2022 (7) TMI 748 - HC - Income Tax

Disallowance u/s 40(a)(ia) - short deduction of tax in violation of Section 197(1) - ITAT deleted the addition - HELD THAT - A perusal of the paper book reveals that the Commissioner of Income Tax (Appeals) while disposing of the appeal filed by the assessee had directed the Assessing Officer to verify whether copies of non-deduction of tax/deduction of tax at lower rate were filed by the assessee before passing the assessment order. The ITAT in the impugned order has recorded that the Assessing Officer after verifying the said tax deduction certificate had deleted the disallowance in order giving effect order. Further, this Court is of the opinion that in cases of short deduction of TDS, disallowance under Section 40a(ia) of the Act cannot be made and the correct course of action would have been to invoke Section 201 of the Act. On similar facts, the Calcutta High Court in CIT vs SK Tekriwal 2012 (12) TMI 873 - CALCUTTA HIGH COURT dismissed the Revenue s appeal Disallowance u/s 40A - Also, both the CIT (A) and ITAT have given concurrent findings on facts in favour of the assessee on the issue of remuneration paid to the director Shri Sunil Baijal by observing that higher salary paid to the said director was accepted as remuneration by the assessing officer during the scrutiny assessment in the subsequent assessment year; and that the assessing officer had not brought any evidence/material for making disallowance under Section 40A(2)(b) of the Act. The ITAT also noted that the Assessing Officer, without any reason or material facts, had arbitrarily disallowed 50% of the remuneration. The ITAT further held that the Assessing Officer had not given cogent reasons to conclude that the remuneration paid was not commensurate with the market value of the services rendered by the Managing Director. No substantial question of law.

Issues:
1. Challenge to ITAT order on disallowance under Section 40a(ia) of the Income Tax Act, 1961.
2. Challenge to ITAT order on addition made under Section 40A(2) of the Act.
3. Interpretation of Section 40(a)(ia) in cases of short deduction of TDS.
4. Justification of remuneration paid to a director under Section 40A(2)(b) of the Act.

Analysis:

Issue 1:
The appellant challenged the ITAT order on disallowance under Section 40a(ia) of the Income Tax Act, 1961. The counsel argued that the ITAT erred in deleting the disallowance as the assessee had done short deduction of tax in violation of Section 197(1) of the Act. However, the High Court noted that in cases of short deduction of TDS, disallowance under Section 40a(ia) cannot be made. It was highlighted that the correct course of action would have been to invoke Section 201 of the Act. The Court cited a similar decision by the Calcutta High Court to support this interpretation.

Issue 2:
The appellant also contested the ITAT order on the addition made under Section 40A(2) of the Act. The High Court observed that the Commissioner of Income Tax (Appeals) had directed the Assessing Officer to verify certain documents before passing the assessment order. The ITAT found that the Assessing Officer, after verifying the tax deduction certificate, had deleted the disallowance. The Court upheld this finding, indicating that the Assessing Officer had not provided sufficient reasons to conclude that the remuneration paid was not commensurate with the market value of services rendered by the Managing Director.

Issue 3:
Regarding the interpretation of Section 40(a)(ia) in cases of short deduction of TDS, the High Court emphasized that the provisions of this section focus on the duty to deduct tax and pay it to the government account. It was clarified that if there is a shortfall due to a difference of opinion on taxability or nature of payments, the assessee can be declared as a defaulter under Section 201 of the Act, but no disallowance can be made under Section 40(a)(ia). The Court provided a detailed analysis of the legal provisions and relevant case law to support this interpretation.

Issue 4:
The justification of remuneration paid to a director under Section 40A(2)(b) of the Act was also examined. The High Court noted that both the CIT (A) and ITAT had given concurrent findings in favor of the assessee on this issue. They observed that the Assessing Officer had not provided substantial evidence for making the disallowance and had arbitrarily disallowed a portion of the remuneration. The Court agreed with the findings and concluded that no substantial question of law arose in the present proceedings, leading to the dismissal of the appeal.

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