2016 (8) TMI 600 - AT - Income Tax

Disallowance of advertisement and professional charges u/s 40(a)(ia) - non dection of tds - Held that - As relying on Merlyn Shipping & Transporters vs. ACIT 2012 (4) TMI 290 - ITAT VISAKHAPATNAM no disallowance can be made under the provisions of sec. 40(a)(ia) of the Act, for non compliance of TDS provisions, if expenditure incurred is paid within the financial year. In the present case on hand, the assessee claims that out of the total disallowance of ₹ 25,12,651/- and ₹ 12,90,386/- a sum of ₹ 22,56,980/- and ₹ 9,27,393/- respectively for the A.Y. 2008-09 and 2009-10 has been paid during the financial year before 31st March. Therefore, we set aside the issue to the file of the A.O. for the limited purpose of verification of paid and payable. In case the expenditure is paid during the same financial year within 31st march, then no disallowance can be made. In other words disallowance u/s 40(a)(ia) should be restricted to amounts remain payable at the end of the financial year. Disallowance of interest paid on unsecured loan under sec. 40(a)(ia) - Held that - The present case on hand, the assessee claims that the recipient had included the interest income in their books of accounts and discharged the tax liability on such interest. The assessee further claims that the assessee was not held as an assessee in default under the provisions of sec. 40(a)(ia) of the Act. Though, assessee filed relevant details before the Bench, we have our own reservations, whether said information was made available to the Assessing Officer at the time of assessment. Therefore, we set aside the issue to the file of the A.O. for the limited purpose of verification, whether the recipient had accounted interest income and discharged his obligation by filing returns of income. In case, it is found that the recipient had considered the interest income in its books of accounts and discharged its obligation by filing return of income, then the A.O. is directed to delete the additions made towards interest paid on unsecured loans u/s 40(a)(ia) of the Act.

Summary

Issues Involved:
1. Head of income under which the income of the assessee is assessable.
2. Disallowance of expenditures under Section 40(a)(ia) of the Income Tax Act.
3. Disallowance of certain expenditures and unpaid liability under Section 43B of the Income Tax Act.
4. Deletion of addition made by the A.O. under Section 40(a)(ia) of the Act towards interest on unsecured loans.

Detailed Analysis:

1. Head of Income Assessment:
The primary issue was whether the income of the assessee, a society registered under the Societies Registration Act and running educational institutions, should be assessed under the head "income from other sources" or "profits and gains of business or profession." The Assessing Officer (A.O.) determined that the activities of the assessee were commercial in nature, akin to a business activity, and thus assessed the income under "profits and gains of business or profession." The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, stating that despite the charitable objectives, the continuous surplus indicated a business activity. The Tribunal confirmed the CIT(A)'s decision, emphasizing that income should be computed under normal commercial principles and assessed under the appropriate head based on the nature of activity.

2. Disallowance of Expenditures under Section 40(a)(ia):
The A.O. disallowed advertisement and professional charges under Section 40(a)(ia) for non-deduction of tax at source (TDS). The assessee contended that amounts paid during the financial year should not be disallowed, referencing the ITAT Visakhapatnam Special Bench Decision in Merlyn Shipping & Transporters vs. ACIT, which held that Section 40(a)(ia) applies only to amounts payable as of March 31. The Tribunal, agreeing with this precedent, set aside the issue to the A.O. for verification. If the expenditures were paid within the financial year, no disallowance should be made.

3. Disallowance of Certain Expenditures and Unpaid Liability under Section 43B:
The A.O. made several disallowances, including personal expenditures, unpaid liabilities under Section 43B, and expenditures under Section 40(a)(ia). The CIT(A) upheld these disallowances as the assessee did not provide adequate explanations. The Tribunal did not provide a detailed discussion on these specific disallowances but upheld the CIT(A)'s decision due to lack of merit-based arguments from the assessee.

4. Deletion of Addition under Section 40(a)(ia) for Interest on Unsecured Loans:
The A.O. disallowed interest on unsecured loans for non-compliance with TDS provisions. The assessee argued that the recipient, Sri Koundinya Education Society, had included the interest income in their returns, invoking the second proviso to Section 40(a)(ia) (inserted by the Finance Act 2012), which deems TDS as deducted if the recipient has paid taxes on the income. The Tribunal agreed that this proviso, being clarificatory, applies retrospectively. The issue was remanded to the A.O. to verify if the recipient had included the interest income in their returns and paid taxes accordingly. If verified, the disallowance should be deleted.

Conclusion:
The Tribunal allowed the appeals for statistical purposes, directing the A.O. to verify specific claims regarding the payment of expenditures and the inclusion of interest income by the recipient in their tax returns. The decision emphasized the importance of proper classification of income and compliance with TDS provisions, while also acknowledging clarificatory amendments to the Income Tax Act.