The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that a buyer cannot be treated as a defaulter under Section 194Q of the Income Tax Act, 1961, where the seller had already collected tax at source under Section 206C(1H) on the same transaction before the buyer could deduct tax.
The bench of Sudhir Kumar (Judicial Member) and Manish Agarwal (Accountant Member) deleted a disallowance of Rs. 2.06 crore made under Section 40(a)(ia), observing that the same transaction cannot again be subjected to tax deduction by the buyer once the seller has already collected tax in accordance with the clarification issued by the Central Board of Direct Taxes (CBDT).
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The appellant/assessee, a partnership firm engaged in supplying CCTV cameras and other security-system products, filed its return of income declaring a total income of ₹15 lakh. Its case was selected for complete scrutiny under the Computer-Assisted Scrutiny Selection system on account of high credits, liabilities and business expenditure.
Following the assessment proceedings, the Assessing Officer determined the firm’s total income at approximately ₹6.17 crore.
Among the additions, the Assessing Officer treated a closing balance of ₹3.76 crore appearing in the account of M/s AMSEC System as an unexplained cash credit under Section 68. The officer also invoked Section 115BBE, which provides for taxation of certain unexplained income at a special rate.
The Assessing Officer further disallowed ₹2.06 crore under Section 40(a)(ia), representing 30% of the payments made to M/s Aditya Infotech Ltd., on the ground that the assessee had failed to deduct tax at source under Section 194Q on its purchases from the company.
The Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, deleted certain other additions relating to differences in sundry creditors and disallowance of expenditure. However, the appellate authority upheld both the ₹3.76 crore addition under Section 68 and the ₹2.06 crore disallowance under Section 40(a)(ia).
The assessee consequently approached the ITAT.
On the issue of non-deduction of tax under Section 194Q, the assessee submitted that M/s Aditya Infotech Ltd. had already collected tax at source on the sales made to it under Section 206C(1H).
It argued that once the seller had collected TCS on the transaction, the buyer was not required to deduct tax again under Section 194Q.
The assessee relied on CBDT Circular No. 13 of 2021 dated June 30, 2021, which contains guidelines regarding the application of Section 194Q.
The circular clarifies that where a transaction falls within both Section 194Q and Section 206C(1H), the primary obligation is ordinarily on the buyer to deduct tax under Section 194Q. After the buyer deducts tax, the seller is not required to collect TCS under Section 206C(1H).
However, the CBDT provided a specific concession for cases where the seller has already collected tax under Section 206C(1H) before the buyer could deduct it under Section 194Q.
In such circumstances, the circular states that the transaction will not again be subjected to tax deduction by the buyer. The clarification was issued to avoid practical difficulties because the tax rates prescribed for deduction and collection under the two provisions are the same.
The Revenue supported the orders of the lower authorities. Alternatively, it requested that the matter be sent back to the Assessing Officer for verification.
The ITAT examined the assessee’s Form 26AS and found that the seller had already collected tax at source on the sales made to the assessee.
Referring to the CBDT circular, the Tribunal held that when the seller collects tax under Section 206C(1H) before the buyer deducts tax under Section 194Q, the buyer is exempted from deducting tax again on the same payment.
“In the event seller has collected the tax at source under Section 206C(1H) of the Act prior to TDS by the buyer, the buyer is exempted from the liability of TDS on such payments,” the Tribunal observed.
Since the TCS collected by the seller was reflected in Form 26AS, the Tribunal concluded that the assessee was not obliged to deduct tax at source on the corresponding payments.
The assessee, therefore, could not be regarded as a defaulter under Section 194Q. Consequently, the provisions of Section 40(a)(ia) could not be invoked, the Bench held while deleting the ₹2.06 crore disallowance.
The Tribunal separately considered the addition of ₹3.76 crore made under Section 68 in respect of the closing balance payable to M/s AMSEC System.
Vikram Gogra, the counsel for the assessee submitted that it had been regularly purchasing CCTV cameras and security-related products from the supplier during the relevant year as well as in preceding assessment years. Purchases exceeding ₹3.15 crore were made during the year, while payments of ₹77 lakh were also made to the supplier.
According to the assessee, the Assessing Officer accepted its books of account, purchases, corresponding sales and declared stock. The credit balance was nevertheless treated as unexplained primarily because the supplier did not respond to a notice issued under Section 133(6).
The assessee explained that a fire had occurred at the business premises of M/s AMSEC System on May 22, 2022, destroying its records and preventing it from providing the required documents during the earlier proceedings.
It sought permission under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963, to submit additional evidence before the ITAT.
The documents included the supplier’s confirmation, ledger accounts for several financial years, sales invoices, bank statements of both parties, the supplier’s income-tax return, GST registration, annual GST report and copies of the daily police diary and Delhi Fire Service report relating to the fire.
The Tribunal noted that the assessee had entered into regular business transactions with the supplier in the ordinary course. The supplier’s existence was capable of verification from its GST registration and income-tax return.
It further observed that the Assessing Officer had not questioned the purchases made from the supplier, the corresponding sales or the stock declared by the assessee. The credit balance had been treated as unexplained solely because the supplier did not comply with the notice issued under Section 133(6).
Considering the fire at the supplier’s premises and the supporting records produced before it, the Tribunal accepted the assessee’s explanation for its inability to submit the material before the lower authorities.
The additional evidence was admitted and the Section 68 issue was remanded to the Assessing Officer for verification.
The Assessing Officer was directed not to make any addition under Section 68 if no discrepancy was found in the additional evidence. The assessee was also directed to appear before the officer and furnish any further material required to establish the genuineness of the creditor.
The appeal was consequently partly allowed, with the TDS-related disallowance being deleted and the unexplained-credit issue restored to the Assessing Officer for fresh verification.
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