2011 (4) TMI 508 - AT - Income Tax

Disallowance - Expenditure on account of royalty - Provisions of section 40(a)(ia) - the assessee disputed that the receiver not having any PAN the assessee did not deduct the tax at source - It was also submitted that payment by way of royalty was diversion of income by overriding title and therefore there was no income accruing to the assessee on account of royalty and there was no obligation of any TDS - It was observed by him that the receiver had been appointed on behalf of the firm which had the license to operate the blood bank and therefore the royalty payable to the receiver was not in his personal capacity - The royalty was payable on behalf of the firm and the assessee was required to deduct tax at source - It was also observed by him that there was no direction of the High Court not to deduct tax at source - since the TDS provisions under section 194J in relation to royalty were applicable only from 13-7-2006 only the payments made for the period from 13-7-2006 onwards will be disallowed under section 40(a)(ia) for non-deduction of tax at source. - Decided against of assessee. Rent paid - under the provisions of section 40(a)(ia) - The claim of the assessee is that tax had been deducted and paid to the Central Government which was supported by the books of account and bank statement - The assessee could not produce the challan which was not traceable and which was the reason for disallowance - Hence one more opportunity is required to be given to the assessee to trace the challan as it would not be proper to make addition if the tax had actually been deducted and paid to the Central Government - Accordingly restore the issue to the file of Assessing Officer for passing a fresh order after allowing opportunity of hearing to the assessee.

Issues Involved:
1. Disallowance of expenditure on account of royalty.
2. Disallowance of rent paid under the provisions of section 40(a)(ia).
3. Charge of interest.

Detailed Analysis:

1. Disallowance of Expenditure on Account of Royalty:

The primary issue pertains to the disallowance of Rs. 42 lakhs incurred by the assessee as royalty. The assessee, a consultant pathologist, was part of a firm named Hi Tech Blood Transfusion and Allied Services, which faced internal disputes leading to the appointment of a Court Receiver by the High Court. The receiver was to manage the firm's business, and the highest bidder among the partners would pay a royalty to continue operations. The assessee, being the highest bidder, paid Rs. 42 lakhs but did not deduct tax at source, leading to disallowance under section 40(a)(ia).

The assessee argued that the arbitration proceedings were ongoing, and the receiver did not have a PAN, making TDS deduction complex. Additionally, the assessee claimed that the payment was a diversion of income by overriding title, thus no income accrued to the assessee, negating the need for TDS. However, the CIT(A) and the Tribunal disagreed, noting that the receiver acted on behalf of the firm, and the royalty was not in a personal capacity. The Tribunal held that the payment was indeed royalty, taxable under section 194J, and non-deduction of TDS warranted disallowance under section 40(a)(ia). The Tribunal also clarified that the payment was an application of income, not a diversion.

The Tribunal distinguished the case from cited judgments, emphasizing that the royalty payment was not linked to business receipts but was a fixed monthly sum. Consequently, the Tribunal upheld the disallowance for payments made from 13-7-2006 onwards, aligning with the applicability of section 194J.

2. Disallowance of Rent Paid:

The second issue involved the disallowance of Rs. 3 lakhs on account of rent under section 40(a)(ia). The Assessing Officer disallowed the claim as the assessee failed to produce the TDS challan, despite claiming that tax was deducted and paid to the Government. The CIT(A) upheld the disallowance.

Before the Tribunal, the assessee reiterated that tax was deducted and supported by books of account and bank statements, but the challan was not traceable. The Tribunal found merit in giving the assessee another opportunity to produce the challan, emphasizing that if tax was indeed deducted and paid, disallowance would be improper. The issue was remanded back to the Assessing Officer for fresh consideration.

3. Charge of Interest:

The third issue on the charge of interest was deemed consequential. The Tribunal directed the Assessing Officer to recompute the interest while giving effect to the order.

Conclusion:

The appeal was partly allowed. The Tribunal upheld the disallowance of royalty payments from 13-7-2006 onwards due to non-deduction of TDS but remanded the issue of rent disallowance back to the Assessing Officer for reconsideration, providing the assessee an opportunity to produce the TDS challan. The interest charge was to be recomputed accordingly.

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