Now a days, assesse’s are facing number of disallowance under various clauses of section 40 of the act by the Income tax officials. These issues were handled with due care at the time of the assessment itself so that in the case of forcefully dis allowance by AO, the assessee will not get hard hits in the appellate level. The important issues which were covered under section 40 are
(i) Disallowance for non deduction of TDS under section 40(a)(i)
(ii) Deduction under section 40(b) for partners.
(iii) Disallowance under section 40A(3) for making cash payments
(iv) Disallowance under section 40A(2)(b) – Related party transactions
Now let us analyze the judicial decisions.
(a) Disallowance for non deduction of TDS under section 40(a)(i)
(i) In the case of R. S. Suriya vs. Dy. CIT 21 ITR 746 the Chennai ITAT held that Payment made by actor to person for managing call sheets, cannot be called payment for professional services hence cannot be disallowed under section 40(a)(ia)(A).
(ii) In the case of Teja Constructions v ACIT, 129 TTJ 57 it was decided that Once estimate of income is made, further disallowance under section 40(a)(ia) for non deduction of TDS is not warranted.
(iii) During assessment year 2001-02, assessee company made royalty payment to its holding company in US after deducting TDS, however, paid amount was so deducted in the Asst. Year 2001-02. As per proviso to section 40(a)(i) deduction is allowable to assessee in subsequent year in which TDS has been paid or deducted under chapter XVIIB, however in the present case TDS had been paid by assessee in present year although deducted in preceding year hence its claim for deduction was allowable. Refer McDonalds (India) (P) Ltd. vs. ACIT, 36 SOT 240.
(iv) Expenditure claimed by the assessee as interest accrued on debentures without deducting the TDS could not be allowed in view of specific provisions of section 40(a)(ia). Refer, Dy. CIT vs. Umang Dairies Ltd, 36 SOT 383.
(v) In the case of CIT vs. Information Architects, 322 ITR 1, the Mumbai High Court held that Amounts paid by the assessee to its employees toward overseas maintenance allowance. These amount constituted only reimbursement for the expenses incurred by the employees and would not form part of the salary in the hands of receipts. Sub clause (iii) of clause (a) of section 40 would not be applicable.
(vi) Payment for SAP software could not be charged to tax in India as interest or royalty or fee for technical services. Even otherwise because of non-discriminatory clause 24(1) of DTAA with India and Germany, foreign national could not be subjected to provisions of section 40(a)(i). As regards depreciation which is allowable under section 32 provisions of section 40(a)(i) are not applicable. Refer, SMS Demag (P) Ltd. vs. Dy. CIT, 38 SOT 496.
(vii) In the case of Orient (Goa) (P) Ltd. 30 DTR 129, it was held that Tax having not been deducted at source from payment of demurrage charges to foreign shipping company, s. 40(a)(i) was clearly attracted; assessee being a resident company, there was no question of invoking s.172.
(viii) No income accrued or arose to the payee from the payment made by the assessee to its non-resident parent company in respect of the expenditure incurred by the latter in connection with the business activity carried on by assessee was not required to deduct tax at source and therefore, the payments could not be disallowed by invoking the provision s of s. 40(a)(i); disallowance could not be made also for the reason that the income of the assessee is to be computed as per the special provisions of s. 42 which overrides the general provisions of computation of income. Refer, Cairn Energy India Pvt. Ltd. 30 DTR 258.
(ix) In the case of DCIT v Lazard India (P) Limited, 6 taxmann.com 30 Mum – ITAT, it was held that Provisions of section 40(a)(i) will not be applicable in the case of reimbursement of expenses. The same was also confirmed for Utility Powertech Ltd. TIOL 545 ITAT (Mum.) (BCAJ) (Nov., 2010) P. 22 [150 (2010) 42 B. BCAJ] where it was held that When there is no element of income and the payment is only as a reimbursement of expenses incurred by the payee, then no disallowance can be made under section 40(a)(ia).
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