A. KISORE RAO AND OTHERS vs. ITO,

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH ‘ B ’ BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T. A. No.1737/Bang/2013 (Assessment Year : 2010-11) Kishore Rao & Others (HUF), 14-2-112/4, Canara Motors, Arvind Building, Balmatta Road, Bangalore-560 016 …. Appellant. PAN AAEHK 25551A Vs. Income Tax Officer, Ward 1(2), Mangalore. ….. Respondent. Appellant By : Shri K.K. Chythanya, Advocate. Respondent By : Dr.P.K. Srihari, Addl. CIT (D.R.) Date of Hearing : 16.7.2015. Date of Pronouncement : 24.07.2015. O R D E R Per Shri Jason P. Boaz, A.M. : This appeal by the assessee is directed against the order of the CIT (Appeals), Mysore dt.18.7.2013 for Assessment Year 2010-11. 2. The facts of the case, briefly, are as under :- 2.1 The assessee (HUF), engaged in business as transport contractors for M/s. Tata Motors Ltd. transporting chasis from the production point to regional outlets for which it engaged sub- contractors. The assessee filed its return of income for Assessment Year 2010-11 on 29.9.2010 declaring total income of Rs.4,42,876 after set off of business loss of Rs.26.23 lakhs. In the

2 ITA No.1737/Bang/2013 course of scrutiny proceedings, the A.O. observed that the assessee had incurred direct expenditure of Rs.;13.20 Crores against receipts of Rs.13.53 Crores on account of transport charges but had short deducted tax at source on certain payments and in certain cases had not remitted the TDS within the due date of filing of the return under Section 139(1) of the Income Tax Act, 1961 (in short 'the Act') and therefore these amounts were liable for disallowance under Section 40(a)(12) of the Act. On being queried in this regard, the assessee submitted that TDS was made at 1% and subsequently on realising that TDS was to be made at 2% of the amounts paid, the balance TDS was paid on 31.1.2011 along with interest under Section 201(1A) of the Act. The Assessing Officer was of the view that deduction of tax at a lower rate cannot be taken as TDS made in accordance with the provisions of Chapter XVII-B. Following the decisions of the ITAT, Chennai Bench in the case of Frontier Offshore Exploration (I) Ltd. V DCIT (118 ITD 494) and ACIT V Pixie Enterprises (2011) 15 Taxmann 314 (Chennai), the Assessing Officer held that even in case of short deduction, the liability to deduct taxes exist as on the date of filing of the return of income and therefore that amount which has not suffered TDS is liable for disallowance under Section 40(a)(ia) of the Act and accordingly disallowed an amount of Rs.3,42,84,912. In coming to this finding the Assessing Officer was of the view that the decision of the ITAT, Kolkata Bench in the case of DCIT V S.K. Tekriwal (2011) 48 SOT 515 (Kol) relied on by the assessee, wherein it was held that no disallowance under Section 40(a)(ia) of the Act can be made if there is any shortfall due to any difference of opinion as to the taxability of any expenditure or the nature of payment, was distinguishable and not applicable to the case on hand. The Assessing Officer also referred to but distinguished, as

3 ITA No.1737/Bang/2013 not applicable to the case on hand, the decision of ITAT, Mumbai Bench in the case of DCIT V Chandabhoy and Jassobhoy (2012) 17 Taxmann.158 (Mum), relied on by the assessee, wherein it was held that since there was a dispute as to the nature of payment and short deduction, such dispute did not warrant disallowance under Section 40(a)(ia) of the Act. The assessment was accordingly concluded under Section 143(3) of the Act vide order dt.19.12.2012, wherein the assessee's income was determined at Rs.3,37,51,632 due to the disallowance of Rs.3,42,86,912 under Section 40(a)(ia) of the Act. 2.2 Aggrieved by the order of assessment dt.19.12.2012 for Assessment Year 2010-11, the assessee preferred an appeal before the CIT (Appeals), Mysore. The learned CIT (Appeals) vide order dt.18.7.2014 dismissed the assessee's appeal holding that the judicial pronouncements relied on by the assessee were not jurisdictional Tribunal decisions and therefore in these circumstances since the word ‘such tax’ in 40(a)(ia) of the Act envisages full tax, he concurred with the findings of the Assessing Officer in making the disallowance under Section 40(a)(ia) of the Act. 3.1 The assessee, being aggrieved by the order of the CIT (Appeals) dt.18.7.2014 for Assessment Year 2010-11, has preferred this appeal raising the following grounds :- “1. The order of the learned CIT (Appeals), Mysore in so far as against the appellant is against the law and facts and circumstances of the case. 2. The learned CIT (Appeals) has grossly erred in sustaining the disallowance of Rs.3,42,86,912 under section 40(a)(ia) of the Act. 3. The learned CIT (Appeals) ought to have allowed the claim of the appellant considering the insertion of the second provision to the section 40(a)(ia) of the Act. 4. The learned CIT (Appeals) has grossly failed to appreciate that the disallowance under section 40(a)(ia) has to be restricted to amounts payable as at the end of the accounting year.

4 ITA No.1737/Bang/2013 5. The learned CIT (Appeals) has grossly failed to appreciate that the appellant has deducted tax at a lower rate due to misinterpretation of the law. 6. Your appellant craves for leave to add, amend or alter all or any of these grounds of appeal. 7. For these grounds and such other grounds as are advanced at the time of hearing of the appeal, the appellant prays that the appeal be allowed.” 3.2 The assessee also preferred the following additional grounds of appeal :- “8. The learned lower authorities have erred in disallowing expenditure by invoking section 40(a)(ia) when the payments made by appellant are not towards ‘work’ as referred to in Explanation (iv) to section 194C of the IT Act. 9. Without prejudice to the above, both the learned CIT (Appeals) and learned Assessing Officer need to consider the amendment made to section 40(a)(ia) of the IT Act by Finance (No.2) Act, 2014 as curative in nature and to consider the amendment as retrospective, which restricts the disallowance to thirty percent of any sum payable.” In the interest of equity and justice the additional grounds raised are admitted for condonation in this appeal.

5 ITA No.1737/Bang/2013 S.K. Tekriwal (supra), wherein the Tribunal held that no disallowance can be made by invoking Section 40(a)(ia) of the Act if there is any shortfall in deduction of tax due to difference of opinion as to the taxability of any expenditure or the nature of payment falling under various TDS provisions. It was submitted by the learned Authorised Representative that the decision of the ITAT, Kolkata in S.K. Tekriwal was upheld by the Hon'ble High Court of Calcutta in (2014) 361 ITR 432 (Cal). It is prayed that since the issue in question was covered in favour of the assessee by the decision of the Hon'ble High Court of Calcutta in the case of S.K. Tekriwal (supra), the assessee's appeal may be allowed on this ground. 5.2 Per contra, the learned Departmental Representative supported the orders of the authorities below. 5.3.1 We have heard the rival contentions on the ground at S.No.5 and perused and carefully considered the material on record; including the judicial pronouncements cited and placed reliance upon. It is not in dispute that the assessee had made short deduction of tax at source @ 1% instead of 2% on certain payments and failed to remit the said TDS within the due date of filing the return of income for Assessment Year 2010-11 under Section 139(1) of the Act. On examination by the Assessing Officer, the assessee explained that subsequently, on realisation that TDs on the said payments were to be made @ 2% thereon, instead of 1% as had been done by the assessee, the balance TDS was paid on 31.1.2011 along with interest under Section 201(1A) of the Act. The Assessing Officer, on examination of the assessee's claim, was of the view that deduction of tax at a lower rate cannot be taken as TDS made in accordance with the provisions of Chapter XVII-B and, following the decisions of the Chennai ITAT in the

6 ITA No.1737/Bang/2013 case of Frontier Offshore Exploration (I) Ltd. (supra) and Pixie Enterprises (supra), held that even in case of short deduction, the liability to deduct tax exists as on the date of filing the return of income and therefore those amounts which have not suffered TDS was liable to disallowance under Section 40(a)(ia) of the Act. On appeal, the learned CIT (Appeals) upheld the decision of the Assessing Officer. 5.3.2 According to the learned Authorised Representative if, as in the case on hand, there is any shortfall in deduction of tax at source due to any difference in understanding or opinion as to the taxability of any payment or the nature of payments made under TDS provisions, no disallowance can be made by invoking the provisions of Section 40(a)(ia) of the Act. We have had occasion to peruse the decision of the Hon'ble High Court of Calcutta in the case of S.K. Tekriwal (supra), wherein their Lordships had considered the very same issue of the applicability of the provisions of Section 40(a)(ia) of the Act in a case where there was short deduction of tax at source on payments made to sub-contractors and find that the facts of that case are similar to those of the case on hand. In the cited case, the Hon'ble Calcutta High Court has held that if there is any shortfall in deduction of tax due to difference in opinion or understanding as to the taxability of any item or nature of payments falling under various TDS provisions, no disallowance can be made by invoking the provisions of Section 40(a)(ia) of the Act. We are of the considered view that the cited case would cover the issue squarely in favour of the assessee and against Revenue. At paras 2 and 3 of its order, the Hon'ble High Court of Calcutta has held as under :- “ 2. The reasoning appearing at paragraph 6 of the judgment and/or order under challenge reads as follows :

7 ITA No.1737/Bang/2013 “ In the present case before us the assessee has deducted tax under Section 194C(2) of the Act being payments made to sub-contractors and it is not a case of non-deduction of tax or no deduction of tax as is the import of section 40a(ia) of the Act. But the revenue’s contention is that the payments are in the nature of machinery hire charges falling under the head ‘rent’ and the previous provisions of section 194I of the Act are applicable. According to revenue, the assessee has deducted tax @ 1% 2 under Section 194C(2) of the Act as against the actual deduction to be made at 10% under Section 194I of the Act, thereby lesser deduction of tax. The revenue has made out a case of lesser deduction of tax and that also under different head and accordingly disallowed the payments proportionately by invoking the provisions of section 40(a)(ia) of the Act. The ld. CIT, DR also argued that there is no word like failure used in section 40(a)(ia) of the Act and it referred to only non-deduction of tax and disallowance of such payments. According to him, it does not refer to genuineness of the payment or otherwise but addition under section 40(a)(ia) of the Act can be made even though payments are genuine but tax is not deducted as required under section 40(a)(ia) of the Act. We are of the view that the conditions laid down under section 40(a)(ia) of the Act for making addition is that tax is deductible at source and such tax has not been deducted. If both the conditions are satisfied then such payment can be disallowed under section 40(a)(ia) of the Act but where tax is deducted by the assessee, even under bonafide wrong impression, under wrong provisions of TDS, the provisions of section 40(a)(ia) of the Act cannot be invoked. Here in the present case before us, the assessee has deducted tax under Section 194C(2) of the Act and not under Section 194I of the Act and there is no allegation that this TDS is not deposited with the Government account. We are of the view that the provisions of section 40(a)(ia) of the Act has two limbs one is where, inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into Govt. Account. There is nothing in the said section to treat, inter alia, the assessee as defaulter where there is a shortfall in deduction. With regard to the shortfall, it cannot be assumed that there is a default as the deduction is not as required by or under the Act, but the facts is that this expression, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in sub-section 3(1) of section 139. This section 40(a)(ia) of the Act refers only to the duty to deduct tax and pay to government account. If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default under Section 201 of the Act and no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act. Accordingly, we confirm the order of CIT (Appeals) allowing the claim of assessee and this issue of revenue’s appeal is dismissed.” 3. We find no substantial question of law is involved in this case and therefore, we refuse to admit the appeal. Accordingly, the appeal is dismissed.”

8 ITA No.1737/Bang/2013 5.3.3 Respectfully following the decision of the Hon'ble High Court of Calcutta in the case of S.K. Tekriwal (supra), which is factually similar to the case on hand, we hold that no disallowance can be made by invoking the provisions of Section 40(a)(ia) of the Act if there was any shortfall in deduction of tax at source due to any difference of understanding or opinion as to the taxability of any item or the nature of payments falling under various TDS provisions and therefore reverse the findings of the authorities below and allow the assessee's appeal in respect of Ground No.5. 6. The Grounds raised at S.Nos.2 to 4 and the Addl. Grounds at S.Nos.8& 9, were not argued or urged before us in this appeal, rendering them infructuous and consequently we dismiss them as infructuous. 7. In the result, the assessee's appeal for Assessment Year 2010-11 is allowed as indicated above. Order pronounced in the open court on 24th July, 2015. Sd/- Sd/- (P. MADHAVI DEVI) (JASON P BOAZ) Judicial Member Accountant Member *Reddy gp Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File. (True copy) By Order

Asst. Registrar, ITAT, Bangalore