2014 (3) TMI 184 - HC - Income Tax

Deletion made u/s 40A(3) of the Act - Whether the Tribunal has erred in upholding the decision of the CIT(A) for deleting the addition made u/s 40A(3) of the Act being payment made in contravention with the provisions of sec.40A(3) of the Act Held that - In strict sense the question of disallowance under section 40A(3) of the Act was not an issue before the Court earlier case of the assessee but, from the portion of the order, it can be seen that the Court did advert to such an issue in the context of the findings of the CIT (Appeals) as well as the Tribunal and approved the same - if such issue was arising in the assessment year 2005-06, the question is, why did the Revenue not raise such a question before the High Court - and can in the present case the revenue can raise such a question the appeal of the Revenue cannot be entertained thus, the view of the CIT (Appeals) and the Tribunal is upheld - that the payments were not expended by the assessee and that therefore would not come within the meaning of expenditure be it based on section 40(a)(ia) or section 40A(3) of the Act Decided against Revenue.

Summary

Issues:
1. Disallowance under section 40A(3) of the Income Tax Act.
2. Interpretation of the nature of payments made by the assessee society.
3. Applicability of sections 40(a)(ia) and 40A(3) of the Act to the payments made to farmers.
4. Role and function of the society in distributing payments received from ONGC.

Analysis:

1. Disallowance under section 40A(3) of the Income Tax Act:
The case involved an appeal by the Revenue against the judgment of the Income Tax Appellate Tribunal regarding the disallowance of an addition made under section 40A(3) of the Income Tax Act. The Assessing Officer disallowed 20% of the sum expended by the assessee society on the grounds of non-compliance with the provisions of section 40A(3) of the Act. The Tribunal and CIT (Appeals) had both ruled against the Revenue, emphasizing the welfare nature of the society's activities and the absence of profit motive. The High Court dismissed the appeal, upholding the concurrent findings of fact by the Tribunal that the society's operations were welfare-oriented, and there was no infirmity in the tribunal's decision.

2. Interpretation of the nature of payments made by the assessee society:
The society, formed to aid land losing farmers, facilitated the receipt and distribution of income from ONGC. The payments received were routed through the society, which then distributed the amounts to the farmers after deducting administrative expenses. The society acted as an intermediary between the farmers and ONGC, maintaining vehicle-wise accounts and ensuring smooth operations. The Commissioner (Appeals) and the Tribunal found that the society's activities were welfare-driven, with no profit motive, leading to the disallowance being set aside under sections 40(a)(ia) and 40A(3) of the Act.

3. Applicability of sections 40(a)(ia) and 40A(3) of the Act to the payments made to farmers:
The Assessing Officer contended that TDS should have been deducted on payments made to individual farmers, and since no TDS was deducted, the expenditure was disallowed under section 40(a)(ia) of the Act. Additionally, 20% of the expenditure was added to income under section 40A(3) due to payments exceeding Rs.20,000 made in cash. However, the Commissioner (Appeals) and the Tribunal found that the society's activities did not fall under the purview of work contracts as per section 194C, leading to the disallowances being set aside.

4. Role and function of the society in distributing payments received from ONGC:
The society, a nonprofit organization, was formed to assist illiterate farmers by coordinating payments from ONGC for the rental of vehicles provided by the farmers. The society maintained individual accounts, facilitating the distribution of payments to farmers. The Tribunal recognized the society's welfare activities and its role as a facilitator between ONGC and the farmers, leading to the dismissal of the Revenue's appeal based on the society's lack of profit motive and the nature of its operations.

In conclusion, the High Court upheld the Tribunal's decision, emphasizing the welfare-oriented nature of the society's activities and the absence of profit motive, leading to the dismissal of the Revenue's appeal against the disallowance under sections 40(a)(ia) and 40A(3) of the Income Tax Act.