2018 (1) TMI 1293 - AT - Income Tax

Disallowance u/s 40(a)(ia) - non deduction of tds on interest paid to Non Banking Financial Companies (NBFC) towards loans availed from them - Held that - A careful reading of the second proviso to Section 40(a)(ia) would make it clear that it will apply if the assessee is not deemed to be an assessee in default in terms of first proviso of section 201(1) of the Act. As per the conditions of Section 201(1) of the Act, the onus is on the assessee to demonstrate through documentary evidence that the recipients have offered the amount paid to them, without deducting tax at source, as income in the return of income filed for the relevant assessment year. Since the aforesaid claim of the assessee requires factual verification and the assessee has to bring proper evidence on record to prove its claim, we restore the issue to the file of the Assessing Officer for fresh adjudication after due opportunity of being heard to the assessee. In case assessee s claim that the recipients have offered the interest paid to them as income in the relevant assessment year is found to be correct, no disallowance under section.40(a)(ia) should be made. With the aforesaid observations, the ground is allowed for statistical purposes. Addition on account of bogus purchases - quantum of disallowance to be made out of bogus purchases - Held that - It is a fact that the assessee is engaged in the business of builder and developer (Civil Construction Work). Therefore, it cannot be expected to earn profit of 20%. Further, in similar types of cases, the tribunal is consistently upholding disallowance at 12.5% of the alleged bogus purchase. In tune with the aforesaid consistent view of the Tribunal, we restrict the disallowance to 12.5% of the alleged bogus purchases.

Summary

Issues:
1. Disallowance of interest under section 40(a)(ia) of the Act.
2. Addition of amount on account of bogus purchases.

Analysis:

Issue 1: Disallowance of interest under section 40(a)(ia) of the Act
The appellant, a company engaged in the business of builder and developer, challenged the disallowance of &8377;49,18,527 under section 40(a)(ia) of the Act for not deducting tax at source on interest paid to Non-Banking Financial Companies. The Assessing Officer disallowed the amount, which was upheld by the First Appellate Authority. The appellant argued that the recipients included the interest in their taxable income, invoking the second proviso to Section 40(a)(ia) with retrospective application. The Tribunal agreed that the second proviso applies retrospectively but emphasized the need for the appellant to prove that recipients declared the amount as income. As factual verification was necessary, the issue was remanded to the Assessing Officer for further examination, with the direction that if the appellant's claim is substantiated, no disallowance should be made.

Issue 2: Addition of amount on account of bogus purchases
The Assessing Officer found purchases of &8377;50,28,053 from certain parties to be bogus, treated them as accommodation bills, and added the amount to the appellant's income. The Commissioner (Appeals) disagreed with the full addition, considering only the profit element embedded in the purchases as doubtful. A 20% disallowance was imposed, which the appellant argued was excessive. The Tribunal noted the nature of the appellant's business as a builder and developer and reduced the disallowance to 12.5% in line with consistent tribunal decisions in similar cases. The decision was specific to the facts of the appeal. Consequently, the appellant's appeal was partly allowed.

In conclusion, the Tribunal's judgment addressed the issues of disallowance of interest under section 40(a)(ia) and addition of amount on account of bogus purchases, providing detailed reasoning and specific directions for further examination by the Assessing Officer, and adjusting the disallowance percentage based on the nature of the appellant's business.