2018 (7) TMI 2276 - AT - Income Tax

Disallowance u/s 40(a)(ia) - Scope of second proviso to Sec.40(a)(ia) - assessee submitted that the recipient of payment from the assessee has included the amount received from assessee in the return of income - scope of amendment to the provisions of section 201(1) and section 40(a)(ia) of the Act by Finance Act, 2012 w.e.f. 1.7.2012 and 1.4.2013 by insertion of first proviso and third proviso respectively - HELD THAT - The Hon ble Delhi High Court in the case of CIT Vs. Ansal Land Mark Township (I) Pvt.Ltd., 2015 (9) TMI 79 - DELHI HIGH COURT has taken the view that the insertion of the second proviso to Sec.40(a)(ia) of the Act is retrospective and will apply from 1.4.2005. Similar view has also been taken by the Hon ble Calcutta High Court in the case of M/s.Tirupati Construction 2016 (8) TMI 1310 - CALCUTTA HIGH COURT Therefore the Assessee is entitled to the benefit of 2nd proviso to Sec.40(a)(ia) - Assessee has filed certificate as is necessary under the 2nd proviso to Sec.40(a)(ia) of the Act and the AO in the remand report after verification has not drawn any adverse inference against the claim of the Assessee. It is thus clear that the recipient of payment from the Assessee has filed return of income for the relevant previous year within time allowed u/s.139(1) and also included the sum received from the Assessee in their return of income. Since the recipients have included the receipts paid by the assessee in their respective returns of income and also paid taxes on the same, no disallowance u/s.40(a)(ia) of the Act should be made. In our view the CIT(A) was fully justified in allowing the relief to the Assessee. Disallowance u/s 14A r.w.r. 8D - HELD THAT - As admitted factual position in the present case is that there was no dividend income or other exempt income earned by the assessee during the relevant previous year - thus no disallowance of expenses u/s 14A of the Act, if there is no exempt income earned during the relevant previous year - Seef M/s UB Infrastructure Projects Ltd. 2017 (12) TMI 1749 - ITAT BANGALORE - Thus we are of the view that the disallowance of expenditure u/s 14A of the Act was rightly deleted by the CIT(A). We find no grounds to interfere with the order of the CIT(A).

Summary

Issues Involved:
1. Disallowance under Section 40(a)(ia) for non-deduction of TDS.
2. Disallowance under Section 14A for expenses related to tax-exempt income.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(ia) for non-deduction of TDS:

The primary issue was whether the CIT(A) was correct in allowing the appeal of the assessee by easing the provisions of Section 40(a)(ia) in favor of the assessee, despite the assessee being a chronic defaulter of TDS. The assessee, engaged in the manufacture of readymade garments, outsourced some manufacturing work and paid Rs. 29,72,63,800 to M/s. L.T. Karle & Co. without deducting TDS as required by Section 194C. The AO added this amount to the total income under Section 40(a)(ia) for non-deduction of TDS.

The assessee contended that the recipient included the payment in their income and paid taxes, supported by Form 26A from an auditor. The CIT(A) referred to the second proviso to Section 40(a)(ia) and the first proviso to Section 201(1), which state that if the payee has included the payment in their income and paid taxes, the payer should not be deemed in default, and no disallowance should be made.

The CIT(A) obtained a remand report from the AO, who did not dispute the certificate but noted it was not filed during the assessment. The CIT(A) deleted the addition, citing various judicial pronouncements, including the Supreme Court's decision in Hindustan Coca Cola Beverages Pvt. Ltd. v. CIT, which held that if the recipient has paid taxes, the same amount cannot be taxed again.

The Tribunal upheld the CIT(A)'s decision, noting that the Delhi High Court in CIT v. Ansal Land Mark Township (P) Ltd. and the Calcutta High Court in M/s. Tirupati Construction held that the second proviso to Section 40(a)(ia) is retrospective and applies from 1.4.2005. Since the recipient included the payment in their income and paid taxes, no disallowance should be made under Section 40(a)(ia).

2. Disallowance under Section 14A for expenses related to tax-exempt income:

The second issue was whether the CIT(A) was right in allowing the appeal of the assessee by not disallowing expenses under Section 14A read with Rule 8D, despite the assessee not earning any exempt income during the relevant year. The AO disallowed Rs. 11,977 under Section 14A, considering the interest expenses and investments likely to yield tax-free income.

The CIT(A) deleted the disallowance, reasoning that no disallowance of expenses under Section 14A can be made when no exempt income is earned during the relevant year. The Tribunal upheld this decision, referencing the Bangalore Bench of ITAT in M/s UB Infrastructure Projects Ltd. v. DCIT and the Delhi High Court in Cheminvest Ltd. v. CIT, which held that Section 14A cannot be invoked when there is no exempt income.

Conclusion:

The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s decisions on both issues. The Tribunal concluded that the CIT(A) was justified in allowing the relief to the assessee under Section 40(a)(ia) and in deleting the disallowance under Section 14A, as there was no exempt income earned during the relevant year. The appeal by the revenue was thus dismissed.