2016 (11) TMI 1607 - AT - Income Tax

Disallowance of expenses u/s 40(a)(i)/40(a)(ia) - disallow payments when TDS was not done and subsequently become taxable on account of a retrospective legislation - HELD THAT - CIT(A) followed the decision of this Tribunal in M/s WS Atkins India Pvt. Ltd, supra, which referred the decisions of Hyderabad Bench of the Tribunal in Infotech Enterprises Ltd 2014 (1) TMI 1363 - ITAT HYDERABAD wherein it has been held that section 40(a)(ia) would not apply to disallow payments when TDS was not done and subsequent ly become taxable on ac count of a retrospective legislation. It has also referred to the decisions of the Delhi & Mumbai Tribunal in SMS Demag Pvt Ltd 2018 (1) TMI 184 - ITAT DELHI & Sonic Biochem Extractions Pvt. Ltd. 2013 (9) TMI 193 - ITAT MUMBAI . We uphold the decision of the CIT(A) and dismiss the grounds raised by the Revenue.

Summary

Issues:
1. Whether the assessee was liable to deduct taxes on payments for software purchases made during the assessment year 2011-12.
2. Whether the disallowance of expenses under section 40(a)(i) and 40(a)(ia) was justified.

Issue 1:
The Appellate Tribunal ITAT Bangalore heard an appeal by the Revenue against the order of the CIT (A) for the assessment year 2012-13. The AO questioned the non-deduction of taxes on software purchases made by the assessee in the assessment year 2011-12. The assessee argued that the payments were for software license renewals, not subject to tax deduction at source, citing various judgments. The AO, however, held the payments as royalty income, necessitating TDS under sections 195 and 194 J. The CIT (A) allowed the appeal, leading to the Revenue's appeal. The assessee relied on precedents and the timing of the payments to argue against retrospective tax liability.

Issue 2:
Regarding the disallowance of expenses under section 40(a)(i) and 40(a)(ia), the CIT (A) considered the assessee's arguments based on prevailing judgments and the lack of clarity on tax liability during the relevant period. The CIT (A) referred to various tribunal decisions supporting the assessee's position, emphasizing that tax deduction at source cannot be imposed retrospectively. The CIT (A) highlighted that the law as it existed when the payments were made determines the tax liability, not subsequent amendments or court rulings. The ITAT upheld the CIT (A)'s decision, citing relevant tribunal cases and dismissing the Revenue's appeal.

In summary, the judgment dealt with the liability of the assessee to deduct taxes on software purchases and the disallowance of expenses under sections 40(a)(i) and 40(a)(ia). The decision emphasized the importance of the law at the time of payment in determining tax liability, rejecting retrospective imposition of tax obligations based on subsequent amendments or court rulings. The tribunal's analysis considered various precedents and upheld the CIT (A)'s decision in favor of the assessee, ultimately dismissing the Revenue's appeal.