No S. 40(a)(ia) Disallowance for non deduction of TDS on Salary Reimbursement to Sister concerns

HIGH COURT OF BOMBAY

Commissioner of Income-tax-II

versus

OCB Engineers

J.P DEVADHAR AND M.S. SANKLECHA, JJ.

IT APPEAL LODGING NO. 2026 OF 2012

MARCH 7, 2013

JUDGMENT

1. Office objections waived.

2. In this appeal by the revenue for assessment year 2007-08 following questions of law have been raised for our consideration.

(a) Whether on the facts and circumstances of the case and in law the Tribunal erred in holding that payments to sister concerns have been incurred for services rendered without appreciating that the Commissioner of Income Tax (Appeals) has specifically looked at the reason ability of quantum and tax implication of the payments made 40A(2)(a) for the first time by the assessee in the assessment year under consideration?

(b) Whether on the facts and circumstances of the case and in law the Tribunal erred in holding that there was no complexion of tax evasion without considering the overall tax implication of both the payer and payee as envisaged in Commissioner of Income Tax v. Glaxo Smithkline Asia (P) Ltd. reported in 290 ITR 35(SC)?

(c) Whether on the facts and circumstances of the case and in law the Tribunal erred in holding that invocation of Section 40(a)(ia) was not correct even when the payments were made for services which were of technical and professional nature and on which tax was deductible at source under Chapter XVII-B of the Act?

(d) Whether on the facts and circumstances of the case the Tribunal erred in affirming the order of the Commissioner of Income Tax (Appeals) without appreciating the fact that the assessee had lesser amount of interest free funds available than advanced as interest free?

3. So far as question (a) is concerned, the respondent assessee was interalia engaged in the business of execution of contracts for erection and commissioning of plants. The Assessing officer disallowed an amount of Rs.16.86 lacs paid by way of reimbursement to sister concerns for payment of salaries to their employees as they were deputed to the respondent assessee. This was disallowed under Section 40(a)(ia) of the Income Tax Act, 1961 (“the Act”) for failure to deduct tax. In appeal, the CIT(A) upheld the order of the Assessing officer. On further appeal the Tribunal by the impugned order has rendered a finding of fact that the payments made by the respondent assessee to its sister concerns was reimbursement for the salaries of the employees who have been deputed by the sister concerns to work with the respondent assessee. The impugned order records that it is not the case of the revenue that the assessee had made any payment for consideration extraneous to any allegation that the amounts paid to its sister concerns were over and the above the salaries due to the employees. In the circumstances, the Tribunal concluded that the expenditure was incurred for salaries and thus no occasion to invoke Section 40(a)(ia) of the Act can arise. Since the decision of the Tribunal is essentially based on a finding of fact we see no reason to entertain question (a).

4. So far as question (b) is concerned, Counsel for the revenue states that question (b) is facet of question (a) which we have already discussed. In view of the above question (b) does not arise independently for our consideration.

5. So far as question (d) is concerned the Assessing officer disallowed interest expenditure of Rs.14.56 lacs as the respondent assessee had made interest free advances for non business purposes under Section 36(1)(iii) of the Act. In appeal revenue, the Tribunal upheld the finding of fact of the CIT(A) that no advances for non business purposes had been made by the respondent assessee. It further applied the decision of this Court in the matter of CIT v. Reliance Utility & Powers Ltd. [2009] 313 ITR 340 to hold that the respondent was in possession of its own interest free funds to the extent of Rs.72 lacs. Therefore, it has to be presumed that interest free advances have been made out the same. As the decision of the Tribunal is based on a finding of fact and the decision of this Court in the matter of Reliance Utility & Powers Ltd (supra), we see no reason to entertain question (d).

6. The appeal is admitted on question (c)