2010 (9) TMI 552 - AT - Income Tax

Disallowance u/s 40A(3) - Cash payment exceeding Rs. 20, 000 - the relevant entries noted by the Assessing Officer as expenditure incurred by the assessee in cash in the sums exceeding Rs. 20, 000 were actually in respect of amounts received by the assessee in cash on account of freight charges - the matter is restored back to the file of the Assessing Officer with a direction to verify the claim of the assessee that the relevant entries are on account of cash receipts and not cash payments from the actual record and allow proper relief to the assessee on the basis of such verification Regarding disallowance of Rs. 8, 06, 64, 465 u/s 40(a)(ia) - It is observed that tax at source @ 1.12 per cent was deducted by the assessee from the freight charges during the period 1-4-05 to 28-2-06 and the same was paid in the months of July and August 2006 - For the said delay the assessee was liable to pay interest under section 201(1A) and the Government thus was getting compensated for the delay on the part of the assessee to pay the tax deducted at source on its behalf by the assessee - The provisions of section 40(a)(ia) as stood prior to the amendments made by the Finance Act 2010 thus were resulting into unintended consequences and causing grave and genuine hardships to the assessees who had substantially complied with the relevant TDS provisions by deducting the tax at source and by paying the same to the credit of the Government before the due date of filing of their returns under section 139(1) - Decided in the favour of assessee

Summary

Issues Involved:
1. Disallowance under Section 40A(3)
2. Disallowance under Section 40(a)(ia)

Issue-Wise Detailed Analysis:

1. Disallowance under Section 40A(3):

The first issue pertains to the disallowance of Rs. 3,17,575 made by the Assessing Officer (AO) under Section 40A(3) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee, a transport contractor, filed a return declaring an income of Rs. 11,35,560. During assessment, the AO found that the assessee had incurred running expenditures with payments exceeding Rs. 20,000 made otherwise than by account payee cheque or draft, totaling Rs. 15,87,868. Consequently, 20% of this amount, i.e., Rs. 3,17,575, was disallowed under Section 40A(3).

The assessee argued before the CIT(A) that the ledger entries noted by the AO as cash expenditures were actually cash receipts from freight charges, thus not attracting Section 40A(3). However, the CIT(A) upheld the AO's disallowance, stating that the AO had specifically found these entries to be expenditures. Upon appeal, the Tribunal noted that the ledger entries provided by the assessee indeed appeared to be cash receipts, not payments. Both parties agreed to a remand for verification. Hence, the Tribunal set aside the CIT(A)'s order and remanded the matter to the AO for verification of the assessee's claim, treating the ground as allowed for statistical purposes.

2. Disallowance under Section 40(a)(ia):

The second issue concerns the disallowance of Rs. 8,06,64,465 on account of transport charges under Section 40(a)(ia). The AO noted that the assessee had deducted tax at source (TDS) amounting to Rs. 9,03,442 from freight charges paid to sub-contractors during the period 1-4-2005 to 28-2-2006, but had not paid the TDS to the government by 31-3-2006. Consequently, the AO disallowed the corresponding expenditure under Section 40(a)(ia).

The assessee contended before the CIT(A) that there was no contract with the truck suppliers, and the TDS was deducted inadvertently. The CIT(A) rejected this argument, noting that the trucks were hired with drivers and conductors, thus constituting a contract under Section 194C. The CIT(A) upheld the AO's disallowance, distinguishing the case from others cited by the assessee.

Upon appeal, the Tribunal considered the assessee's arguments that there was no formal contract and that the TDS provisions were not applicable. However, the Tribunal found that the provisions of Section 194C were indeed applicable, as the trucks were hired along with manpower. The Tribunal also addressed the applicability of the amended provisions of Section 40(a)(ia) by the Finance Act, 2010, which allowed deductions if TDS was paid before the due date for filing the return. The Tribunal noted that the amendments were curative and remedial, thus applicable retrospectively.

The Tribunal concluded that the disallowance under Section 40(a)(ia) was not sustainable, as the TDS was paid before the due date for filing the return. Consequently, the Tribunal deleted the disallowance and allowed the assessee's appeal on this ground.

Conclusion:

The Tribunal allowed the assessee's appeal on both grounds. The disallowance under Section 40A(3) was remanded to the AO for verification, and the disallowance under Section 40(a)(ia) was deleted, recognizing the retrospective applicability of the remedial amendments.