2017 (5) TMI 1737 - AT - Income Tax

Disallowance u/s. 40(a)(ia) - Amount of free airtime given to distributors on sale of prepaid sim-cards by holding the same to be in the nature of commission liable for deduction of lax at source u/s 194H - Scope of amended provision - first contention of the assessee is that as in case of CIT v. Kotak Security Ltd. 2011 (10) TMI 24 - BOMBAY HIGH COURT has held that disallowance u/s. 40(a)(ia) was not at all warranted as the applicant was under bona fide belief that tax was not deductible at source - HELD THAT - The revenue has not controverted that the belief of the assessee regarding non-deduction of tax at source was not bona fide. Therefore respectfully following the decision of the Bombay High Court in Kotak Securities Ltd. (supra) we also hold that in such circumstances no action could be taken u/s. 40(d)(ia) of the Act. In the result this contention of the assessee is allowed. Alternative plea that disallowance if any for non-deduction of tax should be restricted to 30% of the expenditure - By Finance (No. 2) Act 2015 as amended the provisions of section 40(a)(ia) w.e.f. 01.04.2015 though the Finance Minister explained the amendment that earlier disallowance of 100% of such expenditure has caused undue hardship to the assessee particularly where the rate of taxes only 1% to 10%. Therefore only 30% of such payment instead of 100% will be disallowed. In the explanatory memorandum the reasons were also given of reducing the hardship. However it was stated that these amendment will take effect from 1st April 2015 and accordingly apply for A.Y. 2015-16 onwards. We are not inclined to accept the contention of the Ld. AR that rate of disallowance reduced from 100% to 30% of the expenditure by the Finance Act 2014 applies retrospectively -In the result this contention of assessee is rejected and we hold that amendment to section 40(a)(ia) with effect from 1-4-2015 of reduction in rate of disallowance coupled with the increase in scope of the disallowance is not retrospective in nature. Disallowance u/s. 40(a)(ia) should have if at all been restricted to the amount remaining payable at on the last date of the previous year - We have come across the recent decision in M/s. Palam Gas Services v. CIT 2017 (5) TMI 242 - SUPREME COURT wherein has held that disallowance u/s. 40(a)(ia) cannot be restricted to amount payable at the end of the year only but also applies to the amount paid during the year also. In view of this above argument of the assessee is rejected. AO could not have disallowed the amount to the extent of no order u/s. 201 passed treating the assessee to be assessee in default - On reading of both the provisions it is apparent that there was twin consequences applicable in case assessee fails to deduct tax at source and after deducting fails to pay (i) such amount shall not be allowed as deduction and (ii) further the assessee may be asked to pay the tax along with interest and probable penalty. The above argument can also be tested that in case if the amount is disallowed u/s. 40(a)(ia) of the Act does it prohibit the Ld. Assessing Officer in recovering the tax and interest from the assessee by passing an order u/s. 201 of the Act. The obvious answer is No. The second proviso to section 40(a)(ia) of the Act inserted with effect from 1.4.2013 by the Finance Act 2012 also visualizes a situation that when the assessee is not deemed to be in default u/s. 201 of the Act and if the payee has filed the return the disallowance u/s. 40(a)(ia) shall not be made. - we do not agree with the contention of the assessee that unless there is an order u/s. 201 of the Act the impugned amount cannot disallowed u/s. 40(a)(ia) of the Act. Admission of additional ground - assessee ought to be allowed deduction of liability borne by the assessee in pursuance of order(s) passed under section 201(1) of the Income-tax Act 1961 - HELD THAT - As relying on assessee own case 2017 (1) TMI 172 - ITAT DELHI we set aside the above additional ground of appeal after admission to the file of the Ld. Assessing Officer to decide the claim of the assessee afresh after considering the provisions of section 40(a)(ii) and section 37(1) read with Explanation 1 of that section or any other provisions of the Income-tax Act. The miscellaneous application of the assessee is accordingly disposed off.

Summary

Issues Involved:
1. Disallowance under section 40(a)(ia) for non-deduction of tax at source.
2. Application of bona fide belief regarding non-deduction of tax.
3. Retrospective applicability of amendments in section 40(a)(ia).
4. Restriction of disallowance to the amount payable at year-end.
5. Requirement of an order under section 201 for disallowance.
6. Deduction of liability borne under section 201(1) as a business expense.

Detailed Analysis:

1. Disallowance under section 40(a)(ia) for non-deduction of tax at source:
The Tribunal initially disallowed Rs. 505,47,21,495 under section 40(a)(ia) for non-deduction of tax on free airtime given to distributors, categorizing it as 'commission' under section 194H. However, the Tribunal later recalled the order for further adjudication on alternative contentions.

2. Application of bona fide belief regarding non-deduction of tax:
The Tribunal agreed that the assessee's bona fide belief that tax was not deductible warranted no disallowance under section 40(a)(ia). This was based on the Bombay High Court's decision in CIT v. Kotak Securities Ltd., which held that no disallowance should be made if the assessee operated under a bona fide belief. The Tribunal set aside the issue to the assessing officer to verify if the recipients had paid the tax.

3. Retrospective applicability of amendments in section 40(a)(ia):
The Tribunal accepted that amendments made by the Finance Act, 2012, introducing the second proviso to section 40(a)(ia), were curative and should apply retrospectively from 1-4-2005. This proviso allows relief if the payee has paid the tax. The Tribunal directed the assessing officer to apply this retrospectively if the bona fide belief argument did not hold.

4. Restriction of disallowance to the amount payable at year-end:
The assessee argued that disallowance should be restricted to the amount payable at the end of the year. However, the Tribunal rejected this argument, citing the Supreme Court's decision in M/s. Palam Gas Services v. CIT, which held that disallowance applies to both amounts paid and payable during the year.

5. Requirement of an order under section 201 for disallowance:
The assessee contended that disallowance should not be made without an order under section 201 treating the assessee as in default. The Tribunal disagreed, stating that section 40(a)(ia) and section 201 operate independently. Disallowance under section 40(a)(ia) does not require an order under section 201.

6. Deduction of liability borne under section 201(1) as a business expense:
The Tribunal admitted an additional ground regarding the deduction of liability borne under section 201(1) as a business expense. This ground was remitted to the assessing officer for fresh adjudication, following the Tribunal's decision in the assessee's own case for the previous year.

Conclusion:
The Tribunal allowed the assessee's contention of bona fide belief, subject to verification by the assessing officer. It also accepted the retrospective applicability of the second proviso to section 40(a)(ia). However, it rejected the arguments for restricting disallowance to the year-end payable amount and the necessity of an order under section 201 for disallowance. The additional ground regarding deduction under section 201(1) was remitted for fresh adjudication.