UDAYAKUMAR RUDRAKUMAR,CHENNAI vs. ACIT, CHENNAI

disallowance of the expenditure to the extent of Rs. 20,69,958/- following the decision of Hon’ble High Court of Kerala reported in 364 ITR 689. He ought not have relied that the decision of Kerala High Court did not constitute a ratio decidendi. The learned CIT(A) being vested with plenary powers which are coterminous with that of the Assessing Officer ought to have set aside the entire additions made in the assessment order holding it as without jurisdiction as the Assessing Officer failed to comply with the letter and spirit of the Central Board of Direct Taxes, Instruction No. 7 of 2014 dated 26.09.2014 issued u/s. 119 which were in force during the period of assessment proceedings. Apart from the failure to consider the jurisdictional aspect which goes to the root of the matter, learned CIT(A) also erred in not appreciating that the amendment to section 40(a)(ia) introduced by Finance Act, 2012 with effect from 01.04.2013 is curative in nature, intended to supply an obvious omission, take care of unintended consequence and make the section workable and is therefore retrospective. The assessee’s reliance on the amended provisions of section 40(a)(ia) in contesting the disallowance of Rs. 20,60,958/- for the assessment year 2012-13 was in accordance with law and deserved to be allowed by the learned CIT(A) after due verification of the claim made in asseseee’s letter dated 26.03.2015 filed before the AO which was not at all considered before finalizing the assessment etc .

ITA No. 2756/Mds/2016 :-4-:

4.1 The AR invited our attention to the copy of the assessee’s letter to the CIT(A), which are in the paper book in page nos.38 &39 which was also extracted by the CIT(A) in his order . The relevant portion is extracted as under:

“Before me, the appellant submitted as under: The main issue in this case is whether the learned Assessing Officer is justified in adding a sum of Rs.20,60,958/- as taxable income of the year as No TDS has been deducted on these expenses claimed in Profit & Loss account of the assessee despite the fact that all the payees are assessed to income tax and have been filing their return of income regularly. The Assessing Officer has stated that as the assessee has violated the provisions of income tax act 1961 governing TDS, the above sum of Rs. 20,60,958/- is disallowed D/s 40(a)(ia) of the Income Tax Act 1961 and added under the head Income from Business. Rent 2,59,540 Commission 5,16,865 Advertisements 2,04,553 Salary 10,80,000 Total 20,60,958

The assessee had submitted letter to the Assessing Officer on 26.03.2015 and mentioned the following details and requested' to allow the above expenses totalling the sum of Rs. 20,60,958/- since all the payees are assessed to income tax and have been filing their return of income regularly. The letter submitted to the Assessing Officer reads as follows: There was no deduction of TDS on commission, salary, advertisement expenses and Rent by us during the year 2011-2012 since all the deductees have been assessed to income tax and having PAN Numbers. The details of Deductees and their PAN numbers have been enclosed vide Annexure Statement. We also have enclosed the copies of IT acknowledgments of ITA No. 2756/Mds/2016 :-5-: deductees for your records and reference purposes Please refer Finance Bill 2012, and amendment in Section 40(a)(ia) Finance Act, 2012, Section 201(1) defines the term - 'assessee in default' as a person who is required to deduct tax but does not deduct tax or after deducting fails to pay the whole or any part of the tax, as 'required by or under the Act. A proviso has now been inserted to this section to make exception to the above definition of ‘assessee in default'. The proviso provides that where any such default occurs and if payee (i) Has furnished his return of income under section 139; (ii) (ii) Has taken into account such sum for computing income in such return of income; and (iii) (iii)Has paid the tax due on the income declared by him in such return of income, and furnishes a certificate to this effect from an accountant in such for as may be prescribed then assessee will not be regards as assessee-in-default. , The assessee 'having relied on the above provisions had not been deducted TDS on Rent, Commission, Advertisements and Salary Payments. To summarize the above, 1. Prayer by the assessee to give a direction to the Assessing Officer to verify if the payees have declared the receipt from the Assessee in their return of income and if they have so declared then the addition u/s. 40(i)(ia) of the Act should be deleted by the Assessing Officer. The above submission was made in the context of the following amendments to the provisions of Sec.40(a)(ia) of the Act. With a view to liberalize provisions of Section 40(a)(ia) of the Act Finance Act 2012 brought amendment w.e.f 01.04.2013 as under. The following second proviso was inserted in sub- clause (ia) of clause(a) of Section 40 by the Finance Act, 2012, w.e.f 1-4- 2013: "Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub- section (1) of Section 201, then, for the purpose of this sub- clause, it shall be deemed that the assessee has deducted and paid the tax

ITA No. 2756/Mds/2016 :-6-: on such sum on the date of furnishing or return of income by the resident payee referred to in the said proviso." and submitted that the Hon’ble High Court of Karnataka in the case of CIT(A), Mangalore vs. Santosh Kumar Shetty in of 2013 dated 15.07.2014, reported in [2014] 49 taxmann.com 47 (Karnataka) 227 Taxman 170 (Karnataka), has held that the amendment to section 40(a)(ia) by Finance Act, 2010 which comes into effect from 01.04.2010 is curative in nature and thus it has retrospective operation. The AR relied on the decision of the ITAT Raipur Bench in the case of RKP Company vs ITO in ITA No. 106/Rpr/2016 for assessment year 2010-11 dated 24.06.2016 reported in (2016) 180 TTJ (Raipur) 237 of which the head note is extracted as under: “Income Tax Act, 1961, s. 40(a)(ia): Business expenditure disallowance u/s. 40(a)(ia)-retrospective applicability of second proviso to sec. 40(a)(ia)- there are conflicting decisions of Delhi and Kerala High Courts on the issue of retrospectivity of second proviso to sec 40(a)(ia) – it would be wholly inappropriate for the tribunal to choose views of one of the High Courts based on its own perceptions about reasonableness of the respective view points as such an exercise would de facto amount to sitting in judgement over the views of the High Courts-Thus, applying the principle that “if two reasonable constructions of a taxing provision are possible, that construction which favours the assessee must be adopted”, the second proviso to sec. 40(a)(ia) is to be construed as retrospective in operation- Matter is remitted to the AO for verifying as to whether the recipient of payment has included the same in its computation of business income offered to tax, and delete the impugned disallowance if found to be so.”

4.4.2 Further, the A R relied on the jurisdictional ITAT decision in the case of T. Susai Raju vs ITO, Corporate Ward -5(2), Chennai in (mds)

ITA No. 2756/Mds/2016 :-7-: of 2016 dated 30.01.2017 wrt ay 2012-13,reported in [2017] 163 ITD 533/78 taxmann.com 81 (Chennai – trib ) wherein, it is held that “where assessee incurred expenses towards commission and audit fees, to extent assessee was able to adduce evidence that payments formed part of income of payees which was duly returned and tax was paid thereon, assessee could not be treated as assessee in default.”

4.3 Further, the AR relied on the decision of the ITAT Lucknow in the case of ACIT-3, Kanpur vs Raja Chkravarty in of 2013 dated 06.02.2015 wrt ay 2009-10, reported in (2016) 68 SOT 504, 57 taxman.com 88 (Lucknow-trib), the relevant portion is extracted as under:

“Section 40(a)(ia) of the Income Tax Act, 1961 – Business disallowance-interest, etc., paid to a resident without deduction of tax at source (General principle) – assessment year 2009-10 – whether provision of section 40(a)(ia) would cover not only amounts which are payable as on 31st March of a particular year but also which are payable at any time during relevant year – Held, yes – Whether no disallowance under section 40(a)(ia) can be made if it is established that deductee has paid tax on amount received –Held, yes [para 7] [in favour of assessee /matter remanded].”

Per contra, the DR relied on the order of the AO and CIT(A).

ITA No. 2756/Mds/2016 :-8-: returned and tax paid thereon, the assessee cannot be treated as in default and accordingly, section 40(a)(ia) would stand excluded to that extent. In the facts and circumstances of the case, we deem it fit to direct the AO to verify and conclude the re-examination within a period of 90 days from the receipt of this order by him unless otherwise the delay, if any, in passing the consequential order is attributable to the assessee.

Order pronounced on Tuesday, the 10th day of October, 2017 at Chennai.