The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has restored to the Commissioner of Income Tax (Appeals) a dispute concerning a ₹2.35 crore disallowance under Section 40(a)(i) of the Income-tax Act, 1961, holding that the underlying question of tax deduction at source under Section 195 was foundational to the disallowance and was itself pending adjudication in connected proceedings.

The bench of Amit Shukla (Judicial Member) and Rakesh Kumar Lodha (Accountant Member) observed that deciding the Section 40(a)(i) dispute independently while the foundational proceedings under Sections 201(1) and 201(1A) remained pending before the same appellate forum could result in “incongruous or inconsistent conclusions.” It therefore directed the CIT(A) to decide the matters after, or simultaneously with, the connected TDS appeal. 

Buy Now: E-Magazine: 1000+ Landmark GST Judgments (2017–2026)

The principal controversy before the Tribunal concerned a disallowance of ₹2,35,72,409 under Section 40(a)(i).

The reassessment proceedings had originated from an order passed under Sections 201(1) and 201(1A), read with Section 195. In those proceedings, the tax authorities held that the assessee had made a payment of ₹2.35 crore to Ashland Singapore Pte. Ltd., a Singapore-based company, towards consulting and professional services without deducting tax at source.

Relying substantially on the conclusion reached in the TDS proceedings, the Assessing Officer reopened the assessment under Section 147 and disallowed the entire payment under Section 40(a)(i). 

Thus, the Section 40(a)(i) disallowance was not an independent development. Its foundation was the tax authority’s earlier determination that the payment to the Singapore entity attracted a withholding-tax obligation under Section 195.

Before the CIT(A), the assessee challenged both the validity of the reassessment proceedings and the substantive disallowance.

An important aspect raised by the assessee was that the order under Sections 201(1) and 201(1A), read with Section 195—which formed the basis of the reopening and consequential disallowance—had itself been challenged before the First Appellate Authority, and that appeal was still pending.

The CIT(A) took note of the pending appeal. However, on the reasoning that the conclusions contained in the TDS order continued to remain operative during the pendency of the appeal, the CIT(A) confirmed the ₹2.35 crore disallowance.

According to the ITAT order, the CIT(A) did so without independently adjudicating the various legal and factual grounds raised by the assessee. 

The assessee argued that the obligation to deduct tax under Section 195 was the foundational question on which the entire disallowance under Section 40(a)(i) depended.

Since the appeal arising from the order under Sections 201(1) and 201(1A) remained pending before the First Appellate Authority, it was argued that the Section 40(a)(i) proceedings should also be restored to the CIT(A). This, according to the assessee, would permit the interconnected disputes to be adjudicated harmoniously and consistently.

Significantly, the Departmental Representative agreed that, considering the particular circumstances, the matter could be restored to the CIT(A) for adjudication after deciding, or simultaneously with, the appeal arising out of the TDS-default order. 

The Tribunal found a direct connection between the two sets of proceedings.

It noted that both the reopening of assessment and the consequential Section 40(a)(i) disallowance were founded substantially upon the conclusions recorded in the order under Sections 201(1) and 201(1A), read with Section 195. 

The central question was whether the payment made to Ashland Singapore Pte. Ltd. was chargeable to tax in India. The answer to that question would determine whether the assessee was legally obliged to deduct tax at source under Section 195.

The Tribunal observed: “Whether the impugned remittance made to M/s Ashland Singapore Pte. Ltd. was chargeable to tax in India and, consequently, whether the assessee was obliged to deduct tax at source under section 195 are matters which lie at the root of both proceedings.”

It consequently held that the result of the pending appeal against the Section 201(1)/201(1A) order would have a “direct and material bearing” on whether the Section 40(a)(i) disallowance could ultimately be sustained. 

The Tribunal particularly emphasised the need to avoid conflicting findings on the same foundational tax question.

It reasoned that if the Section 40(a)(i) appeal were decided independently while the underlying Section 195/TDS proceedings remained pending before the same appellate authority, the two proceedings could potentially produce incompatible conclusions.

The ITAT accordingly observed that adjudicating the present dispute independently “may lead to incongruous or inconsistent conclusions.”

On that basis, the Tribunal set aside the impugned appellate order and restored the entire appeal to the CIT(A).

The Tribunal directed the CIT(A) to decide the appeal afresh after adjudicating the assessee’s appeal against the order under Sections 201(1) and 201(1A), read with Section 195, or simultaneously with that appeal.

Importantly, the remand is not confined merely to the quantum disallowance.

The ITAT specifically directed the CIT(A) to adjudicate all legal and factual grounds raised by the assessee, including its challenge to the validity of the reassessment proceedings, independently on their merits and in accordance with law.

The assessee must also be provided a reasonable opportunity of being heard. 

The Tribunal clarified that its remand order should not be treated as expressing any conclusion on the merits of the underlying controversy.

It expressly stated that it had not expressed any opinion on the merits of any of the issues raised in the appeal, and that all contentions available to both the assessee and the Revenue remained open. 

Accordingly, the Tribunal has not decided whether the consulting and professional service payment to the Singapore entity was taxable in India, whether Section 195 required deduction of tax at source, whether the assessee could be treated as an assessee in default under Section 201, or whether the Section 40(a)(i) disallowance was ultimately sustainable.

Membership Required to Access Case Details & Order Copy

To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.

Read More: Same-Day ‘Approved’ Sanction Doesn’t Make Reassessment Mechanical: ITAT