2019 (10) TMI 769 - AT - Income Tax

Demand u/s 201(1) 201(1A) - Non deduction of tds - reversal of entries for payment to Avastagen Ltd., parent company of the Assessee - termination of agreement between the parties - Agreement to pay Royalty was cancelled before the closure of account, HELD THAT - Reasons assigned by the revenue authorities cannot be the basis to hold that there was in fact an entry for payment which obligates the Assessee to deduct tax at source. Admittedly, even at the time of survey, the entries for payments as well as the entry for reversal of those entries were found. The theory of reversal cannot therefore be an afterthought. Had there been no reversal of entries in the books of accounts the liability of the Assessee to deduct tax at source would exist. It is only owing the mistake in making the entries for payment despite the agreement having been terminated that the reversal of entries became necessary. Therefore the reversal of entries cannot be said to be an after- thought. Secondly, the termination of agreement between the parties was unilateral and there is no material on record to show that the plea of termination of the agreement was not true. The parties to an agreement are at liberty to vary the terms of the agreement or terminate the agreement. The conclusions of the revenue authorities in this regard are purely based on surmises and cannot be sustained. Since the Agreement was cancelled there was no obligation to deduct tax at source. On further appeal, the Hon ble High Court in Wipro Health Care IT Ltd. 2013 (5) TMI 45 - KARNATAKA HIGH COURT held that from the material on record, it was clear that if agreement with regard to payment of royalty was cancelled, no royalty was payable and therefore, the question of deducting TDS on such royalty does not arise. - decided in favour of assessee.

Summary

Issues:
1. Reversal of TDS entries and payment entries in the books of accounts.
2. Dispute regarding the obligation to deduct tax at source.
3. Applicability of legal precedents to the case.
4. Examination of agreements and termination letters.
5. Assessment of liability under sections 201(1) and 201(1A) of the Income Tax Act.

Issue 1: Reversal of TDS entries and payment entries in the books of accounts:
The case involved a private limited company, a subsidiary of another company, where a survey revealed reversed TDS and payment entries in the books. The entries pertained to R&D expenses supposed to be payable to the parent company but were reversed at the end of the financial year. The tax authority treated the assessee as a defaulter, leading to a dispute over the validity of reversing TDS entries.

Issue 2: Dispute regarding the obligation to deduct tax at source:
The Assessing Officer (AO) held that once tax was deducted, it could not be reversed, leading to a default assessment against the assessee. The assessee argued that as no actual payment was made due to the termination of the agreement, the obligation to deduct tax at source did not exist. The dispute centered around the interpretation of the Income Tax Act provisions regarding TDS obligations.

Issue 3: Applicability of legal precedents to the case:
The assessee relied on a High Court judgment in a similar case involving the cancellation of royalty payments to argue against the tax deduction obligation. The tribunal examined the facts of the cited case and found them analogous to the current situation, emphasizing the importance of agreements and their subsequent cancellations in determining TDS liabilities.

Issue 4: Examination of agreements and termination letters:
The CIT(A) scrutinized the agreement and termination letter between the assessee and the parent company to assess the validity of the reversed entries. The tribunal analyzed the sequence of events, invoice procedures, and the timing of the agreement's cancellation to determine the legitimacy of the reversal of TDS and payment entries.

Issue 5: Assessment of liability under sections 201(1) and 201(1A) of the Income Tax Act:
The tribunal ultimately ruled in favor of the assessee, highlighting that the reversal of entries was necessitated by the termination of the agreement, absolving the assessee of the obligation to deduct tax at source. The decision underscored the importance of factual circumstances and legal precedents in interpreting tax deduction obligations under the Income Tax Act.

This detailed analysis of the legal judgment provides a comprehensive overview of the issues involved, the arguments presented, and the tribunal's decision based on the interpretation of relevant legal provisions and precedents.