2020 (2) TMI 64 - AT - Income Tax

TDS u/s 194C - addition u/s 40(a)(ia) - reimbursements of expenses or not - HELD THAT - Assessee has not furnished any evidence before the AO or the CIT(A) that the recipients had no taxable income or that they had income which is less than taxable income or that the recipients have made the payment of tax on their receipts from the assessee. In view of the same, the proviso to Section 201(1) of the Act would not be applicable to the assessee and in the absence of such applicability, the second proviso to Section 40(a)(ia) of the Act also would not be attracted. TDS provisions are applicable in respect of the labour charges paid by the assessee. AO is therefore, directed to examine whether the labour charges paid by the assessee included reimbursement of the material and transportation cost and if it is found to be so, then after excluding such payment if the payment towards labour charges is less than ₹ 50,000/- to each of such persons, then TDS provisions would not be attracted. However, if the assessee is not able to produce the evidence in support of reimbursements, then the AO shall apply the provisions of section 40(a)(ia) to make the disallowance in respect of such payments. Appeal of assessee is partly allowed for statistical purposes.

Summary

Issues:
1. Interpretation of Section 194C of the Income Tax Act regarding tax deduction on payments.
2. Applicability of Section 40(a)(ia) of the Income Tax Act on payments made without TDS.
3. Disallowance of expenditure and application of Section 40(A)(3) on certain payments.
4. Charging of interest under sections 234B and 234C of the Income Tax Act.

Issue 1: Interpretation of Section 194C of the Income Tax Act regarding tax deduction on payments:
The appellant contested that the payments made totaling to a specific amount were not covered under Section 194C of the Income Tax Act for tax deduction at source. The appellant argued that the payments did not fall within the purview of the said section. However, the Assessing Officer (AO) held that the provisions of Section 194C were applicable to all payments. The AO disallowed the entire expenditure on which no TDS was made. The appellant challenged this decision before the CIT(A) and subsequently before the ITAT. The ITAT analyzed the nature of payments made by the appellant and concluded that if the payments included reimbursements for material and transportation costs, those components would not attract TDS provisions under Section 194C. The ITAT directed the AO to examine the payments to ascertain if they included reimbursements and to apply TDS provisions accordingly.

Issue 2: Applicability of Section 40(a)(ia) of the Income Tax Act on payments made without TDS:
The appellant also raised concerns regarding the applicability of Section 40(a)(ia) of the Income Tax Act on the payments made without TDS. The AO disallowed the expenditure under this section as TDS was not deducted on the payments. The CIT(A) upheld the AO's decision. The appellant argued that the recipients had income below the taxable limit, hence Section 40(a)(ia) should not apply. However, the ITAT noted that the appellant failed to provide evidence that the recipients had no taxable income or that they had paid tax on their receipts. The ITAT concluded that the second proviso to Section 40(a)(ia) would not be attracted in the absence of such evidence, and directed the AO to examine the reimbursements in the payments to determine the applicability of TDS provisions.

Issue 3: Disallowance of expenditure and application of Section 40(A)(3) on certain payments:
The AO disallowed specific expenditure under Section 40(A)(3) and arrived at a disallowance amount. The appellant challenged this disallowance before the CIT(A) and subsequently before the ITAT. The ITAT analyzed the submissions made by the appellant, including the bills and vouchers produced in support of the payments. The ITAT considered the nature of the payments and directed the AO to reexamine the payments to ascertain if they included reimbursements for material and transportation costs, and to apply TDS provisions accordingly.

Issue 4: Charging of interest under sections 234B and 234C of the Income Tax Act:
The ITAT confirmed the charging of interest under sections 234B and 234C of the Income Tax Act. The appellant did not challenge this aspect specifically in the appeal proceedings. The ITAT's decision on this matter was not detailed in the available information.

In conclusion, the ITAT partially allowed the appeal for statistical purposes, directing the AO to reexamine the payments made by the appellant to determine the applicability of TDS provisions and to consider reimbursements for material and transportation costs. The ITAT emphasized the importance of providing evidence regarding the recipients' taxable income to avoid disallowances under Section 40(a)(ia) of the Income Tax Act.