2016 (9) TMI 1 - AT - Income Tax

Disallowance u/s 40(a) - Held that - Once the amount has been disallowed under the provisions of section 40(a)/40 (a) (ia) of the Act on the reason that tax has not been deducted, the AO cannot invoke the TDS provisions for holding the assessee as, assessee in default u/s 201 (1) of the Act. But, if the assessee subsequently claims deduction of the amount after payment of TDS, charging of interest u/s 201 (1A) of the Act for limited period during which TDS was not paid as per the provisions of the Act are applied and be charged accordingly. Accordingly, we direct the AO to verify the provisions made by the assessee towards contingent payments as narrated in the order of the CIT (A) chart filed by the assessee and reproduced by the CIT (A). In terms of the above, the AO will verify the details and will follow the decision of the Hon ble Karnataka High Court in the case of Karnataka Power Transmission Company (2016 (2) TMI 412 - KARNATAKA HIGH COURT).

Summary

Issues:
1. Maintainability of Revenue's appeal due to tax effect below specified limit.
2. Treatment of assessee as "assessee in default" for short deduction/non-deduction of TDS.

Issue 1: Maintainability of Revenue's Appeal
The Revenue's appeal in ITA No.3125/Mum/2014 was challenged by the assessee citing the tax demand below the specified limit of ?10.00 lacs as per CBDT Circular No.21/2015. The Tribunal noted that the tax involved in the disputed issue was indeed below ?10 lacs, leading to the dismissal of the Revenue's appeal as per the circular's retrospective applicability to all pending appeals.

Issue 2: Treatment of Assessee as "Assessee in Default"
In both appeals by the assessee, the primary issue revolved around the CIT (A) upholding the AO's action of treating the assessee as "assessee in default" for TDS violations under Section 201 (1) of the Income Tax Act. The assessee contested this treatment, arguing that the disallowed amount was a provision for the year-end, subsequently reversed in the following year. Reference was made to the Karnataka High Court's decision, emphasizing that no income accrued to suppliers due to the reversal of entries for contingent payments.

The Tribunal acknowledged the lack of clarity in the case, directing the AO to verify the provisions made by the assessee towards contingent payments and follow the Karnataka High Court's decision. It was emphasized that once an amount is disallowed under tax provisions, invoking TDS provisions for defaulting the assessee under Section 201 (1) is not permissible. However, interest under Section 201 (1A) may be charged for the period when TDS was not paid, post subsequent claim of deduction by the assessee.

The Tribunal set aside the lower authorities' orders, allowing the appeals of the assessee for statistical purposes and remitting the issue back to the AO for detailed verification and compliance with the Karnataka High Court's decision.

In conclusion, the Revenue's appeal was dismissed, while the assessee's appeals were allowed for statistical purposes, with directions for the AO to re-examine the issues related to TDS violations and contingent payments in accordance with the legal provisions and court decisions.