Jattana Restaurant & Motels Pvt. Ltd., ... vs Assessee

Jattan Restaurant & Vs. The Income Tax Officer, Motels Pvt. Ltd., Ward 4 (4), H.No.274, Sector 35-A, Chandigarh. Chandigarh. PAN No. AABCJ44947P

(Appellant) (Respondent)

Appellant by : Shri M.R.Sharma Respondent by : Shri S.K.Mittal, D R

Date of hearing : 29.05.2015 Date of Pronouncement : 29.05.2015

PER H.L.KARWA, VP :

This appeal filed by the assessee is directed against

the order of the learned Commissioner of Income Tax

(Appeals)-2, Chandigarh dated 2.2.2015 relating to

assessment year 2006-07.

2. In this appeal, the assessee raised following

grounds:

"1. That the order of the Assessing Officer as upheld by the Commissioner of Income Tax (Appeals), Chandigarh rejecting the application of the appellant u/s 154 of the appellant is bad in law and is beyond all the cannons of law and justice.

2 2. That the order of the Assessing Officer as upheld by the Commissioner of Income Tax (Appeals), Chandigarh rejecting the application of the appellant u/s 154 with regard to the disallowance of Rs 14,82,905/- u/s 40(a)(ia) being the amount of rent paid after deduction of tax at source but deposited late more so when the provision in this behalf was not applicable during the year under consideration and was applicable with effect from 01.04.2006 is bad in law and needs to be set aside.

3. That the order of the Assessing Officer as upheld by the Commissioner of Income Tax (Appeals), Chandigarh rejecting the application of the appellant u/s 154 with regard to the disallowance of Rs.5,31,891/- u/s 40(a)(ia) being the amount of franchisee fee paid without deduction of tax at source when the provision in this behalf was not applicable during the year under consideration is bad in law and needs to be set aside.

4. That the order of the Assessing Officer as upheld by the Commissioner of Income Tax (Appeals), Chandigarh rejecting the application of the appellant u/s 154 with regard to the disallowance of Rs 55,518/- being the amount of depreciation claimed by the appellant on the fixed assets and more so when the depreciation has been allowed in the subsequent year on such assets on the basis of the WDV is bad in law and needs to be set aside."

3. At the time of hearing of the appeal, Shri

M.R.Sharma, learned counsel for assessee did not press for

ground No.4 of the appeal stating that the assessee could not

produce bills regarding fixed assets pertaining to the claim of

depreciation. This ground of appeal is dismissed as not

pressed.

4. While framing the assessment for the year, under

consideration, the Assessing Officer had, inter-alia,

disallowed following amounts :

i) Rs.14,82,905/- under section 40(a)(ia) because the

assessee had not deducted tax at source on the rent as

per provisions of section 194-I of the Income Tax Act,

1961.

ii) Rs.5,31,891/- under section 40(a)(ia) since the 3

assessee had not deducted tax at source on franchise fee

(royalty) as per provisions of section 194-J of the Income

Tax Act, 1961.

5. Subsequently the assessee filed an application

under section 154 of the Act for rectification of the order of

assessment stating that the provisions relating to deduction

of tax at source on the rent and franchise fee (royalty) were

brought on Statute by the Taxation Laws (Amendment) Act,

2006 w.e.f. 13.7.2006 and were not applicable to the year

under consideration and so the tax was not required to be

deducted at source on payment of rent and franchise fee

(royalty). The Assessing Officer rejected the application of

the assessee vide his order dated 30.11.2012. The assessee

preferred an appeal against the said order before the learned

CIT (Appeals) and the learned CIT (Appeals) vide his order

dated 2.2.2015 upheld the order of the Assessing Officer.

6. I have heard Shri M.R. Sharma, learned counsel for

assessee and Shri S.K.Mittal, learned D.R for the Revenue and

have also carefully perused the materials available on record.

Shri M.R. Sharma, learned counsel for assessee reiterated the

submissions made before the lower authorities and submitted

that the provisions relating to deduction of tax at source on

rent and franchise fee (royalty) were introduced by the

Taxation Laws (Amendment) Act, 2006 w.e.f. 13.7.2006 and

were not applicable to the year under consideration and so the

tax was not required to be deducted at source on payment of

rent and franchise fee (royalty). He further submitted that 4

the Legislature amended the sub-clause (ia) of clause (a) of

section 40 of the Income Tax Act to extend the existing

provisions to payments of rent and royalty. Sub-clause (ia)

so amended also provides for the definitions of the terms rent

and royalty. As per provisions of section 40(a)(ia) of the Act

failure to deduct tax or to pay tax after deduction from

amounts payable to a resident, as interest, commission or

brokerage, fees for professional services or fees for technical

services, or amounts payable to a resident contractor or sub-

contractor, results in disallowance of such payments in the

computation of income of the payer. The Legislature has

amended the aforesaid sub-clause (ia) of clause (a) of section

40 of the Act to extend the existing provisions to payments of

rent and royalty. Shri M.R. Sharma, learned counsel for

assessee submitted that vide Circular No.1/2007, dated

27.4.2007, the CBDT clarified that the amended provisions of

section 40(a)(ia) of the Act relating to payments of rent and

royalty are applicable from assessment year 2007-08 onwards.

The Circular reads as under :

13. Deduction not to be allowed in the computation of income if tax is not deducted on payments of rent and royalty Section 40(a)(ia) 13.1 In accordance with the existing provisions of sub-clause (ia) of clause

(a) of section 40, failure to deduct tax, as referred under the provisions of Chapter XVII-B, or pay tax after deduction from amounts payable, to a resident, as interest, commission or brokerage, fees for professional services or fees for technical services, or amounts payable to a resident contractor or sub-contractor, results in disallowance of such payments in the computation of income of the payer.

13.2 The Act has amended the aforesaid sub-clause (ia) of clause (a) 5

of section 40 to extend the existing provisions to payments of rent and royalty. Sub-clause (ia) so amended also provides for the definitions of the terms rent and royalty.

13.3 Applicability: Assessment year 2007-08 onwards.

13.4 In a few representations received after the passage of the Taxation Laws (Amendment), Bill, 2005 and assent thereto on 13th July, 2007, apprehensions were expressed that the provisions of section 40(a)(ia) amended as above would be effective from assessment year 2006-2007 (i.e. in respect of the payments made in financial year 2005-2006) whereas the amended provisions of section 194-1 relating to deduction of tax at source on rent and those of section 194J relating to deduction of tax on fees for professional or technical services had been inserted in section 40(a)(ia) with effect from 13th July, 2006, a date which would relate to assessment year 2007-08 and not to 2006-07. It is, therefore, necessary to clarify that in any case in which tax is not deducted from payment of rent or royalty during the financial year 2005-2006, no disallowance in the computation of income would be required in terms of the amended provisions of section 40(a)(ia). A perusal of sub-clause (ia) makes it clear that a disallowance is attracted only when tax is deductible at source under Chapter XVII-B and it is not deducted or not paid to Government account. Since tax is deductible under the amended provisions of section 194-1 and section 194J from 13th July., 2006, assessment year 2007-2008 would the first relevant assessment year in which a disallowance would be attracted for not deducting or not depositing the tax in terms of the provisions of section 40(a)(ia).

7. In view of the above, I hold that the authorities below

were not justified in disallowing Rs.14,82,905/- on account of rent

and Rs.5,31,891/- on account of franchise fee (royalty) under

section 40(a)(ia) of the Act. The Hon'ble Andhra Pradesh High

Court in the case of Andhra Cement Co. Ltd. Vs. CI T, 232 ITR 364

(AP) held that it is well settled that the income-tax Act as it stands

amended on the first day of April on any f inancial year must apply

to the assessment of that year. Any amendments in the Act which 6

come into f orce after the f irst day of April of a f inancial year, would

not apply to the assessment f or that year, even if the assessment is

actually made af ter the amendments come into f orce.

8. In view of the above, there was no justification in

rejecting the rectification application preferred by the assessee to

the above extent. There is apparent mistake on record to the

extent that the Assessing Officer has wrongly made disallowances

in the assessment year 2006-07 under the amended provisions of

section 40(a)(ia) of the Act, which are applicable from the

assessment year 2007-08 onwards. Accordingly, I delete the

disallowances of Rs.14,82,905/- being the amount of rent paid

and Rs.5,31,891/- being the amount of franchise fee/royalty paid

which were made under section 40(a)(ia) of the Act for non-

deduction of tax at source.

9. In the result, the appeal of the assessee is allowed

partly as indicated above.

Order pronounced in the open court on this 29th day of

May, 2015.

Sd/-

(H.L.KARWA) VICE PRESIDENT

Dated : 29 t h May, 2015

*Rati*

Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.

Assistant Registrar, ITAT, Chandigarh 7