ADDL.CIT, SPECIAL RANGE-1, NEW DELHI vs. DINESH KUMAR MATHUR, NEW DELHI

With these observations, the matter is remanded for reconsideration; in the event the A.O. is satisfied that the claim towards the payment of Rs.3,19,66,460/- does not include any income component but in fact constitutes reimbursement, the question of application of Section 40(a)(ia) would not arise.”

The assessment order was again framed under Section 143(3) r.w. Section 260A of the Act dated 31.12.2017. The Assessing Officer on analysis factual matrix eventually observed that the reimbursement of expenses claimed by M/s. Aakriti Creations Pvt. Ltd. are liable to TDS provisions and consequently resorted to additions of Rs.3,19,66,460/- under Section 40(a)(ia) of the Act once again. The First Appellate Authority however deleted the impugned additions on the ground that the reimbursement in controversy has been included by the payee M/s. Aakriti Creations in their accounts and ‘Total Income’ and paid taxes thereon as applicable. Consequently having regard to the insertion of 2nd proviso to Section 40(a)(ia) read with judgment of Hon’ble Delhi High Court in the case of M/s. Ansal Landmark Township Pvt. Ltd. vs. PCIT reversed the action of the Assessing Officer and deleted the addition. The relevant operative paragraphs of the order of the CIT(A) is reproduced herein for ready reference: “5. The assessee is an individual and was doing business of manufacture and export of garments in the assessment year under question under the name and style of Alankar Creations. The assessee was also a director in M/s. Akriti Creations Pvt. Ltd. which owned a garment Manufacturing facility at 410 Udyog Vihar, Phase-Ill, Gurgaon. Assessee has filed its ITR for A.Y. 2008-09 on 30.09.2008 declaring an income of Rs. 49,02,099/-. Assessment in this case was completed on 30.12.2010 u/s. 143(3)/147 by making a disallowance of Rs.3,19,66,460/- u/s. 40(a)(ia) of the Act on account of non- deduction of TDS on payments to its sister concern M/s. Akriti Creations Pvt. Ltd. During the course of assessment proceedings AO noticed that assessee had made a payment of Rs.3,19,66,460/- to its sister concern M/s Akriti Creations Pvt. Ltd. for reimbursement of expenses without deduction of tax. The assessee had an agreement dated 1st April 2006 with M/s Akriti Creations Private Limited whereby the said Akriti Creations Private Limited would manufacture the garments for the assessee and would be reimbursed all its direct and indirect costs incurred on such manufacture and also would be paid a "Management Fee" of 5% which would be its profit for the manufacture of all the garments. AO observed that there was a liability on assessee to deduct tax u/s 194C of the I.T. Act on the contractual payment of reimbursement of manufacturing expenses. Assessee contended before the assessing officer that M/s Akriti Creations Pvt. Ltd. raised separate monthly bills for reimbursement of expenses and for management charges at 5% of actual expenses incurred and there was no element of profit or income in the reimbursement of expenses and hence there was no liability for deduction of tax on his part. AO also noticed that there was no segregation of expenses incurred on behalf of M/s Alankar Creations and no separation of receipt from M/s Alankar Creations into reimbursement and management charges. AO disallowed an amount of Rs.3,91,66,460/- relying upon the judgment of Hon’ble Supreme Court in the case of Associated Cement Company v CIT 201 ITR 435 (SC) wherein it was held that person responsible for deduction for tax has to deduct tax on the entire sum paid or credited and not merely from the income component of the same. On appeal CIT(A) held that amount of 2% required to be deducted by the buyer out of the sum credited to the account or paid to the contractor has to be confined on his income component and no TDS is warranted on reimbursement of expenses when there is a direct nexus between reimbursement and the actual costs incurred by the agent on behalf of the principle. Accordingly, she allowed the appeal of assessee. On appeal by Revenue to ITAT, Hon’ble ITAT held that genuineness of reimbursement of expenses to M/s. Akriti Creations Pvt. Ltd was never in dispute as well as the reimbursement of expenses was for the purposes of business. Accordingly, ITAT relying on the judgment of Hon’ble Delhi High Court in the case of CIT v M/s Ansal Land Mark Township (p) Ltd. 61 taxmann.com 45 (Delhi) dismissed the appeal of Revenue. On further appeal by Revenue to Hon’ble Delhi High Court, the matter was remanded back to AO vide Hon’ble Delhi High Courts order dated 24.01.2017. On examination, AO held that there is an inherent profit element in the quantification of expenses for reimbursement and accordingly the reimbursement of expenses claimed by M/s Akriti Creations Pvt. Ltd was liable to deduction of TDS u/s 40(a)(ia). As a result, she disallowed the amount of Rs.3,19,66,460/-. Assessee is in appeal against this addition. All the grounds relate to disallowance of amount of Rs.3,19,66,460/- on account of the reimbursement of expenses claimed by M/s Akriti Creations Pvt. Ltd was liable to deduction of TDS u/s 40(a)(ia). Therefore, all the grounds are taken up together. During the course of appellate proceedings, appellant has submitted that the order passed by AO is illegal and bad in law. It has further been stated that AO has exceeded the mandate provided by the order of Hon’ble Delhi High Court while passing the assessment order. Appellant claims that Hon’ble Delhi High Court has took note of its own judgment in the case of CIT v M/s Ansal Land Mark Township (p) Ltd. 61 taxmann.com 45 (Delhi) wherein it was held that amendment to second proviso to section 40(a) (ia) would be applied retrospectively from the date on which the said proviso was inserted in the Act. It has further been stated that M/s Akriti Creations Pvt. Ltd. has included the said amount in its financial statements and has filed its return of income and thus taxing the amount in the hands of assessee would amount to taxing the amount twice i.e. once in the hands of assessee and second in the hands of M/s Akriti Creations Pvt. Ltd. I have carefully considered the observation of AO, submission of appellant and case laws relied on by appellant and order of Hon’ble Delhi High Court in appellant’s case. The issue in dispute is whether TDS was to be made on reimbursement of Rs.3,19,66,460/- by appellant to its sister concern M/s Akriti Creations Pvt. Ltd. From the perusal of Hon’ble Delhi High Courts order it is seen that Hon’ble Delhi High Court has remanded the matter for reconsideration after taking into account the judgment of M/s Ansal Land Mark Township (p) Ltd. The relevant portion of High Court’s order is reproduced as under: “4. In Ansal Land Mark Township (P) Ltd. (supra), the Court elaborately considered the impact of Section 194C and its interpretation of Section 201 and 210 of the Act. Like in the Ansal Land Mark Township (P) Ltd. (supra), here too the deductee, i.e., M/s Aakriti Creation Pvt. Ltd. has filed its returns which reflected the amounts claimed to be expenditure which were examined and after which the assessment orders were framed. The Ansal Land Mark Township (P) Ltd. (supra) had taken note of the Agra Bench of the ITAT decision in Rajiv Kumar Agarwal v. ACIT, ITA No.337/Agra/2013. The Agra Bench had stated as follows: “Deincentivizing a lapse and punishing a lapse are two different things and have distinctly different, and sometimes mutually exclusive, connotations. When we appreciate the object of scheme of section 40(a)(ia), as on the statute and to examine whether or not, on a “fair, just and equitable” interpretation of law- as is the guidance from Hon’ble Delhi High Court on interpretation of this legal provision, in our humble understanding, it could not be an “intended consequence” to disallow the expenditure, due to non-deduction of tax at source, even in a situation in which corresponding income is brought to tax in the hands of the recipient. The scheme of Section 40(a)(ai), as we see it, is aimed at ensuring that an expenditure should not be allowed as deduction in the hands of an assessee in a situation in which income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. It is not, in our considered view, a penalty for tax withholding lapse but it is a sort of compensatory deduction restriction for an income going untaxed due to tax withholding lapse. The penalty for tax withholding lapse per se is separately provided for in Section 271C, and, section 40(a)(ai) does not add to the same. The provisions of Section 40(a)(ai), as they existed prior to insertion of second proviso thereto, went much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the assessee’s tax withholding lapses did not result in any loss to the exchequer. Now that the legislature has been compassionate enough to cure these shortcomings of provision, and thus obviate the unintended hardships, such an amendment in law, in view of the well settled legal position to the effect that a curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically, the insertion of second proviso must be given retrospective effect from the point of time when the related legal provision was introduced. In view of these discussions, as also for the detailed reasons set out earlier, we cannot subscribe to the view that it could have been an “intended consequence” to punish the assessees for non ¬deduction of tax at source by declining the deduction in respect of related payments, even when the corresponding income is duly brought to tax. That will be going much beyond the obvious intention of section. Accordingly, we hold that the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of Section 40(a) was inserted by the Finance (No. 2) Act, 2004.”

In the present case too, the Court is of the opinion that since the amounts received by the payee, i.e., M/s Aakriti Creation Pvt. Ltd. were reported by it in the regular course of assessments, the disallowance of the entire amounts, under Section 40(a)(ia) of the Act in effect would render one payment which constitutes a transaction liable to income tax, twice over. Considering that Parliament remedied the law by amendment through insertion of the second proviso, in cases such as the present one, where the AO can have easy access to the returns of the payee, in the larger interest of the assessee and the Revenue, it would be appropriate that the A. O. examines the ITA figures with relation to the exact claim of payments toward the raw materials. The AO would examine, if necessary, the returns and relative documents pertaining to the payee M/s Akriti Creation Pvt Ltd. The direction given by the Hon’ble High Court in para 6 of the order has to be seen in light of its findings on para 4 and 5. Thus in para 6 the court directs the AO as under 6. With these observations, the matter is remanded for reconsideration; in the event the A.O. is satisfied that the claim towards the payment of Rs.3,19,66,460/- does not include any income component but in fact constitutes reimbursement, the question of application of Section 40(a)(ia) would not arise.” It may be seen that the Hon'ble High Court vide para 5 of the order dated 24th Jan'2017 observed that since the amounts received by the payee i.e. M/s Akriti Creations Pvt Ltd were reported by it in the regular course of assessment, the disallowance of the entire amount under Section 40(a) (ia) of the Act in effect would render one payment which constitutes a transaction liable to income tax twice over. It further observed that as the Parliament remedied the law by amendment through insertion of the second proviso, in cases such as the present one where the AO can have easy access to the returns of the payee, in the larger interest of the assessee and the revenue. Further, it was stated that it would be appropriate that the A.O examines the figures with relation to the exact claim of payment towards the raw material. It also stated that A.O would examine, if necessary, the returns and relative documents pertaining to the payee M/s Akriti Creations Pvt. Ltd. From perusal of Hon’ble High Courts order it is seen that Hon’ble High Court has taken into account the judgment of M/s Ansal Land Mark Township (p) Ltd. However, while deciding the case. Hon’ble High Court has also observed that it would be appropriate that the AO examines the figures with relation to exact claim of payments towards raw material and accordingly, the matter has been remanded to AO for reconsideration. In para 6 of the order the Hon'ble High Court stated that with these remarks the matter is remanded for reconsideration. It is also stated that in the event the AO is satisfied that the claim towards the payment of Rs.3,19,66,460/- does not include any income component but constitutes reimbursement, the question of application of Section 40(a)(ia) does not arise. It is seen that AO in the original assessment order dated 30.12.2010 had held that the agreement between M/s Alankar Creations and M/s Akriti Creations Pvt. Ltd. was contractual in nature and hence, assessee was under obligation to deduct TDS on the same. Ld. CIT(A) vide her order dated 28.09.2011 held that TDS was not warranted on reimbursement of expenses when there is a direct nexus between reimbursement and the actual costs incurred by the agent on behalf of principal. The ground of appeal

It is pointed out by learned counsel for the Revenue that the first proviso to Section 201(1) of the Act was inserted with effect from 1st July 2012. The said proviso reads as under: "Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident— (i) has furnished his return of income under section 139; (ii) has taken into account such sum for computing income in such return of income; and (iii) has paid the tax due on the income declared by him in such return of income; And the person furnishes a certificate to this effect from an accountant in such form as may be prescribed."

The first proviso to Section 201(1) of the Act has been inserted to benefit the Assessee. It also states that where a person fails to deduct tax at source on the sum paid to a resident or on the sum credited to the account of a resident such person shall not be deemed to be an assessee in default in respect of such tax if such resident has furnished his return of income under Section 139 of the Act. No doubt, there is a mandatory requirement under Section 201 to deduct tax at source under certain contingencies, but the intention of the legislature is not to treat the Assessee as a person in default subject to the fulfilment of the conditions as stipulated in the first proviso to Section 201(1). The insertion of the second proviso to Section 40(a)(ia) also requires to be viewed in the same manner. This again is a proviso intended to benefit the Assessee. The effect of the legal fiction created thereby is to treat the Assessee as a person not in default of deducting tax at source under certain contingencies.

Aggrieved by the reversal of addition by the CIT(A), the Revenue has yet again preferred the appeal before the Tribunal.

The ld. DR for the Revenue in the second round submitted at the outset that action of the Assessing Officer is fully justified and could not have been dislodged by CIT(A). On facts, the assessee has failed to establish that the impugned payment of Rs.3,19,66,460/- is on account of reimbursement of actual expenses incurred by the payee, namely, M/s. Aakriti Creations. The invoice raised by the payee merely gives summary account of expenses stated to be incurred which is not absolute but essentially adhoc. The Ld. DR further submitted that the payee is engaged in its own manufacturing work and also the manufacturing work on behalf of the assessee. Both the assessee and the payee are effectively the same. The assessee is Director along with his wife and also shareholder in M/s. Aakriti Creations and thus in a position to claim any amount to be in nature of reimbursement. Therefore, where actual bills along with the account of reimbursement has not been provided to the Revenue, one cannot say that the impugned amount does not include any profit element embedded therein. The obligation to deduct TDS is thus in no way obliterated in the instant case. 10. The ld. DR referred paragraphs 5 and 6 of the observations made in the judgment delivered by the Hon’ble High Court which is the premise of the present proceedings and submitted that the Hon’ble High Court also has emphasized that reimbursement must not include any income component and should constitute only reimbursement to shun the applicability of TDS provisions to escape the clutches of Section 40(a)(ia) of the Act. The ld. DR next pointed out that notwithstanding the so called reimbursement of investment do form part of the profit and loss account of the payee (M/s. Aakriti Creations), it does not per se establish that such inclusion has resulted in swelling of any profit of the payee to take benefit of 2nd proviso to Section 40(a)(ia). The ld. DR thus submitted that the relief granted by the ld. CIT(A) is at odds with the observations of the Hon’ble High Court and hence the relief granted by the CIT(A) does not accord with the position of law read with judgment of the Hon’ble Delhi High Court. The ld. DR thus urged for reversal of the action of the CIT(A).

We have carefully examined the rival submissions and perused the assessment order as well as the first appellate order. The material referred to and relied upon has been adverted to. The sole controversy before us is whether the assessee was under obligation to deduct TDS on impugned reimbursement to its sister concern and if so, whether the obligation can be stated to have been met where documents of the payee reflects the inclusion of corresponding revenue received on account of reimbursement.

On the conspectus of the factual position, it is observed with reference to the profit and loss account of the payee, i.e., M/s. Aakriti Creations, the books results have been deduced after taking into account the aforesaid reimbursement, therefore, it is incorrect to say that the reimbursement as included in the P&L account has not been taken into account for determination of taxable income. We thus see no merit in the aforesaid plea raised on behalf of the assessee. The Hon’ble Delhi High Court in the case of CIT vs. Ansal Land Mark Township Pvt. Ltd., 377 ITR 635 (Del.) has examined the nuances of 2nd proviso to Section 40(a)(ia) of the Act inserted w.e.f 1st April, 2013. The Hon’ble Delhi High Court explained the rationale behind the insertion of 2nd proviso to Section 40(a)(ia) of the Act and held that 2nd proviso is declaratory and curative in nature and should be given retrospective effect from 01.04.2005.

Once we arrive at such conclusion, we do not consider it expedient to dwell upon the other aspect of the controversy, i.e., whether any profit element is included in such reimbursement or otherwise. Regardless of the fact that some element of profit is included in the reimbursement as alleged, the obligation of the assessee stands fulfilled on inclusion of the corresponding income by the deductee/payee in its return of income. As observed, the assessee has successfully demonstrated the inclusion of reimbursement by the payee for determination of his taxable income. We thus see no infirmity in the action of the CIT(A) which appears to be in tune with law as well as the judgment of the Hon’ble Delhi High Court giving rise to the second round of proceedings. Hence, we decline to interfere.

In the result, the appeal of the Revenue is dismissed. Order pronounced in the open Court on 23/12/2022.