2017 (10) TMI 419 - AT - Income Tax

Maintainability of appeal - TDS u/s 195 - addition u/s 40(a)(i) - revenue neutral exercise - Held that - What has been accepted by the CBDT as learned counsel rightly points out is the principle that when a disallowance results in an enhancement of business profits but such an enhancement is revenue neutral inasmuch as related business profits in totality are eligible for deduction under chapter VI such appeals need not be pursued. The reference to Section 40(a)(ia) is no more than illustrative in nature and what holds good for disallowance under section 40(a)(ia) applies in principle equally to disallowance under section 40(a)(i) as well. In this view of the matter in terms of the CBDT circular (supra) the appeal filed by the Assessing Officer on this point is indeed not maintainable. Non-deduction of tax at source from payments made to the non-residents must be dealt with at a different level and bearing in mind the need to protect our tax base we can only point out that lapses with respect to tax withholding obligations from payments made to non-residents is visited with several type of consequences disallowance under section 40(a)(i) recovery under section 201 penalty under section 271C and in certain situations even prosecution under section 276B. We therefore see no need to even deal with the matter on merits in the context of the present proceedings even as we take on record learned counsel s submission that even on merits the issue is now covered in favour of the assessee and that the assessee did not have any obligations to deduct tax at source at all. That aspect of the matter is wholly academic. - Appeal dismissed - Decided against the revenue.

Summary

Issues:
1. Challenge to deletion of addition under section 40(a)(i) by Assessing Officer.
2. Preliminary objection raised by the assessee regarding revenue neutrality and CBDT circular.
3. Disallowance of medical and life insurance premium and late payment of employee's contribution for PF/ESIC.

Analysis:
1. The appeal challenges the deletion of addition under section 40(a)(i) by the CIT(A) for the assessment year 2009-10. The Assessing Officer contends that the assessee did not deduct tax at source as per Section 195 of the Income Tax Act. The assessee raised a preliminary objection citing revenue neutrality due to eligibility for exemption under section 10A, supported by CBDT circular and a High Court judgment. The CBDT circular emphasizes that disallowances enhancing profits lead to higher profit-linked deductions under Chapter VI-A. The Tribunal noted the settled legal position that disallowances under certain sections result in enhanced profits eligible for deduction under Chapter VI-A. The appeal was found to be revenue neutral and not maintainable as per CBDT instructions.

2. The preliminary objection raised by the assessee was upheld by the Tribunal based on the CBDT circular, which recognized that disallowances enhancing profits lead to higher deductions. The Tribunal emphasized that the issue was academic and revenue neutral, and the appeal was dismissed as not maintainable. The Tribunal highlighted the consequences of lapses in tax withholding obligations from payments to non-residents, including disallowance under section 40(a)(i) and other penalties. The Tribunal concluded that pursuing the appeal was unnecessary given the settled legal position and CBDT instructions.

3. Grounds 2 and 3 of the appeal relate to the deletion of disallowances for medical and life insurance premium and late payment of employee's contribution for PF/ESIC. Both parties agreed that if the preliminary objection regarding the first ground was upheld, the same would apply to these grounds as well. The Tribunal dismissed these grievances as academic in the context of revenue neutrality and in line with the CBDT circular. The Tribunal found these grounds non-maintainable and dismissed them accordingly.

In conclusion, the appeal challenging the deletion of addition under section 40(a)(i) was dismissed as not maintainable based on the principle of revenue neutrality and CBDT circular. The Tribunal also dismissed the grievances related to medical and life insurance premium and late payment of employee's contribution for PF/ESIC on similar grounds of academic nature and revenue neutrality. The judgment upheld the preliminary objection raised by the assessee and dismissed the appeal.