2019 (3) TMI 1463 - AT - Income Tax

Addition u/s. 40(a)(ia) for failure of TDS u/s 194C - payments made relating to Freight charges without deducting tds - limited prayer of the assessee that after the amendment in sec. 200/201 when the recipient of the amounts have shown in their return of income, the amount in question and has been assessed to tax, then disallowance is not warranted - HELD THAT - We find force in the contention of the assessee and direct the AO to adjudicate the issue afresh. And direct that if the payees have reflected this payment in question towards them in their respective Return of Income and have taken into account this sum of amount in their Return of Income and has paid tax due on the income declared in the Return of Income, and fulfils the conditions stipulated u/s. 200 of the Act, then no disallowance u/s. 40(a)(ia) of the Act is warranted. Needless to say, the AO may call for the aforesaid details from the payees in case it is found necessary. So, we set aside the order of Ld. CIT(A) and remand the matter back to AO for fresh adjudication as directed above. - Appeal of assessee are allowed for statistical purposes. Deemed dividend addition u/s 2(22)(e) - HELD THAT - We note that assessee firm is not a shareholder of M/s. Modern Solaurum Pvt. Ltd. So, sec. 2(22)(e) of the Act is not attracted against the assessee firm and so the impugned addition invoking sec. 2(22)(e) of the Act cannot be sustained as held by the Hon ble Delhi High Court in Ankitech pvt ltd 2011 (5) TMI 325 - DELHI HIGH COURT wherein this principal/ratio has been held. So since the Firm being not a shareholder of the Pvt. Ltd. company which lent the money cannot be taxed by applying sec. 2(22)(e) of the Act. So, the addition is deleted. This ground of appeal of assessee is allowed.

Summary

Issues:
1. Disallowance of freight charges under sec. 40(a)(ia) of the Income Tax Act, 1961.
2. Addition of accumulated profit as deemed dividend under sec. 2(22)(e) of the Act.

Issue 1: Disallowance of Freight Charges under Sec. 40(a)(ia) of the Income Tax Act, 1961:

The assessee had paid freight charges to Jet Airways and Air India without deducting TDS, leading to a disallowance under sec. 40(a)(ia) of the Act. The assessee argued that since the PAN was provided by the service providers, there was no liability to deduct tax under sec. 194C of the Act. The CIT(A) upheld the AO's decision. The ITAT noted the payments made without TDS and the amendment in sec. 200/201 of the Act. The ITAT directed the AO to reexamine the issue, stating that if the payees had reflected the payments in their income tax return and fulfilled conditions under sec. 200, no disallowance under sec. 40(a)(ia) was warranted. The ITAT set aside the CIT(A)'s order and remanded the matter back to the AO for fresh adjudication.

Issue 2: Addition of Accumulated Profit as Deemed Dividend under Sec. 2(22)(e) of the Act:

The AO added the accumulated profit of a company, in which a partner of the assessee firm had a shareholding, as deemed dividend under sec. 2(22)(e) of the Act. The CIT(A) confirmed this action. The ITAT noted that the firm was not a shareholder of the company, thus sec. 2(22)(e) was not applicable. Citing a Delhi High Court judgment, the ITAT held that the firm cannot be taxed under sec. 2(22)(e) as it was not a shareholder of the lending company. Consequently, the addition was deleted, and this ground of appeal was allowed.

In conclusion, the ITAT partially allowed the appeal of the assessee for statistical purposes, setting aside the disallowance of freight charges and deleting the addition of accumulated profit as deemed dividend. The judgment emphasized the importance of compliance with tax deduction provisions and clarified the scope of deemed dividend under the Income Tax Act.