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2017 (1) TMI 1688 - AT - Income TaxDisallowance u/s 40(a)(ia) - recipient has paid due taxes on the income - HELD THAT - This issue is now covered by the case of CIT Vs. Ansal Landmark Townships Pvt. Ltd. 2015 (9) TMI 79 - DELHI HIGH COURT wherein it is held that as long as the recipient has paid due taxes on the income embedded in such payments, disallowance under section 40(a)(ia) cannot be invoked - the matter can be remitted to the file of the Assessing Officer for the limited verification of the fact that the recipient has included the receipt from the assessee in the computation of income on which taxes have been paid. The assessee may obtain from the recipient concerned a certificate to this effect and file the same before the Assessing Office Disallowance under section 40A(2)(b) - HELD THAT - Issue is now covered in favour of the assessee by the decision of PWS Engineers Limited vs. DCIT 2016 (6) TMI 596 - GUJARAT HIGH COURT wherein held that as long as the amounts paid by the assessee to the specific persons are taxed in the hands of specific persons at the same rate, disallowance under section 40A(2)(b) will be meaningless inasmuch as permitting the Revenue to tax the same income again at the same rate in the hands of the principal payer would amount to double taxation - proper course of action will be to remit the matter to the file of Assessing Officer for verification of factual aspect as to whether or not the said amount is brought to tax in the hands of the recipient at the same rate. If that be so, the disallowance will stand deleted.
Issues Involved:
1. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961. 2. Disallowance under Section 40A(2) of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961: The primary issue was whether the CIT(A) was justified in upholding the disallowance of ?18,45,187/- under Section 40(a)(ia) due to non-deduction of tax at source. The assessee had paid this amount to M/s H.C. Fruits, a partnership concern in which the assessee is a partner. The Assessing Officer disallowed this amount, considering it as commission and noting the absence of tax deduction at source. The Tribunal referred to the judgment of the Hon'ble Delhi High Court in CIT Vs. Ansal Landmark Townships Pvt. Ltd. [(2015) 377 ITR 635 (Del)], which held that disallowance under Section 40(a)(ia) cannot be invoked if the recipient has paid taxes on the income embedded in such payments. The Tribunal also cited the case of RKP & Co. Vs. ITO (ITA No.106/Ahd/2016), which supported this view. The Tribunal decided to remit the matter to the Assessing Officer for fresh adjudication. The Assessing Officer was directed to verify whether the recipient included the payment in their income and paid taxes accordingly. If so, the disallowance should be deleted. The Tribunal emphasized that this approach aligns with the principle of avoiding double taxation and the retrospective application of curative amendments. 2. Disallowance under Section 40A(2) of the Income Tax Act, 1961: The second issue concerned the disallowance of ?18,45,187/- under Section 40A(2)(b), where the Assessing Officer deemed the payment excessive and not in the normal course of business. The CIT(A) upheld this disallowance, considering the payment excessive. The Tribunal referred to the decision of the Hon'ble jurisdictional High Court in PWS Engineers Limited vs. DCIT - Tax Appeal No.209 of 2015, which held that disallowance under Section 40A(2)(b) is meaningless if the amounts paid are taxed in the hands of the recipients at the same rate. The Tribunal decided to remit this matter back to the Assessing Officer as well, for verification of whether the amount was taxed in the hands of the recipient at the same rate. If confirmed, the disallowance should be deleted to prevent double taxation. Conclusion: The appeal was allowed for statistical purposes, with both issues remitted to the Assessing Officer for fresh adjudication based on the Tribunal's observations. The Tribunal directed the Assessing Officer to provide a fair opportunity of hearing to the assessee and decide the matter in accordance with the law. The judgment was pronounced in the open Court on January 25, 2017.
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