TDS not applicable on Reimbursement to Sister Concern

Delhi HC remanded the matter to AO to verify that  claim towards the payment of Rs.3,19,66,460/- does not include any income component and if it constitutes reimbursement, the question of application of Section 40(a)(ia) would not arise.

It further held that  Expense should be disallowed for non-deduction of TDS if corresponding income is brought to tax in the hands of the recipient.

Relevant Extract of the Judgment

2. The assessee had, for the Assessment Year (A.Y.) 2008-09, inter alia shown expenditure to the tune of about Rs.3,19,66,460/- which was paid to M/s. Aakriti Creation Pvt. Ltd. In the course of regular assessments, the assessee explained that the expenditure was incurred towards reimbursements of the cost of raw materials resourced by the payee which was a sister concern. The assessee is engaged in the business of manufacture and export of garments and accessories and M/s Aakriti Creation Pvt. Ltd. does fabric work. The A.O. disallowed the amount and added it back to the assessee’s returns, bringing it to tax. The CIT(A) granted the relief to the assessee in view of the decision of the Tribunal in Grandprix Fab (P) Ltd. v. CIT (2010) 34 DTR 248. The ITAT confirmed that order.

3. Counsel for the Revenue urges that the text of Section 34(i)(ia) of the Act is clear that the payee has no choice but to deduct the amounts towards over payments highlighting that the deductor has the choice under Section 195(2) of the Act. The learned counsel submits that if the individual assessee is examined of any outstanding amount as to which part of any payment is income, the entire meaning of tax collection would be thrown into disarray. It was submitted that the ITAT failed to take note of the fact that the second proviso to Section 40(a)(ia) was introduced only w.e.f. 01.04.2013 by way of an amendment and that the grant of relief in the circumstances of the case virtually made the statute prospective. The learned counsel for the assessee relied upon the previous rulings of this Court particularly upon Commissioner of Income Tax v. Dr. Jaideep Kumar Sharma, ITA 95/2015, decided on 19.11.2015; Commissioner ofIncome Tax v. Ansal Land Mark Township (P) Ltd., ITA 160/2015, decided on 26^thAugust, 2015.

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