2014 (1) TMI 1298 - AT - Income Tax

Mandatory requirements of section 40(a)(ia) of the Act TDS required to be deducted whether paid or payable - Allowability of charges Hire charges paid and relief granted TDS not deducted - Scope of tax deduction u/s 40(a)(ia) of the Act Expenses u/s 28 and Section 30 to 38 of the Act Held that - The legal proposition made by the Commissioner of Income tax (Appeals) that interest expenditure is directly covered by section 28 and, therefore, section 40(a)(ia) will not apply for the reason that the section applies only to those expenses covered by sections 30 to 38 cannot be accepted - The law has provided a comprehensive system for deciding what are profits and gains of business or profession and how profits and gains of business or profession will be computed - When an exhaustive provision is made in the Act, it is not possible to hold that section 28 itself provides for expenditure and, therefore, the assessee can claim the expenditure of interest payment as an expenditure deductible at source itself under section 28 of the Act. Relying upon CIT Vs. Sikandarkhan N.Tunvar & Ors. 2013 (5) TMI 457 - GUJARAT HIGH COURT - the provisions of section 40(a)(ia) cover not only the amounts which are payable as on 31st March of a particular year but also which were paid during the end of the year Decided partly in favour of Revenue. Application of Section 194C of the Act Held that - Commissioner of Income Tax (Appeals) has not dealt with the aspect of whether the provisions of section 194C apply to the hire charges paid by the assessee so as to invoke the provisions of section 40(a)(ia) of the Act As the CIT (Appeals) has not dealt with this aspect, thus, the issue is remitted back to the CIT(A) for fresh adjudication Decided partly in favour of Assessee.

Summary

Issues:
1. Whether hire charges paid by the assessee are subject to TDS under section 40(a)(ia) of the IT Act.
2. Whether the provisions of section 40(a)(ia) apply to expenses allowable under section 28 of the Act.
3. Whether the provisions of section 40(a)(ia) cover amounts already paid during the previous year.

Analysis:

1. The Revenue appealed against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance of hire charges paid by the assessee amounting to Rs. 51,81,117 due to non-deduction of TDS. The Revenue contended that non-deduction of tax warrants action under section 40(a)(ia) of the Act. The assessee argued that hiring charges paid do not attract TDS and that section 40(a)(ia) is not applicable. The Commissioner of Income Tax (Appeals) ruled in favor of the assessee, stating that the hire charges are direct expenses allowable under section 28 of the Act and not under sections 30 to 38, which are subject to disallowance under section 40(a)(ia).

2. The Tribunal reviewed the decisions of co-ordinate benches in similar cases and reversed the Commissioner's order. It was noted that the provisions of section 40(a)(ia) apply to expenses under sections 30 to 38, and not just those under section 28. The Tribunal disagreed with the Commissioner's interpretation and cited precedents to support the decision to disallow the expenses under section 40(a)(ia) due to non-deduction of TDS.

3. The Tribunal also addressed the issue of whether section 40(a)(ia) covers amounts already paid during the previous year. Following the decision of the Gujarat High Court, it was held that the provisions of section 40(a)(ia) apply not only to amounts payable but also to amounts already paid by the end of the year. The Tribunal rejected the contention that section 40(a)(ia) does not apply to amounts already paid, thus upholding the disallowance of expenses under this provision.

In conclusion, the appeal of the Revenue and the cross objection of the assessee were partly allowed for statistical purposes, with the Tribunal reversing the Commissioner's order on the application of section 40(a)(ia) to hire charges and confirming that the provision covers amounts already paid during the previous year. The matter regarding the applicability of section 194C to hire charges was remitted back to the Commissioner of Income Tax (Appeals) for further consideration.