ITAT Restored Case to AO Regarding TDS Applicability u/s 194A on Financial Charges Paid for Car Loan

Samir Synthetics Mills Vs DCIT (ITAT Ahmedabad)

The issue under consideration is whether the disallowance u/s 40(a)(ia) is justified for non deduction of TDS u/s 194A on financial charges paid for car loan?

ITAT states that they have perused the provisions of section 194A of the Act pertaining of deduction of tax on payment of interest other than interest on securities. The Ld. counsel has neither demonstrated how the financial charges paid for car loan are not covered u/s. 194A of the Act , nor pointed out any specific exception prescribed in section 194(3) of the Act under which the payer of the interest on car loan was covered. However, the alternative contention of the ld. counsel that no TDS to be made if the payee has paid tax as per proviso to section 40(a)(ia) and the judicial pronouncements referred in his submission and the claim that payment made to Navin Tradelink Pvt. Ltd. was towards reimbursement of expenses are required to be considered after examination and verification of the relevant material. Therefore, ITAT restore both the issues as supra to the file of the assessing officer for deciding afresh after examination/verification of the relevant material to be furnished by the assessee at the time of set aside proceedings. Accordingly, this ground of appeal of the assessee is allowed for statistical purposes.

FULL TEXT OF THE ITAT JUDGEMENT

This assessee’s appeal for A.Y. 2010-11, arises from order of the CIT(A)-3, Ahmedabad dated 02-02-2016, in proceedings under section 143(3) of the Income Tax Act, 1961; in short “the Act”.

2. The assessee has raised following grounds of appeal:-

“1. The Ld. C.I.T. (A) has erred in dismissing the appeal preferred by the Appellant in regard to the disallowance made by the A.O. u/s 14A amounting to Rs.5,13,516/- by following the judgement of Hon. Mumbai ITAT in the case of HDFC Ltd.

1.1 It is submitted and contended that the Ld. C.I.T. (A) ought not to have dismissed” referred ground of appeal but ought to have allowed the appeal of the Appellant in view of detailed facts and submission made before him.

2. The Ld. C.I.T.(A) has erred in dismissing the appeal preferred by the Appellant against the disallowance of depreciation on Motor Cars amounting to Rs.l,98,672/-made by the A.O.

2.2 It is submitted and contended that the Ld. C.I.T. (A) ought not to have dismissed the above referred ground of appeal but ought to have allowed the appeal of the Appellant in view of detailed facts and submission made before him.

3. The Ld. C.I.T. (A) has erred in dismissing the appeal preferred by the Appellant against the disallowance made by the A.O. u/s 40(a)(ia) amounting to Rs. 7,34,456/-.

3.1 It is submitted and contended that the Ld. C.I.T. (A) ought not to have dismissed the above” referred ground of appeal but ought to have allowed the appeal of the Appellant in view of detailed facts and submission made before him.

4. The Ld. C.I.T. (A) has erred in dismissing the appeal preferred by the Appellant against the disallowance made by the A.O. u/s 36(1)(iii) amounting to Rs. 3,49,216/-.

4.1 It is submitted and contended that the Ld. C.I.T. (A) ought not to have dismissed the above referred ground of appeal but ought to have allowed the appeal of the Appellant in view of detailed facts and submission made before him.

Under the facts and circumstances of the case, the order of the C.I.T.(A) confirming the disallowance as referred above is requested to be set-aside and appeal of the Appellant may kindly be allowed.”

3. The fact in brief is that assessee has filed return of income disclosing income at nill on 27^th Sep, 2010. Subsequently, the case was selected under scrutiny and issued notice u/s. 143(2) of the act on 31^st August, 2011. The remaining facts of the case are discussed as under:

Ground No. 1 (Disallowance u/s. 14A amounting to Rs. 5,13,516/-)

4. At the time of assessment, the assessing officer noticed that assessee has earned exempt income. On query , the assessee explained that they have earned dividend income of Rs. 2,48,183/- and this dividend income was earned from the investment made in shares/MF in the past years and no new investment was made during the year. It was further stated that whatsoever investment was made, it was made out of internal accrual or non-interest bearing fund. The assessee has given working of inadmissible amount u/s. 14A to the amount of Rs. 43,634/- for disallowance u/s. 14A of the Act. The assessing officer has not accepted the explanation of the assesse stating that assessee has given only general explanation and not submitted any proof or specific explanation to demonstrate that investment made out of interest free fund and there was no diversion of interest bearing funds for non-business purposes. Therefore, the assessing officer has computed the disallowance u/s. 14A to the amount of Rs. 5,13,516/- u/s. 14A r.w. rule 8D of the I.T. Act.

5. The assesse has filed appeal against the decision of ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee reiterating the facts reported by the assessing officer.

Ground No. 2 ( Depreciation of Motor Car expenses of Rs. 1,98,672/-)

6. At the time of assessment, the assessing officer noticed that assessee has made disallowance of Rs. 20,000/- out of motor car expenses, however, no proportionate disallowance has been made out of depreciation claimed on motor car. The assessing officer has stated that the assessee has treated the part of motor car expenses as pertained to non-business purposes, therefore, the proportionate disallowance of depreciation @ 20% to the amount of Rs. 1,98,672/- was disallowed after attracting provision of section 38(2) of the Act.

7. The assesse has filed appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal stating that assessee could not substantiate that motor car has been exclusively used for business purposes.

Ground No. 3 ( Disallowance of Rs. 7,34,456/- u/s. 40(a)(ia) of the Act)

8. During the course of assessment, the assessing officer asked the assessee to furnish detail of interest paid on car loan and TDS deducted thereupon and further to explain if TDS has not been deducted on such interest paid then why the said interest should not be disallowed u/s. 40(a)(ia) of the Act. The assessee explained that no TDS on interest paid of Rs. 5,51,159/- on car loan was deducted since the amount of monthly EMI determined by the car loan provider was inclusive of principal + interest amount secured by way of post dated cheque presented every month for a clearance on stipulated date. The assessing officer has not accepted the explanation of the assessee and disallowed interest of Rs. 5,51,159/- paid on car loan u/s. 40(a)(ia) of the Act. The assessing officer has also noticed that the assessee has paid sum of Rs 3,54,746/- on account of handling expenses to Mr. Naveen Trade Link Pvt. Ltd. without deduction of tax. The assessing officer was of the view that since the provision of section 194C has been brought on statute by the Finance Act, 2009, therefore, the assessee was requested to explain as to why the payment made to M/s Naveen Trade Link Pvt. Ltd. should not be disallowed u/s. 40(a)(ia) of the Act. The assessee explained that no disallowance u/s. 40(a)(ia) could be made although no TDS has been made since the handling charges was actually paid during the period from 01-04-2009 to 31-09-2009 and no amount remained payable at the year end. The assessing officer has not agreed with the submission of the assessee stating that assessee was liable to deduct tax as per the provision of section 194C of the Act and made disallowance of Rs. 1,83,297/- of payment made upto 31^st Sep, 2009 to M/s. Naveen Trade Link Pv. Ltd. Accordingly, the assessing officer has made total disallowance of Rs. 7,34,456/- u/s. 40(a)(ia) of the Act.

9. Aggrieved assesse has filed appeal before the ld. CIT(A) . The ld. CIT(A) has dismissed the appeal of the assessee.

Ground No. 4 (Disallowance of Rs. 3,49,216/- u/s. 36(1)(vii) of the Act.

10. At the time of assessment, the assessing officer observed that assessee has made advances to the following persons for which no business purposes have been explained and no interest has been received. The detail of such loans and advances is reproduced as under:-

The assessing officer has also noticed that part of the loan and advances were given for acquisition of capital asset. It is also pointed out that assessee has failed to prove by demonstrative evidences that on the date of making the advances, the assessee was having interest free funds and there was no diversion of interest free funds for non-business purposes/capital purposes. The assessee has failed to submit any fund flow statement to demonstrate that there was no diversion of interest bearing funds. Therefore, the assessing officer has made proportionate disallowance of interest u/s. 36(1)9iii) of Rs. 3,49,216/- and added to the total income of the assessee.

11. Aggrieved assesse has filed appeal before the ld. CIT(A) . The ld. CIT(A) has dismissed the appeal of the assessee reiterating the facts reported by the assessing officer.

12. During the course of appellate proceedings before us, in respect of disallowance u/s. 14A, the ld. counsel contended that assessee has earned dividend income to the amount of Rs. 2,10,249/- whereas assessing officer had made disallowance to the amount of Rs. 5,13,516/- which was more than the exempt income earned. The ld. counsel has further stated that assessee has correctly computed the disallowance to the extent of Rs. 43,634/- which has not been considered by the lower authorities. During the course of appellate proceedings before us, the ld. counsel has also furnished paper book comprising copies of bills furnished before the lower authorities and referred pages no. 8 to 23 of the paper book. The ld. counsel has contended that detailsof exempt income was furnished along with computation u/s. 14A of the Act which was not properly considered by the lower authorities.

Regarding motor car expenses, the ld. counsel contended that assessee is a company and the motor car was used for business purpose, therefore, disallowance of depreciation was not correctly made by the assessing officer.

Regarding disallowance of Rs. 7,43,456/- u/s. 40(a)(ia) of the Act, the ld. counsel has referred pages no. 42 to 44 of the paper book comprising copies of invoice of Naveen Trade Link Pvt. Ltd. and ledger of handling expenses and contended that these payments was of the nature of reimbursement of expenses requiring no deduction of tax. The ld. counsel has also referred page no. 68 to 69 of the paper book pertaining to written submission made before the ld. CIT(A) explaining that payment made to Naveen Trade Link Pvt. Ltd. was towards reimbursement of expenses for which no TDS was required to be deducted. The ld. counsel has also submitted that part of the payment towards repayment of loan was made to the NBFC for which no TDS is required to be deducted.

In respect of disallowance of Rs. 3,49,216/- u/s. 36(1)(iii) of the Act, the ld. counsel has contended that assessee has advanced interest free loan for business purposes and therefore the assessing officer was not correct and justified in disallowing the interest u/s. 36(1)(iii).

13. We have heard both the sides and perused the material on record. On the issue of disallowance u/s. 14A amounting to Rs. 5,13,516/-, the assessing officer has disallowed an amount of Rs. 5,13,516/- after computing the disallowance as per rule 8D of the I.T. Rule, 1962 stating that the assessee has failed to furnish any fund flow statement to substantiate that no part of interest bearing funds has been utilized for earning exempt income. On similar facts, the ld. CIT(A) has sustained the disallowance holding that assessee has failed to furnish any day to day fund flow analysis to prove that no expenditure has been incurred towards earning exempt income. In this regard, we have gone through the copy of balance sheet furnished by the assessee -partnership firm as on 31^st March, 2010 and it is noticed that as on 31^st March, 2010, the total capital of the partners were only Rs. 3,70,849/-whereas assessee has obtained sarafi deposit to the amount for Rs. 3,89,48,473/- and other secured loan and unsecured loan to the amount of Rs. 38,17,183/- and total investment made was reflected at Rs. 61,34,107/-.

In the balance sheet of the assessee firm of the preceding year, as on 31^st March, 2009 the total capital of the partners were in the negative as on 31^st March, 2009 at Rs. -81,05,598/- whereas the sarafi deposit shown at Rs. 3,78,52,532/- and secured loan and unsecured loan was to the amount of Rs. 77,29,181/- and total investments was reflected at Rs. 1,12,44,492/-. No other information i.e. break-up of investment or schedules of the balance sheet were submitted to substantiate that no expenses were incurred towards earning exempt income. Therefore, we do not find any substance in the contention of the assessee of computing disallowance to the extent of Rs. 43,634/- towards expenditure incurred for earning exempt income, however, we restrict the disallowance to the extent of exempt income to the amount of Rs. 2,48,183/- as held in the various decisions of ITAT Ahmedabad i.e. Jivraj Tea Lt. Vs. DCIT, ITA No. 886/Ahd/2012 dated 28^th August, 2014 and the decision of ITAT Delhi in the case of Sahara India Finance Corporation Ltd. 1481 ITD 336.

The assessing officer had made disallowance out of depreciation holding that same was not fully used for the purpose of business. The assessee is not a company but a partnership firm. The assessee has suo motto made disallowance of Rs. 20,000/- out of motor car expenses indicating proportionately personal elements in use of motor car. During the course of assessment proceedings, the assesssee has failed to controvert the personal use of the motor car by the partners therefore the assessing officer has proportionately made disallowance @ 20% of motor car expenses as prescribed in the provisions of section 38(2) of the I. T. Act. During the course of appellate proceedings before us the ld. counsel has failed to refer any specific material to demonstrate any infirmity in the decision of the lower authority. Therefore, we do not find any merit in this ground of appeal of the assessee and the same stands dismissed.

The issue of disallowance of Rs. 7,34,456/- u/s. 40(a)(ia) of the I.T. Act pertained to disallowance of interest of Rs. 5,51,159/- on car loan and amount of Rs. 1,83,297/- paid to M/s. Naveen Trade Link Pvt. Ltd. as handling charges on which no TDS was deducted. In respect of car loan interest of Rs. 5,51,159/-, the ld. counsel contended that this interest charges being paid to NBFC and is not covered u/s. 194A of the Act. In the alternative, he has contended that as per proviso to section 40(a)(ia) no TDS to be made if the payee has already paid tax thereon. In this regard he has placed reliance on the decision of CIT vs. Ansal Landmark Township Pvt. Ltd. 377 ITA 635 Delhi and also on the decision of CIT vs. ASE Market Ltd. ,Tax Appeal No. 616 of 2017 dated 22 August, 2017, Gujarat. Regarding payment of handling charges to M/s. Naveen Trade Link Pvt. Ltd, the ld. counsel contended that this amount was paid as reimbursement of expenses which were not liable to TDS as held in the case of the CIT Vs. Shah investors Home Ltd., Tax Appeal No. 281 of 2017 dated 4^th May, 2017.

We have perused the provisions of section 194A of the Act pertaining of deduction of tax on payment of interest other than interest on securities. The Ld. counsel has neither demonstrated how the financial charges paid for car loan are not covered u/s. 194A of the Act , nor pointed out any specific exception prescribed in section194(3) of the Act under which the payer of the interest on car loan was covered.

However, the alternative contention of the ld. counsel that no TDS to be made if the payee has paid tax as per proviso to section 40(a)(ia) and the

judicial pronouncements referred in his submission and the claim that payment made to Navin Tradelink Pvt. Ltd. was towards reimbursement of expenses are required to be considered after examination and verification of the relevant material. Therefore, we restore both the issues as supra to the file of the assessing officer for deciding afresh after examination/verification of the relevant material to be furnished by the assessee at the time of set aside proceedings. Accordingly, this ground of appeal of the assessee is allowed for statistical purposes.

The assessing officer has made disallowance of interest expenditure of Rs. 3,49,216/- u/s. 36(1)(iii) treating the advances made for non-business purposes. On this issue, the ld. CIT(A) has held that interest cost on investment made in the capital assets i.e. on purchase of shops, purchase of machinery should have been capitalized and the assessee has not given any fund flow analysis to substantiate that amount used for investment in such asset was generated from the internal accrual of the partnership firm. It is observed that assessee has not demonstrated with any evidences that said assets has been reflected as business asset in the balance sheet of the assessee. During the course of appellate proceedings, the ld. counsel has referred pages 101 to 178 placed in the paper book pertaining to ledger account, sale deeds of shops etc. We do not find any reference or examination of such materials in the findings of the lower authorities. It is also observed that the issue of interest paid in respect of acquiring capital assets has not been examined as prescribed in the proviso to section 36(1)(iii) in respect of period of acquisition of the asset and the date on which such asset was first put to use to determine the deduction. The assessing officer is required to examine/verify the above referred material placed in the paper book to determine the claim of the assessee that loan/advances were extended for the business purposes and in case it is found that the loan/advances used for acquiring capital asset then the assessing officer has to examine the same as elaborated above after taking into consideration the proviso to section 36(1)(iii). Accordingly, this ground of appeal of the assessee is allowed for statistical purposes.

14. In the result, the ground no. 1 of the appeal is partly allowed and ground no. 2 of the appeal is dismissed. Ground nos. 3 & 4 of the appeal are allowed for statistical purposes.

Order pronounced in the open court on 09-07-2020