Sections 40(a)(ia), 194I – U/s. 194I tax is not required to be deducted on reimbursements and therefore, the amount so reimbursed cannot be disallowed u/s. 40(a)(ia)

FACTS
The assessee reimbursed rent and parking charges amounting to Rs. 71.49 lakh to its holding company, PSI Data System Ltd.  The holding company had entered into a rent agreement with M/s Golf Links. The assessee entered into a Memorandum of Understanding with its holding company on 1.4.2006 pursuant to which the assessee company would occupy a portion of premises taken on lease by the holding company and the holding company shall apportion the rent payment with the assessee company in the ratio of space actually utilised by the assessee.  The MOU also provided that all statutory liabilities in relation to rental facilities such as TDS, service tax, are the responsibilities of the holding company.  

During the year under consideration, the assessee reimbursed a sum of Rs. 71,49,545 to its holding company as its share of rental expenditure incurred by the holding company. The assessee did not deduct tax at source from the said payment on the reasoning that the liability to deduct tax at source from the rent payment paid to the landlord was taken up by the holding company.  The landlord, M/s Golf Links, had obtained a certificate u/s. 197(1) for non-deduction of tax at source, therefore, the holding company did not deduct tax at source from the rent paid by it to the landlord.  The holding company had obtained no deduction certificate for payments covered by sections 194A, 194C and 194J.  It was also submitted to the AO that the holding company was of a bonafide belief that reimbursement of rent from the assessee would not form part of its income in its hands and hence it did not obtain  specific certificate for payments covered by section 194I.  

The AO held that the assessee should have deducted tax from rent payments made by the assessee to its holding company. He disallowed Rs. 71,49,545 by invoking provisions of section 40(a)(ia) of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the rental agreement has been entered into between the holding company and the land lord and hence the inference drawn by the tax authorities is against the facts available on record. The Tribunal observed that an identical issue was considered by the co-ordinate bench of the Tribunal in the case of Prime Broking Co. (I) Ltd. vs. ACIT (ITA No. 6627/Mum/2010 dated 19.10.2012) and the Tribunal held that the provisions of section 194I shall not apply to reimbursement of rent.  The decision rendered by the Tribunal has since been upheld by the Bombay High Court vide its order dated 9th June, 2015 reported in 2015-TIOL-1472-HC-Bom-IT.

The Tribunal further observed that the return of income of the holding company for the year under consideration has been accepted. Since the payment received from the assessee towards rent has been offered in the return of income filed by the holding company, the provisions of section 40(a)(ia) cannot be applied to the case of the assessee as per the second proviso thereto, which is held to be retrospective by the Delhi High Court in the case of Ansal Land Mark Township (P.) Ltd. (377 ITR 635)(Del).  

Considering the ratio of the judgments of the Bombay High Court and the Delhi High Court, the Tribunal set aside the order of the CIT(A) and directed the AO to delete the addition made u/s. 40(a)(ia) of the Act relating to reimbursement of rent.