2018 (9) TMI 1017 - AT - Income Tax

Disallowance U/s 40(a)(ia) - Non deduction of tds on payment made by the assessee to the contractor for construction of building - assessee is a society and engaged in the activity of maintaining the temple and application of the assessee U/s 12AA of the Act was rejected - AO accepted the income of the assessee under the income from other sources as per the computation of income - Held that - When the income of the assessee has been assessed under the head Income from other sources and there is no provision U/s 56 to 58 of the Act to make a disallowance U/s 40(a)(ia) of the Act prior to the amendment vide Finance Act 2017 w.e.f. 1/04/2018 whereby sub-Section (1A) of Section 58 has been amended for the purpose of making a provision for disallowance U/s 40(a)(ia) of the Act. Therefore, in view of the above facts and circumstances of the case, when the amendment is applicable from 01/4/2018, no disallowance can be made U/s 40(a)(ia) of the Act against the income of the assessee assessed under the head Income from other sources , hence, we direct to delete the disallowance made U/s 40(a)(ia) of the Act. - Decided in favour of assessee

Summary

Issues:
1. Disallowance of payment under Section 40(a)(ia) of the Income Tax Act, 1961.
2. Applicability of Section 40(a)(ia) to a religious institution.
3. Relevance of registration under Section 12A of the Act for claiming charitable nature.
4. Impact of the amendment vide Finance Act 2017 on disallowance under Section 40(a)(ia).

Issue 1: Disallowance of payment under Section 40(a)(ia) of the Income Tax Act, 1961:
The Assessing Officer disallowed a payment of ?2.50 lacs under Section 40(a)(ia) as TDS was not deducted on the payment made to a contractor for construction. The assessee argued that since it was not engaged in business activities, the provision of Section 40(a)(ia) should not apply. The Tribunal noted that the income of the assessee was declared under "income from other sources." Referring to a similar case, the Tribunal held that the disallowance under Section 40(a)(ia) was not justified as the income was not classified as business income.

Issue 2: Applicability of Section 40(a)(ia) to a religious institution:
The Assessing Officer argued that since the registration under Section 12A was rejected, the activities of the religious institution should be assessed on commercial principles, making Section 40(a)(ia) applicable. However, the Tribunal found that the activities of the society were religious in nature, and the income was declared under "income from other sources." Citing a case precedent, the Tribunal ruled that the disallowance under Section 40(a)(ia) was not sustainable for a non-business income entity.

Issue 3: Relevance of registration under Section 12A of the Act for claiming charitable nature:
The Assessing Officer contended that without Section 12A registration, the charitable nature of the institution could not be claimed. However, the Tribunal emphasized that the income source was donations, rent, and interest used for religious activities, and the disallowance under Section 40(a)(ia) was not applicable considering the nature of income and the absence of profit motive.

Issue 4: Impact of the amendment vide Finance Act 2017 on disallowance under Section 40(a)(ia):
The Tribunal highlighted the amendment under the Finance Act 2017, effective from 1st April 2018, which introduced provisions for disallowance under Section 40(a)(ia) against income assessed under "Income from other sources." As the amendment was not applicable to the relevant assessment year, the Tribunal directed to delete the disallowance under Section 40(a)(ia) against the income of the assessee assessed under "Income from other sources."

In conclusion, the Tribunal allowed the appeal of the assessee, emphasizing that the disallowance under Section 40(a)(ia) was not justified given the nature of income, absence of profit motive, and the classification of income under "Income from other sources."