2016 (11) TMI 1009 - AT - Income Tax

Addition u/s 40(a)(ia) - disallowance of finance charges for non deduction of tds - Held that - The amount paid by the assessee towards the finance charges include both interest and principle amount and the entire amount has been paid during the relevant previous year. As decided in case of Merilyn Shipping & Transport (2012 (4) TMI 290 - ITAT VISAKHAPATNAM) held that no disallowance u/s 40(a)(ia) can be made if the entire amount is paid during the relevant previous year and nothing remained payable. TDS u/s 194C - Disallowance of transportation charges - Held that - We agree with the contention of the assessee that the payment made by the assessee to the truck owners is not pursuant to any contract and therefore, provisions of section 194C are not applicable and consequently no disallowance u/s 40(a)(ia) can be made.

Summary

Issues Involved:
1. Disallowance of finance charges under Section 40(a)(ia) of the Income Tax Act.
2. Disallowance of transportation charges under Section 40(a)(ia) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Finance Charges:
The assessee firm, engaged in the transport business, filed its return of income for the A.Y 2013-14. During the assessment proceedings, the AO observed that the assessee had debited finance charges of ?34,91,410 and transportation charges of ?5,05,61,850 to its P&L account. The AO asked the assessee to furnish details of payments made and compliance with TDS provisions. The assessee provided the details, but the AO noted that the assessee made payments to non-banking financial institutions, attracting Section 194A. The AO disallowed the finance charges of ?34,91,410 under Section 40(a)(ia) due to non-compliance with TDS provisions.

The assessee argued that TDS should only be on the interest component of the installments paid to financial institutions, not the entire amount. The assessee cited various judgments, including the Visakhapatnam Special Bench in Merilyn Shipping & Transport and the Hon'ble Allahabad High Court in CIT vs. Vector Shipping Services Ltd, which held that Section 40(a)(ia) does not apply to amounts already paid by the end of the financial year.

The Tribunal found that the entire amount, including both interest and principal, had been paid during the relevant previous year. Following the decision of the Coordinate Bench in KLR Industries Ltd and the Hon'ble Allahabad High Court in Vector Shipping Services Ltd, the Tribunal held that no disallowance under Section 40(a)(ia) can be made if the entire amount is paid during the relevant previous year. Therefore, the Tribunal allowed the assessee's appeal on this ground.

2. Disallowance of Transportation Charges:
The AO observed that the assessee hired vehicles for transportation and was required to deduct tax at source before making payments. The assessee failed to provide PAN numbers for payments amounting to ?69,06,620. Consequently, the AO disallowed the entire sum of ?5,01,61,850 under Section 40(a)(ia).

The assessee contended that there was no contract with the vehicle owners, and TDS provisions were not applicable. The assessee also argued that none of the vehicle owners owned more than 10 vehicles, invoking the exception under Section 194C(6). Additionally, the assessee provided PAN numbers for payments totaling ?4,36,55,230 and submitted that the aggregate payments to some parties did not exceed ?75,000, exempting them from TDS provisions.

The Tribunal noted that exceptions to Section 194C include (i) the recipient not owning more than 10 vehicles, (ii) aggregate payments not exceeding ?75,000, and (iii) providing PAN numbers before payment. The assessee had not collected PAN numbers before making payments, which was a procedural lapse. However, the Tribunal found that neither the AO nor the CIT (A) examined the applicability of the ?75,000 threshold exception.

The assessee also relied on various judgments, including CIT vs. Valibhai Khanbhai Mankar and Associate Roadways P Ltd vs. Dy.CIT, which held that payments for hiring vehicles do not constitute sub-contracts and are not subject to TDS under Section 194C. The Tribunal agreed with the assessee, holding that the payments to truck owners were not pursuant to any contract, and therefore, Section 194C provisions were not applicable. Consequently, no disallowance under Section 40(a)(ia) could be made. The Tribunal allowed the assessee's appeal on this ground as well.

Conclusion:
The assessee's appeal was allowed, and the stay application was rejected as infructuous. The order was pronounced in the Open Court on 18th November 2016.