2014 (11) TMI 1197 - AT - Income Tax

Disallowance u/s 40(a)(ia) for non deduction of TDS - Assessee paid interest on the deposits - as per assessee once the recipient entities are entitled for exemption u/s 10(23C) the assessee is not liable to deduct tax - HELD THAT - The contention of the assessee that provisions of section 40(a)(ia) is applicable only in respect of the amounts remains to be paid as on the last day of the financial year is not accceptable. This Tribunal had an occasion to examine an identical set of facts in Shri Thomas George Muthoot & Ors 2015 (9) TMI 323 - ITAT COCHIN Section 40(a)(ia) would cover not only to the amounts which are payable as on 31st March of a particular year but also which are payable at any time during the year. Of course, as long as the other requirement of the said provision exist. Judgments of the Calcutta High Court in Crescent Export Syndicate (supra) and the Gujarat High Court in Sikandarkhan N Tunvar (supra) are squarely applicable to the facts of the case. We do not see any infirmity in the orders of the lower authorities. Accordingly, the orders of the lower authorities are confirmed. - Decided against assessee. Payment was paid to the fund which was approved u/s 10(23C)(iv) - HELD THAT - The recipient entities are required to file the returns of income even though they are approved u/s 10(23C) by the concerned Chief Commissioner wherever the income exceeds the taxable limit without giving effect to provisions of section 10(23C) of the Act. Therefore, for computation of total income, the recipient entity may exclude the income which is applied for charitable purpose as per the object of the fund / institution and the conditions imposed by the Chief Commissioner. Hence, it is a matter factually to be verified in each and every case and there cannot be a total exemption. In the case before us, only in respect of one recipient, viz. Kerala Building & Other Constructions Workers Welfare Board the assessee has filed copy of the approval received from the Chief Commissioner. In respect of other recipient funds / board the copies of the approval are not filed. Therefore, it needs to be verified. Accordingly, the orders of lower authorities are set aside only for the limited purpose of examining whether the recipient concerns / boards are approved u/s 10(23C)(iv) of the Act by the Chief Commissioner / DIT. Thereafter, the assessing officer shall find out whether the interest is taxable in the hands of the recipient funds / board or not and then decide the issue in accordance with law after giving reasonable opportunity of hearing to the assessee.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(ia) of the Income Tax Act for non-deduction of tax.
2. Applicability of Section 40(a)(ia) to amounts already paid versus amounts payable.
3. Exemption under Section 10(23C) for interest paid to certain welfare funds and boards.
4. Verification of approvals under Section 10(23C) for recipient entities.

Detailed Analysis:

1. Disallowance under Section 40(a)(ia) of the Income Tax Act for Non-Deduction of Tax:
The primary issue in the appeal was the disallowance of Rs. 2,25,90,462 under Section 40(a)(ia) of the Income Tax Act due to the assessee's failure to deduct tax on interest payments made to various welfare funds and boards. The assessee contended that these entities were established by the state government under specific legislation and were eligible for exemption under Section 10(23C). Therefore, the assessee argued that tax deduction was not required.

2. Applicability of Section 40(a)(ia) to Amounts Already Paid Versus Amounts Payable:
The assessee argued that Section 40(a)(ia) applies only to amounts that remain payable at the end of the financial year and not to amounts that have already been paid. They relied on the Allahabad High Court's decision in CIT vs. Vector Shipping Services (P) Ltd and the Special Bench decision in Merilyn Shipping & Transports vs. Addl CIT. However, the Tribunal, referencing decisions from the Calcutta High Court in Crescent Exports Syndicate and the Gujarat High Court in CIT vs. Sikandarkhan N Tunwar, held that Section 40(a)(ia) applies to both amounts payable and paid during the year. The Tribunal emphasized that the object of Section 40(a)(ia) is to ensure tax deduction at source, and this provision operates independently from Section 201, which deals with the recovery of tax from the defaulter.

3. Exemption under Section 10(23C) for Interest Paid to Certain Welfare Funds and Boards:
The assessee claimed that since the recipient entities were entitled to exemption under Section 10(23C), they were not liable to deduct tax. However, the Tribunal pointed out that the exemption under Section 10(23C) is conditional upon the income being applied for charitable purposes and approved by the prescribed authority. Therefore, the assessee cannot unilaterally decide the taxability of the income in the hands of the recipient entities.

4. Verification of Approvals under Section 10(23C) for Recipient Entities:
The Tribunal noted that the assessee had provided approval under Section 10(23C) only for the Kerala Building & Other Constructions Workers Welfare Board. For other entities, no such approval was submitted. The Tribunal directed the lower authorities to verify whether the recipient entities were approved under Section 10(23C) by the Chief Commissioner/DIT and whether the interest was taxable in their hands. The Tribunal set aside the orders of the lower authorities for this limited purpose and instructed the assessing officer to decide the issue in accordance with the law after giving the assessee a reasonable opportunity of being heard.

Conclusion:
The Tribunal upheld the disallowance under Section 40(a)(ia) for non-deduction of tax on interest payments, rejecting the argument that the provision applies only to amounts payable at the end of the financial year. The Tribunal also emphasized the need for verification of approvals under Section 10(23C) for the recipient entities to determine their eligibility for exemption. The appeal was partly allowed, with instructions for further verification by the assessing officer.