2017 (12) TMI 1199 - AT - Income Tax

Addition u/s 36(1)(iii) - diversion of interest bearing loan into interest free advances - Held that - This issue requires a fresh examination at the end of the ld. CIT(A). Hence, we direct the ld. CIT(A) to take proper remand report from the AO to examine the agreement of loan, Maintenance contract and receiving rent-free office accommodation as per agreement to establish the commercial expediency. Therefore, in all fairness we set aside order of the ld CIT(A) and direct the ld. CIT(A) to take the proper remand report from the AO and then go through the loans documents, business contract to receive rent free office and maintenance contract to establish the commercial expediency. Therefore, we allow this ground for statistical purposes Disallowance u/s 40(a)(ia) - non deduction of tax at source u/s 194A - assessee failed to produce the copies of declaration in Form no.15G/H from the parties - Held that - Coordinate Bench Hyderabad, in the case of Malineni Babulu Vs. ITO 2015 (8) TMI 705 - ITAT HYDERABAD wherein it has been held that declaration of the payees in the prescribed form with it at the time when the interest was paid to the respective customers, in this position, the assessee cannot be held to be liable to deduct tax therefrom u/s 194A of the Act. We further hold that if the assessee bank was not liable to deduct tax at the time of payment of interest, then section 40(a)(ia) of the Act is not attracted and the assessee cannot be held liable to pay tax. Therefore, we are of the view that section 40(a)(ia) cannot be invoked by the AO in a situation when the assessee has filed Form 15G/15H before the Appropriate Authority. Non deduction of tax at source by the assessee to the parties against payment on account of repairs and maintenance - Held that - Assessee was rendering different types of service to the customers. Firstly, it was rendering service directly and secondly he was undertaking repairs and service on behalf of the companies for whom products were sold. It is seen that the assessee had deducted TDS when services were on behalf but has not deducted any TDS when the payments was made by way of any reimbursement to the services. We are of the view that the payment was by nature of reimbursement for repair costs met by the customers. Therefore, there is no requirement to make the TDS, when the payments were made on cost-to-cost basis. Therefore, based on the factual position explained above, we confirm the order passed by the ld. CIT(A).

Summary

Issues Involved:
1. Deletion of addition under Section 36(1)(iii) of the IT Act due to diversion of interest-bearing loan into interest-free advances.
2. Deletion of disallowance under Section 40(a)(ia) of the IT Act due to non-deduction of tax at source on interest payment.
3. Deletion of disallowance under Section 40(a)(ia) of the IT Act due to non-deduction of tax at source on payment for repairs and maintenance.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 36(1)(iii) of the IT Act:
The Revenue challenged the deletion of an addition of ?23,86,002/- made under Section 36(1)(iii) for diversion of interest-bearing loans into interest-free advances. The Assessing Officer (AO) observed that the assessee had provided interest-free loans to sister concerns without deriving any business benefit, thus not fulfilling the conditions of Section 36(1)(iii). The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, noting that the assessee received rent-free office accommodation and maintenance contracts, thereby deriving benefits. The CIT(A) relied on the Supreme Court judgment in S.A. Builders Ltd., which established the principle of commercial expediency. However, the Income Tax Appellate Tribunal (ITAT) found merit in the Revenue's argument that the AO was not given an opportunity to examine the documents proving commercial expediency. The ITAT remanded the issue back to the CIT(A) for fresh examination, directing the CIT(A) to obtain a remand report from the AO to verify the documents and establish commercial expediency.

2. Deletion of Disallowance under Section 40(a)(ia) of the IT Act on Interest Payment:
The Revenue contested the deletion of a disallowance of ?11,97,624/- under Section 40(a)(ia) for non-deduction of tax at source on interest payments. The AO disallowed the amount due to the assessee's failure to produce Form 15G/15H declarations. The CIT(A) deleted the disallowance, stating that non-filing or delayed filing of forms does not warrant disallowance under Section 40(a)(ia). The CIT(A) relied on the judgment in M/s Karwat Steel Traders, which held that non-filing of forms does not result in disallowance. The ITAT upheld the CIT(A)'s decision, referencing the Coordinate Bench's judgment in Malineni Babulu, which supported the view that if Form 15G/15H is submitted, Section 40(a)(ia) is not applicable. Thus, the ITAT confirmed the deletion of the disallowance.

3. Deletion of Disallowance under Section 40(a)(ia) of the IT Act on Repairs and Maintenance:
The Revenue appealed against the deletion of a disallowance of ?1,15,200/- under Section 40(a)(ia) for non-deduction of tax at source on payments for repairs and maintenance. The AO disallowed the amount, noting that the assessee failed to deduct TDS on payments to specific parties. The assessee argued that these payments were reimbursements to customers for repairs under warranty, not direct payments to vendors, and thus not subject to TDS. The CIT(A) accepted this explanation and deleted the disallowance. The ITAT upheld the CIT(A)'s decision, agreeing that the payments were reimbursements and not subject to TDS when made on a cost-to-cost basis. Consequently, the ITAT confirmed the deletion of the disallowance.

Conclusion:
The ITAT remanded the issue of addition under Section 36(1)(iii) back to the CIT(A) for fresh examination, while confirming the CIT(A)'s deletion of disallowances under Section 40(a)(ia) for non-deduction of tax at source on interest payments and repairs and maintenance payments. The Revenue's appeal was allowed for statistical purposes on the first issue and dismissed on the second and third issues.