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Facts
The assessee filed its return for AY 2018-19 and the case was selected for scrutiny. The assessment was completed with additions on account of undervaluation of closing stock and disallowance under Section 40(a)(ia) for non-filing of Form 26A. The CIT(A) upheld these additions.
Held
The Tribunal restored the issue of undervaluation of closing stock to the AO for recalculation of interest on a proportionate basis. For the addition under Section 40(a)(ia), the Tribunal deleted the disallowance, holding that the procedural lapse of not filing Form 26A electronically does not disentitle the assessee to the benefit of the proviso.
Key Issues
Whether the disallowance under Section 40(a)(ia) is valid when the assessee has substantially complied with the filing of Form 26A, despite a procedural lapse in electronic filing? Whether the cost of closing stock was correctly valued?
Sections Cited
40(a)(ia), 194A, 201, 139, 31ACB
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Before: SHRI NARENDER KUMAR CHOUDHRY, JUDICIAL & SMT. RENU JAUHRI
सुिवधई की िधरीख / Date of Hearing 28.04.2025 घोर्णध की िधरीख/Date of Pronouncement 21.05.2025 आदेश / O R D E R PER RENU JAUHRI [A.M.] :- This appeal is filed by the assessee against the order of the Learned Commissioner of Income-tax (Appeals), Mumbai/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] dated 19.09.2024 passed u/s. 250 of the Income-tax Act, 1961 [hereinafter referred to as “Act”] for Assessment Year [A.Y.] 2018-19.
A.Y. 2018-19 Padmanabh Pioneer Promoters LLP 2. The assessee has raised the following grounds of appeal:
1. The Ld. National Faceless Appeal Centre (NFAC) Delhi (hereinafter referred to as the "Ld. CIT(A)"] erred in confirming addition of Rs. 33,30,743/- on account of under valuation of closing stock, without correctly appreciating the method of accounting regularly followed by the assesse/Appellant i.c. Project Completion Method of Accounting. Hence, the impugned order dated 19.09.2024 passed by Ld. CIT(A) is therefore bad in law and liable to be set aside.
2. The Ld. CIT(A) erred in confirming addition of Rs. 2,01,95,474/- under section 40(a)(ia) of the Income Tax Act, 1961, (hereinafter referred as "Act") without appreciating that disallowance under the said section cannot be made when tax has been paid by the payee.
3. The Ld. CIT(A) erred in confirming addition of Rs.2,01,95,474/- only on the basis that Form 26A was not filed in electronic form (as per Rule 31ACB of the Income Tax Rules, 1962) is, at best, a procedural defect which is curable by filing electronically during the course of scrutiny proceeding.
4. The Appellant craves leave to add, alter, amend, delete, rescind or withdraw any of the grounds of appeal mentioned hereinabove.”
3. Brief facts of the case are that the assessee filed return for AY 2018-19, declaring income of Rs. 2940/- on 31.10.2018. The case was selected for scrutiny to examine the assessee’s income from the real estate business and other issues.
4. The assessment was completed vide order dated 143(3) r.w.s. 144B dated 24.04.2021 at an income of Rs. 2,35,29,150/-. The addition on account of undervaluation of closing stock was made at Rs. 33,30,743/-. Another addition was made u/s 40(a)(ia) for non-filing of Form 26A due to which Ld. AO calculated the disallowances @30% of total interest expenditure incurred by the assessee, which worked out to Rs. 2,01,95,474/-.
A.Y. 2018-19 Padmanabh Pioneer Promoters LLP 5. Aggrieved with the order of Ld. AO, the assessee preferred an appeal before Ld. CIT(A), who has dismissed the assessee’s appeal on both grounds vide order dated 19.09.2024. 6. Aggrieved with the order Ld. CIT(A), the assessee has filed an appeal before the Tribunal. In all, there are two substantive grounds of appeal
7. Ground No. 1 Addition on account of undervaluation of closing stock – Rs. 33,30,743/- 7.1 Brief facts of the issue are that during the year under consideration, the assessee was engaged in the development of a real estate project, ‘Kapil Akhila’, at Pune. The project was started on 05.09.2012, and the assessee has followed the project completion method to book its revenue. During the year under consideration, three flats were sold to different parties and the assessee recognised revenue to the tune of Rs. 3,26,79,200/-. The assessee reduced the entire sale consideration of Rs. 3,26,79,200/- from its closing stock instead of reducing the cost of flats sold. The assessee submitted that it had considered the total cost up to 31.03.2020, as it follows the project completion method, and therefore, calculated the cost per sq. ft. on the basis of the total cost up to 31.03.2020. However, Ld. AO observed that the project was completed on 27.04.2018 as certified by the assessee itself, and therefore, the cost incurred up to 27.04.2018 should only be considered for valuation of closing stock. The costs incurred after 27.04.2018 are period costs and have no relation to bringing A.Y. 2018-19 Padmanabh Pioneer Promoters LLP inventories to their present location and conditions, and with these observations, Ld. AO recalculated the cost of flats sold at Rs. 2,93,48,457/- and added back Rs. 33,30,743/- being the difference of Rs. 3,26,79,200/- and 2,93,48,457/-. 7.2 Before us, Ld. AR has submitted that the assessee has rightly claimed the interest component in the cost of flats sold. Moreover, the claim of interest has not been made separately in the relevant assessment years. In case the assessee’s argument for upholding its computation is not accepted, an alternative claim has been made to allow interest on a proportionate basis in the relevant years, for which the matter may be restored back to ld. AO. 7.3 Ld. DR has strongly relied on the orders of lower authorities and submitted that the computation made by the Ld. AO has rightly been upheld by the Ld. CIT(A), and therefore, the order of the Ld. AO deserves to be upheld. 7.4 We have considered the rival submissions and perused the material placed before us. We find that there is considerable merit in the reasoning of Ld. AO based on which the interest component has been reduced from the cost of flats sold. However, the alternative plea of the assessee to allow the claim of interest on a proportionate basis in the relevant years also merits consideration. Accordingly, we hereby restore the issue to Ld. AO to calculate and allow the claim of interest on a proportionate basis in view of the alternate claim made by A.Y. 2018-19 Padmanabh Pioneer Promoters LLP the assessee before us. This ground is, therefore, partly allowed for statistical purposes.
8. Ground No. 2 & 3: Addition of Rs. 2,01,95,474/- u/s 40a(ia) of the Act. 8.1 Ld. AO noted that the assessee had incurred interest expenses of Rs. 6,73,18,246/- during the year under consideration. The assessee was required to deduct TDS on the expenses as per the provisions of section 194A of the Act. The assessee claimed that its case falls within the second proviso of section 40(a)(ia), as per which the assessee is not in default as per section 201 of the Act, as it has submitted Form No. 26A in respect of all the three parties. Ld. AO noted that the electronic filing of Form 26A is mandatory from AY 2017-18, and therefore, assessee was asked to furnish the acknowledgement of e-filing of Form 26A. The assessee vide its reply submitted that the same had not been e- filed with CPC TDS. Accordingly, Ld. AO proceeded to make an addition on account of disallowance of 30% interest paid (Rs. 6,73,18,246/-) u/s 40(a)(ia) of the Act and added Rs. 2,01,95,474/- to the assessee’s income. 8.2 Ld. CIT(A) confirmed the order of Ld. AO after observing that for claiming immunity u/s 201, there should be a valid Form 26A issued by the Chartered Accountant and filed in the electronic mode as prescribed. Mere production of physical form does not entitle the assessee to benefit of the 1st proviso to section 201.
A.Y. 2018-19 Padmanabh Pioneer Promoters LLP 8.3 Before us, Ld. AR has pointed that the issue is covered in favour of the assessee by several decisions of the coordinate benches. In particular, he has relied upon the order of the coordinate bench in in the case of M/s Automatic IT Services Pvt. Ltd. v/s ITO, wherein the coordinate bench has, in turn, relied on the order of the Bengaluru Bench in dated 07.07.2022 in the case of M/s. Hical Infra Pvt. Ltd v/s Dy. Commissioner of Income Tax (OSD). Relevant portion of the order, wherein identical facts are involved, is reproduced below: “5. The Assessee, being aggrieved, has challenged the said addition, by filing instant appeal under consideration. Admittedly, in the instant case, the Assessee during the assessment proceedings itself, has submitted Form nos. 26A dated 10.10.2019 and 27.08.2020, though not electronically filed and not as per rule 31ACB of the Rules, but in fact has filed the same during the assessment proceedings itself and therefore, the addition based on a procedural lapse, is liable to be deleted.
We observe that the Hon'ble Tribunal in the case of M/s. Hical Infra Pvt. Ltd. vs. Dy. Commissioner of Income Tax (OSD), Bangalore (ITA No.313/Bang/2022 decided on 07.07.2022) has also dealt with the identical issue and by considering the peculiar facts and circumstances in totality as well as the relevant provisions of law and ultimately deleted the identical addition by observing and holding as under: "22. The AO noticed during the assessment proceeding that out of total interest expenditure of Rs. 78,11,581, the assessee has deducted tax in respect of Rs. 11,07,053 and the balance interest expenditure of Rs. 67,04,528 was paid without deduction of tax at source. The AO asked the assessee to submit Form No 26A to verify whether the payee i.e. M/s Tata Capital Financial Services Limited has taken into account the interest paid by the assessee in computing its total income and whether it has filed the return of income or not. The assessee submitted the Form No 26A [page 178 to 180 of the paper book) as per which M/s Tata Capital Financial Services Limited had taken into account the interest paid by the assessee in computing the total income for AY 2016-17 and had filed the return of income on 30.11.2016. The AO did not accept the explanations of the assessee and held that 30% of the interest expenditure of Rs. 67,04,528 i.e., Rs. 20,11,358 is to be disallowed under section 40(a)(ia). As the entire interest expenditure of Rs. 78,11,581 was disallowed under section 36(1)(iii), it was stated by the AO that the disallowance of Rs. 20,11,358 will be enforced based on the adverse findings (if any) by the appellate authorities at a later stage.
A.Y. 2018-19 Padmanabh Pioneer Promoters LLP 23. On further appeal by the assessee the learned CIT(A) held that mere furnishing the certificate in Annexure A without the declaration in Form 26A by the assessee cannot be said to be compliance of the provision. The CIT(A) further held that as per rule 31ACB, the said form should have been furnished to the DGIT (Systems) and therefore upheld the decision of the AO in disallowing 30% of interest expenditure amounting to Rs. 20,11,358 under section 40(a)(ia).
Aggrieved the assessee is in appeal before the Tribunal. The ld. AR reiterated the submissions made before the lower authorities. The Id. AR submitted that in the present case, it is not in dispute that Form No 26A was submitted to the AO during the assessment proceedings which consisted of both the declaration by the assessee and the certificate of the CA certifying that the payee had taken into account the interest paid by the assessee and that the payee filed the return of income on 30.11.2016 for the AY 2016-17. Thus, the id. AR argued that there is no merit in the contention of the CIT(A) that the declaration of the assessee has not been submitted. As regards non filing of Form No 26A in electronic form to DGIT (Systems), it was the contention of the ld. AR that the same is only a procedural irregularity and that once the condition of filing of Form No 26A is complied in substance the same should be accepted and not rejected only for the reason that the said form is not electronically filed.
The ld. DR supported the order of the lower authorities. A proviso was inserted Section 201 by Finance Act 2012 with effect from 01/07/2012 which reads as under:- "Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a payee or on the sum credited to the account of a payee shall not be deemed to be an assessee in default in respect of such tax if such payee- (i) has furnished his return of income under section 139; (ii) has taken into account such sum for computing income in such return of income; and (iii) has paid the tax due on the income declared by him in such return of income, 26. The corresponding rule i.e. Rule 31ACB contains the procedure as given below :- "31ACB. (1) The certificate from an accountant under the first proviso to sub- section (1) of section 201 shall be furnished in Form 26A to the Director General of Income-tax (Systems) or the person authorized by the Director General of Income-tax (Systems) in accordance with the procedures, formats and standards specified under sub-rule (2), and verified in accordance with the procedures, formats and standards specified under sub rule (2). (2) The Director General of Income-tax (Systems) shall specify the procedures, formats and standards for the purposes of furnishing and verification of the Form 26A and be responsible for the day-to-day administration in relation to furnishing and verification of the Form 26A in the manner so specified."
Section 40(a)(ia) contains a proviso whereby an assessee is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purposes section 40(a)(ia) it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee referred to in the said proviso.
A combined reading of the above provisions of the Act and the rule, makes it clear that an assessee who is required to deduct tax in accordance with Chapter XVII-B, fails to do so would not be treated as an assessee in default provided the payee has paid tax on the said sum and the assessee has filed the required form in 26A along with a CA certificate. When the assessee is not treated as an assessee in default then no disallowance can be done as per the proviso to section 40(a)(ia) as it is deemed that the assessee has deducted and paid the tax.
In the present case, the assessee has submitted Form No 26A to the AO during the assessment proceedings which fact is admitted by the AO in para 5.3 of his order. However, the AO and the CIT(A) have disallowed 30% of the interest on the ground that the assessee has not furnished Form 26A to the DGIT(systems) and that the same should have been done before filing the return of income. This in our view is a procedurals lapse on the part of the assessee and the same cannot be the reason for disallowance. In the case of Sardar Amarjit Singh Kalra v. Pramod Gupta, (2003) 3 SCC 272 where it was held that Procedure has always been viewed as the handmaid of justice and not meant to hamper the cause of justice or sanctify miscarriage of justice. In the given case the assessee has substantiated the fact that the payee M/s. Tata Capital has included the interest as income and has paid taxes on the same and the condition of filing of Form No 26A is complied in substance. Therefore, in our view the assessee cannot be denied the substantial benefit of claiming the interest expense as a deduction on the ground off a procedural lapse. We therefore delete the disallowance made u/s.40(a)(ia) of Rs. 20,11,358."
As the Tribunal in the aforesaid case held that the Assessee cannot be denied the substantial benefit of claiming the interest expense as a deduction, on the ground of a procedural lapse and therefore the Tribunal ultimately deleted the identical addition made u/s 40(a)(ia) of the Act and thus the issue involved in this case is squarely covered in favour of the Assessee and therefore respectfully following the aforesaid judgment, we are inclined to delete the addition under consideration. Thus, the addition is deleted.” 8.3 Respectfully following the decision of the coordinate bench, we hold that the assessee is entitled to the benefit of the first proviso of section 40(a)(ia) of A.Y. 2018-19 Padmanabh Pioneer Promoters LLP the Act, and hence, the disallowance made out of interest to the tune of Rs. 2,01,95,474/- is hereby deleted. This ground is, accordingly, allowed in favour of the assessee. 9. In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 21.05.2025. Sd/- Sd/- NARENDER KUMAR CHOUDHRY RENU JAUHRI (न्यधनयक सदस्य/JUDICIAL MEMBER) (लेखधकधर सदस्य/ACCOUNTANT MEMBER)