2020 (8) TMI 119 - AT - Income Tax

TDS u/s 194C - Disallowance u/s. 40(a)(ia) - freight charges paid without deduction of tax - HELD THAT - A plain reading of the provisions of subsection 6 of section 194C of the Act reveals that the assessee shall not deduct any TDS on the payment made to the contractor engaged in the business of plying, hiring or leasing goods carriages, on furnishing of his PAN to the assessee. There is no ambiguity about the fact that contractor has furnished its PAN to the assessee as evident from the page number 13 of the paper book where the copy of the PAN is placed. As such the contractor has discharged its liability by furnishing PAN to the assessee for non-deduction of TDS under section 194C (6) of the Act. Accordingly the assessee did not deduct the TDS. We also note that the requirement under sub-section 7 of section 194C of the Act for furnishing PAN to the prescribed authority within the prescribed time and form is procedural in nature as held in the case of Vali bhai Khan bhai Mankad 2011 (4) TMI 887 - ITAT, AHMEDABAD . If the assessee failed to furnish the requisite form to the prescribed authority within the time, he cannot be made subject to the disallowance of transport expenses on account of non-deduction of TDS. Accordingly, we hold that there cannot be any disallowance of the transport expenses incurred by the assessee after 30th September 2009. TDS u/s 194C - HELD THAT - We hold that the expenses claimed by the assessee on account of transport charges cannot be disallowed on account of non-deduction of TDS under section 194C of the Act. Hence the ground of appeal of the assessee is allowed. Disallowance of amount of interest on the amount advanced as interest-free advance loans - addition u/s 40A - whether the assessee has given loans and advances without interest to the specified persons for the commercial purposes? - HELD THAT - Assessee on one hand is advancing interest free loans and advances to his father proprietary concern and on the other hand the assessee is paying interest on the loan obtained from his father. In the case on hand it is a transaction between the individual assessee and the Proprietary concerns of the father of the assessee. Accordingly we are of the view that the facts are different from the present case with the facts of the case referred by the assessee. We find force in the argument of the assessee that there cannot be any disallowance of any interest expenses for the amount advanced to the aforesaid firms without any interest to the extent of the amount available with the assessee in the form of capital. Accordingly we direct the AO to work out the amount of loans and advances given without interest after reducing the own fund in the form of capital of the assessee from the said amount. Thus the ground of appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(ia) of the Income Tax Act for ?2,13,832/- being freight charges paid without deduction of tax.
2. Disallowance of interest expenses for ?7,16,468/- on account of alleged diversion of borrowed funds for purposes other than business purposes.

Issue-Wise Detailed Analysis:

1. Disallowance under Section 40(a)(ia) of the Income Tax Act for ?2,13,832/- being freight charges paid without deduction of tax:

The assessee challenged the disallowance made by the AO and confirmed by the CIT(A) for transport/freight expenses amounting to ?2,13,832/- paid to Associated Road Carriers Limited (ARCL). The assessee did not deduct TDS under section 194C, leading to the disallowance by the AO.

The Tribunal separated the disallowance into two parts:
- Payment up to 30 September 2009 (?93,310/-): The Tribunal noted that the assessee had obtained the PAN of the transporter, which, as per the amendment in section 194C(6), exempts the requirement of TDS deduction. The Tribunal referred to the case of Govind Ram Gupta v JCIT, which supports that procedural or technical defects should not lead to disallowance if the PAN is provided.
- Payment after 30 September 2009 (?1,20,522/-): The Tribunal observed that the amendment effective from 1 October 2009 exempts TDS deduction if the PAN is furnished. The Tribunal referred to the ITAT Ahmedabad case of Vali bhai Khan bhai Mankad Vs. DCIT, which held that non-furnishing of PAN to the prescribed authority is procedural and does not warrant disallowance if the PAN is provided.

The Tribunal concluded that the disallowance under section 40(a)(ia) cannot be made for both periods as the assessee had obtained the PAN of the transporter.

2. Disallowance of interest expenses for ?7,16,468/- on account of alleged diversion of borrowed funds for purposes other than business purposes:

The assessee claimed interest expenses of ?14,79,652/- on borrowed funds while advancing interest-free loans to related parties. The AO disallowed ?7,16,468/- of interest expenses, asserting that the advances were made from interest-bearing funds without commercial expediency.

The CIT(A) upheld the AO's decision, noting that the assessee failed to establish commercial expediency and that the advances were made from an OD account, which is interest-bearing.

The Tribunal examined whether the advances were for commercial purposes. It found that only a small portion of the advances was adjusted against job work charges after two years, indicating no significant commercial purpose. Additionally, the assessee's father, a proprietor of the related parties, received interest-free loans while the assessee paid interest on loans from his father, suggesting a lack of commercial expediency.

However, the Tribunal agreed with the assessee's argument that disallowance should not apply to the extent of the assessee's own capital. It directed the AO to calculate the disallowance after considering the assessee's capital.

Conclusion:

The Tribunal allowed the appeal for the disallowance under section 40(a)(ia) and partly allowed the appeal for the disallowance of interest expenses, directing a recalculation based on the assessee's capital. The order was pronounced on 08/07/2020 at Ahmedabad.