The Income Tax Appellate Tribunal (ITAT) held that incentives paid to employees under section 40(a)(ia) in the nature of salaries cannot be disallowed.
The assessee is in wholesale distribution of mobile handsets. For the assessment year 2014-15, the assessee filed the return of income on 22.09.2014 admitting a total income of Rs.10,86,820/-.
The case was selected for scrutiny and the assessment was completed accepting the income returned. Subsequently, Ld.Pr.CIT, Vijayawada has taken up the case for revision u/s 263 and found that the Assessing Officer (AO) has not conducted inquiries on various issues in respect of incentives to its employees, trade incentives given to its dealers for which the assessee is liable to deduct the tax at source as per the provisions of section 194H of the Act.
The Ld.Pr.CIT further observed that the AO did not obtain relevant information or details etc. with regard to deduction of tax at source, therefore, issued the show-cause notice to the assessee calling for an explanation as to why the assessment should not be revised u/s263 of the IT Act.
In response to the notice, the assessee filed explanation objecting for revision and stated that the issue with regard to payments made to retailers and the incentives given to staff was examined by the AO at the time of assessment and the assessee is not liable for deduction of tax at source.
Not being convinced with the explanation of the assessee, the Ld.Pr.CIT held that the order passed by the AO is erroneous and prejudicial to the interest of the revenue, accordingly directed the AO to redo the assessment after detailed verification.
The Tribunal comprising of Judicial Member, Durga Rao, and Accountant Member, D.S Sunder Singh on an appeal filed by M/s Fusion Voice Solutions.
The Tribunal observed that, in respect of the incentives passed on to the retailers, the AO. has obtained the details of ledger accounts and examined the same. Therefore, it is established beyond doubt that the AO. has examined the issue and taken one of the possible views.
The Tribunal also examined that the entire transaction and sales by the assessee company to its retail dealers and sales by its dealers till to the end-users and verification of principal-agent relationship etc. at best can be treated as an inadequate inquiry but not lack of inquiry.
While setting aside the order the tribunal also observed that incentives paid to the employees take the character of salaries u/s 192 and no disallowance is warranted u/s 40(a)(ia) for the payment of salaries. Hence the assessment order passed by the AO is neither erroneous nor prejudicial to the department.
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