion:
The Tribunal upheld the CIT's order, confirming that the assessment order was erroneous and prejudicial to the interest of the revenue. The grounds raised by the assessee were dismissed, and the appeal was rejected. The Tribunal emphasized the mandatory nature of the TDS provisions and the necessity for strict compliance to avoid disallowance of expenses. The order was pronounced in court on 18.6.2015.

← Previous Next →