2017 (4) TMI 110 - AT - Income Tax

Disallowance u/s 40(a)(ia) - whether section 40(a)(ia) can be invoked only with reference to the amount that has remained outstanding? - Held that - Assessee has placed reliance upon CIT vs. Vector Shipping Services (P) Ltd. (2013 (7) TMI 622 - ALLAHABAD HIGH COURT). In the said case Hon ble Allahabad High Court has upheld the finding that when the expenses incurred by the assessee is totally paid and not remained payable as at the end of the relevant accounting period, provisions of section 40(a)(ia) are not applicable. We are also aware that there are certain other Hon ble High Court decisions wherein this proposition has not been upheld that provisions of section 40(a)(ia) are attracted only when the amount is payable. However, we note that there is no jurisdictional High Court decision on this issue. In such a situation we now have a Hon ble Allahabad High Court decision which is in favour of the assessee as Hon ble Apex Court in the case of CIT vs. Vegetable Products Ltd. 1973 (1) TMI 1 - SUPREME Court has to be followed. In the said decision the Hon ble Apex Court has expounded that in case there are two views possible, the view in favour of the assessee should be followed. Thus Disallowance u/s 40(a)(ia) can be made only with respect to the sums which have remained unpaid. Since this aspect needs factual examination with reference to the records, we remit this issue to the file of the AO. The AO is directed to examine the amounts which have been paid and which have remained unpaid. The AO is directed to restrict the disallowance only with reference to those amounts which have remained outstanding. Needless to add the assessee should be granted adequate opportunity of being heard.

Summary

Issues:
1. Disallowance under section 40(a)(ia) - Payments disallowed by AO and confirmed by CIT(A).

Analysis:
The appeal pertains to the assessment year 2005-06, where the appellant challenged the order of the CIT(A) upholding substantial additions made by the Assessing Officer (AO). The appellant raised various grounds of appeal, including the disallowance under section 40(a)(ia). The appellant contended that the disallowed payments were made before the end of the financial year, with only a small amount outstanding. The appellant argued that section 40(a)(ia) should apply only to unpaid amounts, not to those already paid. The appellant cited relevant case laws and emphasized that the provision of section 40(a)(ia) is applicable to expenses payable as of the year-end, not those already settled during the previous year without TDS deduction.

The Tribunal considered the submissions of both parties and referred to the case law CIT vs. Vector Shipping Services (P) Ltd. where the Allahabad High Court held that if expenses are fully paid and not outstanding at the end of the accounting period, section 40(a)(ia) does not apply. The Tribunal noted that while there are conflicting decisions on this issue, the absence of a jurisdictional High Court ruling led them to follow the Allahabad High Court decision favoring the assessee. The Tribunal also highlighted the dismissal of the Revenue Department's appeal by the Supreme Court, further supporting the assessee's position. Consequently, the Tribunal held that disallowance under section 40(a)(ia) can only be made for amounts that remained unpaid, directing the AO to examine the paid and outstanding amounts and restrict disallowance accordingly, granting the assessee a fair hearing.

In conclusion, the Tribunal partly allowed the appeal for statistical purposes, emphasizing that disallowance under section 40(a)(ia) should be limited to outstanding amounts. The Tribunal's decision rested on the interpretation of relevant legal provisions, case laws, and the principle of favoring the assessee in case of conflicting views, ensuring a fair assessment based on factual examination and due process.