Business disallowance under section 40(a)(ia)–cannot be done if their is a Short deduction of TDS

Where there was any shortfall due to difference of opinion or taxability of any items or the nature of payment falling under various TDS provisions, assessee could be declared to be assessee-in-default under section 201, but no disallowance could be made under section 40(a)(ia) and therefore, disallowance made was to be deleted.

AO observed that assessee was liable to deduct TDS at the rate of 20 per cent from payments made to sub-contractors whose permanent account numbers were not available but assessee made deduction at the rate of 1%. Further in respect of sub-contractors TDS was deducted at the rate of 1% instead of 2%. AO disallowed certain amount under section 40(a)(ia). CIT(A) confirmed disallowance. Held: In the case of DCIT v. S.K. Tekriwal 260 CTR (Cal) 76, Kolkata High Court had held that section 40(a)(ia)  refers only to the duty to deduct tax and pay to government account. Explaining further, it was observed by  High Court that if there is any shortfall due to any difference of opinion as to the taxability of any items or the nature of payment falling under various TDS provisions, the assessee could be declared to be an assessee in default under section 201, but no disallowance could be made by invoking the provisions of section 40(a)(ia) following the said decision of jurisdictional High Court, the disallowance made by the AO under section 40(a)(ia) and confirmed by the CIT(A) was deleted.

Decision: In assessee’s favour.

Followed: Dy. CIT v. S.K. Tekriwal 260 CTR 76.

Referred: Dy. CIT v. Neemrant Hotel (P) Ltd. ITA No. 3134/Del/2013.

IN THE ITAT, KOLKATA BENCH

P.M. JAGTAP, A.M. & S.S. VISWANETHRA RAVI, J.M.

Power Max (India) (P) Ltd. v. DCIT

ITA No. 125/Kol/2017

15 June, 2018

Assessee by: A.N. Chatterjee, FCA

Revenue by: S. Dasgupta, Additional Commissioner (Departmental Representative)

P.M. Jagtap, A.M.

This appeal filed by the assessee is directed against the order of learned Commissioner (Appeals)–18, Kolkata dated 19-12-2016.

2. At the time of hearing before the Tribunal, the learned counsel for the assessee has not pressed ground no 1 raised in the appeal of the assessee. It is also noted that ground no 4 raised by the assessee in this appeal in general which does not call for specific adjudication.

3. The issue involved in ground no 2 relates to the addition of Rs. 1,16,51,016 made by the assessing officer under section 40(a)(ia) of the Income Tax Act, 1961 and confirmed by the learned Commissioner (Appeals).

4. The assessee in the present case is a company which is engaged in the business of manufacturing of boilers and related accessories. The return of income for the year under consideration was filed by it on 29-9-2011 declaring a total income of Rs. 1,96,40,682. As noted by the assessing officer during the course of assessment proceedings, tax at 1% was deducted by the assessee from the payments made to some subcontractors whose permanent account numbers were neither mentioned nor available with the assessee. According to the assessing officer, the assessee was liable to deduct tax @20% in such cases as per the provision of section 206AA and since there was short deduction of tax, he made a disallowance of Rs. 22,46,041 on account of relevant payments made to the sub-contractors under section 40(a)(ia) of the Act. The assessing officer also found that the assessee had made payments to two sub-contractors namely Aman Construction Co. and Biswas Construction amounting to Rs. 15,04,240 and Rs. 98,58,240 respectively and tax at source was deducted from the said payments at 1% instead of 2% as applicable in the case of a firm. He accordingly held that tax @2% was deducted by the assessee from the 50% of such amount and the balance amounting to Rs. 56,81,220 was disallowed by him under section 40(a)(ia) of the Act. The assessing officer further noted that the assessee had failed to deduct tax on cumulative payment amounting to Rs. 37,23,755. He accordingly disallowed the said amount also under section 40(a)(ia). Thus a total disallowance of Rs. 1,16,51,016 was made by the assessing officer under section 40(a)(ia) in the assessment completed under section 143(3) of the Act vide an Order, dt. 24-3-2014.

5. Against the order passed by the assessing officer under section 143(3), an appeal was preferred by the assessing officer before the learned Commissioner (Appeals) disputing the disallowance made by the assessing officer under section 40(a)(ia). In support of its case on this issue, it was contended on behalf of the assessee that the disallowance under section 40(a)(ia) could not be made for short deduction of tax and the said provision could be invoked only when there is no deduction of tax. This contention of the assessee was not found acceptable by the learned Commissioner (Appeals) and he proceeded to confirm the disallowance made by the assessing officer under section 40(a)(ia) for the following reasons given in his impugned order :–

“I have carefully considered the facts of the case and the submission of the assessee. The judgment of S.K. Tekriwal(supra) is in respect of bona fide mistake when there was some confusion regarding the nature of payments and the appropriate section of TDS applicable in that case. Under the circumstances Hon’ble Kolkata, ITAT held that assessee cannot be faulted for short deduction. In that case TDS was to be deducted under section 194I whereas appellant had deducted tax under section 194C(2). Similarly in other decisions, cited by the appellant, fact was that assessee had deducted tax by applying different section of the Act under bona fide belief regarding the nature of payments. This is not so in the present case. On the contrary Hon’ble Delhi ITAT in the case of DCIT v. Neemrant Hotel (P) Ltd., ITA No. 3134/Del/2013 has upheld the disallowance when there was short deduction of tax due to application of wrong section. Appellant’s interpretation that section 40(a)(ia) is not applicable in the case of short deduction is not acceptable. Provision of section 40(a)(ia) covers both non deduction as well as short deduction of tax at source. Now let us look at the facts of appellant’s case. Appellant had made payments of Rs. 22,46,041 to sub contractors after deducting tax @ 1%. These sub contractors either did not have any PAN allotted in their name or the assessee did not bother to collect the same from the sub contractors. Still it went ahead and deducted tax @ 1% whereas as per the Act, it was required to deduct tax at higher rate. This cannot be held to be as bona fide mistake. Similarly in respect of payments made to sub contractors, which were firms and not individuals, appellant was required to deduct tax @ 2%, as per the act. There was no confusion in this regard. Still appellant has deducted tax only @ 1%. Here the assessing officer has been judicious enough to disallow only 50% of the payments made to these two firms by considering the deducted amount as full compliance in respect of half of the payments. Under the circumstances appellant’s prayer for relief in respect of the above mentioned disallowances under section 40(a)(ia) is not acceptable and the additions are confirmed.

Now coming to the disallowance of Rs. 37,23,755 for non deduction of tax at source, appellant’s contention that these payments were below the threshold limit of deducting tax, is not acceptable because appellant has neither provided the details of these payments at assessment stage nor in appeal proceedings. Hence the additions made of Rs. 37,23,755 are confirmed. This ground is dismissed.”

6. We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that the disallowance under section 40(a)(ia) to the extent of Rs. 22,46,041 and Rs. 56,81,220 was made by the assessing officer on account of short deduction of tax at source by the assessee from the relevant payments. In the case of DCIT v. S.K. Tekriwal 260 CTR 76 cited by the learned counsel for the assessee, Hon’ble Kolkata High Court has held that section 40(a)(ia) of the Act refers only to the duty to deduct tax and pay to government account. Explaining further, it was observed by the Hon’ble Kolkata High Court that if there is any shortfall due to any difference of opinion as to the taxability of any items or the nature of payment falling under various TDS provisions, the assessee can be declared to be an assessee in default under section 201 of the Act, but no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act. Respectfully following the said decision of Hon’ble Jurisdictional High Court, we delete the disallowance made by the assessing officer under section 40(a)(ia) and confirmed by the learned Commissioner (Appeals) to the extent of Rs. 22,46,041 and Rs. 56,81,220. As regards the balance amount of Rs. 37,23,755 disallowed under section 40(a)(ia), it is observed that disallowance to that extent under section 40(a)(ia) was made by the assessing officer and confirmed by the learned Commissioner (Appeals) on account of the failure of the assessee to deduct tax at source from the relevant payment. At the time of hearing before us, the learned counsel for the assessee has not raised any material contention to show that the assessee was not liable to deduct tax at source from the relevant payment. It is thus clear that the assessee had failed to deduct tax at source from the payment as required under the Act and the disallowance made by the assessing officer under section 40(a)(ia) to the extent of Rs. 37,23,755 was rightly confirmed by the learned Commissioner (Appeals). We, therefore, modify the impugned order of the learned Commissioner (Appeals) on this issue and restrict the disallowance of Rs. 1,16,51,016 made under section 40(a)(ia) to Rs. 37,23,755. Ground no 2 of the assessee’s appeal is thus partly allowed.

7. The issue raised in ground no 3 relates to the disallowance of Rs. 3,26,412 made by the assessing officer and confirmed by the learned Commissioner (Appeals) on account of donation and subscription.

8. In the profit and loss account filed along with its return of income, the assessee had debited a sum of Rs. 3,26,412 on account of donations and subscriptions. During the course of assessment proceedings, the assessee however was unable to furnish any documentary evidence to establish that the expenditure on donations and subscriptions was incurred wholly and exclusively for the purpose of its business. The same therefore was disallowed by the assessing officer. On appeal, the learned Commissioner (Appeals) confirmed the said disallowance as the assessee could not establish the business expediency of the expenditure incurred on donations and subscriptions.

9. We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As submitted by the learned counsel for the assessee, the assessee is a construction company executing the work at different sites. On these sites, different pujas and functions are performed for which the assessee has to give donations and subscriptions. Although this submission of the learned counsel for the assessee shows some nexus of the expenditure incurred by the assessee on donations and subscriptions to its business, it is observed that the claim of the assessee is not fully verifiable in the absence of the relevant details and supporting documentary evidence. In our opinion, it would, therefore, be fair and reasonable to allow the claim of the assessee on account of donations and subscriptions only to the extent of 50%. We accordingly modify the impugned order of the learned Commissioner (Appeals) on this issue and restrict the disallowance on account of donations and subscriptions to 50%. Ground no 3 of the assessee’s appeal is thus partly allowed.

10. In the result, the appeal of the assessee is partly allowed.