M/S VYDEHI SCHOOL OF EXECELLENCE ,BANGALORE vs. INCOME TAX OFFICER WARD-4(2)(1), BANGALORE

This is an appeal by the assessee against the order of CIT(A)-4, Bengaluru dated 28/2/2018 relating to the asst. year 2014-15.

The assessee is a LLP. The assessee runs educational institution. In the assessment proceedings, on verification of the details, the AO noticed that assesee had incurred expenses under the head ‘food expenses’ which was claimed as deduction in computing total income. On the aforesaid payment, assessee did not deduct tax at source. The AO invoked the provision of sec 40(a)(ia) of the Act and disallowed the claim for deduction of expenses to the tune of Rs.45,73,563/- for non deduction of tax at source. Accordingly, the aforesaid sum was added to the total income of the assessee in the order of asst. dated 26/12/2016 passed u/s 143(3) of the Income-tax Act 1961 (the Act).

Before the CIT(A), the assessee contended that it had made payment to caterers by name “M/s V HIRE 4 U” and the payee had included the sum received from the assessee in their return of income filed for the relevant asst. year. The Assessee filed Form No. 26A issued by the Chartered Accountant of “M/s. V hire 4 U” wherein it was certified that to the extent of Rs.41,51,863/- being the amount received by them from the assessee, they had offered the same in their return of income. The Assessee also submitted that the balance amount of Rs. 4,21,700/- i.e. [Rs. 45,73,5631- minus Rs. 41,51,8631-] is the provision made by the Assessee for the month of March 2014 paid in the subsequent month which fell in the next assessment year. The Assessee submitted that the certificate in form 26A may be admitted as additional evidence under Rule 46A of the Income Tax Rules, 1962 (Rules). The Assessee submitted that as per the second proviso to section 40(a)(ia) of the Act read with proviso to section 201(1) of the Act inserted by Finance Act 2012 w.e.f. 01.04.2013 and 01.07.2012 respectively, if it is established that the person to whom made the payments made are disallowed u/s 40(a)(ia) of the Act has furnished return of income u/s 139 of the Act and has also taken into account the sum received from the assessee in computing in such return of income and if he had paid tax on the income declared by him on such income and furnished the certificate to the above effect to the accountant in Form No.26A, then the assessee cannot be deemed to be an assessee in default u/s 201(1) of the Act and no disallowance u/s 40(a)(ia) of the Act should be made.

The CIT(A) however, did not consider the above submissions of the Assessee but confirmed the order of the AO. Aggrieved by the order of the CIT(A), assessee has filed present appeal before the Tribunal.

At the time of hearing, the ld counsel for the assessee made submissions in ground 4 to 6 which reads as follows:-

The learned Commissioner of Income-tax [Appeals] failed to appreciate that the deduction of tax is only one mode of recovery of tax and once the tax is recovered by any other mode and the recovery of tax on the amount which has suffered tax in the hands of payee is not permissible since the same will amount to taxing the same income twice i.e. once disallowance of expenditure in the hands of the payer and once again the amounts being taxed in the hands of the payee, on the facts and circumstances of the case.”

We have considered the rival submissions. As per the second proviso to sec.40(a)(ia) of the Act, which was inserted by the Finance Act, 2012 w.e.f. 1-4-2013, if the payees have filed their return of income showing the receipts from the Assessee in their return of income than the 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 resident payee referred to in Sec.40(a)(ia) of the Act. The proviso to section 201(1) of the Act inserted by the Finance Act 2012 w.e.f. 01.07.2012 reads as follows :- “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 resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident – (i) has furnished his return of income under seciton 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, and the person furnishes certificate to this effect form an accountant in such form as may be prescribed] 8. The plea of the Assessee was that as per the second proviso to section 40(a)(ia) of the Act read with proviso to section 201(1) of the Act inserted by Finance Act 2012 w.e.f. 01.04.2013 and 01.07.2012 respectively, if it is established that the person to whom made the payments made are disallowed u/s 40(a)(ia) of the Act has furnished return of income u/s 139 of the Act and has also taken into account the sum received from the assessee in computing in such return of income and if he had paid tax on the income declared by him on such income and furnished the certificate to the above effect to the accountant in Form No.26A, then the assessee cannot be deemed to be an assessee in default u/s 201(1) of the Act and no disallowance u/s 40(a)(ia) of the Act should be made.

Despite specific plea of the Assessee above, supported by report of a chartered accountant as required by the proviso to Sec.201(1) of the Act, the CIT(A) confirmed the disallowance, without making a reference to the additional evidence in the form of Chartered Accountants Certificate in Form No.26A. We are of the view that the Assessee is entitled to the benefit of 2nd proviso to Sec.40(a)(ia) of the Act. Therefore, the CIT(A) ought to have directed the AO to verify whether the recipients have included the receipts paid by the assessee in their respective returns of income and also paid taxes on the same, by calling for a remand report, after admitting the additional evidence filed before him. To the extent the recipients from the Assessee have so included the sum in their returns of income and filed the same, no disallowance u/s.40(a)(ia) of the Act ought to have been sustained by the CIT(A). The CIT(A) completely ignored the additional evidence filed before him. We therefore set aside the order of the CIT(A) to the extent to which he had sustained the order of the AO on the disallowance u/s.40(a)(ia) of the Act and remand the issue to the AO to verify whether the recipients have included the receipts paid by the assessee in their respective returns of income and also paid taxes on the same, after admitting the additional evidence filed by the Assessee before CIT(A). To the extent the recipients from the Assessee have so included the sum in their returns of income and filed the same and paid taxes, if due, on such income no disallowance u/s.40(a)(ia) of the Act should be made by the AO.

In the result, appeal of the Assessee is treated as allowed for statistical purpose.