ITO Vs Saat Rasta Properties Private Limited (ITAT Mumbai)
The Revenue appealed against the order of the CIT(A)/National Faceless Appeal Centre concerning the assessment under Section 143(3) of the Income Tax Act, 1961 for AY 2013-14.
The assessee, a company engaged in development of land and buildings, had filed its return declaring a loss of Rs.6,04,397. The assessment was completed under Section 143(3), assessing the loss at the same amount after the Assessing Officer made a disallowance of Rs.4,23,87,490 under Section 40(a)(ia). The amount represented payments debited to Capital Work-in-Progress.
Before the CIT(A), the assessee contended that the amounts paid to certain parties had been capitalised as Work-in-Progress and had not been debited to the Profit & Loss Account or claimed as expenditure. The CIT(A) deleted the disallowance on this basis.
The Revenue challenged the deletion before the ITAT, raising grounds concerning the applicability of Section 40(a)(ia) to payments towards architectural fees and construction, including whether the provision applied irrespective of whether the expenditure was capital or revenue in nature.
Before the Tribunal, the learned Senior Departmental Representative relied on the assessment order. It was, however, admitted that the impugned amount had neither been debited to the Profit & Loss Account nor claimed as expenditure. The assessee’s Senior Authorised Representative supported the CIT(A)’s order.
The ITAT considered Section 40(a)(ia), which provides for non-deduction of the specified amount in computing income under the head “Profits and gains of business or profession” where tax deductible under Chapter XVII-B has not been deducted or paid within the prescribed time.
The Tribunal noted that the assessee had neither debited the payments to the Profit & Loss Account nor claimed them as a deduction while computing profits and gains of business. The amounts had instead been capitalised and disclosed as long-term assets in the Balance Sheet. The Tribunal therefore held that the impugned payments were outside the ambit of Section 40(a)(ia).
The Tribunal also noted the CIT(A)’s observations concerning the assessee’s business activity. The Profit & Loss Statement showed zero operating income and no expenses other than minimal administrative expenses, while the amounts spent for construction had been capitalised. The assessee did not claim depreciation on the fixed assets.
The Tribunal further recorded that the amounts paid to M/s Studio Mumbai Architecture & Design Pvt. Ltd. and M/s BAP Constructions Pvt. Ltd. had been disclosed by those parties in their financial statements and offered for tax. The assessee had treated the payments as capital expenditure.
The Tribunal observed that proceedings concerning non-deduction of tax at source were separate from proceedings under Sections 143(3) or 144. According to the Tribunal, Section 40(a) operates as an additional measure for enforcing compliance with Chapter XVII-B by disallowing expenditure otherwise allowable under the Act. Therefore, a disallowance under Section 40(a) arises where an expenditure is claimed by the assessee without deducting tax at source as required under Chapter XVII-B.
Since the payments in question had not been debited to the Profit & Loss Account or claimed as revenue expenditure, but had been capitalised as Work-in-Progress, the Tribunal held that the Assessing Officer’s disallowance of Rs.4,23,87,490 from Work-in-Progress was an incorrect application of law.
The ITAT found no infirmity in the CIT(A)’s decision and upheld the deletion of the disallowance. The Revenue’s appeal was dismissed. The order was pronounced in the open court on 23 October 2024.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeal has been filed by the Revenue which emanates from the appellate order passed by the Ld.CIT(A)/ National Faceless Appeal Centre (NFAC), Delhi, with regard to the assessment order passed under section 143(3) of the Income Tax Act 1961, (in short ‘the Act’) for the A.Y. 2013-14.
2. The Revenue has raised following grounds of appeal :
“1. On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) is correct in deleting the disallowance u/s. 40a(ia) on account of failure to deduct TDS towards payments made on account of architectural fees and construction?
2. On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) is correct in deleting the disallowance u/s. 40a(ia) made by the AO on account of failure to deduct TDS towards “payments” irrespective of whether it is capital or revenue expenses?
3. On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) is correct in deleting the disallowance u/s. 40a(ia) made by the AO towards failure to deduct TDS towards “payments” as Legislature has used the word “payments” as per provisions of section 194C and 194J of the 1.T. Act, 1961.
4. On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) is correct in deleting the disallowance u/s. 40a(ia) made by the AO towards failure by the assessee, as provisions of section 40a(ia) uses the words “on which tax is deductible at source under Chapter XVIIB and such tax has not been deducted or, after deduction, has not been paid” and accordingly, AO rightly made disallowance u/s. 40a(ia).”
3. Facts of the case are that the assessee company engaged in development of land and buildings has filed its return of income declaring total income at loss of Rs.6,04,397/-. Subsequently, assessment was completed u/s 143(3) of the Act, assessing the loss at Rs.6,04,397/- by making a disallowance u/s 40(a)(ia) of Rs.4,23,87,490/- on account of amount debited to Capital Work in Progress. Before the ld.CITA),the assessee pleaded that the Ld. Assessing Officer, invoked Section 40(a)(ia) of Act and disallowed the amounts paid to certain parties. He disallowed and reduced the Capital Work in Progress by the amount paid aggregating Rs. 4,23,87,4907/- working out the Capital WIP to be Rs. 48,03,344/-instead of Rs. 4,71,90,834/- as disclosed in the Balance Sheet.He erred in invoking Section 40(a)(ia) and disallowing the Capital WIP.
3.1 The ld.CIT(A) deleted the above addition on the ground that the assessee did not claim any deduction of the expenditure which were capitalized in the books as work-in-progress. The impugned sum was not debited to the profit and loss account.
4. Before us, the learned Sr.DR relied on the assessment order. However, it was admitted that the impugned amount was not debited to the profit and loss account and was also not claimed as expenditure. Per contra, the ld,Sr.AR pleaded that the provisions of section 40(a)(ia) were not applicable and the ld.CIT(A) rightly deleted the addition.
5. We have carefully considered the issue in hand, respective contentions as also the position of law in this regard. It would be relevant to reproduce the relevant provisions of the section which is as below:
40. Amounts not deductible.
Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,-(a) in the case of any assessee- (ia) “Thirty percent of any sum payable to a resident” 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;
5.1 Plain reading of the section makes it clear that no deduction could be made under Sections 30 to 38 while computing the profits and gains of business if TDS has not been deducted. In the present case, it is undisputed fact is that the assessee has neither debited the amount paid to the Profit & Loss Statement nor claimed the amounts paid as a deduction while computing the profits & gains of business. The above amounts have been capitalised and disclosed under long term assets in the Balance Sheet. Therefore, it is apparent that the impugned sum paid is outside the ambit of Section 40(a)(ia). The ld.CIT(A) has also examined the issue in the light of the business activity of the assessee by observing that the assessee is not engaged in business activity. The Profit & Loss statement indicates a zero operating income for the assessee. There are no expenses debited to the Profit & Loss Statement, except minimal administrative expenses. The amount spent for constriction he has been capitalised by the assessee. Since the assessee does not have any business activity, it does not claim any depreciation on the fixed assets.
Hence, there is no deduction of the amounts paid within the ambit of sections 30 to 38. The amounts paid to the two parties M/s Studio Mumbai Architecture & Design Pvt. Ltd. and M/s BAP Constructions Pvt. Ltd. Besides, the amounts paid to them have been disclosed by them in their financial statements and have been offered for tax. Hence, there is no loss of revenue on account on non- deduction of TDS by the asessee. The assessee has treated the amount as a capital expenditure. Hence, the treatment given by the AO is not in line with the provisions of Section 40(a)(ia).
5.2 In the instant case, the amounts in question were not debited to P&L account and not claimed as revenue expenditure by the assessee which capitalized it the books as Work-In-Progress. Whether the assessee may be subject to any proceeding under the Act for non- deduction of tax at source, is not a subject matter of proceeding under section 143(3) or 144 of the Income Tax Act and it is altogether separate proceedings under that chapter. The provision of section 40(a) is only an additional measure to enforce the compliance of Chapter XVIIB of the Act, by disallowing an expenditure which is otherwise allowable under the provisions of the Act. Therefore, the question of disallowance under section 40(a) arises only when an expenditure is claimed by the assessee without deducting the tax at source as per the provisions of Chapter-XVIIB of the Act. Hence, the action of the ld.AO in disallowing the amount of Rs.4,23,87,490/- from WIP is patently incorrect application of law and was rightly deleted by the ld.CIT(A).Finding no infirmity in his decision, we uphold the deletion.
6. In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 23.10.2024.
