2016 (5) TMI 619 - AT - Income Tax

Revision u/s 263 - non tds u/s 194A - Held that - If the AO has adopted one of courses permissible in law which resulted in loss of revenue or where two views are possible and AO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of revenue unless the view taken by the AO is unsustainable in law. The assessee in the instant case has not replied to the show cause notice issued by the Ld.CIT, however, the record shows that prior to initiation of proceedings u/s.263 the AO has dropped the rectification proceedings issued u/s.154 on the very same issue. It is also clear from the record that no amount of interest to Tata Finance and Tata Motors Ltd. was outstanding at the end of the accounting year and the entire amount was paid to the above concerns. Under these circumstances no disallowance u/s.40(a)(ia) was called for in view of various decisions in favour of the assessee. Since the issue before the Ld.CIT was a debatable one and since the AO has taken a possible view, therefore, the Ld.CIT in our opinion is not justified in invoking jurisdiction u/s.263 of the I.T. Act. - Decided in favour of assessee.

Summary

Issues:
Jurisdiction under section 263 - Erroneous order prejudicial to revenue, Disallowance under section 40(a)(ia) for non-deduction of tax u/s.194A, Interpretation of section 40(a)(ia) regarding interest payments to Tata Finance and Tata Motors Ltd.

Analysis:

Issue 1: Jurisdiction under section 263 - Erroneous order prejudicial to revenue
The appeal challenged the CIT's invocation of jurisdiction under section 263, arguing that the AO had initiated proceedings under section 154 on the same issue of disallowance. The AO had proposed rectification for not deducting tax on interest payments to Tata Finance and Tata Motors Ltd. The assessee contended that the AO's decision not to disallow the interest amount under section 40(a)(ia) was based on a valid interpretation of the law. The Tribunal cited precedents emphasizing that loss of revenue alone does not make an order erroneous unless it is unsustainable in law. The Tribunal found that the AO's decision was debatable, and since the issue was contentious, the CIT's invocation of jurisdiction under section 263 was unwarranted.

Issue 2: Disallowance under section 40(a)(ia) for non-deduction of tax u/s.194A
The dispute centered on the disallowance of interest payments to Tata Finance and Tata Motors Ltd. under section 40(a)(ia) due to non-deduction of tax u/s.194A. The assessee argued that no disallowance was warranted as the interest had been paid during the year, and nothing was outstanding at the end of the financial year. The Tribunal noted conflicting decisions on the applicability of section 40(a)(ia) in such cases. While the CIT relied on the failure to deduct tax, the Tribunal considered the AO's decision not to disallow the amount reasonable, especially given the debatable nature of the issue. The Tribunal concluded that no disallowance was justified under the circumstances.

Issue 3: Interpretation of section 40(a)(ia) regarding interest payments to Tata Finance and Tata Motors Ltd.
The appeal contended that the interest payments made to Tata Finance and Tata Motors Ltd. did not fall under section 40(a)(ia) as the payees had offered the income and paid taxes. The Tribunal noted the proviso to section 40(a)(ia) inserted later, emphasizing that if the payee had paid taxes, the payer could not be considered a defaulter. The Tribunal considered the assessee's argument that reputable companies like Tata Finance and Tata Motors Ltd. would have complied with tax obligations. This interpretation was supported by various decisions favoring the assessee's position. The Tribunal ultimately allowed the appeal, finding no justification for disallowance under section 40(a)(ia) in this case.

In conclusion, the Tribunal set aside the CIT's order under section 263 and allowed the appeal filed by the assessee, emphasizing the debatable nature of the issues involved and the reasonableness of the AO's decision in the circumstances.