The Lucknow bench of the Income Tax Appellate Tribunal ( ITAT ) has held that disallowance under section 40(a)(ia) of the Income Tax Act, 1961 is not allowable in the absence of TDS deduction on the Purchase of trade items.
Sudhanshu Rastogi, the assessee challengedthe order of the CIT(A)-1, Lucknow. The assessment was framed for the assessment year 2013-14 under section 143(3) of the Income Tax Act, 1961, vide order dated 31.3.2016.
The assessee is a proprietor of Sarat Arts engaged in the business of trading embroidery clothes. The Assessing Officer, during the course of assessment proceedings, on perusal of the profit and loss accounts of Sarat Arts, noted that the assessee has debited direct expenses to the tune of Rs.4,68,36,533/- under the head Ready (Embroidery).
The Assessing Officer required the assessee as to why these expenses arenot disallowed in the absence of non-deduction of TDS. It was explained by the assessee that the assessee deals in trading embroidered cloth items and the alleged expenses of Rs.4,68,36,533/- are like purchases of embroidered cloth items.
The Assessing Officer disallowed these as business expenses under section 40(a)(ia) of the I.T. Act for non-detection of TDS. The ld. CIT(A) also confirmed the action of the Assessing Officer.
It was evident that the assessee is regularly maintaining its books of account and duly got the same audited under section 44AB of the Act andfiled complete books of accounts, bills and vouchers for verification and evidence, explaining the entire transaction.
Further, the assessee produced the trading account and profit and loss account and balance sheet for the year ended on 31.3.2013 which reflects that there is the purchase of Ready (Embroidery) to the extent of Rs.4,68,36,533/- and the corresponding sale also booked at Rs.5,37,06,037/-.
A Coram comprising of Shri. Mahavir Singh, Vice President and Shri Girish Agrawal, Accountant Member observed that these are purchases, rather than trade items not liable for disallowance under section 40(a)(ia) of the Income-taxAct, as no TDS is to be deducted for purchases of these items.
Further viewed that the disallowance under section 40(a)(ia) of the Income Tax Act attracts only expenses incurred by the assessee, on which tax is deductible at source under Chapter XVIIB. The Tribunal held that “once no TDS is liable to be deducted on these purchases, no disallowance under section 40 (a)(ia) of the I.T. Act can be attracted. Hence, we delete this addition and allow this issue of the assessee’s appeal. “
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