2018 (12) TMI 1065 - AT - Income Tax

Revision u/s 263 - disallowance u/s 40(a)(i) - non deduction of tds payment to the non-resident u/s 195 and no remit to the Government account - Held that - Point of allowability of deduction u/s 40(a)(i) in respect of payments which attracts the tax deducted at source under Chapter XVIIB is on remittance of such tax to Government account, but not before the year in which it was paid/incurred. It is a fact that the assessee has not complied with the provisions of section 195 and Chapter XVIIB of the Act. Therefore, till the expenditure was remitted to Govt. of India account, the assessee would not be entitled for the deduction. In the instant case, there is no dispute that the assessee has made the payment to the NRI and the payment attracts the TDS provisions u/s 195 of the Act and the assessee has neither deducted the TDS nor paid such tax to Govt. of India account. The assessee has claimed the expenditure in the impugned A.Y. and the same is covered by section 40(a)(i) and the AO has not examined the issue at the time of assessment. Therefore, the AO has committed an error in the assessment by not examining the issue which required to be examined consequently, which caused prejudice to the revenue. Therefore, we hold that Ld. Pr. CIT has rightly invoked the jurisdiction u/s 263 and we do not see any reason to interfere with the order of the Ld. Pr. CIT. - decided against assessee.

Issues:
1. Revision of assessment order under section 263 of the Income Tax Act related to non-deduction of tax at source.
2. Disallowance of expenditure under section 40(a)(i) of the Act.
3. Nature of transaction - capital asset or business asset.
4. Adequacy of scrutiny assessment and examination of issues by Assessing Officer.

Analysis:

1. Revision of assessment order under section 263:
The appeal was filed against the order of the Principal Commissioner of Income Tax for the Assessment Year 2012-13. The issue revolved around the non-deduction of tax at source by the assessee while purchasing a property from a non-resident, resulting in the revision of the assessment order under section 263 of the Income Tax Act. The Principal Commissioner observed that the expenditure debited to the Profit & Loss account under 'Work-in-Progress' needed to be disallowed under section 40(a)(i) due to the failure to deduct tax at source as required by section 195 of the Act.

2. Disallowance of expenditure under section 40(a)(i):
The contention of the assessee that the expenditure should be disallowed in the year of the transaction, not the year of payment, was rejected by the Principal Commissioner. The argument that the property was purchased as a capital asset, not a business asset, was also dismissed. The Principal Commissioner emphasized the mandatory requirement of deducting tax at source under section 195, irrespective of the nature of the transaction, to claim deductions under section 40(a)(i).

3. Nature of transaction - capital asset or business asset:
The Principal Commissioner rejected the argument that the property was purchased as a capital asset, emphasizing the requirement to deduct tax at source regardless of the nature of the transaction. The assessee's claim that the asset was initially a capital asset, not a business asset, was not considered valid in the context of tax deduction obligations under section 195 and disallowance provisions under section 40(a)(i).

4. Adequacy of scrutiny assessment and examination of issues by Assessing Officer:
The Principal Commissioner noted that the scrutiny assessment did not adequately address the non-deduction of tax at source issue, leading to the revision under section 263. The failure of the Assessing Officer to examine the issue during assessment was highlighted, indicating an error that prejudiced the revenue. The Appellate Tribunal upheld the revision, emphasizing the importance of complying with tax deduction requirements and the consequent disallowance of expenditure under section 40(a)(i).

In conclusion, the appeal of the assessee was dismissed, affirming the revision of the assessment order under section 263 due to the failure to deduct tax at source as required by section 195, leading to the disallowance of expenditure under section 40(a)(i) for the Assessment Year 2012-13.

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