Case Law Details
Mcnally Bharat Infrastructure Limited Vs DCIT (ITAT Kolkata)
In a recent decision, the Income Tax Appellate Tribunal (ITAT) in Kolkata ruled in favor of McNally Bharat Infrastructure Limited, stating that Tax Deducted at Source (TDS) on rent reimbursement is not deductible when there is no lessor and lessee relationship. The case revolved around the disallowance of expenses under Section 40(a)(ia) of the Income Tax Act for non-deduction of TDS on rent reimbursement.
Background: McNally Bharat Infrastructure Limited had filed its return of income for the assessment year 2014-15, declaring a total income of Rs. Nil. The return was processed under Section 143(1) of the Income Tax Act, followed by a scrutiny assessment. During the assessment, the Assessing Officer (AO) observed that the company had claimed expenses on rent amounting to Rs. 15,98,400, but had not deducted TDS as required under Section 40(a)(ia) of the Act. Consequently, the AO disallowed the entire rent expense.
ITAT’s Ruling: In its decision, the ITAT held that there was no lessor and lessee relationship between McNally Bharat Infrastructure Limited and its holding company, as the rent was being reimbursed by the former to the latter. The ITAT found that this reimbursement arrangement had been consistent over several years and had never been disputed by the tax authorities, even after the introduction of TDS provisions.
The ITAT also noted that the holding company did not debit the entire rent to its books of accounts; instead, it only accounted for the portion of rent corresponding to the premises occupied by McNally Bharat Infrastructure Limited. As a result, the ITAT concluded that the provisions of Section 194-I of the Income Tax Act, which pertain to TDS on rent, did not apply in this case.
Conclusion: The ITAT’s ruling underscores the importance of a consistent and well-documented financial arrangement between related parties. In this instance, McNally Bharat Infrastructure Limited’s reimbursement of rent to its holding company was deemed not to require TDS deduction, as there was no lessor and lessee relationship. The decision serves as a reminder for businesses to ensure that their financial arrangements align with the applicable tax provisions to avoid unnecessary disallowances and disputes with tax authorities.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This appeal of the assessee for the assessment year 2014-15 is directed against the order dated 02.05.2023 passed by the ld. Commissioner of Income-tax, Appeals, NFAC, Delhi [hereinafter referred to as ‘the ‘ld. CIT(A)’]. The assessee has raised the following grounds of appeal:
“1. On the facts of the case and in law, the appellate order under section 250 read with section 251 of the Income-tax Act, 1961 (‘the Act’) passed by the ld. CIT(Appeals) under National Faceless Appeal Centre (“NFAC”) (hereinafter referred to as “CIT(A)”) is erroneous on facts and bad in law.
Corporate Tax
2. Disallowance of rent expenses
2.1. That on the facts and circumstances of the case, the ld. CIT(A) has erred in holding that expenses relating to rent reimbursed to holding company aggregating to Rs. 15,98,400/- do not qualify for deduction under the Act.
2.2. That on the facts and circumstances of the case, the ld. AO has erred in not deliberating on the imposition of interest of Rs. 19,267/-u/s 234D although the issue was taken up in grounds of appeal.
3. The appellant craves leave to add to add/or amend, alter, modify or rescind the grounds hereinabove before or at the time of hearing of the appeal.”
2. Brief facts of the case are that the assessee filed its return of income for the A.Y. 2014-15 by declaring total income at Rs. Nil. The return of income filed by the assessee was processed u/s 143(1) of the Act followed by selection of the case for scrutiny and were duly issued and served upon the assessee. During the assessment proceeding, the ld. AO has observed that assessee has claimed expenses on rent at Rs. 15,98,400/-. However, assessee has not deducted TDS as required u/s 40(a)(ia) of I.T. Act. Therefore, the AO has disallowed expenses of Rs. 15,98,400/- in the hands of assessee.
3. Aggrieved by the above order, assessee is in appeal before the ld. CIT(A) where the appeal of the assessee was dismissed.
4. Feeling aggrieved by the above order, assessee is in appeal before this Tribunal where the only issue involved for determination is against sustaining the addition of Rs. 15,98,400/- made u/s 40(a)(ia) of the Act. The ld. AR submitted that the assessee is paying rent to its holding company and in respect of premises taken by the holding company on rent paid is claimed as reimbursement since several years. This position has been accepted by the department in the proceedings and subsequent assessment years and never disputed even when the provision for TDS inserted on the statute since 1994 by inserting section 194-I of the I.T. Act, 1961 was in Act w.e.f. 01.06.1994. Similarly, this position was also not disputed even after the amendment in section 40(a)(ia) of the Act by the Taxation Law (Amendment) Act, 2006 w.e.f. 01.04.2006. The ld. AR further contended that on this issue there is no material change in the facts and law during the year under consideration. As per the lease deed entered between subsidiary and holding company, which provided for use of the premises by the subsidiary companies and consequent to that actual payments made by the lessee (holding company) to the lessor and necessary tax was deducted there from. The ld. AR also submitted that the holding company has also not debited the whole of rent to its books of account which has only debited the rent which pertains to the part of the premises occupied by it. Therefore, on the factual position, there was no lessor and lessee relationship between the holding company and present assessee where the provisions of section 194-I are attracted. The ld. AR to substantiate his contention he relied on the decision in the case of ACIT, Circle-15(1), New Delhi vs M/s. Result Service Pvt. Ltd. which is pari material in the facts of the case wherein the Hon’ble Tribunal held that disallowance u/s 40(a)(ia) of the Act for non-deduction of TDS u/s 194-I for recovery of rent from subsidiary company by holding company and the impugned addition made by the AO cannot be sustained either on facts or in law and the same is therefore liable to be deleted.
5. On the other hand, ld. DR relied on the decision rendered by the authorities below. We after hearing the rival submission of the parties and perused the material available on record. The assessee is a subsidiary of holding company M/s. McNally Bharat Engineering Co. Ltd. and McNally Bharat Engineering Co. Ltd. entered into lease agreement with Williamson Magor and Co., 4th Floor at 4 Mangoe Lane, Kolkata-700001 and applicable tax deducted at source by depositing thereon. As the assessee was occupying part of the said rented property and reimbursing its holding company towards rent partially. In the present case, the assessee is paying rent to the holding company as reimbursement since last couple of years. This position has been accepted by the department all through and it has been never disputed even when provisions for TDS were inserted on statute since 1994, section 194-I of the Act was inserted in Act w.e.f. 01.06.1994. Similarly, this position was not disputed even after amendment in section 40(a)(ia) of the Act by the Taxation Law (Amendment) Act, 2006 which is w.e.f. 01.04.2006. On this issue, there is no material change in the facts and circumstances of the case as well as the law during the year under consideration. The ld. AR placed before us the copy of lease deed which provided for use of the premises by subsidiary companies. The actual payments are made by the lessee (holding company) to the lessor and necessary tax was deducted there from. Further, the holding company also did not debit the whole rent to its books of account. It has only debited the rent which pertains to the part of the premises occupied by assessee. In such a situation, in our considered opinion, there is no lessor and lessee relationship between the holding company and the present assessee where the provisions of section 194-I are applicable. Keeping in view, on the facts of the case and following the decision rendered by the co-ordinate bench in the case of ACIT, Circle-15(1) vs M/s. Result Service Pvt. Ltd. Accordingly, we direct the AO to delete the addition made u/s 40(a)(ia) of the Act setting aside the impugned order dated 02.05.2023 passed by the ld. CIT(A) by allowing the appeal of the assessee.
6. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 25.08.2023.
