No Disallowance u/s. 40(a)(ia) where TDS on Buyback of Shares Paid Not Claimed in P&L but Adjusted Against Reserves: ITAT upholds CIT(A) Order [Read Order]

The tribunal held that disallowance under Section 40(a)(ia) of the Income Tax Act applies only when TDS on buyback of shares is claimed as expenditure in P&L and not when it is adjusted against reserves.

The assessee Nuwave E Solutions is engaged in the business of development and export of software. The major shareholder in the assessee company is Shri Anil Gutpa, who has 99% shareholding, and he also took a substantial interest in its Associate Enterprises (“AE”) in the US, which is the sole buyer of the software developed by the assessee.

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During the year under appeal, the assessee had shown a net profit @ 80% and claimed a deduction under Section 10A of the Act. The AO based on Schedule 12 to the financial accounts, wherein INR 49,33,50,421/- was shown as “Arbitration Award” held that this award is not the software sales and excluded the same from the claim of exemption under Section 10A of the Act and further, denied the exemption under Section 10A of the Act on the gain on account of currency fluctuation of INR 1,23,33,934/- by holding the same being not earned from the eligible business.

Besides this, AO made the disallowance of INR 3,55,47,260/- by invoking the provision of section 40(a)(ia) of the Income Tax Act, as the assessee has deducted 10% TDS on buy back of shares, which, as per AO, should be 20%. Thus, he made the disallowance of the proportionate payment without TDS. Accordingly, the total income of the assessee was assessed at INR 49,74,14,740/-.

Against the said order, the assessee preferred an appeal.CIT(A) allowed the appeal of the assessee, wherein the additions made as well as disallowances made were deleted. Aggrieved by the said order of CIT(A), Revenue filed an appeal before the ITAT.

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The AO alleged that as per Section 195 of the Income Tax Act, 20% TDS was to be made, and accordingly, he made the proportionate disallowance of 50% of the amount paid on buyback of the shares.

The Tribunal observed that the CIT(A) while deleting the disallowance, had observed that provisions of section 40(a)(ia) of the Income Tax Act are applicable only when the amount on which tax is to be deducted is claimed as expenditure in the Profit & Loss Account. And when the amount paid was reduced from the Reserves and Surplus, provision of section 40(a)(ia) of the Act is not applicable. Also opined that, once the assessee had deducted the tax at source, though at a lower rate, the due compliances had been made to satisfy the condition of Section 40(a)(ia) of the Income Tax Act.

The Tribunal also observed that in the instant case, the assessee had deducted the tax @ 10% therefore, the compliance had been made. The Tribunal relied on the judgment of the Rajasthan High Court in the case of CIT vs M.C.Sharma and the judgment of the Kolkata High Court in the case of CIT vs. S.K.Tekriwal to support the view.

The two-member bench of Sudhir Kumar (Judicial Member) and Manish Agarwal (Accountant Member) held that the provision of Section 40(a)(ia) of the Income Tax Act could not be invoked for making disallowances where even a short deduction is made. Accordingly, the appeal raised by the Revenue was dismissed.

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