2015 (9) TMI 1004 - AT - Income Tax

Addition made on account of disallowance u/s 40(a)(ia) - CIT(A) deleted the addition - submissions of assessee concluded that organsations to whom assessee has made payments are within the purview of section 194A(3)(iii) of the Act, hence, there is no requirement for assessee to deduct tax at source on the payments made to them - Held that - the only reason on which disallowance u/s 40(a)(ia) was made is, Citi Corp and AB Builders Fund Co-op. Society are not covered under Banking Regulation Act. However, on perusal of the relevant statutory provision, it is seen that both the organizations to whom assessee has paid interest, but, are coming within the exception provided u/s 194A(3)(iii) of the Act. Therefore, ld. CIT(A) was correct in holding that there is no requirement for assessee to deduct tax at source on the payments made. Even otherwise also, it is the contention of assessee that the entire finace charges were paid by assessee during the relevant PY and nothing remained outstanding at the end of the PY. The aforesaid factual position has not been controverted by the department. That being the case, following the decisions cited by ld. AR as referred to by ld. CIT(A), no disallowance u/s 40(a)(ia) can be made. In view of the above, we uphold the decision of ld. CIT(A) on this issue - Decided against revenue. Bogus purchases - Outstanding closing balance in respect of three creditors - CIT(A) deleted the addition - Held that - When AO accepts purchases as well as payments made by assessee to the concerned parties, he cannot treat the outstanding closing balance of the concerned creditors as bogus. If at all he had an doubt with regard to the transactions affected by assessee with the concerned parties, he should have treated the entire transactions as bogus and not part of it. Moreover, it is seen from the observations made by AO that he accepts the fact that bills/vouchers submitted by assessee to certain extent proves the genuineness of the transaction between parties. That being the case, in our view, AO cannot treat the outstanding balance due to the creditors as bogus purchases of the assessee on purely conjectures and surmises. In the aforesaid view of the matter, having not found any infirmity in the order of ld. CIT(A) in deleting addition made by AO in respect of the three creditors, we uphold the same by dismissing the grounds raised by the department.- Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition made on account of disallowance under section 40(a)(ia).
2. Deletion of additions in respect of three trade creditors.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made on Account of Disallowance Under Section 40(a)(ia):

The department challenged the decision of the CIT(A) in deleting the addition made due to disallowance under section 40(a)(ia). The assessee, a partnership firm engaged in civil contract works, filed its return of income for AY 2009-10. During the assessment, the AO noticed that the assessee had debited Rs. 27,32,230 as finance charges in the P&L account, with interest payments made to ICICI, HDFC, Citi Corp, and AB Builders Fund Co-op. Society. The AO observed that the provisions of section 194A are not applicable to Citi Corp and AB Builders Fund Co-op. Society, as they are not covered by the Banking Regulation Act. Consequently, the AO disallowed Rs. 12,29,055 under section 40(a)(ia) for non-deduction of tax at source.

The assessee contended before the CIT(A) that both organizations fall under the exception provided in section 194A(3)(iii), negating the requirement to deduct tax. Additionally, the assessee argued that section 40(a)(ia) could not apply as the entire finance charges were paid during the relevant PY, leaving nothing outstanding. The CIT(A) agreed with the assessee, concluding that the organizations were within the purview of section 194A(3)(iii), thus no tax deduction was required. The Tribunal upheld the CIT(A)'s decision, noting that the department did not dispute the factual position that the entire finance charges were paid during the relevant PY and nothing remained outstanding. Consequently, the ground raised by the department was dismissed.

2. Deletion of Additions in Respect of Three Trade Creditors:

The department also contested the deletion by the CIT(A) of additions amounting to Rs. 45,00,000, Rs. 23,64,500, and Rs. 2,97,500 related to three trade creditors. During the assessment, the AO found that the assessee had shown Rs. 4,99,85,846 as credits for goods supply and outstanding expenses. The AO called for details and, upon verification, found that three creditors did not confirm the supply of materials. The creditors in question were Syed Sadiq Mohiuddin, Shankar, and M/s KSL Constructions. The AO noted discrepancies such as non-existent PAN for Syed Sadiq Mohiuddin and non-response to summons under section 131. Consequently, the AO treated the closing balances as unexplained credits and added them to the assessee's income.

Before the CIT(A), the assessee argued that the creditors were long-term suppliers with running accounts, and the transactions were genuine, supported by bills and payments. The CIT(A) observed that the AO accepted the genuineness of the payments and purchases but doubted the closing balances. The CIT(A) noted that the credits were not cash credits but supplies purchased on credit, and the non-response from creditors did not imply bogus purchases or payments. Therefore, the CIT(A) deleted the additions.

The Tribunal upheld the CIT(A)'s decision, noting that the AO accepted the purchases and payments but doubted only the closing balances. The Tribunal emphasized that the AO could not treat the closing balances as bogus when the transactions were otherwise accepted as genuine. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the grounds raised by the department.

Conclusion:

The appeal by the department was dismissed, with the Tribunal upholding the CIT(A)'s decisions on both issues. The Tribunal agreed that the disallowance under section 40(a)(ia) was not justified and that the additions related to trade creditors were unwarranted, as the transactions were genuine and supported by evidence.