UNDERSTANDING DISALLOWANCE UNDER SECTION 40 OF INCOME TAX ACT, 1961 WITH LATEST CASE LAWS. Part – II.

Earlier in the part 1  we had discuss in length about various disallowances under section 40 of the Income tax act 1961.  You can refer the same here at

http://taxbymanish.blogspot.com/2011/12/understanding-disallowance-under.html

However, out of this Disallowance for  non deduction of TDS under section 40(a)(i)   I still find a challenge for tax payers and accordingly provided few more recent judgements which may enable you with more knowledge  about section 40(a)(i) disallowances.

·         In the case of ITO (TDS) v. Cognizant Technology Solutions India P. Ltd, VOL 33 PG 382, it was held that foreign payment for use of telecom equipment & ors services are liable for TDS.

·         When transaction is not entitled for deduction u/s 30 to 38, question of disallowance u/s 40(a)(i)  does not arise. Accordingly, no tds on reimbursement expenses are not required to be disallowed. Refer. jaguar Enterprises v. Deputy CIT, VOL 33 PG 483.

·         In CIT vs. Vector Shipping Services (P) Ltd (2013) 357 ITR 642(All)(HC) held that disallowance u/s  40(a)(ia) applies only to amounts “payable” as of 31st March and not to amounts already “paid” during  the year. The majority judgement in Merilyn Shipping& Transports v. Add. CIT (2012) 136 ITD 23 (SB) was approved. The department filed a Special Leave Petition (SLP) in the Supreme Court. The said SLP has been dismissed by the Supreme Court in limine.(SLP No. 8068/2014, dt. 02/07/52014).

·         No disallowance could be made when tax was deducted at source before March 31 of the year and amounts were deposited with the Central Government before last date for filing return. Refer, CIT .v. J.K. Construction Co, 361 ITR 181.

·         Following the judgment in CIT v. Gujarat Narmada Valley Fertilizers Co Ltd (2014) 361 ITR 192(Guj.)(HC),no disallowance u/s 40(a)(ia) could be made for non-deduction of tax at source from transportation charges. Amendment in section 40(a)(ia) of the Income–tax Act by the Finance Act of 2010 has retrospective effect. Relationship between assessee and agent is that of principal and agent. Refer, CIT .v. B.M.S. Projects P. Ltd, 361 ITR 195.

·         Payment for expenditure was actually made and tax deducted therefrom in March and deposited in April. Held, deduction was allowable. Section 40(a)(ia) of the Income-tax Act, 1961, and the proviso thereto, as amended by the Finance Act, 2008, with retrospective effect from April 1, 2005, acknowledged that where tax was deductible and was deducted during the last month of the previous year but was paid before the due date specified under sub-section (1) of section 139, deduction shall be allowed in the year. Refer, CIT .v. Rajinder Kumar, 362 ITR 241.

·         ONGC acquired lands from farmers and formed a society. The Society received amounts from ONGC and distributed the same to farmers. Held, that payments could not be said to have been expended by society. Hence, they would not come within meaning of expenditure either under section 40(a)(ia) or section 40A(3).No disallowance could be made. Refer, CIT v. Ankleshwar Taluka ONGC and Land Loser Travellers Co-op Society, 362 ITR 92.

·         Assessee made a claim that certain parties made payments to the assessee after deduction of TDS, but failed to issue TDS certificates and hence the amount of TDS certificates not recovered should be allowed as deduction as business loss. Tribunal held that the amount represents TDS by the parties on behalf of the assessee, the same is in the nature of TDS receivable. It is settled position that tax payment is not a charge against but application of income. S. 40(a)(ii) clearly provides that any sum paid on account of taxes on the profits or gains of any business or profession, is not deductible. Unrecovered TDS amount could not be allowed as business loss. Refer, Ricoh India Ltd. .v. Dy.CIT, 38 taxmann.com 264.

·         Payments to overseas institutions towards examination fees and course material. Evidence that fees paid towards study curriculum including teachers textbooks, teaching aids, associated marketing tools and materials and Failure by Department to prove payments as fees for technical services hence disallowance not justified. Refer, Assistant CIT v. Myrind School of Catering and Computer Management P. Ltd., VOL 33 PG 138.

·         Held that the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004 (ITA No. 337/Agra/2013, dt. 29.05.2013). Refer, Rajeev Kumar Agarwal .v. ACIT, Agra ITAT.

·         Amounts not deductible-Non–resident-Payments made to non resident for transmission of bulk SMS were not FTS and hence no liability to deduct tax at source-DTAA-India –South Africa.[S, 4, 5, 9(I)(vii), 195, Art 12]. Refer, DCIT .v. Velti India (P.) Ltd, 43 taxmann.com 425.

·         Short deduction of TDS is not the ground for disallowance. Refer, Three Star Granites P. Ltd. v. Assistant CIT, VOL 32 PG 398.

·         The assessee paid transponder fee to a Malaysian entity for usage of its satellite without deduction of tax at source. The A.O. disallowed the said payment under section 40(a)(ia) of the Act. The C.I.T. (A) deleted the addition without discussing the provisions of the applicable treaty. In view thereof the matter was remanded back to the A.O. Readjudication in light of applicable law and treaty. Refer, ACIT .v. Zee News Ltd, 61 SOT 59 (Mum.)(Trib.).

·         Disallowance under section 40(a)(ia) is to be made where there is non-compliance with the provision of TDS irrespective of the fact whether the amount has been already paid during the relevant year or the amount is outstanding at the end of the year. Refer, ACIT .v. Rishiti Stock & Shares (P) Ltd, 159 TTJ 300.

·         Special Bench decision in the case of Merilyn Shipping and Transports not accepted. Refer, ACIT .v. Raviraj Relempaadu, 29 ITR 387.

·         Deduction at source-Tax deducted before 31st March and paid before due date of filing return - amount deductible. Refer, R.V. Chakrapani .v. ACIT, 29 ITR 342.

·         Tax deducted at source paid before due date of filing return, no disallowance can be made. Refer, ACIT .v. Ace Fire Services, 29 ITR 73.

·         Assessee a licensed internet provider procuring domestic half circuit facility for customers from organisations in France--Payments made towards use of standard facility as lessee not having any domain or control or possessory rights over facility--Not a use of assets and no tax deductible on payments. Refer, Global One India P. Ltd. v. Assistant CIT, VOL 31 PG 722.

·         Amendment to provisions retrospective from 01.04.2005- Deposited tax deducted at source before due date for filing of income, impugned disallowance to be deleted. Refer, ACIT .v. Vimala S. Warad, 145 ITD 165.

·         Foreign reimbursement of expenses not liable for TDS.  Refer, ITO.v.Pubmatic India (P) Ltd., 60 SOT 54.

·         Amendment to section 40(a)(ia) by Finance Act, 2010 is retrospective and, therefore, when assessee has paid to Government account tax deducted at source before due date of filing of return of income under section 139(1), disallowance of expenditure by invoking provisions of section 40(a)(ia) is not called for. Refer, S. S. Warad .v. ACIT, 60 SOT 144.

·         Payments were subject to tax deduction at source. The assessee produced additional evidence before the Commissioner (Appeals) in form of revised tax deduction at source return filed subsequent to assessment. Held, the Assessing Officer should be granted opportunity to examine additional evidence. Hence, matter was remanded. Refer, ACIT .v. Shimoga District Milk Producers Societies Union Ltd., 28 ITR 369.

·         No disallowance under section 40(a)(ia) could be made when assessee, a transport contractor, deposited tax deducted amount before the due date for filing the return. Refer, Madineni Mohan .v. ITO, 28 ITR 157.

·         Held, human skill was involved in providing internet bandwidth facilities availed of by assessee. Hence, payment was in the nature of fees for technical services and assessee under obligation to  deduct tax at source. Refer, Brigade Global Services P. Ltd. .v. ITO, 28 ITR 411.

·         Assessee-company reimbursed demurrage charges for delayed loading, payable by foreign buyers to ship owners, as assessee had to export goods on FOB basis, which was disallowed under section 40(a)(ia) for non-deduction of tax at source .Tribunal held that such payment was in nature of expenditure incurred for sales in view of contract with foreign buyer, since Explanation 1(b) to section 9(1)(i) provides that no income shall be deemed to accrue or arise in India to a non-resident, through or from operations confined to purchase of goods in India for export, amount of demurrage could not be deemed as income in hands of foreign buyer, and no disallowance could be made under section 40(a)(ia). Refer, Sesa Goa Ltd. .v. JCIT, 60 SOT 121.

·         Assessee bank received arrangers fee for mobilising deposits from State Bank of India, which it remitted to its head office/overseas branch in UAE. Tribunal held that such arrangers' fee was not in nature of fees for technical services under section 9(1)(vii), but merely commission, it was not taxable, and no tax was required to be deducted at source on same. Refer, Dy.CIT .v. Abu Dhabi Commercial Bank Ltd, 60 SOT 71.

·         Assessee was engaged in business of charter hire of helicopters. During assessment proceeding AO held that assessee had not deducted tax at source while making payment towards training expenses paid to a US based company. AO opined that in view of Explanation 2 to section 9(1)(vii), payments made by assessee was 'fees for technical services' and, therefore, same was liable to be taxed in India. Accordingly, AO disallowed amounts paid by assessee on account of training expenses, by invoking provisions of section 40(a)(i). Tribunal held that the training was given to pilots and other staff as per requirement of DGCA Rules, therefore, it was only a part of eligibility of pilots and other staff for working in industry of aviation and such training would not fall under term 'service make available' as mentioned in para 4(b) of article 12 of India - USA DTAA, in view of above, amount of training expenses was not taxable in India in hands of non-resident company and, therefore, assessee was not required to deduct tax at source while making payment of said expenses. Consequently, disallowance was deleted. Refer, United Helicharters (P.) Ltd. v ACIT, 60 SOT 58.

·         Circulars No. 23, dated July 23, 1969, No. 163, dated May 29, 1975, and No. 786, dated February 7, 2000 which clarified that payments in the form of commission or discount paid to a foreign party were not chargeable to tax in India were withdrawn by Circular No. 7 of 2009. Circular No. 7 of 2009 cannot be classified as explaining or clarifying the earlier circulars issued in 1969 and 2000. Hence, it  did not have retrospective effect. Hence, in the relevant accounting year tax did not have to be deducted and no disallowance under section 40(a)(i) was justified on account of such non-deduction. Refer, CIT .v. Angelique International Ltd, 359 ITR 9.

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