2022 (8) TMI 683 - AT - Income Tax

Revision u/s 263 - As per CIT assessee firm has paid interest on unsecured loan of 3 ex-partners but not deducted TDS on the interest amount so paid as per provision of section 194A - AO has not examined that interest paid by assessee firm to its partner on their capital balance relating to the period both before retirement and after retirement without deduction of tax at source is disallowable u/s 40(a)(ia) - HELD THAT - PCIT has observed that the amount of interest on which no deduction of tax was made is liable to be disallowed and therefore, the submission put forth by the assessee is rightly rejected by the Ld. PCIT. However, he objected the decision of set a siding the passement the assessment order by holding it to be erroneous so far as prejudicial to the interest of revenue under clause (a) (b) of Explanation 2 to section 263 as being not applicable to the facts of the present case in as much as assessee has furnished the certificate of CA under first proviso to section 201(1) of the Act which is a part of the record and therefore, section 40(a)(ia) is not convincing primarily, it was not before either the AO or the Ld. PCIT and secondly in the revision proceedings, the assessee shall get an opportunity to produce the material documentary evidence with certification of third parties if any required including CA s certificate which would not cause any prejudice to the assessee. The assessee in proceedings before learned CIT u/s 263 of the Act and also before us, failed to demonstrate that all the facts were before the AO and how the AO has taken a conscious decision on merits which is a plausible decision which does not warrant interference u/s 263 of the Act to revise concluded assessment. We have also considered all the replies given by the assessee on merits before AO and CIT as well before us. We find that the assessee has failed to demonstrate on merits that the view taken by the AO before passing assessment order was a plausible view as being taken after due enquiries on the issue under consideration. Thus, we uphold the finding of the PCIT in categorizing the assessment as erroneous so far as prejudicial to the interest of the Revenue and as such order of the ld. PCIT passed u/s 263 of the act is sustained. - Decided against assessee.

Summary

Issues Involved:
1. Legality of the order passed by the Principal Commissioner of Income Tax (PCIT).
2. Applicability of Section 40(a)(ia) of the Income Tax Act regarding disallowance due to non-deduction of tax at source on interest paid to retiring partners.
3. Examination of whether the Assessing Officer's (AO) order was erroneous and prejudicial to the interest of the revenue.

Analysis:

1. Legality of the Order by PCIT:
The assessee contended that the order passed by the PCIT was illegal and bad in law. The PCIT had invoked revisionary powers under Section 263 of the Income Tax Act, asserting that the AO's order was erroneous and prejudicial to the interest of the revenue. The PCIT observed that the AO failed to examine the issue of non-deduction of TDS on interest paid to retiring partners, which was liable for disallowance under Section 40(a)(ia).

2. Applicability of Section 40(a)(ia) of the Income Tax Act:
The PCIT noted that the assessee firm paid interest amounting to Rs. 35,07,236/- to three retiring partners without deducting TDS, as required under Section 194A. The PCIT held that the AO should have disallowed 30% of the interest payment (Rs. 10,52,171/-) under Section 40(a)(ia). The assessee argued that no TDS was required on interest paid to partners before their retirement and that the interest paid post-retirement should not be disallowed under Section 40(a)(ia) because the partners had included this interest in their income and paid taxes accordingly.

3. Examination of AO's Order:
The PCIT concluded that the AO's order was passed without proper application of mind and was thus erroneous and prejudicial to the interest of the revenue. The PCIT emphasized that the AO did not consider the information available on record regarding the deduction of tax on interest payments. The assessee argued that the AO had considered all relevant information during the assessment proceedings and that the interest paid was not claimed as an expenditure in the Profit & Loss account but was capitalized to the cost of land, making Section 40(a)(ia) inapplicable.

Judgment:
The tribunal upheld the PCIT's order, agreeing that the AO's assessment was erroneous and prejudicial to the interest of the revenue. The tribunal noted that the assessee failed to demonstrate that the AO had taken a conscious decision on merits after due enquiries. The tribunal also pointed out that the assessee did not provide sufficient evidence to show that the interest payments were examined by the AO and were not liable for TDS. Consequently, the appeal of the assessee was dismissed.

Conclusion:
The tribunal sustained the PCIT's order under Section 263, holding that the AO's order was erroneous and prejudicial to the revenue. The appeal filed by the assessee was dismissed, confirming the disallowance under Section 40(a)(ia) for non-deduction of TDS on interest paid to retiring partners. The assessee was given an opportunity to provide necessary documentary evidence during the revision proceedings.