2020 (12) TMI 185 - HC - Income Tax

Addition u/s 40A(3) - Disallowance u/s 40(a)(ia) - payment in cash to SNBT for raw material purchases and SNBT making the said amount to the suppliers - HELD THAT - Since the matter stood remitted by the learned Tribunal with regard to Section 40A(3) of the Act, to first determine whether there was a contract of Agency Agreement between the Appellant/Assessee, an individual viz., Mr.R.Venugopal and the Company by name M/s.Srinivas Buildtech Pvt Ltd (SNBT) where the Assessee was the Managing Director, therefore, unless such contractual relationship is established, both the issues with regard to disallowance under Section 40A(3) of the Act for Assessee having made cash payments to the Company for the alleged purchases of raw materials and building materials and also applying Section 40(a)(ia) of the Act for Service Charges paid by the Assessee to the Company for such agency work of purchasing those materials without deduction of Income Tax at Source cannot be determined. Since both the issues are inter-related and since the matter stood remitted by the learned Tribunal vide para 12 aforequoted for Section 40A(3), the issue with regard Section 40(a)(ia) of the Act also ought to have been restored to the file of the CIT (A). No substantial question of law.

Summary

Issues:
1. Disallowance under section 40A(3) of the Income Tax Act for cash payments made by the assessee to a company for raw material purchases.
2. Application of section 40(a)(ia) of the Income Tax Act for service charges paid by the assessee to the company without deduction of Income Tax at Source.

Analysis:

Issue 1: Disallowance under Section 40A(3)
The High Court analyzed the appeal concerning the disallowance under section 40A(3) of the Income Tax Act due to cash payments made by the assessee to a company for raw material purchases. The Tribunal observed that the payments were made in cash to the company, which then paid the suppliers through account payee cheques. However, the existence of a 'principal and agent relationship' between the assessee and the company was not clearly demonstrated. The Tribunal remanded the matter to the CIT (A) for a reasoned order and consideration of relevant legal provisions. The High Court upheld the Tribunal's decision and directed the CIT (A) to pass a speaking order after considering all aspects and legal arguments.

Issue 2: Application of Section 40(a)(ia)
Regarding the application of section 40(a)(ia) for service charges paid by the assessee to the company without deduction of Income Tax at Source, the Tribunal found that there was an implied contract between the parties for services rendered. The CIT (A) had correctly adjudicated the issue, and the High Court upheld the decision, stating that the CIT (A) discussed the matter extensively before granting relief to the assessee. The High Court concluded that the decision taken by the CIT (A) was fair and reasonable, not warranting any interference.

The High Court emphasized the need for the assessee to establish the existence of a contractual relationship, specifically an Agency Agreement, between the assessee and the company. As both issues were interrelated and remitted by the Tribunal, the High Court directed the assessee to provide relevant evidence to establish the Agency Agreement before the CIT (A) for fresh consideration. The High Court disposed of the appeals without answering the questions raised, instructing the CIT (A) to decide both issues under section 40A(3) and section 40(a)(ia) afresh in accordance with the law.