2019 (8) TMI 1457 - AT - Income Tax

Disallowance u/s 40(a)(ia) - Disallowance on the ground that the only amount which has been shown as payable in the books of account will entail disallowance u/s 40(a)(ia) and not the amount which has been paid even though TDS has been deducted - HELD THAT - This issue has been set at rest by the Hon'ble Supreme Court in the case of Palam Gas Service 2017 (5) TMI 242 - SUPREME COURT that disallowance u/s 40(a)(ia) is applicable not only on the payable amount but also on paid and under both the circumstances TDS should be deducted. Thus, reasoning given by the Ld. CIT (A) is rejected. However, we agree with the other contention of the Ld. Counsel that if the payee has accounted for the commission as his income and has shown it in his return of income and also paid tax thereon then no disallowance can be made in terms of second proviso to section 40(a)(ia) r.w.s first proviso to section 201. The AO is accordingly directed to verify the contention of the assessee that if payee has accounted for the commission payment received by him as his income and has paid taxes thereon, then no disallowance should be made. Contention of the Ld. Counsel is concerned that only 30% should be disallowed in view of amendment brought in the statute w.e.f. 01-04-2015 and should be applied retrospectively - where disallowance has been made hundred percent and assessee does not challenge the quantum, then can he claim that disallowance ought to have been at reduced percentage. In a vice versa situation if amended provision increase the quantum of disallowance, then can revenue retrospectively disallow higher percentage of disallowance. Answer would be no. Whenever there is an amendment with regard to rate of tax or fixation of any quantum of deduction for disallowance or allowance, then such an amendment has to be interpreted prospectively only after the statute has brought the provision with prospective date. It is a trite law that a substantive provision cannot be given retrospective effect unless statute provides for. Its only when any beneficial provision is brought in the statute to undo any hardship and or remove any mischief, then such an amended provision is given retrospective effect. Thus, the contention raised by the assessee is dismissed. Accordingly this issue is restored back to the file of the AO only with respect to the verification of the fact whether payee has shown the commission amount as his income or not, which is to be examined in light of second proviso to section 40(a)(ia). Disallowance of wages - HELD THAT - Perusal of the muster roll that it clearly pertains to the assessee company and month wise details of labour payment has been given along with rate and days of work and the quantum wages paid. Nowhere has it been pointed out that such labour payments is excessive as compared to the earlier year or are not in consonance with the overall trading result or past history. Thus, adhoc disallowance cannot be made on the reasons given by the AO for making the adhoc addition cannot be sustained. In the result, order of the Ld. CIT (A) is confirmed and additions stands deleted. Addition on account of sundry creditors - DR submitted that all the sundry creditors remained unverified even in response to enquiries made by the AO u/s 133(6) - HELD THAT - From the perusal of the copy of the ledger account and the balance sheet, it is quite clear that during the year addition on account of sundry creditors are only ₹ 35,36,546/-; and if AO is invoking section 68, ostensibly, the entire addition of ₹ 2,22,59,664/- could not have been made u/s 68, because these are not credits in the books of account for the relevant previous year. Moreover, from the perusal of the ledger account of the sundry creditors it is seen that all these parties were having regular transactions from whom assessee has been making purchases and all the payments has been made though account payee cheques against specific bills and also mentions vouchers numbers. The bills of these parties contain the entire details of purchases made by the assessee. Once from all the parties assessee was having regular business transaction and regular payment has been made from these parties, duly backed by bills and payment vouchers, then where is the question of disallowance. If the purchases made from these parties have been duly accounted for and are part of trading account and neither the debits side nor the credit side of the trading results have been disturbed nor books of accounts have been rejected, then no addition on account of sundry creditors can be made. Accordingly, the addition as confirmed by the Ld. CIT( A) is confirmed and additions stands deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961.
2. Adhoc disallowance of labor expenses.
3. Addition under Section 68 of the Income Tax Act, 1961 for unconfirmed creditors.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961:
The revenue contested the deletion of a disallowance of ?97,900 made by the Assessing Officer (AO) under Section 40(a)(ia) due to the assessee's failure to deduct TDS on commission payments. The CIT(A) had deleted the disallowance, relying on the judgment of the Allahabad High Court in CIT v. Vector Shipping Services (P.) Ltd., which held that no disallowance could be made if the amount was shown as paid. However, the Supreme Court in Palam Gas Service v. CIT clarified that disallowance under Section 40(a)(ia) applies to both paid and payable amounts. The Tribunal upheld the Supreme Court's view but remanded the matter to the AO to verify if the payee had accounted for the commission income and paid taxes thereon, as per the second proviso to Section 40(a)(ia) read with the first proviso to Section 201. The Tribunal rejected the assessee's argument that only 30% of the amount should be disallowed retrospectively, as the amendment was prospective.

2. Adhoc Disallowance of Labor Expenses:
The AO had made an adhoc disallowance of 10% of labor expenses amounting to ?14,81,258, citing non-compliance with labor laws and lack of clarity on the muster rolls' authenticity. The CIT(A) deleted the disallowance, noting that the AO had no basis for the 10% disallowance and that compliance with EPF and ESI was not a ground for disallowance under the Income Tax Act. The assessee had provided detailed monthly labor expenses and muster rolls, which clearly showed the company's name and work sites. The Tribunal confirmed the CIT(A)'s deletion, stating that the AO's reasons for the adhoc addition were unsustainable and that there was no evidence of excessive labor payments.

3. Addition under Section 68 for Unconfirmed Creditors:
The AO had added ?2,22,59,664 under Section 68, treating the entire sundry creditors as unexplained due to non-response to notices sent under Section 133(6). The CIT(A) observed that the AO did not provide the assessee an opportunity to object to the non-compliance and noted that the addition during the year was only ?35,36,546. The Tribunal agreed with the CIT(A) that Section 68 could not be applied to amounts representing purchases made on credit, especially when the purchases were accounted for in the profit and loss account. The Tribunal found that the AO had not examined the nature of sundry creditors or the ledger accounts and had made the addition without verifying the books of accounts. The Tribunal confirmed the CIT(A)'s deletion of the addition, noting that the transactions were regular, supported by bills and payment vouchers, and that the trading results were not disturbed.

Conclusion:
The Tribunal restored the issue of disallowance under Section 40(a)(ia) to the AO for verification of the payee's income accounting but confirmed the CIT(A)'s deletion of adhoc disallowance of labor expenses and addition under Section 68 for unconfirmed creditors. The appeal was allowed in favor of the assessee.