Delhi ITAT in case of LDS Engineers on AO's duty, approach and Onus u/s 40(a)(ia) TDS disallowance section highlighted; Madras high court where assessee has given a special right or privilege to the franchisees to undertake a particular business in the property of the assessee on receipt of franchisee fee is clearly in the nature of business income & not income from house property; Section 205 bar on direct recovery once TDS done Madras high court order; Section 153A invalid order on dissolved firm detailed pune bench ITAT order; ITAT expresses displeasure over "AO/CIT had sent the scrutiny report/approved the filing of second appeal in a very casual manner"!

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Kapil Goel

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Sep 14, 2014, 7:34:16 AM9/14/14

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IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH ‘D’, NEW DELHI

ITA No. 2082/Del/2010 : Asstt. Year : 2006-07

M/s LDS Engineers Pvt. Ltd.

Date of Pronouncement : 12.9.2014

At this

stage it is relevant to note the mandate of sec. 40(a)(ia) as per which no

deduction in computing the income chargeable under the head ‘Profit

and gains of business or profession’ shall be allowed towards the stated

expenses: ‘on which tax is deductible at source under chapter XVII-B

and such tax has not been deducted’ or has not been paid before the time

prescribed u/s 139(1) of the Act. On going through the above

prescription of sec. 40(a)(ia), it is manifested that its invocation is

possible only when the Assessing Officer first shows that there is a

violation of any of the relevant sections of Chapter XVII-B, such as,

section 194A (Interest other than interest on securities’), 194C (Payment

to contractors), 194H (Commission) and 194-I (Rent). Only when the

AO proves the violation of the relevant section(s), that the

consequences, inter alia, in terms of invocation of section 40(a)(ia),

follow. The initial burden for acquiring jurisdiction to make

disallowance u/s 40(a)(ia) is on the AO, who can discharge it by

demonstrating that the payment sought to be disallowed by him is

covered within one of the relevant sections. Only when he makes up his

mind that a particular payment made by the assessee requiring deduction

of tax at source etc. under a particular section, has been made without

such deduction etc., that he can put across his view to the assessee for

showing cause as to why no disallowance be made under section 40(a)(ia) of the Act. Then the burden shifts on the assessee to exhibit

the reasons as to how the payment made did not violate that section

triggering disallowance u/s 40(a)(ia) of the Act. To put in simple words,

the Assessing Officer, at the first instance, is under obligation to bring

the payment made by the assessee within any of the relevant sections

such as 194A, 194C, 194H or 194I etc. It is only when he makes out a

clear cut case of the obligation of the assessee to deduct tax at source

under any of such specific sections, that the question of invoking section

40(a) can arise. The AO cannot pick up any item of expense debited to

the Trading or Profit and loss account and disallow the same by

invoking section 40(a)(ia) of the Act generally without first showing as

to how there existed an obligation on the assessee to deduct tax at source

from such payment under a particular section. It assumes more

significance because such sections requiring deduction of tax at source

have varying rates for deduction of tax at source.

IN THE HIGH COURT OF JUDICATURE AT MADRAS

DATE : 02.09.2014

Tax Case (Appeal) Nos.341 and 342 of 2014

& M.P.No.1 of 2014

M/s. Tamil Nadu Tourism Developoment

Corporation Ltd.,

13. As is evident from the various clauses in the above agreement, the assessee has not leased out the property merely as a land and building, but also with further conditions as to how the business of the lessees/franchiees should be conducted with regard to the hotel industry only. The Special conditions of contract make it clear that the name of the assessee should clearly, in fact, prominently be indicated in the name Board and the name of the franchisee should be below the name of TTDC, thereby, making it clear that the TTDC continues to be operating their business through their franchisees. Thus the Special conditions make it clear that the assessee corporation continues to be in the business of tourism activities, though not directly but through the franchisees and has received income as franchisee fee and that cannot be lost sight of while determining the nature of income.

14. We also find much force in the findings of the Tribunal that the properties let out by the assessee are business assets of the assessee corporation, as they have not treated the leased out properties as non-business assets of the assessee-corporation. It is relevant to state the definition of the word 'franchisee' mentioned the dictionary, which reads as follows:

"any special right, privilege, or exemption granted by the government, as to be a corporation, operate a public utility, etc."

15. In the decision reported in (2008) 300 ITR 118 (Mad) (Keyaram Hotels (P) Ltd. V. Assistant Commissioner of Income Tax) while dealing with the income earned by the assessee therein by letting out the property, this Court held as follows:

"Before the authorities under the Act as well as the Tribunal, the assessee has not placed any materials to support its case that the property from which income has been derived was used as business property and the exploitation of the property was in the nature of the business of the assessee company."

16. In this case, we find that the assessee has given a special right or privilege to the franchisees to undertake a particular business in the property of the assessee on receipt of franchisee fee. Therefore, the income is clearly in the nature of business income and not income from house property. Hence, the decision reported in (2008) 300 ITR 118 (Mad) (Keyaram Hotels (P) Ltd. V. Assistant Commissioner of Income Tax) does not applicable to the facts of case.

17. We find that the reasoning of the Tribunal is justified in the facts of the case. Accordingly, we find no question of law much less any substantial question of law arises for consideration in the above Tax case (Appeals).

T.C.(A) Nos.341 and 342 of 2014

& M.P.No.1 of 2014

IN THE HIGH COURT OF JUDICATURE AT MADRAS

DATED:11.08.2014

Executors of the Estate of S. Shanmuga Mudaliar

14. It is not disputed that tax was deducted at source by the tenant Union Motors Services Limited and they have issued some Certificates which has been given credit to by the Department. The present dispute relates to the failure of non issuance of TDS certificates by the tenant. The mandate is on the tenant to deduct tax at source and remit the amount to the Government and also issue certificate to the assessee.

15. Sec.205 of the Income Tax Act reads as follows:

"205. Bar against direct demand on assessee._ Where tax is deductible at the source under sections 192 to 194, section 194A, section 194B, section 194BB, section 194C, section 194D, section 194E, section 195 and section 196A, the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income".

16. The plain reading of the section makes it clear that whenever tax is deductible under the provisions of this Act and where the tax has already been deducted, no demand can be raised on the deductee. This implies that to the extent of TDS, demand cannot be raised on the deductee. However, for the failure on the part of the deductor, suitable provisions are available in section 201 and other sections mentioned supra.

19. The facts and circumstances of the above case is similar to the facts of the present case. Therefore, we have no hesitation to hold that the bar under Sec.205 of the Income Tax Act prevents the department from demanding the tax deducted at source from the assesee who has suffered a deduction. Further more, now the liability rests with the Official Liquidator. Therefore, the Department is at liberty to proceed against the company in liquidation in the hands of the Official liquidator by filing a claim for the amount in question.

IN THE INCOME TAX APPELLATE TRIBUNAL

PUNE BENCH “A”, PUNE ITA Nos.842 to 844/PN/2012

(A.Ys. 2003-04 to 2005-06) M/s. Shah Himmatlal Manilal & Co.,

Date of pronouncement : 28.08.2014

We also find that the assessee has filed return of income for

A.Y. 2006-07 because it had worked for some part of the year

previous to the relevant assessment year 2006-07, wherein in

column No.5 i.e. date of birth has been mentioned as dissolved

firm. So, it was impliedly in the knowledge of Revenue Department

that the said firm is dissolved at relevant point of time. We find that Delhi ‘A’ of the Tribunal in the case of Impsat (P) Ltd. vs. ITO

(2004) 91 ITD 354 (Del) has held that assessment on a company

which has been dissolved and struck off the register of companies

u/s.560 of the Companies Act, 1956, is invalid, even though the

company participated in assessment proceedings. Even the case

before us, the assessee firm was dissolved at relevant point of time

which is evident from the order of District Court, Jalna and the

subsequent proceedings, appointment of Arbitrator by the

jurisdictional High Court and the interim award passed by the said

Arbitrator as discussed above. So, the firm was dissolved and not

in existence as on date of search. We also find that the Hon’ble

High Court of Punjab & Haryana in the case of CIT vs. Rakesh

Kumar, Mukesh Kumar L/H of Late Mohar Singh (supra) has held

that search warrant being issued in the name of a dead person and

Panchnama also prepared in the name of dead person, the search

and the authorization were held as invalid and void ab initio and

therefore block assessment u/s.158BC r.w.s. 144 in pursuance

thereof is also held as invalid. The ratio of Rakesh Kumar, Mukesh

Kumar L/H of late Mohar Singh (supra) supports the argument of

the learned Authorized Representative that search cannot be

conducted on non-existence dissolved firm. The ITAT Pune Bench

in the case of ACIT & Another vs. Chilka Vyankatesh Sidram &

Others reported in (2010) 122 TTD 293 (Pune) held that assessee

cannot challenge the validity of search action. It has been held

that ITAT examine the validity of search action, however, this case

distinguishable in case before us. The contention of assessee is

that search cannot be conducted on firm which is dissolved and

hence assessment completed u/s 153A of the Act is illegal. The

validity of search action of entire group is not being challenged.

The issue raised by assessee is that one firm has been dissolved it

cannot be subjected to search action and hence the consequent

assessment completed u/s 153A of the Act is null and void. We also find that the Hon’ble Bombay High Court in the case of

Hemendra Ranchhoddas Merchant v. DIT (Investigation) & Others

reported in (2013) 351 ITR 206 (Bom) wherein assessee had filed a

Writ before the Hon’ble High Court challenging the search action.

The assessee and his wife had floated a firm viz. M/s Sriram

Warehousing Corporation on 1st November, 1992 later on firm was

dissolved w.e.f. 31st March, 2004. Thereafter, search was carried

out on assessee and his wife. The assessee challenged the search

action and consequent assessment order u/s 153A of the Act on

the ground that search warrant was not issued in his name and

same was issued in the name of dissolved firm. The Hon’ble High

Court rejected the contention of assessee on the ground that

search warrant was issued in the name of assessee and his wife

and therefore consequent assessment completed u/s 153A of the

Act was justified. The Hon’ble High Court further noted that

search was conducted on various concerns of assessee group and

Department has also much information that assessee and his

group concern has generated substantial unaccounted income.

Accordingly, the Hon’ble High Court upheld the validity of search

action on the assessee and it has been noted that warrant was also

issued in the name of assessee. Now, the facts in the case of

Hemendra Ranchhoddas Merchant (supra) are distinguishable. In

the case before us, contention of assessee is that search cannot be

conducted on firm which is dissolved and hence assessment

completed u/s 153A of the Act is illegal. The validity of search

action on the entire group is not being challenged by the assessee.

The assessee contention is that once firm has been dissolved it

cannot be subjected to search action and hence consequent

assessment completed u/s 153A of the Act is null and void and

this issue was not a subject-matter before the Hon’ble High Court

in the case of Hemendra Ranchhoddas Merchant (supra). The

main plea of the assessee is that once firm is dissolved its assessment could not be completed u/s 153A of the Act and

accordingly, the decision of Hemendra Ranchhoddas Merchant

(supra) is not applicable to the facts of the present case. In view of

above discussion, we hold that the assessments on dissolved firm

are not justified and the same are annulled.

INCOME TAX APPELLATE TRIBUNAL,MUMBAI - ‘A’ BENCH.

ITA No.3393/Mum/2013 Assessment Year-2009-10

Laxmi C. Mistry Date of Pronouncement : 03-09-2014

.Before parting we will like to mention that we are at loss to understand the justification and logic behind filing the second appeal in the present case.Though in the Ground of appeals it has been mentioned that the FAA had admitted additional evidences,but nowhere it is mentioned as to which additional evidences were admitted by her.We find that the FAA had not admitted any new evidence while deciding the appeal.We want to add that in the case before us the AO/CIT had sent the scrutiny report/approved the filing of second appeal in a very casual manner.It is a sorry state of affairs that on one hand the CBDT is directing the officers of field formation to reduce litigation and not to file frivolous appeals and on the other hand we come across appeals that clearly show that the orders of senior officers of the level of CIT(A) are being challenged on very very flimsy grounds.Present appeal is one of such cases.We do not wish to comment further about it,except saying that the assessee has been dragged to the Tribunal unnecessarily.