In the re-assessment proceedings, the Assessing Officer noted that the assessee had made payments to various lawyers for their professional services but had not deducted tax at source u/s. 194J from the same. The Assessing Officer was of the view that the assessee was under statutory obligation to deduct tax at source u/s.194J and, since the assessee had failed to perform this obligation, such payments were disallowed u/s. 40(a)(ia).
The CIT(A) rejected the assessee’s contention that expenditure which is not claimed in and did not appear in the Return and the P & L a/c should not be disallowed by application of section 40(a)(ia). The CIT(A) upheld the Assessing Officer’s order. The Tribunal, setting aside the orders of the lower authorities, noted as under:
(1) Unless a deduction is claimed in respect of the said amounts u/ss.30 to 38, the disallowance u/s.40(a)(ia) cannot come into play at all. The question of disallowance u/s.40(a)(ia) can arise only when something is claimed as a deduction in computation of business income; reimbursements simplicitor, being profit neutral, are not routed through the P & L a/c.
(2) Whether the assessee had claimed the fees paid to outside lawyers as a reimbursement from its clients or not was simply a matter of fact which will be evident from the bills raised on the clients and there was no need for making any inferences in respect of the same.
(3) If in the bills raised on its clients, the assessee had separately itemised the payments made to the outside counsel and claimed reimbursements in respect of the same, then these expenses cannot be of such a nature as to seek deduction in respect of the same. When the expenses are being reimbursed by the clients, these expenses cease to be expenses of the assessee and, therefore, there is no question of deduction in respect of the same.
(4) However, if the assessee has raised composite bills for professional services, on gross basis and without giving details of payouts to outside lawyers on behalf of his clients, the payments to outside lawyers will be in the nature of deduction to be claimed by the assessee.
(5) Without there being any categorical finding to the effect that the payments to outside lawyers were claimed as deductions in computation of profits, the disallowance u/s.40(a)(ia) in respect of such payments is not legally sustainable.
The matter was remanded back to the Assessing Officer for adjudication de novo in light of the above observations.
