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CIT vs. ITD CEM India JV (Bombay High Court)
September, 23rd 2017

40(a)(ia)/40(ba) Disallowance of reimbursement of salary for non-deduction of TDS: Displeasure and unhappiness expressed at the manner in which the Tribunal approached the matter insofar as the applicability of s. 40(ba) is concerned. Tribunal cautioned that it should not use abbreviations in the order without indicating what the terms stand for as it causes confusion

(i) The Tribunal approached the matter by bifurcating the disallowance in relation to salary and administrative expenses. The Tribunal, after noting the rival contentions and particularly the argument that no disallowance has been made in the assessment years 2006-2007 and 2007-2008 which were framed under Section 143(3), proceeded further to hold that the departmental representative relied on some decision, details of which are not disclosed to justify the disallowance. The Tribunal holds in paragraph 18 that it has heard the detailed arguments, perused the evidence placed in the Appeal paper book and the written submissions.

(ii) It then mixes up its findings and in relation to the applicability of Section 40(a)(ia) and 40(ba), but concludes that it does not find any reason to sustain the disallowance under Section 40(a)(ia) as the payments made by the assessee to ITD Cementation India Limited were only on account of salary and related expenses.

(iii) Then it purports to divert it’s attention to Section 40(ba) of the IT Act, but proceeds to state that this provision is specific. It calls for disallowance of payment of any kind by the association of persons to it’s members. Then it holds that it could have accepted the arguments of the departmental representative had the member of the assessee been an individual. Because the provision seeks to prevent the enrichment of members through back door. However, in the case at hand, the payment has been made to a company, which is a separate juridical person, distinct from it’s shareholders/directors. It then holds that payment has been made on account of reimbursement of an expense incurred by the company. Therefore, the question of enrichment of a member does not arise. There is no profit element. That is why the Section 40(ba) does not get attracted.

(iv) The counsel for the assessee on the other hand, would submit that there is no question of invoking Section 40(ba) of the IT Act and merely because the Assessing Officer has referred to it does not mean that the Tribunal was obliged to render any finding about its applicability. We do not agree with the counsel for the assessee for more than one reason. The finding with regard to the applicability of Section 40(ba) is rendered in paragraphs 20, 21 and 22 of the Tribunal’s order. These paragraphs read as under:

20. Now we divert our attention to the provision of section 40(ba).

21. The provision is very specific, because it calls for disallowance of payment of any kind by the AOP to its member. We would have accepted the arguments of the DR/AO/CIT(A), had the member of the assessee were an individual, because, the provision has the enrichment of members through back door. But here is the case of a company, which is a separate juridical person, distinct from its shareholders/directors. In the instant case, the payment has been made on account of reimbursement of an expense made by the company. Here the question of enrichment of a member does not arise, as has been held earlier that there is no profit element.

22. In such a circumstance, provision of section 40(ba) does not get attracted.

(v) As far as Section 40(ba) is concerned, that is pertaining to the amounts not deductible. Section 40 opens with a nonobstante clause. Notwithstanding anything to the contrary in Sections 30 to 38 of the Income Tax Act, 1961, the amounts enumerated in the clauses and subclauses thereto shall not be deducted in computing the income chargeable under the head “Profit and gains of business or profession” That inter alia includes an amount in the case of an AOP (Association Of Persons) or body of individuals (other than a company or a cooperative society or a society registered under the Societies Registration Act, 1860, or under any law corresponding to that Act in force in any part of India) any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such association or body to a member of such association or body. There are three Explanations below the same.

(vi) We have not found from the Tribunal’s order that it has taken into consideration the provisions and the wide wording thereof. It’s applicability therefore, will have to be decided on the touch stone of the plain language of this provision. We do no see any discussion in the Tribunal’s order on this point at all.

(vii) Apart from that, the Tribunal’s order is confusing. In the impugned order, the Tribunal does not indicate what it means by AOP. It does not indicate as to what it means by TAS for both sides tell us that it is identical to TDS, namely, Tax Deducted at Source. We are unhappy with the abbreviations and short forms in the Tribunal’s order. We do not see who is reluctant, either one who dictates or one who takes down the same, but such abbreviations and shortcuts increase burden on the higher Courts. We would caution the Tribunal that hereafter it should indicate somewhere in the order as to what the abbreviations used by it stand for.

(viii) In the circumstances, we proceed to admit this Appeal on question no.10(a) of the paper book. The question reads as under:

10(a) Whether on the facts and in the circumstances of the case and in law, the Hon’ble tribunal erred in deleting the addition of Rs.4,99,19,593/pertaining to salaries, made by the Assessing Officer and confirmed by CIT(A), on account of disallowance U/s 40(ba) of the Income Tax Act, 1961?

(ix) Despite his persuasive ability, when Mr. Ahuja would submit that even the reframed question (a1) is the substantial question of law, we are unable to agree with him. We affirm the findings of fact by the Tribunal and dismiss this Appeal to that extent.

(x) However, we have expressed our displeasure and unhappiness at the manner in which the Tribunal approached the matter/issue insofar as the applicability of Section 40(ba) (question no. 10(a) reproduced above) of the IT Act is concerned, we allow this Appeal. We set aside the Tribunal’s order to that extent. We restore the issue to the file of the Tribunal for being decided afresh on merits and in accordance with law. The Tribunal shall not be influenced in any manner by it’s earlier observations. We also clarify that when we note the rival contentions, beyond that exercise, we have expressed no opinion on the correctness of these contentions. All of them are open insofar as this issue is concerned for being raised before the Tribunal. There will be no order as to costs.

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