2015 (10) TMI 989 - AT - Income Tax

Disallowance u/s. 40(a)(ia) - TDS liability - wrong classification of expenses as payment to contract whereas payment were made towards rent and reimbursement of expenses - Held that - It is a fact that during the year, Assessee had entered into agreements with Natraj Synthetics and Arbuda Textiles, whereby the Assessee had taken the machineries and other facilities located at the shed on rent. As per the rent agreement, Assessee had agreed to pay the monthly operating charges towards plant and machinery and infrastructure facilities and towards the use of land and building. It was also agreed that the assessee would bear all expenses in the nature of labour wages staff salaries, manufacturing expenses etc. It was also agreed interalia that at the expiration of the term, the Assessee will hand over vacant possession of the set up. Revenue has not brought any material on record to demonstrate that the agreement entered into by the Assessee was not in existence or an afterthought. In view of the aforesaid facts, we are of the view that the payment made by Assessee consisted of agreed payments towards rent and therefore also reimbursements. Further, with respect to reimbursements, no material has been brought on record by Revenue to doubt its genuineness. Further the submission of ld. A.R. that the payee s have also paid the taxes has not been doubted by Revenue. In view of the aforesaid facts, we are of the view that no disallowance u/s. 40(a)(ia) can be made in present case. - Decided in favour of assessee.

Summary

Issues Involved:
Appeal against order of CIT(A) for A.Y. 2005-06 regarding disallowance of expenses under section 40(a)(ia) of the Act.

Detailed Analysis:

Issue 1: Disallowance of expenses under section 40(a)(ia) of the Act
- The Assessee appealed against the order of CIT(A) regarding the disallowance of expenses under section 40(a)(ia) for A.Y. 2005-06.
- The Assessing Officer (AO) observed that the Assessee had not deducted TDS on sub-contract payments to certain parties, leading to the disallowance of expenses.
- The Assessee contended that the expenses were reimbursement of wages and power expenses incurred on their behalf by outside parties, and no TDS was required as per Section 194(I) of the Act.
- The AO disagreed, considering the parties as sub-contractors of the Assessee and held that TDS should have been deducted on the payments made.
- CIT(A) upheld the AO's order, stating that the payments to the parties were in the nature of payments to sub-contractors, attracting the provisions of section 40(a)(ia).
- The Assessee then appealed before the ITAT, reiterating that the payments were for rent and reimbursements, not subject to TDS under section 194C.
- The ITAT examined the agreements with the parties and found that the payments were for rent and reimbursements as agreed upon, with no evidence to doubt their genuineness.
- The ITAT allowed the Assessee's appeal, concluding that no disallowance under section 40(a)(ia) could be made in the present case.

This judgment highlights the importance of proper documentation and agreements in determining the nature of expenses for TDS purposes under the Income Tax Act. The ITAT's decision emphasizes the need for clarity and substantiation to support claims and the significance of genuine agreements in tax matters.