2022 (4) TMI 671 - AT - Income Tax

Application of 40(a)(ia) on the evidential documents of identification and copy of ITR - HELD THAT - In the case at hand, firstly, so far as payment of interest / finance charges to M/s Magma Leasing Finance Ltd is concern, a copy of ITR filed for AY 2010-2011 along-with a letter of confirmation of receipt is placed to substantiate the compliance of aforesaid provision, however in the absence of certificate from an accountant proving the twofold facts, as to whether the amount of interest in question is accounted as income and taxes due thereon has been paid to the credit of Government Treasury remained unestablished. Secondly so far as SREI Infrastructure Finance Ltd is concern, in support of assessee s claim, the reliance was placed on copy of PAN and a certificate of lower deduction obtained by the said NBFC from the Income Tax Authority and contended the due compliance of first provision to section 201(1) vis- -vis second proviso to section 40(a)(ia) however the assessee failed to substantiate how these documents alone testify the twofold establishment of aforesaid provision of law, therefore the appellant disentitled himself from immunity of being held as the assessee-in-default within the meaning of Section 201(1) of the Act and resultantly, un-distanced from application of provisions of section 40(a)(ia) of the Act. Thus, in the light of aforesaid observations, the ground number 1 is dismissed. Ad-hoc disallowance of business expenses - As per assessee AO had in a most arbitrary manner disallowed portion of expense applying ad-hoc percentile and which has been sustained by the Ld CIT(A), despite of the fact that, all these business expenditure debited to profit loss account and claimed in the return of income has all the valid characteristic laid in section 37(1) - HELD THAT - We neither could come across any provision in the present Income Tax Statute nor it has been brought to our notice by either parties to dispute, which subscribes vis- -vis authorises the tax authorities to arrive at this logic of subscribing ad-hoc disallowances. Evidently, there has been no clear findings as to number of vouchers requiring denial of allowances with the amount of expenditure and nature of defects therein or therewith, moreover department could not bring out any deprecative material on record to substantiate its conclusion as logical. We couldn t also see remotely there is any mention of rationale in arriving at the percentile of disallowance in the present case, consequently we find substantial force in the claim of the assessee that devoid of any specific infirmity qua the assessee s claim for deduction of the aforementioned expenditure by the lower tax authorities, and for the reason, the ad-hoc disallowance carried out in a most arbitrary manner could by no means be held to be justified. Thus we, do not find favour with the view taken by the lower tax authorities, consequently we vacate the ad-hoc disallowance in its entirety and thereby allow the ground number 2 of the appeal.

Summary

Issues Involved:
1. Legality of ad-hoc disallowance of business expenses.
2. Application of Section 40(a)(ia) of the Income-tax Act, 1961 for non-deduction of tax.

Detailed Analysis:

1. Legality of Ad-hoc Disallowance of Business Expenses:

The appellant challenged the ad-hoc disallowance of ?2,00,000/- made by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO disallowed part of the total expenses on the basis of self-made cash vouchers and the presence of elements not related to business usage. The major business expenses included vehicle repairing, office expenses, diesel and lubricants, labor welfare, motorcycle running, and salary & wages, totaling ?1,18,55,252/-.

The appellant argued that all business expenditures debited to the profit & loss account and claimed in the return of income had valid characteristics as laid out in Section 37(1) of the Income-tax Act. The appellant contended that the disallowance was arbitrary and lacked specific findings or evidence pointing to any bogus or fictitious expenses. The tribunal noted that neither the AO nor the CIT(A) identified any specific vouchers that lacked genuineness or were not incurred wholly and exclusively for business purposes.

The tribunal found that there was no provision in the Income-tax Statute authorizing such ad-hoc disallowances without any specific infirmity or evidence. The tribunal cited the judgment of the Hon'ble High Court of Madras in "V.C. Arunai Vadivelan Vs ACIT" which emphasized that ad-hoc disallowances without specific reasons are not legally tenable. Consequently, the tribunal vacated the ad-hoc disallowance in its entirety, allowing the appellant's ground number 2.

2. Application of Section 40(a)(ia) for Non-deduction of Tax:

The appellant challenged the disallowance of ?8,30,975/- made under Section 40(a)(ia) for non-deduction of tax under Section 194A from payments made to NBFCs, namely Magma Leasing Finance Limited and SREI Infrastructure Limited. The appellant argued that the deductees were reputed NBFCs paying taxes and no amount was outstanding at the end of the year.

The tribunal noted that the appellant failed to provide certificates from a Chartered Accountant as required by the first proviso to Section 201(1) of the Act, which would prove that the payees had accounted for the interest as income and paid the due taxes. The tribunal emphasized the importance of the first proviso to Section 201(1) and the second proviso to Section 40(a)(ia) introduced by the Finance Act, 2012, which provide relief to the assessee if the payee has furnished their return of income, taken into account the sum for computing income, and paid the tax due.

In the case of Magma Leasing Finance Ltd, the appellant provided a copy of the ITR filed and a letter of confirmation of receipt, but failed to provide the necessary certificate from an accountant. For SREI Infrastructure Finance Ltd, the appellant relied on a copy of PAN and a certificate of lower deduction, but these documents alone did not satisfy the requirements of the provisions.

The tribunal referred to judgments by the Hon'ble Delhi High Court and the Hon'ble Apex Court, which emphasized that no recovery of tax demand should be enforced against the assessee if the payee has accounted for the amount as income and paid the due taxes. However, in the absence of the required certificates, the appellant was not entitled to the relief provided by the provisions. Consequently, the tribunal dismissed ground number 1.

Conclusion:

The appeal was partly allowed. The tribunal vacated the ad-hoc disallowance of business expenses, but upheld the disallowance under Section 40(a)(ia) for non-deduction of tax due to the absence of necessary certificates. The order was pronounced on April 1, 2022.