Business disallowance under section 40(a)(ia): There is nothing to disallow when there is shortfall in deduction of TDS.

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Business disallowance under section 40(a)(ia): There is nothing to disallow when there is shortfall in deduction of TDS.

Short Overview : There is nothing in section 40(a)(ia) to treat assessee as a defaulter where there is shortfall in deduction of TDS and if the shortfall is due to any difference of opinion as to taxability of any item or the nature of payment falling under various TDS provisions, the assessee can only be declared to be an assessee-in-default under section 201 and no disallowance could be made.

AO alleged that assessee had deducted TDS at 4.22%, instead of 20%, hence, he made disallowance under section 40(a)(ia) for short deduction of TDS on foreign payments made by assessee.

it is held that Section 40(a)(ia) has two limbs; one is where assessee has to deduct tax and the second where after deducting tax, assessee has to pay into government account. There is nothing in the said section to treat assessee as a defaulter where there is shortfall in deduction of TDS. More so, where there is shortfall due to any difference of opinion as to taxability of any item or the nature of payment falling under various TDS provisions, the assessee can only be declared to be an assessee-in-default under section 201 and no disallowance could be made. Hence, AO was not justified in making disallowance under section 40(a)(ia) for short deduction of TDS on foreign payments made by assessee.

Decision: In assessee’s favour.

Followed: CIT v. S.K. TEKRIWAL (2013) 260 CTR 73 (Cal) : 2013 TaxPub(DT) 0240 (Cal-HC).

Referred: ITO v. Quatro mortgage Solution Pvt. Ltd. [ITA No. 2819/Del/2015 And C. O. No. 43/Del/2016, dt. 25-1-2019], Quatro Mortgage Solution Pvt. Ltd. v. ITO [ITA No.-5044/Del/2015 And CO No.-44/Del/2016, dt. 18-8-2017].

IN THE ITAT, DELHI BENCH

PRASHANT MAHARISHI, A.M. & K. NARASIMHA CHARY, J.M.

Hall Offshore Ltd. v. ACIT

ITA No. 5069/Del/2016

3 September, 2019

Assessee by: Somi Aggarwal, Advocate

Department by: Amit Katoch, Sr. DR

ORDER

Narasimha K. Chary, J.M.

Aggrieved by the order of the Commissioner (Appeals) -4, New Delhi (“CIT (A)” for assessment year 2011-12), assessee preferred this appeal on the following grounds :–

“1. That having regard to the facts and circumstances of the case, learned Commissioner (Appeals) has erred in law and on facts in not deleting the disallowance of Rs. 39,38,400 made by learned assessing officer under section 40(a)(i) and further erred in directing the learned assessing officer to verify the claim and that too without observing the principles of natural justice.

2. That in any case and in any view of the matter, action of learned Commissioner (Appeals) in not deleting the disallowance of Rs. 39,38,400 made by learned assessing officer under section 40(a)(ia) is bad in law and against the facts and circumstances of the case.

3. That having regard to the facts and circumstances of the case, learned Commissioner (Appeals) has erred in law and on facts in confirming the action of learned assessing officer in making addition of Rs. 11,63,500 on account of interest income.

4. That the appellant craves the leave to add, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.”

2. At the outset, at the time of arguments, learned AR submitted that Ground No. 4 is general in nature, and that they are not pressing Ground No. 3. Therefore, what remains for our adjudication are ground Nos. 1 & 2 in respect of Rs. 39,38,400 by making disallowance under section 40(a)(ia) of the Income Tax Act, 1961 (‘the Act’). On this aspect assessment order speaks that during the course of assessment proceedings, learned assessing officer found that the assessee made short deduction of TDS of Rs. 7,87,680 on foreign payments, deducted TDS at 4.22% instead of 20% and, therefore, the total payment made by the assessee to the foreign party to the tune of Rs. 49,92,585 proportionately was disallowed which comes to Rs. 39,38,400 under section 40(a)(ia) of the Act.

3. In appeal, learned Commissioner (Appeals) confirmed the same. Assessee is, therefore, before us challenging the same and placing reliance on the decision of the Hon’ble Calcutta High Court in the case of S.K. Tekriwal (2013) 260 CTR 73 (Cal) : 2013 TaxPub(DT) 0240 (Cal-HC) followed by the coordinate benches of this Tribunal in the case of ITO v. Quatro Mortgage Solution (P.) Ltd. for assessment year 2010-11 in ITA No. 2819/Del/2015 by Order, dated 25-1-2019 and for assessment year 2011-12 in ITA No. 5044/Del/2015 by Order, dated 18-8-2017.

4. It is an admitted fact that it is not a case of non-deduction of TDS but it is a case of short deduction of TDS on foreign payments. Instead of 20% as opined by the learned assessing officer, assessee effected the TDS at 4.22% on the payment of Rs. 49,92,585.

5. In the case of S.K. Tekriwal (supra), Hon’ble High Court held that in the case of shortfall in deduction due to any difference of opinion as to the taxability of any item or nature of payments falling under various TDS provisions, the proper course for the revenue is to declare the assessee as 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. In these circumstances, while respectfully following the said decision, we hold that it is not open for the revenue to disallow any amount under section 40(a)(ia) of the Act and the addition is directed to be deleted.

6. In the result, appeal of the assessee is allowed.

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