The Income Tax Appellate Tribunal (ITAT), Bangalore, in a recent ruling, held that the amount paid towards chit loss cannot be treated as interest payments, and therefore, in such cases, there is no need to deduct tax at source.
Assessee, an individual engaged in the business of civil construction, dealer in real estate, petroleum products and allied business.
Assessing Officer, in the instant case, disallowed a sum of Rs.2,27,964/- claimed by the assessee by invoking section 40(a)(ia) of the Income Tax Act on ground that assessee failed to deduct tax at source u/s. 194A. Assessee contended that the amount debited in the name of MCI Leasing Ltd. is not interest payments, but loss on subscription to chit, therefore, the provisions of section 194A has no application.
Accepting the contentions of the assessee, the bench noted that the AO has made addition merely on the basis of ledger extract filed by the assessee on the assumption that the said payments are interest payments which attracts TDS under the provisions of section 194A of the Act, without conducting further enquiries in the background of the assessee’s claim that the said payments are loss from subscription to chits.
“The AO should have conducted necessary enquiries before making the disallowance u/s. 40(a)(ia). The AO has not exercised his option to conduct the necessary enquiries and made the addition purely on suspicion and surmises, based on the ledger extract ignoring the evidence filed by the assessee to claim that the said amount is loss on account of chit which was wrongly booked under the head interest payment to MCI Leasing Ltd. At the same time, the assessee, though claims said payment is not interest, but chit loss, failed to furnish required evidence. If payment to MCI Leasing Ltd. is on account of chit loss, then, the question of TDS does not arise. Consequently, no disallowance of expenditure u/s. 40(a)(ia).”
Read the full text of the Order below.
