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Facts
The assessee, Sigma Electric Manufacturing Pvt. Ltd., filed its return for AY 2020-21. The CPC processed the return under Section 143(1)(a) and made a disallowance under Section 40(a)(i) for non-deduction of tax on payments to foreign companies. The AO, in subsequent scrutiny proceedings under Section 143(3), initially accepted the assessee's contentions and did not propose any addition, but inadvertently included the CPC's disallowance while computing total income.
Held
The Tribunal held that the Assessing Officer (AO) had accepted the assessee's contentions during the scrutiny proceedings and had not made any disallowance under Section 40(a)(i). The AO's inadvertent inclusion of the CPC's disallowance while computing total income was considered an error. Therefore, the disallowance was deleted.
Key Issues
Whether disallowance under Section 40(a)(i) is justified when the Assessing Officer has accepted the assessee's contentions and no addition was made in scrutiny proceedings, despite an initial disallowance by CPC under Section 143(1)(a).
Sections Cited
143(1)(a), 40(a)(i), 143(3), 144B, 154
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCHES “B”, PUNE
Before: DR.MANISH BORAD & SHRI VINAY BHAMORE
आदेश / ORDER
PER DR. MANISH BORAD, ACCOUNTANT MEMBER :
The captioned appeal at the instance of assessee pertaining to A.Y. 2020-21 is directed against the order dated 29.01.2025 passed by Addl/JCIT(A)-2, Visakhapatnam u/s.250 of the Income-tax Act, 1961 (in short ‘the Act’) arising out of the Intimation order dated 24.12.2021 passed u/s.143(1)(a) of the Act.
Assessee has raised following grounds of appeal :
“1. The Ld. CPC erred in disallowing Rs.18,48,488/- u/s 40(a)(i) of the IT ACT. 2. The Ld. CIT-A ought to have considered the fact that the no withholding tax is required to be deducted on payment made to M/s UL LLC and CSA Group Testing & Certification INC and therefore no disallowance u/s 40(a)(i) is required to be made
The Ld. CIT-A erred in misinterpreting that issue relating to Disallowance u/s 40(a)(i) is discussed by AO and accepted, whereas AO has discussed this issue but did not accept. AO while passing the order u/s 143(3), has started with "Assessed income u/s 143(1)" of the IT Act.”
3. With the assistance of both the sides and also on perusal of the records including the paper book filed by the assessee running into 69 pages, facts in brief are that the assessee a Private Limited Company filed the return for A.Y. 2020-21 on 12.02.2021 which was subsequently revised on 31.03.2021 declaring income of Rs.82,01,46,400/-. Return of income processed u/s.143(1)(a) of the Act and CPC made the disallowance u/s.40(a)(i) of the Act for the alleged non-deduction of tax on payment made to a Foreign Company namely M/s. UL LLC and USA Group Testing and Certification Inc at Rs.18,48,488/-. After receiving the intimation order u/s.143(1)(a) of the Act, assessee preferred appeal before ld.CIT(A) but in the mean time case of the assessee was selected for scrutiny and the issue under consideration was again show caused to the assessee by the AO to which a detailed reply was submitted and the AO in the order u/s.143(3) of the Act r.w.s. 144B dated 27.09.2023 observed in the assessment order that no addition is required to be made for the alleged transaction u/s.40(a)(i) of the Act. However, while computing the total income, ld. AO inadvertently adopted the figure of income computed by CPC as a result of which the disallowance made by CPC again formed part of the total addition. Assessee thereafter filed an appeal before ld.CIT(A) against the intimation u/s.143(1)(a) of the Act. During the course of hearing, when the assessee intimated ld.CIT(A) about the issue having been examined by the Ld.AO in the scrutiny proceedings u/s.143(3) of the Act and accepted the assessee’s contentions, ld.CIT(A) dismissed the ground for statistical purposes.
Now the assessee has preferred this appeal against the said finding of ld.CIT(A) dismissing the grounds raised by the assessee as dismissed for statistical purposes.
Ld. Counsel for the assessee referring various documents filed in the paper book again contended that TRC certificate has been filed along with Form 15CB as well as PE Certificate and India Office undertaking document to demonstrate that tax was not required to be deducted on the alleged payment. He also submitted that ld. AO has himself accepted the assesssee’s contentions and the scrutiny proceedings which were carried out after the processing of return u/s.143(1)(a) of the Act, therefore the impugned disallowance deserved to be deleted.
On the other hand, ld. Departmental Representative submitted that the best course available to the assessee was to file application u/s.154 of the Act for rectifying the mistakes in the assessment order u/s.143(3) of the Act on 27.09.2023. Ld. DR further stated that the assessee has furnished the details which asserts the contention of ld. Counsel for the assessee that disallowance u/s.40(a)(i) of the Act was not required to be made.
We have heard the rival contentions and perused the record placed before us. We observe that the impugned order is against order processed u/s.143(1)(a) of the Act wherein CPC made prima facie adjustments making disallowance u/s.40(a)(i) of the Act for non-deduction of tax on the payment of Rs.18,48,488/- towards the amounts paid to non-residents for certification fees for products which was necessary to sell the products in USA and Canada market. The alleged disallowance was made based on the observations made by the Auditor in the Tax Audit Report which was captured by the online system while processing the return u/s.143(1)(a) of the Act. It is interesting to note that after the return being processed u/s.143(1)(a) of the Act on 24.12.2021 the case of the assessee was selected for scrutiny and the same was carried out u/s.143(3) r.w.s.144B of the Act and in the course of scrutiny proceedings one of the issue raised in the show cause notice by the AO was regarding the alleged addition made u/s.40(a)(i) of the Act. Necessary discussion made by the AO in the assessment order reads as under :
“Assessee has made the contention that payments made to Canadian Standard Association and UL LLC are not covered under 40(a)(i) payments. As per assessee CSA Group tests and certifies many global leading brands to help comply with applicable U.S. and Canadian standards written by ANSI, ASME, ASSE, ASTM, ASFE, UL, CSA, NSF, and more. CSA's safety, electromagnetic compatibility (EMC), and energy efficiency verification (EEV) laboratories are located around the world and accredited internationally. Thus, we approached to CSA for certification of our products as per international standards so that our product gets required ratings. (This certification is Akin to ISO certification in India). To get the certification done for our product the charges were paid to CSA. Being export sale, we need to focus on ensuring that our products are certified according to the very latest country requirements and also meets international standards. UL LLC certifications demonstrate that our products have been tested to applicable standards with the help of UL's recognized regulatory expertise which provides critical credibility to authorities and the marketplace where our product is sold. From above explanation, the contention of the accepted and no addition is being made.”
From perusal of the above observation of the AO in the assessment order, it clearly indicates that the AO accepted the contention of the assessee and it was further stated that no disallowance is required u/s.40(a)(i) of the Act. Therefore, it is established that ld. AO in the scrutiny proceedings has accepted the contentions of the assessee and has not made any disallowance u/s.40(a)(i) of the Act. However, while computing the total taxable income ld. AO inadvertently took income computed u/s.143(1)(a) of the Act which inter alia included the disallowance u/s.40(a)(i) of the Act. Though the AO was required to deduct the alleged disallowance made by CPC u/s.40(a)(i) of the Act but ld. AO forgot to deduct the same and computed the total income including the alleged disallowance. All these facts clearly demonstrate that the AO has accepted the assessee’s contention and no disallowance u/s.40(a)(i) of the Act was required to be made.
We are conscious of the fact that the impugned order is against the return processed u/s.143(1)(a) of the Act and suitable course for the assessee was to file application u/s.154 of the Act indicating the apparent mistake committed by the ld. AO in completing the assessment u/s.143(3) of the Act but since the issue has been examined in the scrutiny proceedings and the details in support of the same are placed before us, we are of the considered view that grounds of appeal raised against the alleged disallowance u/s.40(a)(i) of the Act deserves to be allowed. We accordingly delete the impugned disallowance and set aside the finding of ld.CIT(A) and allow the effective grounds of appeal raised by the assessee.
In the result, appeal of the assessee is allowed.
Order pronounced on this 27th day of May, 2025.