2017 (2) TMI 398 - HC - Income Tax

TDS u/s 194C - payments made to a sister concern - Held that - Since the amounts received by the payee, i.e., M/s Aakriti Creation Pvt. Ltd. were reported by it in the regular course of assessments, the disallowance of the entire amounts, under Section 40(a)(ia) of the Act in effect would render one payment which constitutes a transaction liable to income tax, twice over. Considering that Parliament remedied the law by amendment through insertion of the second proviso, in cases such as the present one, where the AO can have easy access to the returns of the payee, in the larger interest of the assessee and the Revenue, it would be appropriate that the A.O. examines the figures with relation to the exact claim of payments toward the raw materials. The AO would examine, if necessary, the returns and relative documents pertaining to the payee M/s Aakriti Creation Pvt. Ltd. With these observations, the matter is remanded for reconsideration; in the event the A.O. is satisfied that the claim towards the payment does not include any income component but in fact constitutes reimbursement, the question of application of Section 40(a)(ia) would not arise.

Summary

Issues:
Question of law regarding the applicability of Section 194(C) on payments made to a sister concern.

Analysis:
The appellant, engaged in the business of manufacturing and exporting garments, made payments to a sister concern for raw materials. The Assessing Officer (A.O.) disallowed the expenditure, adding it back to the appellant's returns. However, the Commissioner of Income Tax (CIT) granted relief based on a Tribunal decision. The Income Tax Appellate Tribunal (ITAT) confirmed this decision. The Revenue contended that the payee must deduct amounts towards overpayments as per Section 34(i)(ia) of the Act, emphasizing the deductor's responsibility under Section 195(2). The ITAT's failure to consider the second proviso to Section 40(a)(ia), introduced in 2013, was highlighted. The appellant cited previous court rulings to support their case.

In a similar case, the Court extensively analyzed Section 194(C) and related provisions. The Court emphasized the importance of examining whether the income embedded in an expenditure has remained untaxed due to tax withholding lapses. It differentiated between de-incentivizing and punishing lapses in tax withholding, stating that Section 40(a)(ia) aims to restrict deductions for untaxed income, not penalize withholding lapses. The Court held that the second proviso to Section 40(a)(ia) is declaratory and curative, with retrospective effect from April 1, 2005.

The Court observed that the payee had reported the amounts received in regular assessments, suggesting that disallowing the entire amounts under Section 40(a)(ia) would result in double taxation. Considering the legislative amendment and the ease of access to payee returns, the Court directed the A.O. to re-examine the payment claim towards raw materials. If the payment is deemed a reimbursement without an income component, Section 40(a)(ia) would not apply. Consequently, the matter was remanded for reconsideration, with the appeal partly allowed based on these observations.