2015 (7) TMI 357 - AT - Income Tax

Disallowance u/s 40(a)(ia) - Disallowance for salary paid - Held that - The issue duly covered in favour of assessee because it is an undisputed fact that payments were made during the year itself and therefore, were not outstanding as payable. The Special Bench in the case of Merylin Shipping &Transport Co. in 2012 (4) TMI 290 - ITAT VISAKHAPATNAM has clearly held that disallowance u/s 40(a)(ia), can be made of the amounts which are payable and cannot be made of the amounts which have already been paid. Similar findings has also been made in case of Vector Shipping Service Pvt. Ltd. reported at 2013 (7) TMI 622 - ALLAHABAD HIGH COURT against which SLP filed by the department has also been dismissed. Though in the case of CIT Vs Cresent Export Syndicate 2013 (5) TMI 510 - CALCUTTA HIGH COURT and CIT vs Sikander Khan 2013 (5) TMI 457 - GUJARAT HIGH COURT are not in favour of assessee but keeping in view of case of CIT VS Vegetable products 1973 (1) TMI 1 - SUPREME Court , the assessee is entitled to application of judgement benefiting to it - Decided in favour of assessee. Addition u/s 41(1) being salary payable - Held that - Various courts have decided that addition u/s 41(1) can only be made if the provisions of liability are written back in the P & L account and in the absence of such write back, addition u/s 41(1) cannot be made. It is undisputed fact that provisions were not written back and were outstanding in the balance sheet and reflection of such liabilities in the balance sheet itself proves that liabilities had not ceased and therefore, provisions of Section 41(1) were not applicable. - Decided in favour of assessee. Amount received from the Director as a violation of Section 269SS - Held that - There was no violation of provisions of Section 269SS as these provisions are not applicable in a case where the assessee had received loans or deposits by way of passing of a journal entry and therefore, Ld. CIT(A) s action in confirming the action of A.O. in initiating penalty u/s 271D is not justified - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of salary paid
2. Addition u/s 41(1) for salary payable
3. Violation of Section 269SS for cash payment received

Issue 1: Disallowance of Salary Paid
The appellant challenged the disallowance of Rs. 4,28,675 for salary paid. The Assessing Officer (AO) observed that payments were made to professionals without TDS deduction, leading to the disallowance under Section 40(a)(ia) of the Act. Additionally, the AO noted a provision of Rs. 1.80 lacs for salary payable in the balance sheet, of which only Rs. 20,000 was paid. The AO treated the unpaid salary as a ceased liability and made an addition u/s 41(1) of the Act. The appellant contended that the payments were made during the year and not outstanding, citing precedents. The Tribunal ruled in favor of the assessee, emphasizing that disallowance under 40(a)(ia) applies to payable amounts, not those already paid.

Issue 2: Addition u/s 41(1) for Salary Payable
Regarding the addition u/s 41(1) for the salary provision, the appellant argued that since the provision was not written back and remained outstanding in the balance sheet, the provisions of Section 41(1) did not apply. The Tribunal agreed, stating that liabilities reflected in the balance sheet indicate that they had not ceased, thereby disallowing the addition u/s 41(1).

Issue 3: Violation of Section 269SS for Cash Payment Received
The AO alleged a violation of Section 269SS due to a cash payment of Rs. 1,19,928 to M/s. Hans Hundai for a car purchase, funded by a loan from directors. The appellant contended that the loan was not accepted in cash but passed through journal entries, citing legal precedents. The Tribunal referenced the Hon'ble Delhi High Court's decision, emphasizing that Section 269SS applies to cash transactions, not book entries. As no cash was involved, the Tribunal ruled in favor of the appellant, disallowing the penalty under Section 271D. Consequently, the appeal was allowed, and the CIT(A)'s decision was overturned.

This detailed analysis of the judgment provides insights into the legal reasoning and application of precedents in resolving the issues raised by the appellant in the ITAT Delhi case.