ITAT Invalidates TDS Disallowance u/s 40(a)(i) due to Lack of Incriminating Evidence in S.153A Assessment [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) invalidated the disallowance of Tax Deducted at Source ( TDS ) under Section 40(a)(i) of the Income Tax Act,1961, ruling that the assessment under Section 153A was invalid due to the absence of incriminating evidence.

JMC Projects,appellant-assessee,entered into a contract with Bemo Project Engineering LLC for the design, supply, and installation of roofing for the indoor cycling Velodrome at Indira Gandhi Stadium, New Delhi. The contract, according to the MoU, was indivisible, with Bemo responsible for both the materials and services.

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The Assessing Officer ( AO ) noted that under the India-UAE DTAA, a permanent establishment ( PE ) could be created if a project lasted over nine months. Since Bemo worked in India for more than one and a half years, the AO concluded that Bemo had a PE in India, making it subject to Indian tax laws.

As a result, the assessee was required to deduct TDS on payments made to Bemo. The AO invoked Section 40(a)(i) for non-deduction of tax on Rs. 12,69,79,006, disallowing the deduction. The AO did not focus on Section 195, which deals with the obligation to deduct tax but highlighted the non-compliance under Section 40(a)(i) of the Act.

The assessee argued that the payments were mainly for the import of materials, which should not attract TDS under Section 40(a)(i) of the Act.

The Commissioner of Income Tax (Appeals) [CIT(A)] examined Section 40(a)(i) and Section 195 of the Act, along with the Double Taxation Avoidance Agreement(DTAA) between India and UAE. The CIT(A) agreed with the AO that Bemo Project Engineering LLC had a permanent establishment in India because the project duration exceeded nine months. This led to a tax liability for Bemo under Indian law, requiring the appellant-assessee to deduct tax under Section 195. Since the assessee failed to do so, the CIT(A) upheld the disallowance under Section 40(a)(i) and rejected the appeal.

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The two member bench comprising Suchitra Kamble ( Judicial Member ) and Makarand V.Mahadeokar ( Accountant Member ) considered the facts and legal submissions and observed that the appellant-assessee challenged the validity of the assessment under Section 153A, arguing that no incriminating material was found during the search to justify it.

Agreeing with this contention, the tribunal had already held the assessment invalid. As a result, the appeal was allowed on legal grounds without examining the disallowance under Section 40(a)(i) of the Act.

To Read the full text of the Order CLICK HERE

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