2016 (4) TMI 1479 - AT - Income Tax

Disallowance u/s 40(a)(ia) - non deduction of TDS on consultancy charges and towards audit fees - HELD THAT - Under the scheme of Income-tax Act the tax has to be deducted at the time of payment or while giving credit in the books of account. In this case admittedly the assessee has paid the amount without deducting the tax. Since the assessee admittedly failed to deduct tax at the time of payment this Tribunal is of the considered opinion that the CIT(A) has rightly confirmed the addition made by the Assessing Officer. Addition u/s 68 - there was a contradiction between the claim of the assessee and the evidence available with regard to share application money received - HELD THAT - Tribunal is of the considered opinion that the letters have to be sent to the address mentioned in the Government website of Department of Corporate Affairs to find out the existence or otherwise of the nine companies who said to have invested in the shares of the assessee-company. Since the assessee specifically claims that the letters were not sent to the correct address of the investors Tribunal is of the considered opinion that giving one more opportunity to the AO to send the letters to correct address of nine companies may not prejudice the interest of the Revenue. This Tribunal is of the considered opinion that giving such an opportunity would definitely promote the cause of justice. Before concluding that the transactions are bogus or dubious in nature this Tribunal is of the considered opinion that the existence of the so-called nine companies need to be ascertained. Accordingly the orders of the authorities below are set aside and the issue of addition made u/s 68 is remitted back to the file of the AO. AO shall issue notice to the nine companies in the address mentioned in the website of Department of Corporate Affairs. It is open to the assessee to furnish correct address of nine companies so as to enable the Assessing Officer to issue letters / show cause notice with regard to investment made in the assessee-company.

Summary

The legal judgment from the Appellate Tribunal ITAT Chennai involves appeals filed by both the assessee and the Revenue against an order from the Commissioner of Income Tax (Appeals) for the assessment year 2009-10. The judgment addresses two primary issues: the disallowance under Section 40(a)(ia) of the Income-tax Act, 1961, and the addition under Section 68 of the Act.

1. Issues Presented and Considered

The core legal questions considered in this judgment are:

• Whether the disallowance under Section 40(a)(ia) of the Income-tax Act, 1961, was justified given the assessee's failure to deduct tax at source.
• Whether the addition of 169,00,000/- under Section 68 of the Act was justified, considering the alleged receipt of share application money from nine companies.

2. Issue-Wise Detailed Analysis

Disallowance under Section 40(a)(ia)

• Relevant Legal Framework and Precedents: Section 40(a)(ia) of the Income-tax Act, 1961, mandates disallowance of certain payments if tax is not deducted at source. The Tribunal referred to the decisions of the Calcutta High Court in CIT v. Crescent Export Syndicate and the Gujarat High Court in CIT v. Sikandarkhan N. Tunvar, which held that the decision of the Special Bench in Merilyn Shipping and Transports is not good law.
• Court's Interpretation and Reasoning: The Tribunal found that the assessee failed to deduct tax at the time of payment, thus justifying the disallowance. The Tribunal preferred the judgments of the Calcutta and Gujarat High Courts, which provided detailed reasoning against the interpretation that Section 40(a)(ia) applies only to amounts payable at the end of the financial year.
• Key Evidence and Findings: The Tribunal noted that the assessee paid consultancy and audit fees without deducting tax, and the CIT(Appeals) rightly confirmed the disallowance.
• Application of Law to Facts: The Tribunal applied the legal principles from relevant High Court judgments, concluding that the disallowance was justified irrespective of whether the amounts were paid or payable at the end of the financial year.
• Treatment of Competing Arguments: The Tribunal rejected the assessee's reliance on the Merilyn Shipping decision and the Allahabad High Court's judgment in Vector Shipping Services, emphasizing the detailed reasoning of the Calcutta and Gujarat High Courts.
• Conclusions: The Tribunal upheld the CIT(Appeals)'s decision to confirm the disallowance under Section 40(a)(ia).

Addition under Section 68

• Relevant Legal Framework and Precedents: Section 68 of the Income-tax Act, 1961, pertains to unexplained cash credits. The Tribunal examined whether the assessee satisfactorily explained the receipt of share application money.
• Court's Interpretation and Reasoning: The Tribunal found inconsistencies in the assessee's claims and the evidence presented. It noted the lack of substantial evidence supporting the existence of the companies that allegedly invested in the assessee's shares.
• Key Evidence and Findings: The Tribunal observed that the addresses used by the Assessing Officer to send notices were incorrect, and the share application money was used for personal expenses by the directors.
• Application of Law to Facts: The Tribunal determined that the existence of the investor companies needed verification. It noted that the money was deposited and quickly transferred or withdrawn, suggesting accommodation entries.
• Treatment of Competing Arguments: The Tribunal considered the assessee's claim that the letters were sent to incorrect addresses and decided to provide the Assessing Officer another opportunity to verify the companies' existence.
• Conclusions: The Tribunal set aside the orders of the lower authorities regarding the addition under Section 68 and remitted the matter back to the Assessing Officer for further verification.

3. Significant Holdings

• Preserve Verbatim Quotes of Crucial Legal Reasoning: The Tribunal emphasized the principle that when different High Courts express different opinions, the judgment with elaborate reasoning should be preferred. It also noted that the language of Section 40(a)(ia) does not support the interpretation that it applies only to amounts payable at the end of the financial year.
• Core Principles Established: The Tribunal reinforced the principle that disallowance under Section 40(a)(ia) applies irrespective of whether amounts are paid or payable at the end of the financial year. It also highlighted the need for substantial evidence to support claims of share application money to avoid additions under Section 68.
• Final Determinations on Each Issue: The Tribunal confirmed the disallowance under Section 40(a)(ia) and remitted the addition under Section 68 for further verification by the Assessing Officer.