2022 (3) TMI 1573 - AT - Income Tax

TDS u/s 194A - finance charges paid to NBFCs without deducting TDS - Addition u/s 40(a)(ia) - assessee in default u/s 201(1) - As Certificate of Chartered Accountant filed certifying that the finance charges paid by the appellant had been considered by deductees in Return of Income have paid the taxes and filed the Return of Income - HELD THAT - As law laid down in CIT Vs Ansel Landmark Township 2015 (9) TMI 79 - DELHI HIGH COURT and M/s Hindustan Coca Cola Beverages Pvt Ltd 2007 (8) TMI 12 - SUPREME COURT and in the context of circular number Circular No. 275/201/95-IT(B) dt 29/1/1997 issued by CBDT the Hon ble Lordships have observed that once it is proved on record that the payee has accounted the amount in question as income and discharged the due taxes thereon then no recovery of tax demand be enforced against the assessee. Applying the same analogy to the case at hand the assessee placed on records a certificate from a chartered accountant showcasing the income accounted and due discharge of taxes paid thereon by one of the resident payee. Consequently for the said amount of certificate the assessee cannot be held as the assessee-in-default within the meaning of Section 201(1) and resultantly such amount shall distant from application of provisions of section 40(a)(ia). Thus in the light of aforesaid observations the ground number 1 2 are partly allowed in terms of above. Disallowance in case of travelling vehicle maintenance - allowable business expenditure u/s 37(1) - HELD THAT - Neither of the lower tax authorities had pointed any such voucher the genuineness of the expenditure therein claimed to have been incurred by the assessee wholly and exclusively for the purpose of its business did not inspire any confidence nor it was the case of the revenue that any part of the expenditure in question was either found to be bogus or fictitious nor was found to have not been incurred by the assessee wholly and exclusively for the purpose of his business. Indeed it showcased an exercise of running around the circle by both the lower tax authorities while dealing with the present case. We neither could come across any provision in the present Income Tax Statute nor it has been brought to our notice by either parties to dispute which subscribes vis- -vis authorises the tax authorities to arrive at this logic of subscribing ad-hoc disallowances. Evidently there has been no clear findings as to number of vouchers requiring denial of allowances with the amount of expenditure and nature of defects therein or therewith moreover department could not bring out any deprecative material on record to substantiate its logical conclusion. We couldn t also see remotely there is any mention of rationale in arriving at the percentile of disallowance in the present case consequently we find substantial force in the claim of the assessee that devoid of any specific infirmity qua the assessee s claim for deduction of the aforementioned expenditure by the lower tax authorities and hence the ad-hoc disallowance carried out in a most arbitrary manner could by no means be held to be justified. We do not find favour with the view taken by the lower tax authorities consequently we set-aside the impugned order of CIT(A) on this score and vacate the ad-hoc disallowance in its entirety and thereby allow the ground number 3 of the appeal

Summary

Issues Involved:
1. Legality of ad-hoc disallowance of business expenses.
2. Application of Section 40(a)(ia) for non-deduction of tax under Section 194A.

Detailed Analysis:

1. Legality of Ad-hoc Disallowance of Business Expenses:

The appellant, an individual engaged in the transport and logistics business, challenged the ad-hoc disallowance of various business expenses by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO disallowed a portion of expenses on an ad-hoc basis, citing self-made vouchers and potential personal usage. The CIT(A) upheld these disallowances. The specific disallowed expenses included spare parts and repairs, tyre tube expenses, office expenses, telephone expenses, depreciation, traveling and vehicle maintenance, and pump maintenance expenses.

The Tribunal observed that neither the AO nor the CIT(A) pointed out any specific voucher or expenditure that was found to be non-genuine, bogus, or not incurred for business purposes. The Tribunal noted that there is no provision in the Income Tax Statute authorizing ad-hoc disallowances without clear findings or rationale. The Tribunal cited the judgment of the Hon'ble High Court of Madras in V.C. Arunai Vadivelan Vs ACIT, which held that making ad-hoc disallowances without specific reasons or evidence is not legally tenable.

Consequently, the Tribunal set aside the impugned order of the CIT(A) and vacated the ad-hoc disallowances in their entirety, allowing the appellant's ground number 3.

2. Application of Section 40(a)(ia) for Non-deduction of Tax under Section 194A:

The appellant also challenged the disallowance of interest/finance charges under Section 40(a)(ia) due to non-deduction of tax at source (TDS) under Section 194A. The appellant argued that the interest/finance charges paid to Non-Banking Financial Corporations (NBFCs) were already accounted for by the payees in their returns of income, and taxes were duly paid. The appellant submitted certificates from a Chartered Accountant in terms of the first proviso to Section 201(1) of the Income Tax Act, which were not considered by the CIT(A).

The Tribunal admitted the additional evidence (CA certificates) and noted that the first proviso to Section 201(1) and the second proviso to Section 40(a)(ia) were inserted by the Finance Act, 2012, to benefit the assessee. These provisions state that if the payee has furnished their return of income, accounted for the sum, and paid the due taxes, the payer shall not be deemed to be an assessee in default, and the sum shall be deemed to have been deducted and paid on the date of furnishing the return by the payee.

Applying this interpretation, the Tribunal found that for the amount of ?1,21,280/- certified by the CA for Shree Ram Transport Finance Co Ltd, the appellant could not be held as an assessee in default. Consequently, the disallowance under Section 40(a)(ia) for this amount was vacated. However, for the amounts without CA certificates, the disallowance was upheld.

For the subsequent assessment year 2011-2012, the Tribunal applied the same rationale and vacated the disallowance of interest for ?3,51,036/- based on the CA certificate. The disallowance for amounts without CA certificates was upheld.

Conclusion:

The appeals were allowed in part, with the ad-hoc disallowances vacated entirely, and the disallowance under Section 40(a)(ia) modified based on the availability of CA certificates. The Tribunal's order emphasized the need for specific findings and evidence when making disallowances and the benefit provided to the assessee by the statutory provisions.