2015 (6) TMI 123 - AT - Income Tax

Disallowance of interest for non-deduction of TDS u/s. 194A invoking the provision of section 40(a)(ia) - Held that - In order to provide clarity regarding discharge of tax liability by the resident payee on payment of any sum received by him without deduction of tax, it proposed to amend section 201 to provide that the payer who fails to deduct the whole or any part of the tax on the payment made to a resident payee shall not be deemed to be an assessee in dealt in respect of such tax if such resident payee. (i) Has furnished his return of income under section 139 ; (ii) Has taken into account such sum for computing income in such return of income ; and (iii) Has paid the tax due on the income declared by him in such return of income, and the payer furnishes a certificate to this effect from an accountant in such form as may e prescribed. The date of payment of taxes by the resident payee shall be deemed to be the date on which return has been furnished by the payer.It is also proposed to provide that where the payer fails to deduct the whole or any part of the tax on the payment made to a resident and is not deemed to be an assessee in default under section 201(1) on account of payment of taxes by the such resident, the interest under section 201(1A)(i) shall be payable from the date on which such tax was deductible to the date of furnishing of return of income by such resident payee.These amendments will take effect from 1st July, 2012. In order to rationalize the provisions of disallowance on account of non-deduction of tax from the payments made to a resident payee, it is proposed to amend section 40(a)(ia) to provide that where an assessee makes payment of the nature specified in the said section to a resident payee without deduction of tax and is not deemed to be an assessee in default under section 201(1) on account of payment of taxes by the payee, the, for the purpose of allowing deduction of such sum, it shall be deemed that the assessee had deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee. These amendments will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent assessment years. The insertion of second proviso to sec. 40(a)(ia) of the Act is curative and it has retrospective effect w.e.f. 1st April, 2005, being a date from which Sec. 40(a)(ia) of the Act was inserted by the Finance (No. 2) Act, 2004. Thus that matter needs fresh adjudication in the light of the fact that the AO will carry out necessary verification in regard to related payments having been taken into account by the recipient in computation of its income and verification of payment of taxes in respect of such income and also filing of income tax return by the recipient. In term of the above, the second aspect argued by Ld. counsel is restored back to the file of the AO and assessee will provide all the details in terms of second proviso to sec. 40(a)(ia) of the Act. - Decided in favour of assesse for statistical purposes. Disallowance of expenses - Held that - The disallowances were made by the AO and confirmed by CIT(A) on the above disallowances @ 20% is excessive, thus the disallowances be restricted @ 10% of the expenses.

Issues Involved:
1. Disallowance of interest for non-deduction of TDS under Section 194A of the Income Tax Act.
2. Disallowance of freight receipt shortage.
3. Disallowance of telephone expenses.
4. Disallowance of prior period expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Interest for Non-Deduction of TDS under Section 194A:
The first issue concerns the disallowance of interest amounting to Rs. 91,929 due to non-deduction of TDS under Section 194A, as invoked by the AO under Section 40(a)(ia) of the Income Tax Act. The assessee argued that the loan was taken in an individual capacity and invested in the proprietary concern as capital, thus TDS provisions under Section 194A should not apply. The assessee also cited CBDT Instruction No. 275/201/95-IT(B) dated 29.01.1997, approved by the Supreme Court in Hindustan Coca Cola Beverages (P) Ltd. (2007) 293 ITR 226, asserting that if there is no tax liability for the loan creditors, TDS need not be deducted. Additionally, the assessee contended that the second proviso to Section 40(a)(ia), inserted by Finance Act 2012, should apply retrospectively, thus exempting them from TDS deduction.

The CIT(A) upheld the AO's decision, stating that the loan was used for business purposes, and thus TDS provisions applied. The CIT(A) also noted that no evidence was provided to show that the recipient of the interest had paid tax on the interest received. The Tribunal, however, found merit in the assessee's argument regarding the retrospective application of the second proviso to Section 40(a)(ia). The Tribunal cited several judgments, including Allied Motors (P) Ltd. v. CIT (1997) 224 ITR 677 (SC) and CIT v. Alom Extrusions (2009) 319 ITR 466 (SC), which supported the view that curative amendments have retrospective operation. The Tribunal concluded that the matter needs fresh adjudication to verify if the recipient had accounted for the interest in their income and paid the necessary taxes. Thus, the issue was remanded back to the AO for verification.

2. Disallowance of Freight Receipt Shortage:
The second issue pertains to the disallowance of Rs. 16,235 out of a total freight receipt shortage of Rs. 81,177. The AO made this disallowance, which was subsequently confirmed by the CIT(A). The Tribunal, upon reviewing the facts, found the disallowance to be excessive and reduced it to 10% of the expenses, deeming a 20% disallowance as unwarranted.

3. Disallowance of Telephone Expenses:
The third issue involves the disallowance of Rs. 12,543 out of total telephone expenses of Rs. 62,219. The AO disallowed this amount, which was upheld by the CIT(A). The Tribunal found this disallowance excessive as well and reduced it to 10% of the claimed expenses.

4. Disallowance of Prior Period Expenses:
The final issue is the disallowance of prior period expenses amounting to Rs. 5,238. The AO disallowed this amount, and the CIT(A) confirmed the disallowance. The Tribunal, however, found the disallowance excessive and reduced it to 10% of the claimed expenses.

Conclusion:
The Tribunal partly allowed the appeal, remanding the issue of interest disallowance back to the AO for verification and reducing the disallowances for freight receipt shortage, telephone expenses, and prior period expenses to 10% of the claimed amounts.

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