Non TDS deduction disallowance not sustainable if payee discharges his Tax Liability

Brief of the Case

ITAT Ahmedabad held in the case Kurian Ulahannan Moothukuzhiyil vs. ITO that in the case of CIT vs. Ansal Land Mark Township (P) Ltd. in ITA 160/2015 & ITA 161/2015 dated 26/08/2015, it was held that there is one thing common to both the provisions to Section 40(a) (ia) and Section 201 (1) is that the as long as the payee has filed its return of income disclosing the payment received by and in which the income earned by it is embedded and has also paid tax on such income, the Assessee would not be treated as a person in default. Looking to the totality of the facts of the current case, we deem it proper to restore this issue back to the AO to verify whether any order u/s.201 has been passed against the assessee. In case, no order has been passed, the AO would decide this issue in the light of the above judgement.

Facts of the Case

The assessee was picked up for scrutiny assessment and the assessment u/s 143(3) was framed, thereby the AO made various additions on account of disallowances of expenditure. The AO made disallowance of depreciation of Rs.1,51,059/-, disallowance on account of late payment of employees’ contribution to PF & ESI into Government Account of Rs.4,73,003/-, disallowance by invoking the provisions of section 40(a)(ia) on account of late deposit of tax to the Government account of Rs.18,53,850/-, disallowance by invoking the provisions of section 40(a) (ia) on account of non-deduction of TDS of Rs.18,29,036/- and addition on account of unexplained cash credit u/s.68 of Rs.3,94,000/-.

Contention of the Assessee

The ld counsel of the assessee submitted against confirming disallowance of employees contribution for PF & ESI of Rs.4,73,003/ that this issue has been decided by the Hon’ble Jurisdictional High Court in favour of the Revenue in the case of CIT vs. Gujarat Road State Transport Corporation reported at (2014) 265 CTR 0064 (Guj.).

Further against confirming disallowance of expenses u/s.40(a)(ia) of Rs.18,53,850/- on account of deduction of tax paid after the specific date, he submitted that the TDS was deposited before the due date for filing of return of income u/s.139(1). He relied on the decision of Hon’ble Gujarat High Court in the case of CIT vs. Omprakash R Chaudhary reported at (2015) 57 Taxmann.com 38 (Gujarat) holding that the amendment has retrospective effect w.e.f. 01/04/2005.

Further against confirming the disallowance of expenses by invoking the provisions of section 40(a)(ia) for short deduction or non deduction of TDS, he submitted that no order u/s.201 has been passed against the assessee and, therefore, assessee cannot made subject to disallowance u/s.40(a)(ia) in view of second proviso inserted by Finance Act, 2012 w.e.f. 1.4.2013 but this amendment has been held to be curative and has retrospective effect from the date when section 40(a)(ia) was inserted by Finance (No.2) Act, 2004 by the judgement of Hon’ble High Court of Delhi in the case of CIT vs. Ansal Land Mark Township (P) Ltd. in ITA 160/2015 & ITA 161/2015 dated 26/08/2015.

Further against confirming the addition u/s.68 in respect of unexplained cash credit, it was submitted that confirmation, bank statement of depositor was produced. The assessee cannot be made scapegoat for non-appearance of depositor in compliance of summons issued to him. Even if the assessee was required to explain deposit so receipt only an amount of Rs.1,52,000/- received on 17/11/2009 was to be explained. Balance amount was representing receipt of amount against advances made earlier or amounts squared up on the same date. He also submitted that no show-cause was issued to the assessee by the AO for making the addition in this respect.

Held by CIT (A)

CIT (A) upheld the order of AO.

Held by ITAT

ITAT held that in the case of CIT vs. Ansal Land Mark Township (P) Ltd. in ITA 160/2015 & ITA 161/2015 dated 26/08/2015, it was held that there is one thing common to both the provisions to Section 40(a) (ia) and Section 201 (1) is that the as long as the payee/resident has filed its return of income disclosing the payment received by and in which the income earned by it is embedded and has also paid tax on such income, the Assessee would not be treated as a person in default. As far as the present case is concerned, it is not disputed by the Revenue that the payee has filed returns and offered the sum received to tax.

Further in the case of Rajiv Kumar Agarwal vs. ACIT), the ITAT thorough analysis of the second proviso to Section 40(a) (ia) and held that primary justification for such a disallowance is that such a denial of deduction is to compensate for the loss of revenue by corresponding income not being taken into account in computation of taxable income in the hands of the recipients of the payments. Such a policy motivated deduction restrictions should, therefore, not come into play when an assessee is able to establish that there is no actual loss of revenue. The scheme of Section 40(a)(ia), as we see it, is aimed at ensuring that an expenditure should not be allowed; as deduction in the hands of an assessee in a situation in which income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. It is not, in our considered view, a penalty for tax withholding lapse but it is a sort of compensatory deduction restriction for an income going untaxed due to tax withholding lapse. The penalty for tax withholding lapse per se is separately provided for in Section 271 C, and, section 40(a) (ia) does not add to the same. In view of these discussions, as also for the detailed reasons set out earlier, we -cannot subscribe to the view that it could have been an ‘”intended consequence” to punish the assessees for non deduction of tax at source by declining the deduction in respect of related payments, even when the corresponding income is duly brought to tax. That will be going much beyond the obvious intention of the section. Accordingly, we hold that the insertion of second proviso to Section 40(a) (ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005.

On the matter of addition u/s 68, in respect of unexplained cash credit, ITAT held that the AO has not given set off of debit entries, when the transaction is routed through banking channel, identity of depositor is established, therefore in our considered view, the AO was not justified in making the disallowance of the entire credit entries amounting to Rs.3,94,000/- and he ought to have given the set off of the debit entry. Therefore, the addition is sustained to the extent of Rs.1,52,000/- which is closing balance and rest of the addition is directed to be deleted.

Accordingly appeal of the assessee partly allowed for statistical purpose.

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