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Case Number

I.T.A No. 1796.Bang/2013 (Assessment Year: 2010-11)

Attorney(S)

Assessee by: Shri. G. Venkatesh, Advocate
Revenue by: Dr. P.K Srihari, Addl. CIT

Judges

Abraham P. George, A.M
Vijay Pal Rao, J.M

Acts

u/s. 40(a)(ia) of the Income-tax Act, 1961 (the Act in short).

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Smart Summary

Factual and Procedural Background

This appeal arises from an order dated 27.09.2013 passed by the Commissioner of Income Tax (Appeals) [CIT (A)]—I, Bengaluru, concerning the assessment year under dispute. The Revenue challenged the CIT (A)’s order which had scaled down a disallowance made by the Assessing Officer (AO) under Section 40(a)(ia) of the Income-tax Act, 1961. The AO had disallowed Rs. 44,86,432/- on account of failure to deduct tax at source on payments made as ground handling charges, while the CIT (A) restricted the disallowance to Rs. 15,580/-. The assessee, engaged in aviation support services, contended that payments to certain government entities and amounts below threshold limits were not liable for TDS deduction and also argued on the interpretation of Section 40(a)(ia) regarding applicability to paid versus payable amounts. The Revenue also challenged the deletion of an addition by the CIT (A) related to cessation of liability on an unsecured loan of Rs. 62 lakhs, which the AO had treated as income under Section 41(1) of the Act.

Legal Issues Presented

Whether Section 40(a)(ia) of the Income-tax Act applies to amounts paid during the previous year or only to amounts payable as at the end of the previous year.
Whether the assessee is liable to disallowance under Section 40(a)(ia) when the payees have filed returns and paid due taxes on the amounts received from the assessee.
Whether addition under Section 41(1) of the Act is justified on cessation of liability when the assessee has not claimed any deduction or allowance for the loan amount and the creditor has confirmed the balance due.

Arguments of the Parties

Revenue's Arguments

The AO disallowed Rs. 44,86,432/- under Section 40(a)(ia) for failure to deduct tax at source on payments characterized as hire charges and fees for technical services.
The Revenue contended that Section 40(a)(ia) applies to both paid and payable amounts, relying on the jurisdictional High Court’s decision in Ryatar Sahakari Sakkare Karkhane v. ACIT.
The Revenue challenged the CIT (A)’s deletion of addition under Section 41(1) related to an unsecured loan, asserting the loan was waived and thus taxable, relying on the judgment of Karnataka High Court in CIT v. Compaq Electric Ltd., though noting the appeal before the Supreme Court was pending.

Assessee's Arguments

It was impracticable to deduct tax at source on ground handling charges as services required full payment.
Payments to government-controlled entities such as AAI, HAL, and Air India Sats Airport Services were not subject to TDS.
Section 40(a)(ia) applies only to amounts payable at the end of the previous year, not to payments already made.
Payees had filed returns and paid taxes on the amounts received, which according to the assessee, exempts it from disallowance under the second proviso to Section 40(a)(ia), relying on the Delhi High Court’s decision in CIT v. Ansal Land Mask Townships (P) Ltd..
Regarding the loan, the assessee submitted a balance confirmation from the creditor confirming the debt and argued no cessation of liability occurred under Section 41(1).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Merilyn Shipping and Transports v. Addl. CIT (2012) 16 ITR (Trib) 1 Vishakapatnam	Section 40(a)(ia) applies only to payable sums and not to paid amounts.	Assessee relied on this decision to argue disallowance should not apply to paid amounts; CIT (A) accepted this view partially.
CIT v. Vector Shipping Services (P) Ltd. [357 ITR 642] (Allahabad High Court)	Interpretation of Section 40(a)(ia) regarding applicability to paid and payable amounts.	Referenced by both parties; jurisdictional High Court later held Section 40(a)(ia) applies to both paid and payable sums, leading to remand.
DCIT v. Ananda Markala [ITA 1584.Bang/2012, dt. 13.09.2013]	Section 40(a)(ia) applies only on payable sums.	Assessee cited this coordinate Bench decision in support of its argument.
Ryatar Sahakari Sakkare Karkhane v. ACIT [ITA 100111 to 100120/2015, dt. 26.02.2015] (Karnataka High Court)	Section 40(a)(ia) applies to both paid and payable amounts.	Court relied on this decision to set aside CIT (A)’s order on this issue and remand for fresh consideration.
CIT v. Ansal Land Mask Townships (P) Ltd. [(2015) 124 DTR 185] (Delhi High Court)	Second proviso to Section 40(a)(ia) is retrospective and exempts assessee if not deemed in default under Section 201(1).	Court acknowledged this principle but required positive demonstration by assessee before exemption applies.
CIT v. Compaq Electric Ltd. [(2012) 66 DTR 0032] (Karnataka High Court)	Section 41(1) applies only if assessee had claimed deduction or allowance earlier; otherwise, remission of liability is capital receipt.	Court accepted this principle, found no cessation of liability, and upheld CIT (A)’s deletion of addition under Section 41(1).

Court's Reasoning and Analysis

The court examined the applicability of Section 40(a)(ia) of the Income-tax Act on the disallowance made by the AO. It noted that the jurisdictional Karnataka High Court in Ryatar Sahakari Sakkare Karkhane held that Section 40(a)(ia) applies to both paid and payable amounts, overruling the assessee’s contention that it applies only to payable sums. Consequently, the court set aside the CIT (A)’s order on this issue, remitting the matter to the AO for fresh consideration in accordance with law.

However, the court gave due regard to the assessee’s claim that the payees had filed returns and paid taxes on the amounts received, invoking the second proviso to Section 40(a)(ia). It observed that this proviso is retrospective as per the Delhi High Court in CIT v. Ansal Land Mask Townships, but emphasized that the assessee must positively demonstrate non-default status under Section 201(1) before exemption can be granted. Thus, the issue was remanded for fresh adjudication.

Regarding the addition under Section 41(1) related to the unsecured loan, the court found that the creditor had confirmed the balance and no write-back or remission of liability had occurred in the assessee’s books. The court relied on the Karnataka High Court’s ruling in CIT v. Compaq Electric Ltd. which held that Section 41(1) applies only where an allowance or deduction was claimed previously. Since no such allowance was claimed by the assessee, the amount represented a capital receipt, and Section 41(1) was not attracted. The court found no error in the CIT (A)’s deletion of the addition and dismissed this ground.

Holding and Implications

The court’s final decision was to partly allow the appeal of the Revenue for statistical purposes. Specifically:

The order of the CIT (A) on the disallowance under Section 40(a)(ia) was set aside and the matter remitted to the AO for fresh consideration in light of the jurisdictional High Court’s ruling that the section applies to both paid and payable amounts, and the assessee’s entitlement to claim exemption under the second proviso subject to demonstration of non-default.
The CIT (A)’s deletion of the addition under Section 41(1) relating to the unsecured loan was upheld, dismissing the Revenue’s ground on this issue.

No new precedent was established by this decision; it primarily applies existing judicial interpretations and remands the matter for further factual and legal examination.

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Deputy Commissioner Of Income Tax, Circle-11(1), Bangalore v. M/S. Aviators (India) P. Ltd., 1309, Brigade Towers, 135, Brigade Road, Bangalore 560025 .

Abraham P. George, A.M:— This is an appeal of the Revenue directed against an order dt. 27.09.2013 of CIT (A)—I, Bengaluru, for the impugned assessment year.

2. There appears six grounds of which grounds 1, 5 and 6 are general needing no specific adjudication.

3. Vide its ground numbers 2 and 3, grievance raised by the Revenue is that CIT (A) scaled down a disallowance made by the AO u/s. 40(a)(ia) of the Income-tax Act, 1961 (‘the Act’ in short). AO had made a disallowance of Rs. 44,86,432/- which was restricted to Rs. 15,580/- by the CIT (A).

4. Facts apropos are that assessee had effected payments totalling Rs. 45,56,334/- as ground handling charges to various companies. Assessee was engaged in the aviation support business and providing related services. As per the AO the payment were in the nature of hire charges, were contractual in nature and also had an element of fee for technical services. According to the AO, assessee was obliged to deduct tax at source. Though the assessee argued that part of the payments were to AAI which was a wing of the Government, and many of the payments were below the threshold limit for deducting TDS, these were not acceptable to the AO. Assessee's pleading that Section 40(a)(ia) of the Act could be applied only to amounts standing payable as at the end of the relevant previous year and not to paid amounts also did not find any positive response from the AO. Section 40(a)(ia) was applied and a disallowance of Rs. 44,86,432/- was made.

5. Aggrieved assessee moved in appeal before the CIT (A). Argument of the assessee was that it was not practicable to deduct tax at source on ground handling charges since the services could be availed only if full payments were made. Further as per the assessee payments effected to M/s. AAI, HAL and Air India Sats Aiport services could not be subjected to TDS since these were Government controlled entities. Assessee also relied on a Special Bench decision of this Tribunal in the case of Merilyn Shipping and Transports v. Addl. CIT, (2012) 16 ITR (Trib) 1 Vishakapatnam, that of Hon'ble Allahabad High Court in the case of CIT v. Vector Shipping Services (P) Ltd. [357 ITR 642], and that of a coordinate Bench decision in the case of DCIT v. Ananda Markala [ITA. 1584.Bang/2012, dt. 13.09.2013], for arguing that Section 40(a)(ia) of the Act could be applied only on ‘payable’ sums and not paid amounts. CIT (A) was appreciative of the last line of the argument of the assessee i.e, Section 40(a)(ia) could be applied only on payable sums. He found that the sum of Rs. 44,86,432/-, but for Rs. 15,580/-, was paid during the currency of the previous year. He thus scaled down the disallowance to Rs. 15,580/-.

6. Now before us, Ld. DR strongly opposing the order of CIT (A) submitted that Hon'ble jurisdictional High Court in the case of Ryatar Sahakari Sakkare Karkhane v. ACIT [ITA. 100111 to 100120/2015, dt. 26.02.2015] had went in depth to the applicability of Section 40(a)(ia) of the Act, to paid amounts, and had held that it applied to both paid as well as payable sums.

7. Per contra, Ld. AR submitted that the companies to which assessee had paid the ground handling and other charges had furnished their respective returns of income, computing their income taking into account the amounts received from the assessee, after paying due taxes. According to him, assessee would be able to demonstrate this if given a chance. Ld. AR further submitted that by virtue of second proviso to Section 40(a)(ia) of the Act, once assessee is not deemed as one in default rigours of the said section could not be applied. As per the Ld. AR, second proviso to Section 40(a)(ia) had to be retrospectively construed by virtue of the judgment of Hon'ble Delhi High Court in the case of CIT v. Ansal Land Mask Townships (P) Ltd. [(2015) 124 DTR 185].

8. We have perused the orders and heard the rival contentions. In so far as issue of applicability of Section 40(a)(ia) of the Act, on paid amounts are concerned, Dharwad Bench of Hon'ble jurisdictional High Court in the case of Ryatar Sahakari Sakkare Karkhane (supra), after considering the judgment of Hon'ble Allahabad High Court in the case of Vector Shipping P. Ltd. (supra) had held that the said section applied both to paid and payable amounts. Hence we have no qualms in setting aside the order of CIT (A) on this issue. However the claim of the assessee that payees had filed returns after paying due taxes, taking into account the receipts from the assessee and therefore Section 40(a)(ia) of the Act could not be applied merits attention. Hon'ble Delhi High Court in Ansal Land Mask Township's case (supra) held second proviso to Section 40(a)(ia) of the Act, as retrospective in operation. Nevertheless assessee has to positively demonstrate that it could not be considered as one in default by virtue of first proviso to Section 201(1) of the Act, for applying second proviso to Section 40(a)(ia) of the Act. We therefore set aside the orders of the authorities below and remit the issue relating to disallowance u/s. 40(a)(ia) of the Act, back to the AO for consideration afresh in accordance with law. Grounds 2 and 3 of the Revenue are treated as allowed for statistical purposes.

9. Vide its ground number 4, Revenue is aggrieved that CIT (A) deleted an addition made by the AO, for cessation of a liability.

10. During the course of assessment proceedings it was noted by the AO that an unsecured loan of Rs. 62 lakhs taken by the assessee from one M/s. Samayanallur Investments (P) Ltd., was outstanding for more than five years and there were no transactions in the creditor's account. It seems assessee could not provide a confirmation proving the genuineness of the loan. AO concluded that the loan was no longer a liability of the assessee. He applied section 41(1) of the Act and made an addition of Rs. 62 lakhs.

11. In its appeal before the CIT (A) assessee, apart from filing a balance confirmation from the creditor which inter alia stated that latter could enforce a claim for recovery, also argued that there was no cessation of liability coming within the ambit of Section 41(1) of the Act. CIT (A) was appreciative of these contentions. After analysing Section 41(1) of the Act, he held that said section could not be applied since the amount stood payable and also since assessee had not claimed any allowance or deduction of the amount while computing its income for any year. He deleted the addition.

12. Now before us, Ld. DR submitted that judgment of Hon'ble Karnataka High Court in the case of CIT v. Compaq Electric Ltd., [(2012) 66 DTR 0032], relied on by the CIT (A) for ruling in favour of the assessee had not become final and Revenue had preferred an appeal before the Hon'ble Apex Court.

13. Per contra, Ld. AR supported the order of the CIT (A).

14. We have perused the orders and heard the rival contentions. It is not disputed that the creditor had confirmed the balance as due to him. It is also not disputed assessee had not effected any write-back of the amount in its books, squaring up the liability. It continued to exist in its books. Hon'ble jurisdictional High Court in the case of Compaq Electric Ltd. (supra) had held as under:

For the application of section 41(1), the condition precedent is that there should be an allowance or deduction in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. Then, subsequently, during any previous year, if the creditor remits or waives any such liability, then the assessee is liable to pay tax under section 41. The whole object is to avoid double benefit to the assessee. In the instant case, the amount claimed as capital receipt is in respect to which there was no allowance or deduction claimed by the assessee for the previous year. Therefore, when its creditor has waived the repayment of the said amount, it amounts to a capital receipt and not a revenue receipt. As the assessee did not have the benefit of any allowance or deduction in respect of the said amount, section 41 is not attracted.

In that view of the matter, there was no merit in this appeal. No substantial question of law arises for consideration. Accordingly, the appeal is dismissed.

15. Further the conditions of remission/cessation of liability has not been proved by the Revenue. We cannot find any error in the order of the CIT (A) on this aspect. Ground number 4 of the Revenue stands dismissed.

16. In the result, appeal of the Revenue is partly allowed for statistical purpose.

Deputy Commissioner ... v. M/S. Aviators (India...