2021 (1) TMI 326 - HC - Income Tax

TDS u/s 195 - Disallowance u/s 40(a)(ia) - payments made sub contractor - Tribunal setting aside the disallowance made under section 40(a)(ia) by holding that assessee made only journal entries in the books and as such it does not require deduction of TDS - HELD THAT - It has been held by the Supreme court in VICTORIA MEMORIAL HALL vs. HOWRAH GANATANTRIK NAGRIK 2010 (3) TMI 1059 - SUPREME COURT reasons were held to be the heartbeat of every conclusion apart from being an essential feature of the principles of natural justice that ensure transparency and fairness in the decision making process Tribunal has merely recorded its conclusion and has not assigned any reasons in support of the conclusion. Thus for the aforementioned reasons the impugned order dated passed by the tribunal is hereby quashed. The substantial question of law is answered accordingly. Tribunal is directed to decide the claim of the assessee under Section 40(a)(ia) of the Act afresh on the basis of the material available on record and on the basis of the reasoning assigned by the AO as well as CIT(Appeals) and shall also advert to the issue whether the condition precedent for invocation of Section 40(a)(ia) of the Act have been fulfilled in the fact situation of the case.

Summary

Issues:
1. Interpretation of Section 40(a)(ia) of the Income Tax Act, 1961 regarding disallowance of expenses.
2. Examination of whether the expenses claimed by the assessee were valid and required TDS deduction under Section 195 of the Act.
3. Assessment of the tribunal's decision to set aside the disallowance made under Section 40(a)(ia) by considering the nature of expenses and journal entries.

Analysis:

1. The appeal under Section 260A of the Income Tax Act, 1961 was filed by the revenue challenging the tribunal's decision to set aside the disallowance made under Section 40(a)(ia) of the Act. The primary issue revolved around whether the assessee was justified in not deducting TDS towards payments made to a subcontractor, leading to the disallowance under Section 40(a)(ia).

2. The facts of the case involved the assessee debiting a substantial amount as subcontract charges under the head of 'personnel cost,' prompting the Assessing Officer to issue a show cause notice for disallowance under Section 40(a)(i) of the Act. The tribunal's decision was based on the premise that the expenses recorded in the books were merely journal entries, thereby negating the need for TDS deduction under Section 195 of the Act.

3. The revenue contended that the tribunal's decision was erroneous as it failed to consider the substantial evidence required to validate the claim that no services were provided by the subcontractor. The revenue argued that the tribunal did not analyze the findings of the lower authorities and overlooked the provisions of Section 40(a)(i), Explanation (i) to (vi), Section 195, and Section 9 of the Act.

4. On the other hand, the assessee argued that the conditions for invoking Section 40(a)(ia) were not met as the responsibility for payment and TDS deduction lay with the seller. The assessee also cited a Rajasthan High Court decision affirmed by the Supreme Court to support the contention that TDS deduction was not mandatory without a formal agreement.

5. The High Court observed that the tribunal's decision lacked reasoning and failed to provide adequate justification for setting aside the disallowance under Section 40(a)(ia). Citing established legal principles, the Court emphasized the importance of reasons in judicial decisions and quashed the tribunal's order, directing a fresh assessment based on the material available and the reasoning of the lower authorities.

6. Consequently, the Court disposed of the appeal, instructing the tribunal to reevaluate the claim under Section 40(a)(ia) considering the conditions for invoking the provision and the evidence presented by the assessee and the revenue authorities. The judgment highlighted the necessity for thorough reasoning and analysis in tax assessments to ensure transparency and fairness in decision-making processes.