PANCHAMI DEVELOPERS,BANGALORE vs. THE INCOME TAX OFFICER WARD-6(3)(2), BANGALORE

Page 2 of 10 Both these appeals were heard together and are being disposed of by way of this common order for the sake of convenience.

2. The CIT(A) grossly erred in not appreciating that the expenditure incurred was mainly towards business promotion and hence the same did not warrant deduction of tax at source and therefore, S.40(a)(ia) was not applicable. 3. The CIT(A) ought to have appreciated that the AO being Statutory authority, should have enlightened hapless Assessee as to the benefits/deductions/liabilities and made additions based on materials available on record instead of alleging that the appellant/its AR agreed for addition, which is against the spirits of the Act. 4. Without prejudice, the CIT(A) ought to have appreciated that most of the payments made did not warrant deduction of tax at source and ought to have deleted the disallowance made by the AO. 5. The appellant craves the leave of the court to amend, alter, modify, delete or withdraw any or all of the grounds before or during the arguments.

Page 3 of 10 of the Paper Book filed before the Tribunal in and on pages 19-24 of the Paper Book filed before the Tribunal in in and both the written submissions are identical and hence any one can be considered in this regard. He pointed out that various submissions were made before the CIT(A) including these submissions that there was amendment to section 201 of the Income Tax Act, 1961 by Finance Act, 2012 to provide that the payer who fails to deduct the tax from the resident payee shall not be deemed to be an assessee in default in respect of such tax if such resident payee has furnished his return of income under section 139, has taken into account such sum for computing income in such return of income and has paid the tax due on the income declared by him in such return of income. In the said written submissions submitted before CIT(A), this was also submitted that the payee in the present case has filed return of income and has included the amount paid by the assessee for computing income in such return of income and has paid tax due on the income declared by the payee in such return of income and therefore, the assessee cannot be considered as the assessee in default and no disallowance can be made under section 40(a)(ia) in this regard. He submitted that there is no finding given by learned CIT(A) regarding this part of the written submission filed by the assessee before CIT(A) and hence, his orders should be modified and it should be held that the disallowance made by the AO is not justified. It was the alternative submissions that if required, the matter may be restored back to the file of the AO for a fresh decision after examining these claims of the assessee. Learned DR of the Revenue supported the orders of the authorities below.

“7. The grounds of appeal

, appellant's statement of facts, written submissions, AO's observations I explanations and legal position have been duly considered. The solitary issue to be adjudicated in the instant appeal concern 8. disallowance of a sum of Rs. 1,31, 80,311/- u/s 40 (a)(ia) on account of non deduction of tax at source by appellant on payments made under the head Sales Promotion, Advertisement, Commission and Audit Fee.

9. In this context it may be noted that as per provisions of section 40 a) (ia), the appellant ought to have deducted tax at source on payments made against Sales Promotion, Advertisement, Commission and Audit Fee. It is to be noted that Explanation to sub clause (ia) of section 40(a) clearly indicates that an assessee ought to deduct tax at source on such payments.

10. In the instant appeal, it is noted that the appellant had no explanation to offer before AO. Even during appellate proceedings, appellant failed to explain reasons for its failure to deduct tax at source.

11. Therefore, in view of the facts narrated above, no interference in AO's order is called for since no infirmity arose.”

5. We also reproduce relevant paras of the written submissions filed by the assessee before CIT(A) in the case of M/s. Sai Panchami Developers in from pages 19 to 21 of the Paper Book filed by the assessee regarding this appeal. These paras are as under:

“1. Section 40(a)(ia) favour the Assessee As per Section 40(a)(ia) of the Income Tax the following deduction is not allowed:

Page 5 of 10 (ia) Any interest, commission or brokerage fees for professional services or fees technical services payable to a resident or amounts credited or paid to a contractor or sub-contractor, being resident, for carrying out work (including supply of labour carrying out any work), on which tax has not been deducted or, after deduction, has not been paid before the expiry of the time prescribed u sub-section (1) of section 200 and in accordance with the other provisions of Chapter XVI-B As per the provisions of Chapter XVII-B of the Income Tax Act, a person is required to deduct tax on certain specified payments at the specified rates if the payment exceeds specified threshold. In case of non-deduction of tax in accordance with the provisions of this chapter he is deemed to be an Assessee in default under section 201(1) in respect of the amount of non-deduction. However, section 191 of the Act provides that a person shall be deemed to be assess default in respect of non/short deduction of tax only in cases where the payee has also to pay the tax directly. Therefore, the deductor cannot be treated as assessee in default respect of non/short deduction of tax if the payee has discharged his tax liability.

In order to provide clarity regarding discharge of tax liability by the resident payee on payment of any sum received by him without deduction of tax, section 201 was amended by Fin Act 2012 to provide that the payer who fails to deduct the whole or any part of the tax o payment made to a resident payee shall not be deemed to be an Assessee in default respect of such tax if such resident payee -

(I) has furnished his return of income under section 139; has taken into account such sum for computing income in such (ii) return of income; and has paid the tax due on the income declared by him in such (iii) return of income,

Page 6 of 10 The date of payment of taxes by the resident payee shall be deemed to be the date on return has been furnished by the payer. SUPPORTING STATEMENT The payee of the amounts has filed the return of income offering to tax the amounts received from the Assessee. The payee has also paid the taxes on its business profits. As the Company is complied with the requirement of the Income tax act, it is said to be company not in default for this purpose. The Assessee in support of the claim has produced the following documents and details. Income Tax returns with statement of computation of income of 1. Payee Financial statements with schedules and notes of Payee 2. Ledger extract of the Assessee in the books of Payee 3. Declaration on tax payment on the business profits of Payee 4. The statement of amounts paid by the Assessee to the Company 5. towards the marketing/commission As per the contract the Assessee has to pay the commission to the Company on customer entering into 'agreement to sale'. Based on this, Assessee has accounted/paid Rs 69,92,235/- (Rs Sixty Nine Lacs Ninety Two thousand two hundred and thirty five) during F.Y 2010-11 and 2011-12. The detailed breakup of the amounts paid is provided in Annexure — 1. The recipient Company has offered Rs 58,39,777 for the A.Y 11-12 and Rs 63,627 for the A.Y 12-13 in its income tax returns against the total payment of Rs . 69,92,235 by the Assessee We bring to your notice that as per the insertion made by the Finance Act, 2012 and considering the fact that the recipient of commission has Page 7 of 10 included the income in their filed returns of income tax and has already paid tax, such disallowance cannot be invoked in this case. We contend that the object of the amendment made was that though the assessee has not deducted TDS but there has been no loss to the Revenue, as such the disallowance under Section 40(a) (ia) should not be invoked.

"In the case of Bharti Shipyard Ltd vs. DCIT (141 TTJ 129), and that of the Hon'ble Delhi High Court in case of Rajinder Kumar wherein it was held that any amendment of a provision which is aimed at removing unintended consequences with the intention to make the provisions operative should be treated as retrospective no matter whether the same has been given effect prospectively. The Tribunal carefully interpreted the legislative amendment of section 40(a) (ia), as per the Finance Act 2012. Second proviso to Section 40(a) (ia). introduced with effect from 1.4.13 provides that if an assessee fails to deduct TDS according to the provisions of Chapter XVH-B on any such sum but is not an assessee in default under the first proviso of section 201(1), then, it shall be considered that the assessee has deducted and paid the tax on such sum on the date of filing the return of income by the resident. It can be stated that till the assessee is not an assessee in default, the disallowance under section 40(a) (ia) cannot be invoked. It was held that by the amendment as per the Finance Act, 2012 the legislature has expressed its view to decline from deduction for expenditure in connection with payments made on which TDS has not been deducted but has not resulted in any loss to the Revenue was never the intended consequence. It was declared that the consequences of these amendments is that the disallowance under section 40(a) (ia) cannot be invoked where even if the assessee has not deducted tax at source from the payments for expenses but the recipient has taken them into account while calculating his income and has paid due taxes, if any, and has filed his income tax return under section 139(1).

Page 8 of 10 The Tribunal held that in the circumstances, the proviso shall apply retrospectively_ The appeal was allowed." We submit that the assesse has provided all the proofs to claim the benefit of the Second proviso to Section 40(a) (ia), of the income tax act. We request you to grant the relief to the Assessee by allowing the so much of expenses stated above in its return of income.

We want to draw your kind attention to the recent amendment to the section 40(a)(ia) restricting the disallowance to 30% from 100% disallowance on the expenses paid on which TDS is not deducted. We request you to consider Assessees request on this and grant any remedy if possible.

The Assessee could not collect the information from the payee for the below amounts paid which are disallowed by the AO.

Sales promotion INR 44,00,000 Advertisement INR 16,60,075 Audit Fee INR 1,28,000 TOTAL INR 61,88,075”

Pronounced in the open court on the date mentioned on the caption page.