2015 (3) TMI 971 - AT - Income Tax

Addition u/s. 40A(2)(b) - interest to its sister concern - CIT(A) deleted addition in view of the provisions of section 37(1) of the I.T. Act 1961 - Held that - The undisputed fact is that the assessee has paid interest to its sister concern @ 12% per annum. It is also an undisputed fact that the assessee has not paid any interest on other borrowings/advances. However the reasons given by the AO for disallowing the interest are not tenable in law. Further the assessee has been paying interest since 1999-2000 by making TDS as per provisions of law. The said interest has been allowed in all the preceding assessment year. The recipient M/s. Gazebo Industries Ltd. is declaring the interest income in its return of income. The Ld. CIT(A) has very rightly declined to invoke Explanation to Sec. 37(1) of the Act in respect of this payment of interest. Considering all these facts in totality no interference is called for with the findings of the Ld. CIT(A). - Decided against revenue. Addition u/s. 40(a)(ia) - TDS on labour charges - CIT(A) deleted addition - Held that - It is not in dispute that the labour charges have been incurred by M/s. Dev Construction. The Ld. CIT(A) has given a categorical finding that TDS has been made by Dev Construction on such labour payments. It is an undisputed fact that the assessee has simply reimbursed the expenditure incurred by M/s. Dev Construction. On such reimbursement of expenditure there is no liability for TDS. The Ld. CIT(A) has rightly deleted the addition. No interference is called for. - Decided against revenue. Deemed dividend - CIT(A) allowed part relief out of addition u/s 2(22)(e) - Held that - The Ld. Counsel for the assessee for the first time stated that provisions of Sec. 2(22)(e) of the Act was not applicable on the facts of the case because the assessee is neither a share holder of M/s. Gazebo Industries Ltd. nor the assessee is a member or a partner or a share holder in any concern in which M/s. Gazebo Industries Ltd. has a substantial interest nor the assessee has any substantial interest in M/s. Gazebo Industries Ltd. We find that this aspect has not been looked into by the lower authorities. Therefore for verifying the fact for this limited purpose we restore this issue to the files of the AO. - Decided in favour of revenue for statistical purpose.

Summary

Issues:
1. Disallowance of interest paid to sister concern under section 40A(2)(b) and 37(1) of the Income Tax Act, 1961.
2. Disallowance of expenses under section 40(a)(ia) for non-deduction of TDS.
3. Treatment of advances from sister concern as deemed dividend income under section 2(22)(e) of the Act.
4. Confirmation of penalty under section 271(1)(c) by the DCIT.

Issue 1:
The Revenue challenged the deletion of addition of interest paid to a sister concern under section 40A(2)(b) and 37(1) of the Income Tax Act. The Assessing Officer disallowed the interest paid as it was not reflected in the Tax Audit report. The CIT(A) held that the interest was not in violation of any law and directed the AO to delete the addition. The ITAT upheld the CIT(A)'s decision, stating that the interest was paid since 1999-2000 with proper TDS compliance and had been allowed in previous years.

Issue 2:
The AO disallowed expenses under section 40(a)(ia) for non-deduction of TDS on payments to M/s. Dev Construction. The CIT(A) found that TDS had been deducted by M/s. Dev Construction on labour charges, and as the assessee reimbursed these expenses, no additional TDS was required. The ITAT agreed with the CIT(A) and dismissed the ground of appeal.

Issue 3:
The AO treated advances from a sister concern as deemed dividend income under section 2(22)(e) of the Act. The CIT(A) reduced the deemed dividend amount after considering the transactions between the parties. The ITAT directed the AO to verify the shareholding patterns and substantial interests before making a decision, allowing the ground for statistical purposes.

Issue 4:
The assessee's appeal against the confirmation of penalty under section 271(1)(c) was allowed for statistical purposes as the issue related to deemed dividend income was set aside for fresh consideration. The penalty order was also set aside for the AO to decide afresh.

This detailed analysis covers the key issues raised in the judgment, providing a comprehensive understanding of the legal reasoning and decisions made by the authorities involved.