Conditions laid down under Section 40(a) (ia ) requires addition to the income if
– 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 ).
Provisions of Section 40(a)(ia) have two limbs,
- Assessee has to deduct tax and
- Where after deducting tax, the assessee has to pay into Government Account.
There is nothing in the said section to treat the assessee as defaulter where there is a shortfall in deduction.
The Section 40(a) (ia) refers only to the duty to deduct tax and pay it to the Government Treasury.
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 any of the TDS provisions, assessee can be declared to be an assessee-in-default under Section 201 and no disallowance can be made by invoking the provisions of Section 40(a )(ia)
INCOME TAX OFFICER vs. PREMIER MEDICAL SUPPLIES & STORES
ITAT, KOLKATA BENCH
Mahavir Singh, JM & C. D. Rao, AM.
ITA No. 1061/Kol/2010, 1062/Kol/2010 & C.O. No.86/Kol/2010, C.O. No.87/Kol/2010
28th October, 2011
(2012) 31 CCH 0269 KolTrib
(2012) 53 SOT 0263
Legislation Referred to
Section 40(a)(ia), 194H, 192, 291, 139
Case pertains to
Asst. Year 2006-07
Decision in favour of:
Assessee
Business Expenditure—Commission—Tax deduction at source—Disallowance u/s. 40(a)(ia)—Assessee company paid commission to its directors on the basis of net profit determined and was shown as liability in Balance Sheet—Assessee claimed deduction on payment of these commission being part of salary in terms of Articles of Association of Company and deducted TDS under s. 192—AO while framing assessment made a disallowance of this expenditure by applying the provision of s. 40(a)(ia) for not deducting TDS on commission as per provisions of s. 194H—CIT(A) deleted the addition made by the AO—Held, in the case of DCIT vs. S. K. Tekriwal in ITA No.1135/Kol/2010 dated 21.10.2011case, it was held that the conditions laid down under s. 40(a)(ia) are to be satisfied only then such payment can be disallowed under s. 40(a)(ia) but where tax is deducted by the assessee, even under bonafide wrong impression, under wrong provisions of TDS, the provisions of s. 40(a)(ia) cannot be invoked—Therefore, following the judgment in S.K. Tekriwal’s case, order of CIT(A) is confirmed—Appeals of the revenue are dismissed and Cross Objection of the assessee is also dismissed as infructuous
It is held that:
In view of the legal proposition discussed in the case law of DCIT vs. S. K. Tekriwal in ITA No.1135/Kol/2010 dated 21.10.2011, of this Tribunal, the court confirms the order of CIT(A) and the two appeals of revenue are dismissed. Since, the court has dismissed revenue’s appeal, the Cross Objections of the assessee being supportive to the order of CIT(A) needs no adjudication and dismiss as infructuous.
Short overview:
Conditions laid down under s. 40(a)(ia) 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 s. 40(a)(ia) but where tax is deducted by the assessee, even under bonafide wrong impression, under wrong provisions of TDS, the provisions of s. 40(a)(ia) cannot be invoked.
In favour of:
Assessee
Case referred to
Ran Prasad vs. CIT 86 ITR122
Gestetner Duplicators Pvt. Ltd. vs. CIT 117 ITR 1
DCIT vs. S. K. Tekriwal in ITA No.1135/Kol/2010 dated 21.10.2011
DCIT vs. M/s Chandabhoy & Jassobhoy dated 08.07.2011
Counsel appeared:
Ravi Tulsiyan for the Revenue.: M. Bhattacharya for the Assessee
ORDER
{JUDGMENT}PER BENCH
- These appeals by revenue and Cross Objections by assessee are arising out of orders of CIT(A)-XII, Kolkata in appeal Nos.416/CIT(A)-XII/Cir-11/09-10/Kol and 691/CIT(A)- XII/Ward-11 (4)/09-10/Kol dated 25.03.2010. Assessment for Assessment Year 2006-07 was framed by DCIT, Circle-11, Kolkata dated 30.10.2008 and assessment for Assessment Year 2007-08 was framed by ITO, Ward-11(4), Kolkata dated 30.11.2009 u/s. 143(3) of the Income Tax Act, 1961(hereinafter referred to as “the Act”). For the sake of brevity and clarity, we dispose of both these appeals and cross objections by this consolidated order.
- The only issue in these appeals of revenue and Cross Objections of assessee is against the order of CIT(A) in reversing the action of Assessing Officer in making the disallowance of commission payment by invoking the provisions of section 40(a)(ia) of the Act as the assessee has not deducted tax in terms of provisions of section 194H of the Act . The revenue has raised following common ground in both the years:
“On the facts and in the circumstances of the case, Ld. CIT(A) has erred in deleting the addition made u/s. 40(a)(ia) of the I. T. Act for violation of sec. 194H of the I. T. Act.”
- We have heard rival submissions and have gone through the facts and circumstances of the case. Brief facts are that the assessee is a distributor of pharmaceuticals products of M/s. Unichem Laboratories and UCB India Ltd., filed its returns of income on the basis of audited accounts. In these assessment years, the assessee company paid commission to its directors on the basis of net profit determined. Assessee claimed that the commission paid to directors was part of salary in terms of Articles of Association of Company. The assessee company’s net profit was determined on completion of accounts and commission was payable to directors, which was calculated as per accounts. The assessee company debited this commission in P&L Account and was shown as liability in Balance Sheet. The assessee treated this commission as part of salary and deducted TDS u/s. 192 of the Act at the time of payment of the same to directors in both the years. The assessee made TDS u/s. 192 of the Act but Assessing Officer while framing assessment made a disallowance of this expenditure by applying the provision of section 40(a)(ia) of the Act as according to him assessee has not deducted TDS on commission as per provisions of section 194H of the Act. Hence, he made disallowance by invoking the provisions of section 40(a)(ia) of the Act. Aggrieved, assessee preferred appeal before CIT(A). CIT(A) deleted the addition by treating the commission paid to directors as part of salary and held that the assessee has rightly applied the provisions of section 192 of the Act for deducting TDS under the head salary. The CIT(A) while deciding the issue has relied on the case of Hon’ble Apex Court in the case of Ran Prasad V, CIT ( ) 86 ITR122 and also Gestetner Duplicators Pvt. Ltd. Vs. CIT 117 ITR 1.
- Before us, the Ld. Sr. DR argued that Assessing Officer in para 3(a) and 3(b) of assessment order clearly stated that under provisions of section 291 of Companies Act, where directors who only direct the affairs of the company and not in service or employment of the company in the capacity of either Secretary or Manager or Accountant or otherwise, shall not be treated as employee of the company. He also argued that provisions have been made in the articles of Association for fees for the directors for attending Board Meetings. The right to fees for sitting in Board meetings makes the directors indisputably distinct and separate from employees. He also argued that nowhere in the Articles of Association, there is any clause in respect of employer-employee relationship which evidences the existence of an employer employee relationship. Therefore, payments made to the Managing Director/Directors are not the same as salary paid to employees and hence, according to him assessee was thus liable to deduct tax at source under the provision of section 194H of the Act. The company has failed to deduct tax accordingly. On the other hand, the Ld. Counsel Shri Ravi Tulsiyan heavily relied on the decision of ITAT, Kolkata “C” Bench in the case of Jahangir Biri Factory (P) Ltd. Vs. DCIT, ITA No. 1173/Kol/2008, A.Y 2005-06 and stated that the Tribunal has held that the commission paid to directors as per terms of employment for the work done in their capacity as whole-time directors is to be treated as incentive in addition to salary, etc. and did not come within the purview of commission and brokerage as defined in section 194H or fee for professional or technical services as defined in s. 194J and therefore, same cannot be disallowed under s. 40(a)(ia) of the Act.
- After hearing the rival submissions, we find that, admittedly, the assessee has deducted tax u/s. 192 of the Act under the head salary and this fact has not been denied by revenue. Revenue’s contention is that this particular payment i.e. commission paid to directors was not part of salary and it is only commission, reason being there was no employer employee relationship between company and directors and further no contractual relationship existed there. Without going into this controversy, even though the issue is covered in favour of the assessee, we are of the view that the assessee has deducted tax in both years u/s. 192 of the Act under the head salary and in view of this, this issue is covered in favour of assessee by the decision of this Tribunal “B” Bench of Kolkata in the case of DCIT Vs. S. K. Tekriwal in ITA No.1135/Kol/2010 dated 21.10.2011, wherein it held as under:
- From the order of CIT(A), we find that CIT(A) has gone into the controversy of assessee falling under the head ‘sub contractor’ or falling under the head ‘rent’, the expenses made under the head ‘machinery hire charges’. It is also a fact that the assessee has deducted TDS u/s. 194C(2) of the Act and covered itself under the head ‘sub contractor’. We find that CIT(A) after verifying records and explanation submitted by assessee reached to a conclusion that payments are in the nature of contract payments made to sub contractors. On merits, we are in agreement with the findings of CIT(A) and even revenue before us could not controvert the same. Another facet of this issue is that once the assessee has deducted TDS u/s. 194C(2) of the Act, whether disallowance can be made by invoking the provisions of section 40a(ia) of the Act. The relevant provision reads as under:“40a(ia) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), 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 subsection (1) of section 139:”In this provision it is provided that where in respect of any sum, as referred in this section, tax has not been deducted or after deduction has not been paid on or before the due date specified in sub-section (1) of section 139 of the Act, such sum shall be disallowed as a deduction while computing the income of the assessee for the previous year relevant to AY under consideration. But in the present case before us, the assessee has deducted tax, although u/s. 194C(2) of the Act 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. Even otherwise if it is considered that this particular sum falls under section 194I of the Act, it may be considered as tax deducted at a lower rate and it cannot be considered a case of non- deduction or no deduction. Similar view is taken by ‘C’ Bench of Mumbai ITAT in ITA No. 20/Mum/2010 in the case of DCIT v M/s Chandabhoy & Jassobhoy dated 08.07.2011, wherein it is held that there is no dispute with reference to the deduction of tax u/s 192 of the Act with the fact that the alleged consultants, in their individual assessments declared these payments as salary payments and accepted by revenue as it is. Further, it is held that the assessee had deducted tax u/s. 192 of the Act as against the allegation of revenue that the provisions of section 194J of the Act would be attracted as these consultants are in the capacity of professionals. The Bench held that the provisions of section 40(a)(ia) of the Act will not apply as the said provision can be invoked only in the event of non-deduction of tax but not for lesser deduction of tax. In that case the assessee has deducted tax u/s. 192 of the Act as against section 194J of the Act as against the claim of revenue.
- In the present case before us the assessee has deducted tax u/s. 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% u/s. 194C(2) of the Act as against the actual deduction to be made at 10% u/s. 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 u/s. 40(a)(ia) can be made even though payments are genuine but tax is not deducted as required u/s. 40(a)(ia) of the Act. We are of the view that the conditions laid down u/s. 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 u/s. 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 u/s. 194C(2) of the Act and not u/s. 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 Government 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 (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 u/s. 201 of the Act and no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act.”
- After going through the facts and circumstances of the case, legal proposition discussed in the case law of S. K. Tekriwal (supra) of this Tribunal, we confirm the order of CIT(A) and these two appeals of revenue are dismissed. Since, we have dismissed revenue’s appeal, the Cross Objections of the assessee being supportive to the order of CIT(A) needs no adjudication and dismiss as infructuous.
- In the result, both appeals of revenue and Cross Objections of assessee are dismissed.
- Order pronounced in open court on 28.10.2011 (Refer:https://thetaxtalk.com/2020/01/15/landmark-judgment-no-disallowance-u-s-40aia-if-there-is-a-shortfall-in-deduction-or-if-deduction-is-done-in-wrong-section/)