If defects in Form 15H are curable then AO to provide opportunity to the Assessee before making any disallowance for non deduction of TDS

Industrial Thermoplastics Vs ITO (ITAT Mumbai) –  Whether the dis allowance is warranted u/s 40(a)(ia) for non-deduction of tax on interest payment by the assessee to a concern covered u/s 40A(2) though the assessee has explained that there is no taxable income of the corporation and the defects in Form 15H are curable and cannot be considered without giving an opportunity to rectify the defects. – Assessee’s appeal allowed.

IN THE INCOME TAX APPELLATE TRIBUNAL

“I” Bench, Mumbai

ITA No. 420/Mum/2010 (Assessment Year: 2005-06)

M/s. Industrial Thermoplastics  Vs. Income Tax Officer

ORDER

Per D.K. Agarwal, J.M.

This appeal preferred by the assessee is directed against the order dated 05.10.2009 passed by the learned Commissioner of Income Tax (Appeals) [CIT(A)] for A.Y. 2005-06.

2. Briefly stated facts of the case are that the assessee firm is engaged in the business of job work in respect of printing on aluminum foils, field return declaring an income of 98,710/-. During the course of assessment proceedings it was inter alia observed by the (Assessing Officer (A.O.) that the assessee has claimed interest payment of 10,50,693/- paid to M/s Modi Finance Corporation, which is shown in the Tax Audit Report as person covered under section 40A(2)(b) of the Income Tax Act, 1961 (the Act). The assessee was asked to justify the interest claim. In response, the assessee submitted that the interest was paid at 18% which is at the prevailing market rate and such payment is not made for the first time and paid in the past also, which has been allowed. The A.O., after considering assessee’s submissions, observed that the assessee has not paid any interest in the last three financial years to the said party and credited interest component to the principal amount of loan and further interest on interest credited year after year. The fact that the lender is covered under section 40A(2)(b) and related to the assessee, the accounting treatment giving to the loan and interest and non payment of interest to the said party and instead, converting the same to further loan is nothing but diversion of income to group concern where other family members of the assessee are interested. Assessee was therefore, asked to explain as to why the same should not be treated as diversion of income. In reply, it was stated by the assessee that this is an independent entity. However, the A.O. in the absence of any material on record to prove the reasonableness and its allow ability under the Act, treated the amount of interest of 10,50,693/- as unexplained expenditure within the meaning of section 69C of the Act. Without prejudice to the above, the A.O. further observed that the assessee was asked to submit the details of TDS made as required under section 194A of the Act on the interest payment of 10,50,693/-. The assessee was also asked to show cause as to why the said amount should not be disallowed under section 40a(ia) of the Act in case of non-compliance of TDS provisions. In response, the assessee furnished details of interest claimed but no TDS has been made as the said party has submitted Form No. 15H for non-deduction of tax at source. The A.O. observed from the copy of Form No. 15H that the said declaration was furnished to the assessee by the declarant on 3 1.03.2005. The verification part of the said form is not signed. Further, the part of the said declaration which is to be filled in by the person to whom the declaration is furnished is made is filled in and signed by M/s. Modi Finance Corporation itself and not by the assessee as a deductor. Moreover, this part of Form No. 15H is filled in only on 30.06.2005. As per section 197 r.w. relevant rules such declaration required to be furnished to the concerned CIT by the deductor within 7 days of from the end of the month in which the declaration is received. Assessee as a deductor did not furnish any proof on record so as to establish that the said declaration was in fact forwarded to the respective Commissioner of Income Tax. Therefore, the act of the assessee as a deductor in violation of section 197 renders the declaration filed by the deductee invalid. Accordingly the assessee is liable for deduction of tax at source on this interest expense of 10,50,693/- which the assessee failed to do so. Therefore, the A.O. disallowed the amount of interest within the meaning of section 40(a)(ia) of the Act. Since the A.O. has already made addition of the said amount under section 69C, therefore, he did not make any separate addition on this account.

3. On appeal, the learned CIT(A), on the issue of dis allowance under section 69C of the Act observed that as per provisions of section 36(1)(iii), if the borrowed money is used for business purposes the interest is to be allowed as revenue expenditure. This expenditure is allowed to the assessee from year to year in its earlier assessment years. Therefore, he held that the A.O. was not justified in invoking provisions of section 69C of the Act while disallowing assessee’s claim of interest. With regard to the alternate ground for making the dis allowance under section 40a(ia) of the Act, the learned CIT(A) observed that M/s. Modi Finance Corporation to whom the assessee has paid interest is a private discretionary trust having four beneficiaries, viz., Shri Vibha K. Modi (30%), Master Dhrunit K. Modi (25%), Kalpesh D. Modi (HUF) (25%) and Shri Dhirajlal L. Modi (HUF) (20%) and its income before allocation to the various beneficiaries as per its income and expenditure account for the relevant assessment year is 19,36, 127/- and the said concern is assessed as AOP in its total income before allocation to the beneficiaries is more than the minimum taxable limit. Therefore, the very basis of filing of Form No. 15H by M/s. Modi Finance Corporation is incorrect. The learned CIT(A), while agreeing with the Assessing Officer’s views pointing out various defects and deficiencies in Form No. 15H held that since the assessee has not deducted the tax at source as required under section 194A of the Act, the A.O. was justified in invoking provisions of section 40a(ia) of the Act and accordingly he confirmed the dis allowance made by the A.O.

4. Being aggrieved by the order of the CIT(A) the assessee is in appeal before us.

5.  Ground Nos. 1 & 2 read as under: –

“1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not allowing the interest or Rs. 10,50,612/- by invoking the amended provisions of section 40(a)(ia) of the I. T. Act as no TDS is deducted by the appellant on the payment of interest made to M/s. Modi Finance Corporation as From No.15-H is not submitted.

2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not accepting the fact that the appellant firm has received the From 15-H.”

6. At the time of hearing the learned counsel for the assessee at the outset submits that there is no dispute that the interest of 10,50,612/- was paid by the assessee to M/s. Modi Finance Corporation, a private determinate trust, and in support, the assessee has also filed confirmation of accounts from the said Trust. He further submits that M/s. Modi Finance Corporation has filed its return of income at Nil income in the status of AOP on 10.08.2005 wherein it was mentioned that the income is to be shared among the beneficiaries as under: –

In support, he also placed on record a copy of acknowledgement of the return, statement of total income, income and expenditure account, balance sheet as on 31.03.2005 and details of interest received and paid of M/s. Modi Finance Corporation appearing on page No. 4 to 9 of assessee’s paper book. He further submits that all the beneficiaries, namely, Shri Vibha K. Modi, Master Drumil K. Modi (Minor) whose income was included in the return of Kalpesh D. Modi, Kalpesh D. Modi (HUF) and Shri Dhirajlal L. Modi (HUF) have also filed their income tax returns separately wherein they have included the share of benefits from M/s. Modi Finance Corporation and have paid advance tax on their total income including the amount received as share of benefit from M/s. Modi Finance Corporation and in some cases refund on the excess advance tax paid by them was also claimed. In support he also placed on record a copy of the acknowledgement of return, statement of total income, balance sheet as on 31.03.2005 and copy of capital account, income and expenditure account of all the four beneficiaries appearing on page No. 10 to 32 of assessee’s paper book. In the light of the above documentary evidence he submits that since the beneficiaries have shown the respective income received from AOP in their income tax returns and have paid due tax thereon, therefore, the assessee has made due compliance of provisions of section 194A r.w.s. 197A of the Act and, therefore, the A.O. and the learned CIT(A) have erred in invoking the provisions of section 40a(ia) of the Act. He, therefore, submits that the addition made by the A.O. and sustained by the CIT(A) be deleted. In the alternative he submits that since the issue has not been examined in the light of the above submissions despite the fact that the assessee has filed all the relevant material appearing at page 65 to 93 of the assessee’s paper book before the learned CIT(A), therefore, in the interest of justice the issue may be set aside to the file of the A.O.

7. On the other hand the learned D.R., while relying on the orders of the A.O. and the CIT(A), further submits that the assessee has taken a new plea which was not taken before the A.O. and the learned CIT(A), therefore he has no objection if the issue is set aside to the file of the A.O.

8. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as it is also not in dispute that against the payment of interest paid to M/s. Modi Finance Corporation the assessee has filed Form No. 15H issued by M/s. Modi Finance Corporation showing that the income of the Trust is not taxable. We further find that the A.O. after pointing out certain defects and deficiencies in Form No. 15H held that the act of the assessee as a deductor in violation of section 197 requires the declaration filed, if any, by the deductee invalid. We further find that the learned CIT(A) on the contrary, held that it is not established that the appellant or M/s. Modi Finance Corporation ever filed the said declaration as required under section 197A(1) of the Act. We further find that the assessee in the paper book at page 4 to 9 has filed copy of the return of M/s. Modi Finance Corporation alongwith its statement of total income, income and expenditure account, balance sheet and details of interest and rent received and paid to show that the income of M/s. Modi Finance Corporation is nil. The Revenue has brought no material on record to show that the income of M/s. Modi Finance Corporation is taxable. We further find that the assessee has filed copy of acknowledgement of return, statement of total income, income and expenditure account, balance sheet and copy of capital accounts of all the beneficiaries to show that they have paid tax on their income including the income received from the AOP. Further, there is no material on record to show as to whether the above evidences filed by the assessee have been considered by the Revenue authorities or after considering the same was rejected. Since there is a contradiction on the facts, namely, according to the learned CIT(A) the total income of M/s. Modi Finance Corporation before allocation to the beneficiaries is more than the minimum taxable limit whereas according to the assessee the said AOP has filed its return of nil income and he has not received any order wherein the income shown as nil has been assessed as taxable income and keeping in view that the defects pointed out by the A.O. in Form No. 15H given by the M/s. Modi Finance Corporation and filed by the assessee are curable defects and no opportunity was provided to the assessee to remove those defects, therefore, we are of the view that in the interest of justice the matter should go back to the file of the A.O. and accordingly we set aside the orders passed by the Revenue authorities on this account and send back the matter to the file of the A.O. who shall decide the same afresh in the light of our observations hereinabove and according to law after providing reasonable opportunity of heard to the assessee. The grounds taken by the assessee are, therefore, partly allowed for statistical purposes.

9.  In the result, assessee’s appeal stands partly allowed for statistical purposes.

Order pronounced in the open court on 18th February 2011.