2017 (1) TMI 811 - AT - Income Tax

Disallowance u/s 40 (a)(ia) - Held that - Since no amount was outstanding to be paid, the provisions of section 40 (a)(ia) are not attracted in this case. Hence a disallowance is not justified - Decided in favour of assessee

Summary

Issues:
1. Disallowance of expenditure under section 40(a)(ia) for non-deduction of TDS
2. Violation of principle of natural justice in passing the order

Issue 1: Disallowance of expenditure under section 40(a)(ia) for non-deduction of TDS

The case involved an appeal against the order of the Learned CIT(Appeals) regarding the disallowance of royalty expenses under section 40(a)(ia) of the Income Tax Act, 1961 for non-deduction of TDS under section 194J. The Assessing Officer (AO) had made an addition of a specific amount under section 40(a)(ia) due to the failure of the assessee to make TDS on royalty expenses. The Learned CIT(Appeals) affirmed the AO's action, leading to the appeal before the ITAT.

During the proceedings, the counsel of the assessee argued that section 40(a)(ia) was not applicable in this case as the entire amount was paid by the end of the year, and no amount was outstanding. The counsel relied on previous decisions to support this argument. The Departmental Representative did not dispute that the amount in question was paid during the year and not outstanding.

The ITAT referred to a precedent set by the Tribunal in a similar case where it was held that section 40(a)(ia) is not attracted if the expenses are fully paid and not outstanding at the end of the relevant accounting period. The ITAT also mentioned a decision by the Hon'ble Allahabad High Court supporting this interpretation. As there was no amount outstanding to be paid in the present case, the ITAT concluded that the provisions of section 40(a)(ia) were not applicable, and hence, the disallowance was not justified. Consequently, the ITAT allowed the appeal by the assessee.

Issue 2: Violation of principle of natural justice in passing the order

One of the grounds of appeal was that the order passed by the Learned CIT(A) violated the principle of natural justice. However, the judgment primarily focused on the substantive issue of disallowance under section 40(a)(ia) and did not delve into the alleged violation of natural justice. The ITAT's decision to allow the appeal was based on the interpretation and application of tax provisions rather than procedural aspects like natural justice.

In conclusion, the ITAT's judgment primarily addressed the issue of disallowance under section 40(a)(ia) for non-deduction of TDS, providing a detailed analysis of relevant legal precedents and arguments presented during the proceedings. The judgment highlighted the importance of timely TDS deductions and payments to avoid disallowances under the Income Tax Act, ultimately ruling in favor of the assessee based on the specific circumstances of the case.