M.V.A. Seetharama Raju Vs DCIT (ITAT Chennai)
ITAT Chennai held that if TDS is deducted by applying wrong provisions or at lower rates, the sum paid cannot be disallowed attracting provisions of section 40(a)(ia) of the Income Tax Act.
Facts-
During the year under consideration, the assessee had entered into agreements for supply of iron ore with various companies, however, the assessee could not supply iron ore to his customers as agreed due to Supreme Court order banning mining licenses. As per contractual terms with his customers, the assessee has agreed to pay penalty for cancellation of contracts for non-supply of iron ore, as per which it has debited a sum of Rs.2,40,50,000/- as compensation for termination of contract. The assessee has made payments after deducting TDS @ 2% as applicable to contractors and subcontractors u/s.194C of the Income Tax Act, 1961. However, compensation paid by the assessee for breach of contract is in the nature of interest which attract TDS as per provisions of section 194A of the Act @ 10%, but not TDS @ 2%. Therefore, after considering relevant facts, the Assessing Officer has worked out TDS deducted by the assessee @ 2% and assumed that the assessee has only deducted TDS on 20% of amount debited into profit & loss account and thus, balance 80% of Rs.1,92,40,000/- has been disallowed u/s.40(a)(ia) of the Act, for non-deduction of tax at source u/s.194A of the Income Tax Act, 1961.
CIT(A) dismissed the appeal. Being aggrieved, the present appeal is filed.
Conclusion-
Hon’ble Calcutta High Court in the case of CIT Vs. S.K. Tekriwal has held that where the assessee deduct TDS at lower rates or under wrong provisions of TDS, provisions of section 40(a)(ia) of the Act cannot be invoked. In this case, there is no doubt with regard to compliance of TDS provisions by the assessee, because, the assessee has deducted TDS @ 2% as applicable to contractors / sub-contractors u/s.194C of the Act. Therefore, we are of the considered view that once any payment made by the assessee which is covered under the provisions of section 40(a)(ia) of the Act is subjected to TDS, then even if, the assessee has deducted TDS by applying wrong provisions of the Act or at lower rates, then sum paid by the assessee cannot be disallowed u/s.40(a)(ia) of the Act, on the ground that the assessee has deducted TDS at lower rates or under wrong TDS provisions of the Act. The Assessing Officer as well as the learned CIT(A), without appreciating facts has simply disallowed compensation paid by the assessee for breach of contract u/s.40(a)(ia) of the Act. Hence, we direct the Assessing Officer to delete additions made towards disallowance of expenses u/s.40(a)(ia) of the Act.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal filed by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-2, Chennai, dated 25.01.2019 and pertains to assessment year 2013-14.
2. The assessee has raised following grounds of appeal:-
“1) The order of the Assessing officer is contrary to the law, facts and circumstances of this case, irrational and unfair.
2) It is a prima facie case of high-pitched assessment, nonobservance of principles of natural justice and non-application of mind.
3) This high-pitched scrutiny assessment not only reflects harassment of taxpayers but also leads to generation of unproductive work for department as well as appellate authorities.
4) The learned Assessing Officer erred in disallowing the Foreign Travel Expenses on his own imaginary explanation which is totally contrary to the explanation given by the Assessee during the scrutiny proceedings.
5) The learned Assessing Officer erred in disallowing the Contract Cancellation Charges paid as penalty for breach of Contract, without considering the TDS provisions of the Income Tax Act, which is contrary to the law, facts and circumstances of this case.
6) The courts have held that under Section 40(a)(ia) of the Act there should be legal liability to deduct the tax under Chapter XVII. If there is no such liability to deduct TDS, then the provisions of Section 40(a)(ia) of the Act cannot be invoked.
7) With a view to liberalize provisions of Section 40(a)(ia) of the Act, Finance Act 2012 brought amendment with effect from 01.042013 as under:
