2022 (12) TMI 398 - AT - Income Tax

TDS u/s 40 (a)(ia) - additions made towards disallowance of interest paid on partners capital account - assessee is following mercantile system of accounting, income and expenditure pertains to relevant accounting period is required to be accounted whether or not such expenditure/income is received by the assessee - HELD THAT - When it comes to deductibility of any expenditure, it is subject to provisions of section 40(a)(ia) of the Act and as per said provision, expenditure debited to profit and loss account cannot be allowed as deduction, in case the assessee has not deducted TDS on said expenditure. The provisio provided to section 40(a)(ia) further states that said expenditure can be allowed as deduction in the year in which the assessee has deducted TDS and remits to Government account. Assuming for a moment, the assessee has made a provision for interest payment to partner in the earlier assessment year 2013-14, but same cannot be allowed as deduction because of non-deduction of tax at source. Further, it is a tax neutral exercise, because if assessee provides interest in the last financial year, to that extent profits of the assessee would come down and at the same time for non-deduction of TDS if expenses is disallowed then profit would remain same. Therefore, for assessment year 2013-14 there is no net effect on the profit declared by the assessee. As per provisions of section 40(a)(ia) even if assessee debited expenditure, but same needs to be allowed as and when the assessee deducts TDS on said expenditure. In this case, the assessee has deducted TDS on impugned expenditure for the assessment year 2014-15, which has to be allowed irrespective of method of accounting followed by the assessee. AO as well as the CIT(A) are erred in disallowing interest paid to outgoing partner s account and thus, we direct the AO to delete additions made towards disallowance of interest paid on partners capital account. Appeal filed by the assessee is allowed.

Summary

Issues:
1. Disallowance of interest on capital account of outgoing partner.
2. Deduction under section 40(a)(ia) of the Income Tax Act, 1961.
3. Application of mercantile system of accounting.
4. Allowability of TDS deduction on interest paid to partner.

Analysis:
1. The appeal addressed the disallowance of Rs.16,55,991/- by the learned Commissioner of Income Tax (Appeals) concerning interest on the capital account of an outgoing partner for the assessment year 2014-15. The Assessing Officer disallowed the interest paid to the partner's capital account, stating that under the mercantile system of accounting, such expenditure from previous years should have been claimed in the assessment year 2013-14. The appellant contested this decision but was unsuccessful, leading to the sustained addition by the CIT(A).

2. The appellant argued that irrespective of the accounting method, deduction under section 36(1)(iii) of the Income Tax Act should be allowed subject to the proviso under section 40(a)(ia). Since TDS was deducted and paid on the interest to the partner's capital account during the assessment year 2014-15, the appellant contended that it should be allowed in that year, even if following the mercantile system of accounting.

3. The dispute revolved around the application of the mercantile system of accounting and the timing of the accrual of interest from 01.09.2012 to 31.03.2013. The contention was that the interest accrued in the financial year relevant to the assessment year 2013-14, leading to the disallowance by the AO. However, the Tribunal highlighted that under section 40(a)(ia) of the Act, expenditure can be allowed as a deduction in the year when TDS is deducted and remitted to the Government account, regardless of the accounting method followed.

4. The Tribunal concluded that the AO and CIT(A) erred in disallowing the interest paid on the partner's capital account. It was emphasized that the deduction of TDS on the impugned expenditure for the assessment year 2014-15 should be allowed, irrespective of the accounting method. Therefore, the Tribunal directed the AO to delete the additions made towards the disallowance of interest paid on the partner's capital account, ultimately allowing the appeal filed by the assessee.

This detailed analysis of the judgment highlights the key legal issues addressed and the Tribunal's decision regarding the disallowance of interest and the application of relevant provisions of the Income Tax Act.