2022 (5) TMI 33 - AT - Income Tax

Disallowance u/s 40(a)(ia) - interest paid to various NBFC - Scope of second proviso to section 40(a)(ia) of the Act inserted by Finance Act 2012 w.e.f. 01.04.2013 - HELD THAT - The assessee though has taken the plea on the basis of second proviso to section 40(a)(ia) of the Act however failed to establish or prove that NBFCs had paid income tax on interest received from the assessee. Accordingly the CIT(A) upheld the disallowance made by the Assessing Officer. Now in the present appeal the assessee by way of additional evidence has produced copies of Form No. 26A in support of its aforesaid plea based on second proviso to section 40(a)(ia). We deem it appropriate to admit the additional evidence filed by the assessee before us. We are further of the view that this issue be remanded to the Assessing Officer for de novo adjudication as per law after necessary verification of details as submitted by way of additional evidence before us. Before concluding on this issue we may add that in respect of interest paid to Citicorp Finance Ltd. and Indiabulls Finance Ltd. if the assessee is able to furnish similar details before the Assessing Officer same shall be taken into consideration while deciding the issue as per law. As a result ground No. 1 in assessee s appeal is allowed for statistical purpose. Disallowance u/s 40(a)(ia) of the Act on account of salary paid to Directors - HELD THAT - In the present case it is an undisputed fact that salary was paid to the Directors of the assessee company and the Directors had offered the same in the return of income filed. The only basis on which CIT(A) dismissed the appeal filed by the assessee on this issue was that the assessee has not furnished the certificate as required under first proviso to section 201(1) of the Act. As the assessee has now furnished the said certificate issued under Form No. 26A we deem it appropriate to remand this issue to the file of Assessing Officer for necessary verification of the details furnished by way of additional evidence before us and decide the issue de novo as per law. As a result ground No. 2 in assessee s appeal is allowed for statistical purpose. Disallowance under section 40(a)(ia) of the Act on account of rent paid - HELD THAT - The assessee neither during the course of assessment nor in the proceedings before us placed any cogent material on the basis of which it can be concluded that the rent was required to be paid separately to Mr. Pandharinath Mali and Mrs. Pratiksha Mali - assessee has not furnished any additional evidence to the effect that the payee have offered the rent income in the return of income and paid taxes thereon. Thus as there is no dispute that as per leave and license agreement assessee is required to pay Rs. 1, 50, 000 per annum which is below the threshold required for deducting tax at source on the payment of rent we direct the Assessing Officer to delete the disallowance under section 40(a)(ia) covered by the aforesaid leave and license agreement. As a result ground No. 3 raised in assessee s appeal is partly allowed. Ad hoc disallowance out of diesel petrol and oil expenses and freight expenses - HELD THAT - The assessee is engaged in business of transporters. It cannot be doubted that being in such business the assessee would have incurred freight expenses and diesel petrol and oil expenses on daily basis - the expenditure incurred in cash in comparison to the freight income is very minuscule. We are of the view that assessee being engaged in business of transporters such expenses are unavoidable and at the same time it is difficult to maintain proper documentation in respect of such cash expenditure. Further the Assessing Officer has also not provided any basis for making disallowance on an ad hoc basis. Accordingly we direct the Assessing Officer to delete the disallowance out of diesel petrol and oil expenses and freight expenses. As a result ground No. 4 raised in assessee s appeal is allowed.

Summary

Issues Involved:
1. Disallowance under section 40(a)(ia) of the Income Tax Act on account of interest paid to various NBFCs.
2. Disallowance under section 40(a)(ia) of the Act on account of salary paid to Directors.
3. Disallowance under section 40(a)(ia) of the Act on account of rent paid.
4. Ad hoc disallowance of Rs. 6,55,161 out of diesel, petrol and oil expenses and freight expenses.
5. Disallowance of Diwali expenses.

Issue-wise Detailed Analysis:

1. Disallowance under section 40(a)(ia) of the Act on account of interest paid to various NBFCs:
The assessee challenged the disallowance of Rs. 10,87,826 under section 40(a)(ia) for non-deduction of TDS on interest paid to NBFCs. The Assessing Officer (AO) disallowed the interest expenses as the assessee failed to deduct TDS on payments made to L & T Finance Ltd., Citi Corp Finance Ltd., Indiabulls Financial Services Ltd., Sundaram Finance Ltd., and SREI Equipment Private Limited. The CIT(A) upheld this disallowance, stating that the assessee did not prove that the NBFCs had paid income tax on the interest received. The assessee later submitted Form No. 26A, certifying that some NBFCs had accounted for the interest while computing their taxable income. The Tribunal admitted this additional evidence and remanded the issue to the AO for verification, directing that similar details for Citicorp Finance Ltd. and Indiabulls Finance Ltd. should also be considered if provided. The appeal on this ground was allowed for statistical purposes.

2. Disallowance under section 40(a)(ia) of the Act on account of salary paid to Directors:
The assessee contested the disallowance of Rs. 9,60,000 paid as salary to its Directors without deducting TDS. The AO disallowed the salary expenses under section 40(a)(ia). The CIT(A) upheld this disallowance, citing the lack of a certificate from an accountant as required under the first proviso to section 201(1). The assessee later furnished Form No. 26A, certifying that the Directors had accounted for the salary in their income tax returns. The Tribunal remanded the issue to the AO for verification of the additional evidence and directed a de novo adjudication. The appeal on this ground was allowed for statistical purposes.

3. Disallowance under section 40(a)(ia) of the Act on account of rent paid:
The assessee challenged the disallowance of Rs. 3,02,500 paid as rent without deducting TDS. The AO disallowed the rent expenses, noting discrepancies in the rent agreements and payments made to Mr. Pandharinath Mali and Mrs. Pratiksha Mali. The CIT(A) upheld the disallowance. The Tribunal found that the rent agreement specified a payment of Rs. 1,50,000 per annum, which was below the TDS threshold. The Tribunal directed the AO to delete the disallowance for the amount covered by the agreement and allowed the appeal on this ground partly.

4. Ad hoc disallowance of Rs. 6,55,161 out of diesel, petrol and oil expenses and freight expenses:
The assessee contested the ad hoc disallowance of 1% of diesel, petrol, and oil expenses and freight expenses, totaling Rs. 6,55,161, made by the AO for want of verification. The CIT(A) upheld this disallowance. The Tribunal noted that the expenses in cash were minimal compared to the total freight income and were necessary for the assessee's transport business. The Tribunal found the AO's disallowance to be without basis and directed the AO to delete the disallowance. The appeal on this ground was allowed.

5. Disallowance of Diwali expenses:
The assessee did not press this ground during the hearing. Consequently, the Tribunal dismissed this ground as not pressed.

Conclusion:
The appeal by the assessee was partly allowed for statistical purposes, with specific directions for verification and de novo adjudication on certain issues. The Tribunal provided a detailed analysis of each issue, considering the additional evidence and submissions made by the assessee.