No disallowance u/s. 40(a)(ia) as reimbursement of expense considered as receipts and tax paid thereof

Crisil Limited Vs ACIT (ITAT Mumbai)

ITAT Mumbai held that disallowance under section 40(a)(ia) of the Income Tax Act unjustified when reimbursement of expenses is considered as receipts in total income and tax is paid on the same therefore no disallowance in terms of proviso to section 201.

Facts- In this case original assessment was made u/s.143(3) vide order dated 13/03/2015, wherein, the addition of Rs. 1,07,51,004/- was made u/s.40(a)(ia) of the Act for non-deduction of tax at source for payments made to Crisil Ltd., which was in the nature of reimbursement of expenses.

AO confirmed the disallowance of Rs.74,57,621/-however deleted the addition / disallowance of Rs.32,93,383/-which was as per the direction of the Tribunal was towards reimbursement of expenditure wherein, no TDS provision would apply.

CIT (A) despite the fact that ld. AO was passing order giving effect to the ITAT order which was set aside to him after making observations and addition of Rs.32,93,383/- was directed to be deleted because it related to expenses where no TDS provision was applicable, he not only upheld the addition made by the AO but also further enhanced it by making the disallowance of Rs.32,93,383/- without providing any opportunity or notice of hearing to the assessee.

Conclusion- Held that, on none of the payments, the provision of TDS would apply because they are directly incurred for the purpose of business. Nowhere, any such expenses entail provision for deduction of TDS under the Act, therefore, no disallowance can be made with respect to expenditure of Rs.32,93,383/- which has been reimbursed by the assessee to Crisil Limited.

Held that these are reimbursement of expenses towards common expenses such as rent, electricity, repairs and maintenance, postage, printing and stationery, staff welfare, telephone, internet charges, etc. and did not contain any mark up on cost. Primafacie, no tax is deductible at source on most of the payments. At the most TDS is deductible on these payments/ expenses relating to rent expenses of Rs.13,38,133/- and salary expenses of Rs. 23,18,598/-, however it has been stated that, firstly, it is reimbursement of expenses; and secondly, Crisil Ltd., has considered such receipts in its total income and has paid the tax due thereof and furnished the return of income. For this purpose, copy of certification of Chartered Accountant in Form 26A confirming that Crisil Limited has considered such receipts in its total income, paid the tax thereon and furnished the return of income, then no disallowance can be made u/s. 40(a)(ia), the copy of Form 26A has been placed in the paper book before us at page 11-15. We find that this Form 26A was also filed before the ld. CIT(A) alongwith the submission dated 30/10/2019. Once Form 26A has been filed and Chartered Accountant has confirmed that M/s. Crisil Limited has considered the said receipts in total income and has paid the tax thereof and furnished the return of income, then no disallowance u/s.40(a)(ia) can be made in view of the proviso to Section 201.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The aforesaid appeal has been filed by the assessee against order dated 31/03/2024 passed by NFAC, Delhi for the quantum of assessment passed u/s. 143(3) r.w.s. 254 for the A.Y.2012-13.

2. In various grounds of appeal assessee has challenged disallowance of Rs.1,07,51,004/- u/s. 40(a)(ia) which pertains to reimbursement of expenses made to Crisil Limited on account of non-deduction of tax at source.

3. The brief facts are that, in this case original assessment was made u/s.143(3) vide order dated 13/03/2015, wherein, the addition of Rs. 1,07,51,004/- was made u/s.40(a)(ia) of the Act for non-deduction of tax at source for payments made to Crisil Ltd., which was in the nature of reimbursement of expenses.

4. In the first appeal ld. CIT (A) vide his order dated 18/10/2016, deleted the said disallowance and decided the issue in favour of the assessee. Aggrieved by the said order, Revenue preferred an appeal before the Tribunal and the Tribunal vide order dated 12/02/2019 restored the matter to the file of the ld. AO for verification of the assessee’s claim following the decision of the Hon’ble Tribunal in assessee’s own case for A.Y.2008-09. In the set aside proceedings assessee in response to the notice dated 28/05/2019, filed various replies and in sum and substance, the submissions of the assessee were as under:-

a. The reimbursement of expenses were towards common expenses such as rent, electricity, repairs and maintenance, postage, printing and stationery, staff welfare, telephone, internet charges, etc. and did not contain any mark up on cost. Therefore, no tax is deductible at source on such payments.

b. Since Crisil Limited had considered such receipts in its total income, paid the tax due thereon and furnished the return of income, the Appellant shall not be deemed to be an assessee in default under section 201 of the Act. As a result, the disallowance for non- deduction of tax under section 40(a)(ia) of the Act will not be tenable.

5. The ld. AO, however without considering any submissions made by the assessee and without giving any opportunity of hearing, the ld. AO confirmed the disallowance of Rs.74,57,621/-however deleted the addition / disallowance of Rs.32,93,383/-which was as per the direction of the Tribunal was towards reimbursement of expenditure wherein, no TDS provision would apply.

6. The ld. CIT (A) despite the fact that ld. AO was passing order giving effect to the ITAT order which was set aside to him after making observations and addition of Rs.32,93,383/- was directed to be deleted because it related to expenses where no TDS provision was applicable, he not only upheld the addition made by the AO but also further enhanced it by making the disallowance of Rs.32,93,383/- without providing any opportunity or notice of hearing to the assessee. He held that even if it is a reimbursement to a parent company, TDS is deductible and disallowance has to be made. The ld. CIT (A) has not even considered that assessee has filed Form 26A before the ld. AO that the Crisil Limited has already shown it as income wherever the payment related pertain to income and therefore, in terms of proviso to Section 201, no disallowance u/s.40(a)(ia) can be made. Ld. CIT (A) has not even elaborated as to how certain expenditure incurred for the purpose of business false in the category of payment in nature of income.

6. We have heard both the parties, perused the relevant finding given in the impugned order as well as material referred to before us. First of all from the perusal of the break-up of Rs.1,07,00,000/-, it is seen that the disallowance has been made in the following three categories:-

7. The details of expenditure of Rs.32,93,383/- are as under:-

Details of Reimbursements towards expenditure, where even if the assessee would have had directly incurred such as expenditure, the provisions of TDS would not apply

8. Perusal of these expenditures it can be seen that, on none of the payments, the provision of TDS would apply because they are directly incurred for the purpose of business. Nowhere, any such expenses entail provision for deduction of TDS under the Act, therefore, no disallowance can be made with respect to expenditure of Rs.32,93,383/- which has been reimbursed by the assessee to Crisil Limited.

9. In so far as service tax component with respect to reimbursement of expenditure of Rs.10,03,947/-, there is a CBDT Circular No.1 of 2024 dated 13/01/2014 wherein, it has been stated that no taxes are required to be deducted on the service tax component. The relevant extract of the Circular reads as under:-

“In exercise of the powers conferred under section 119 of the Act, the Board has decided that wherever in terms of the agreement/contract between the payer and the payee, the service tax component comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Act on the amount paid/payable without including such service tax component.”

10. Thus, no TDS is required to be deducted on the service tax component and the same is deleted.

11. Coming to the balance reimbursement of expenditure of Rs.64,53,674/-, it is seen from the records that these are reimbursement of expenses towards common expenses such as rent, electricity, repairs and maintenance, postage, printing and stationery, staff welfare, telephone, internet charges, etc. and did not contain any mark up on cost. Primafacie, no tax is deductible at source on most of the payments. At the most TDS is deductible on these payments/ expenses relating to rent expenses of Rs.13,38,133/- and salary expenses of Rs. 23,18,598/-, however it has been stated that, firstly, it is reimbursement of expenses; and secondly, Crisil Ltd., has considered such receipts in its total income and has paid the tax due thereof and furnished the return of income. For this purpose, copy of certification of Chartered Accountant in Form 26A confirming that Crisil Limited has considered such receipts in its total income, paid the tax thereon and furnished the return of income, then no disallowance can be made u/s. 40(a)(ia), the copy of Form 26A has been placed in the paper book before us at page 11-15. We find that this Form 26A was also filed before the ld. CIT(A) alongwith the submission dated 30/10/2019. Once Form 26A has been filed and Chartered Accountant has confirmed that M/s. Crisil Limited has considered the said receipts in total income and has paid the tax thereof and furnished the return of income, then no disallowance u/s.40(a)(ia) can be made in view of the proviso to Section 201. Accordingly, the entire disallowances confirmed by the ld .CIT(A) is deleted.

12. In the result, appeal of the assessee is allowed.

Order pronounced on 9t^h January,2025.