Business expenditure- Disallowance u/s. 40(a) (ia) r/w. s. 194H- A. Y. 2009-10- Bank providing swiping machine to assessee- Amount punched in swiping machine credited to account of retailer by bank- Bank providing banking services in form of payment and subsequently collection of payment- Bank does not act as agent- No obligation to deduct tax at source- Disallowance u/s. 40(a)(ia) is not warranted-

Assessee was engaged in the business of trading in garments. HDFC provided swiping machine to assessee. Amount punched in swiping machine credited to the account of retailer by bank. Bank providing banking services in form of payment and subsequently collecting payment. For the A. Y. 2009-10 the Assessing Officer held that the amount earned by the HDFC was in the nature of commission and should have been subjected to deduction of tax at source u/s. 194H of the Income-tax Act, 1961. Since tax was not deducted at source, he disallowed an amount of Rs. 44,65,654/- u/s. 40(a)(ia) of the Act. The Tribunal held that the assessee had not violated section 194H and accordingly the Tribunal deleted the addition.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) HDFC was not acting as an agent of the assessee. Once the payment was made by HDFC, it was received and credited to the account of the assessee. In the process a small fee was deducted by HDFC. HDFC realized and recovered the payment from the bank which had issued the credit card. HDFC had not undertaken any act on “behalf” of the assessee. The relationship between HDFC and the assessee was not of an agency but that of two independent parties on principal to principal basis. Therefore, section 194H would not be attracted.

ii) Another reason why section 40(a)(ia) should not have been invoked was the principle of doubtful penalisation which required strict construction of penal provisions. The principle requires that a person should not be subjected to any sort of detriment unless the obligation is clearly imposed. HDFC would necessarily have acted as per law and it was not the case of the Revenue that HDFC had not paid taxes on its income. It was not a case of a loss of revenue as such or a case where the recipient did not pay its taxes.

iii) We do not find any merit in the present appeal and the same is dismissed.”