TDS provisions are not applicable in case of Payments in the nature of Reimbursement to Sister Concern: Delhi HC [Read Judgment]

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In Pri. CIT v. Shri Dinesh Kumar Mathur, the division bench of the Delhi High Court held that TDS provisions cannot be applied in a case where the payments made to the Sister concern are in the nature of reimbursement and therefore, s. 40(a)(ia) of the IT Act cannot be invoked in such cases.

The assessee, for the relevant financial year shown an expenditure paid to M/s. Aakriti Creation Pvt. Ltd, a sister concern. The assessee claimed that the expenditure was incurred towards reimbursements of the cost of raw materials. 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.

However, the AO disallowed the amount and added back the amount to the taxable income of the assessee. On appeal, the CIT(A) allowed the claim relying upon the decision of the Tribunal in Grandprix Fab (P) Ltd. v. CIT.The Revenue, being unsuccessful in securing relief from the Tribunal, approached the High Court contending 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. Further, 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 further 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 assessee, on the other hand, 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 of Income Tax v. Ansal Land Mark Township (P) Ltd., ITA 160/2015, decided on 26th August, 2015.

The division bench comprising of Justice S.Ravindra Bhat and Justice Najimi Waziri noted that in Ansal Land Mark Township (P) Ltd., the Court elaborately considered the impact of Section 194C and its interpretation of Section 201 and 210 of the Act. “Like in the Ansal Land Mark Township (P) Ltd. (supra), here too the deductee, i.e., M/s Aakriti Creation Pvt. Ltd. has filed its returns which reflected the amounts claimed to be expenditure which were examined and after which the assessment orders were framed.”

Considering the factual circumstances of the case, the bench opined that “since the amounts received by the payee, i.e., M/s Aakriti Creation Pvt. Ltd.were reported by it in the regular course of assessments, the disallowance of the entire amounts, under Section 40(a)(ia) of the Act in effect would render one payment which constitutes a transaction liable to income tax, twice over. Considering that Parliament remedied the law by amendment through insertion of the second proviso, in cases such as the present one, where the AO can have easy access to the returns of the payee, in the larger interest of the assessee and the Revenue, it would be appropriate that the A.O. examines the figures with relation to the exact claim of payments toward the raw materials. The AO would examine, if necessary, the returns and relative documents pertaining to the payee M/s Aakriti Creation Pvt. Ltd.”

“With these observations, the matter is remanded for reconsideration; in the event the A.O. is satisfied that the claim towards the payment of Rs.3,19,66,460/- does not include any income component but in fact constitutes reimbursement, the question of application of Section 40(a)(ia) would not arise.”

Read the full text of the Judgment below.

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