Tribunal can’t set aside sec. 40(a)(i) disallowance without assigning reason for its conclusion: Karnataka HC


Tribunal can’t set asidView poste sec. 40(a)(i) disallowance without assigning reason for its conclusion: Karnataka HC

Short Overview of the case:
Subex Technologies Ltd
[2021] 127 675 (Karnataka)
The issue was pertaining to Section 195 read with section 40(a)(i), of the Income-tax Act, 1961 which is regarding deduction of tax at source on Payment to non-resident
 The issue was pertaining to the Assessment year 2008-09
 Assessee-company was engaged in development, sales and service of software products
During relevant assessment year, as per scheme of arrangement service business of parent company (STI) was transferred to assessee
Assessing Officer observed that assessee had debited certain sum as sub-contract charges under head of personnel cost in its profit and loss account – Assessing Officer invoked section 40(a)(i) and made addition for said expenditure as assessee failed to deduct tax at source under section 195
On appeal, Tribunal held that income and expenses recorded in books of STI between intervening period of transfer of service business were recorded in books of assessee as mere journal entry thus, there was no need to deduct tax at source under section 195 and make disallowance under section 40(a)(i)
It was noted that Assessing Officer as well as Commissioner (Appeals) had categorically held that assessee had failed to establish claim with substantial evidence that no services were made available by (STI) to it and had merely produced invoices detailing out transactions to show that they were raised in connection with providing of services claimed by assessee and said amount was paid towards reimbursement of expenses
The issue before HC was whether since Tribunal merely recorded its conclusion without assigning any reasons in support of said conclusion and failed to record any findings related to nature of services impugned order passed was to be quashed
HC held it in affirmative.
On the issue as to whether matter was to be remanded to Tribunal to decide claim of assessee under section 40(a)(i) afresh on basis of material available on record and on basis of reasoning assigned by lower authorities, HC again held it as yes
The High Court held that where Tribunal set aside disallowance made under section 40(a)(i) for failure of assessee to deduct tax at source on sub-contract charges claimed by assessee, by merely concluding that sub-contract charges in books of account of assessee were merely journal entries recorded from books of parent company and did not assign any reasons related to nature of service, matter was to be remanded