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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Per CHANDRA POOJARI, AM:
This appeal filed by the assessee is directed against the order of the CIT(A),
Kottayam dated 20/08/2018 and pertain to the assessment year 2013-14.
The first ground raised by the assessee is with regard to disallowance u/s.
40(a)(ia) of the Act.
The facts of the case are that the Assessing Officer on examination of books of
accounts and other details/documents furnished, it was observed that the assessee
firm had given interest on loan amounting to Rs.8,08,029/- to its sister concern,
I.T.A. No.506/Coch/2018 M/s. VNP & Co. and the same was recorded in the ledger account of M/s. VNP & Co.
in the books of the assessee. The assessee explained that the loan was availed by
the sister concern, M/s. VNP & Co. but the interest was given by the assessee to
Kerala Finance Corporation where from the sister concern availed loan directly and
the entry was made in the loan account of M/s. VNP & Co. The interest amount
was given by the assessee to KFC on behalf of the sister concern and as such the
assessee should have deducted tax on such interest payment as the payee, M/s.
VNP & Co. is a private party. Therefore, the Assessing Officer invoked the
provisions of section 40(a)(ia) of the Act and added the impugned interest to the
income of the assessee.
On appeal, the CIT(A) observed from the balance sheet of the assessee for the
period ending on 31/03/2013 that M/s. VNP & Co. was the creditor for the amount
of Rs.76,73,777/-. Therefore, the interest amount of Rs.8,08,029/- paid to the
sister concern VNP & Co. by the assessee is against the said loan in the name of the
sister concern. Thus, according to the CIT(A), the assessee was liable to deduct tax
on the said interest paid which the assessee failed to do so and the same was
disallowed.
Against this, the assessee is in appeal before us. The Ld. AR submitted that
the assessee had utilised the loan from Kerala Financial Corporation (KFC) for the
last many years commencing from Assessement year 2006-07. The ld. AR submitted
that the credit appearing in the name of KFC was transferred to V.Narayana Pillai &
I.T.A. No.506/Coch/2018 Co. during the financial year 2012-13 as the statement of account with KFC was
issued in the name of VNP & Co,. a sister concern in which there were common
partners . It was submitted that the amount of interest charged by KFC was paid by
the sister concern VNP& Co. on its behalf, in the first place and thereafter,
reimbursed by the assessee. The sister concern had not treated the amount paid by
the assessee to them as their income. According to the Ld. AR, even if section 194A
was not applicable , no tax deduction was required, as it was only a reimbursement
of the amount actually paid by the sister concern to a financial corporation to which
the provisions of section 194A applied. It was submitted that whether the amount
was paid by the assessee or the sister concern to KFC, exemption provided u/s 194A
would apply. It was submitted that even if there was failure to deduct tax at
source, the disallowance should have been restricted to thirty percent of the amount
as the amendment to the provisions of s. 40(a)(ia) was retrospective.
The Ld. DR relied on the order of the CIT(A).
We have heard the rival submissions and perused the record. As rightly
observed by the CIT(A) there was a outstanding amount in the name of VNP & Co.
as on 31/03/2013 for an amount of Rs.76,73,777/- and the assessee claimed
interest at Rs.8,08,029/- which was paid to the sister concern VNP & Co. It was
submitted that the assessee was not owing any amount to VNP & Co. On the other
hand, it was owing money to KFC and the interest payable to KFC was routed
through VNP & Co., which is the sister concern of the assessee. However, we are of
I.T.A. No.506/Coch/2018 the opinion that the assessee is liable to deduct tax on the interest amount of
Rs.8,08,029/- paid by the assessee to KFC routed through VNP& Co. which the
assessee has failed to do so. The lower authorities was justified in invoking the
provisions of section 40(a)(ia) of the Act.
The Ld. AR made an alternate plea to restrict the disallowance at 30% of the
addition and not the entire amount on the ground that section 40(a)(ia) of the Act
was amended by Finance (No. 2) Act, 2014 with effect from 1.4.2015. By virtue of
insertion of this proviso to section 40(a)(ia), if any such sum taxed has been
deducted in any subsequent year or has been deducted during the previous year
but paid after the due date specified in sub-section (1) of section 139, such sum
shall be allowed as deduction in computing the income of previous year but paid
after the due date specified in sub-section(1) of section 139, such sum shall be
allowed as a deduction in computing the income of previous year, and further,
section 40(a)(ia) has been substituted wherein 30% of any sum payable to a
resident has been substituted. According to him, though substitution to section
40(a)(ia) has been made with effect from 1/4/2015, the amendment is to be treated
as retrospective in view of the following judgments of the Tribunal and Supreme
Court relied upon by him:
1) Smt. Kanta Yadav vs. ITO in ITA No. 6312/Del/2016 dated 12/05/2017 (ITAT, Delhi).
2) Shri Rajendra Yadav vs. ITO in ITA No.895/JP/2012 dated 29/01/2016 (ITAT Jaipur).
I.T.A. No.506/Coch/2018 3) Smt. Sonu Khandelwal vs. ITO in ITA No.597/JP/2013 dated 13/05/2016 (ITAT, Jaipur)
4) CIT vs. Calcutta Export Company (93 taxmann.com 51) (SC)
5) Kolli Gopi Krishna vs. Dy. Director of Income-tax (Intl.Taxation) (83 taxmann.com 330) (Hyderabad-Trib.)
6) A. Daga Royal Arts vs. ITO (94 taxmann.com 401) (Jaipur Trib.)
8.1 Further, the Ld. AR submitted that this issue was considered by the Delhi
Bench of the Tribunal in the case of Chopra Properties vs. Addl. CIT in ITA
No.3099/Del/2015 dated 01/08/2018 wherein it was held as under:
“7. After hearing both the sides, we find the only issue to be decided in the grounds of appeal is regarding the restriction of the disallowance to 30% of the addition. We find an identical issue had come up before the Co-ordinate Bench of the Tribunal in the case of Smt. Kanta Yadav vs. ITO. We find the Tribunal in ITA No.6312/Del/2016 order dated 12.05.2017 for assessment year 2012-13 has decided the identical issue and has observed as under:-
“6. We have considered rival submissions and find that issue is covered in favour of the assessee by order of ITAT Jaipur Bench in the case of Shri Rajendra Yadav vs. ITO and Smt. Sonu Khandelwal vs. ITO. In these orders it was held that the disallowance u/s. 40(a)(ia) to be restricted to 30% of the addition. In these orders the Tribunal has considered the amended provisions of section 40(a)(ia) of I.T. Act. In these orders the assessment year’s involve was 2007-08 and 2008-09. In the present appeal the assessment year is 2012-13. Therefore facts are identical. In this view of the matter and following the above decisions of Jaipur Bench, we set aside and modify the orders of the authorities below and direct the Assessing Officer to restrict the addition to 30% of the total addition made on account of deduction of TDS u/s. 40(a)(ia) of the Act.”
Respectfully following the decision of the Co-ordinate Bench of the Tribunal, we hold that the disallowance u/s. 40(a)(ia) should be restricted to 30% of the total addition on account of non-deduction of TDS. So far as the argument of the ld. Counsel for the assessee that direction may be given to the Assessing Officer to allow such disallowance made in this year in the order of the subsequent years, we hold that the assessee may move appropriate application before the Assessing Officer who shall decide the issue as per fact 5
I.T.A. No.506/Coch/2018 and law. We hold and direct accordingly. The grounds raised by the assessee are accordingly partly allowed.”
8.2 On the other hand, the Ld. DR submitted that the above amendment cannot
be applied retrospectively in view of the judgment of the Jurisdictional High Court in
the case of Prudential Logistics and Transports vs. ITO (364 ITR 789) (Ker.)
wherein it was held that second proviso to section 40(a)(ia) which was inserted by
Finance Act of 2012 with effect from 1-4-2013 cannot be applied to the assessment
year 2006-07.
8.3 We have heard the rival submissions and perused the record. We find no
merit in the argument of the Ld. AR in view of the judgment of the Jurisdictional
High Court in the case of Prudential Logistics and Transports (supra) wherein it was
held that second proviso to section 40(a)(ia) which was inserted by Finance Act of
2012 with effect from 1.4.2013 cannot be applied retrospectively. On the same
analogy, first proviso to section 40(a)(ia) which was inserted by Finance (No.2) Act,
2014 with effect from 1.4.2015 cannot be made applicable to the assessment year
2013-14 which is in the present case. Being so, we are inclined to dismiss the
alternate plea made by the Ld. AR.
9 The next ground is with regard to disallowance made u/s. 40A(3) of the Act.
9.1 The facts of the case are that while examining the cash book, expenses for
repairs and maintenance for a sum of Rs.8,19,462/- to M/s. Beena Iron & Steel 6
I.T.A. No.506/Coch/2018 Corporation and another sum of Rs.21,450/- to M/s. KILCO Machines on 07/05/2012
and 12/04/2012 respectively were made in cash violating provisions contained in
section 40A(3) for which the assessee explained that it was because the payee, M/s.
Beena Iron & Steel Corporation, insisted on cash payment. Since no valid
explanation was provided by the assessee on this issue, the Assessing Officer made
disallowance u/s. 40A(3) of the Act. According to the Assessing Officer,
contravening provisions of the sec. 40A(3) without any reasonable grounds as
envisaged in Rule 6DD of the I.T. Rules, 1962 would attract disallowance of such
expenses and hence, disallowance of Rs.8,40,912/- was made to the total income.
9.2 On appeal, the CIT(A) confirmed the addition made by the Assessing Officer
by observing that the reasons stated by the assessee for not complying with the
provisions of section 40A(3) of the Act does not fall under Rule 6DD of the I.T.
Rules. Hence, the CIT(A) upheld the disallowance of Rs.8,19,462/- made u/s.
40A(3) of the Act.
9.3. Against this, the assessee is in appeal before us. The Ld. AR submitted that
Rule 6DD as amended is not exhaustive to visualize all kinds and nature of business
expediencies which can be considered genuine so as to come within the exception
provided in Rule 6DD. It was submitted that so along as the expenditure was
genuine and had been supported by proper bills from the suppliers no particular
advantage was gained by the assessee by payment in cash which by implication
proves that the cash payment was made by insistence from the parties. According
I.T.A. No.506/Coch/2018 to the Ld. AR, the invoices issued by the parties to whom the payments were made
had been produced and accepted by the assessing authority and the identity of the
payees and the genuineness of the source of payments by the assessee had been
proved and accepted by the assessing authority. It was submitted that as per
proviso to s.40A(3) , considerations of business expediency and other factors have
to be taken into account and the section does not permit a blanket disallowance
merely because the amount was paid in cash.
9.4 The Ld. DR relied on the order of the CIT(A).
9.5. We have heard the rival submissions and perused the record. The assessee
has not shown any reasonable cause for making such cash payment in violation of
section 40A(3) of the Act. The assessee does not fall under any exemption provided
in Rule 6DD of the I.T. Rules. Hence, we do not find any infirmity in the order of the
CIT(A) and the same is confirmed. Accordingly, this ground of appeal of the
assessee is dismissed.
In the result, the appeal filed by the assessee is dismissed. Order pronounced in the open Court on this 3rd April, 2019
sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER
Place: Kochi Dated: 3rd April, 2019
I.T.A. No.506/Coch/2018 GJ Copy to: 1. M/s. The Vijaya Palace, House No.CPXII/83877C, Thattassery, Chavara, Kollam-691 583. 2. The Income-tax Officer, Ward-5, Alappuzha. 3. The Commissioner of Income-tax(Appeals), Kottayam. 4. The Pr. Commissioner of Income-tax, Kottayam. 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order
(ASSISTANT REGISTRAR) I.T.A.T., Cochin