2016 (2) TMI 463 - AT - Income Tax

Disallowance on interest expenses u/s.40(a)(ia) - assessee had not deducted/remitted any TDS on these expenses - Held that - In the absence of any material to suggest that the amount is outstanding at the end of the close of the previous year relevant to the assessment year then impugned amount cannot be disallowed u/s. 40(a)(ia) of the Act. Similar view has been taken by the Co-ordinate Bench of Chennai Tribunal in the case of Shri N. Palanivelu Vs. ITO Salem reported in 2015 (10) TMI 1415 - ITAT CHENNAI . Accordingly we direct the Assessing Officer to disallow the only amount which is outstanding at the end of the close of the previous year relevant to the assessment year. Hence for limited purpose to verify the outstanding amount out of this impugned amount at the end of the close of the previous year relevant to the assessment year we remit the issue back o the file of the ld. Assessing Officer. Further we also make it clear that if the assessee paid the TDS before the returns filed u/s.139(1) of the Act that expenses cannot be disallowed. The ld. Assessing Officer has to decide the issue after giving an opportunity to the assessee for producing necessary evidence. - Decided in favour of assessee for statistical purposes.

Summary

Issues:
Deletion of disallowance of interest expenses under section 40(a)(ia) of the Income Tax Act for assessment years 2010-11 & 2011-12.

Analysis:
The appeals by the Revenue were against the Commissioner of Income Tax (Appeals)'s order regarding the deletion of disallowance of interest expenses under section 40(a)(ia) for the assessment years 2010-11 & 2011-12. The Assessing Officer disallowed interest expenses as TDS was not deducted on these expenses. The Commissioner of Income Tax (Appeals) relied on various judgments to determine the applicability of section 40(a)(ia). The Special Bench of ITAT (Vizag Bench) held that the provision applies only to expenses "payable" and outstanding as of 31st March of the relevant financial year. This view was supported by the High Court of Allahabad. However, conflicting views were presented by the High Courts of Kolkata and Gujarat. The Commissioner of Income Tax (Appeals) followed the Allahabad High Court's decision, which was upheld by the Supreme Court, and held that disallowance under section 40(a)(ia) applies only to amounts "payable" and not "paid."

The Commissioner of Income Tax (Appeals) emphasized that since the interest expenses were already paid by the assessee as of 31.03.2010 and 31.03.2011, they cannot be disallowed under section 40(a)(ia). The Revenue appealed this decision. The ITAT Chennai Bench concurred with the Commissioner of Income Tax (Appeals) and held that section 40(a)(ia) is not applicable if there is no outstanding balance at the end of the relevant financial year. The ITAT directed the Assessing Officer to disallow only the outstanding amount at the end of the relevant year and remitted the issue back for verification. It was also clarified that if TDS was paid before filing returns, the expenses cannot be disallowed. The appeals by the Revenue were partly allowed for statistical purposes.

In conclusion, the judgment clarified the application of section 40(a)(ia) concerning the disallowance of interest expenses, emphasizing the distinction between "payable" and "paid" amounts. The decision underscored the importance of outstanding balances at the end of the relevant financial year and provided guidance on the disallowance of expenses based on TDS deductions.