2015 (2) TMI 246 - AT - Income Tax

Disallowance under section 40(a)(ia) and u/s 40(a)(iii) - Held that - Only disallowance can be made out of the amounts claimed in the P & L account. Coming to the issue of quantum for disallowance as rightly admitted by Ld. Counsel, the amounts added to the work in progress in earlier year without TDS were also part of the project expenses debited to P & L account during the year. Therefore, whatever is the amount included in the total project cost without making TDS up to the end of the year should be considered for disallowance proportionately at 2.16%. Total amount that should be considered for proportionate disallowance under section 40(a)(ia), being the amount included in the project cost was submitted by assessee as extracted above. AO directed to examine the same and then disallow the proportionate 2.16% under section 40(a)(ia) as in earlier year as per directions of ITAT on this issue. Decided partly in favour of assessee for statistical purposes.

Summary

Issues:
Disallowance under section 40(a)(ia) in construction company's income tax return for A.Y. 2010-2011.

Analysis:
The appeal pertains to the disallowance under section 40(a)(ia) in the income tax return of a construction company for the assessment year 2010-2011. The company, engaged in constructing residential complexes, filed its return admitting income of &8377; 1,03,21,866 on sales of &8377; 31.82 crores. The Assessing Officer (A.O.) made additions for disallowance under section 40(a)(ia) and 40(a)(iii), which were contested before the Ld. CIT(A) and subsequently appealed.

The disallowance issue revolves around the company's accounting method, where expenses were added to opening work in progress and sales were shown proportionately. The A.O. proposed disallowing an amount paid as interest to a venture capital fund due to non-deduction of TDS. The company contended that only a proportionate amount should be disallowed, as only a percentage of total expenditure was debited to the Profit & Loss (P & L) account. The A.O. disagreed, leading to the disallowance upheld by the Ld. CIT(A).

The company argued that the disallowance should be restricted to the amount claimed in the P & L account, citing a previous ITAT decision in its favor for A.Y. 2009-10. The company admitted that proportionate disallowance should also apply to the previous year's expenses without TDS. The ITAT acknowledged that only the amount claimed in the P & L account should be disallowed, directing the A.O. to reexamine and apply a proportionate disallowance of 2.16% under section 40(a)(ia) as per previous directions.

The ITAT's decision was based on the principle that only the proportionate amount claimed in the P & L account should be disallowed. The A.O. was instructed to calculate and apply the 2.16% disallowance on the project cost without TDS, as per the ITAT's previous ruling. The appeal was partly allowed for statistical purposes, emphasizing the need for correct disallowance calculations based on the ITAT's directions.

In conclusion, the ITAT's judgment focused on the correct application of disallowance under section 40(a)(ia) in the context of the company's accounting practices, emphasizing the proportionate disallowance based on amounts claimed in the P & L account and previous year's expenses without TDS.