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Income Tax Appellate Tribunal, ‘’SMC’’ BENCH, AHMEDABAD
आयकर अपील�य अ�धकरण, अहमदाबाद �यायपीठ IN THE INCOME TAX APPELLATE TRIBUNAL, ‘’SMC’’ BENCH, AHMEDABAD (CONDUCTED THROUGH VIRTUAL COURT) BEFORE, SHRI WASEEM AHMED, ACCOUNTANT MEMBER And Ms. MADHUMITA ROY, JUDICIAL MEMBER आयकर अपील सं./ITA No. 216/AHD/2015 �नधा�रण वष�/Asstt. Year: 2010-2011 Shri Samir Chandravadan Bhalavat, Income Tax Officer, M/s.Shreeji Engineering Enterprise, Vs. Sabarkantha Ward-4, 18, Yamuna Nagar Society, Modasa. Nr. Zaver Nagar, Vaghodiya Road, Vadodara-390025.
PAN: ABTPB4528L
(Applicant) (Respondent) Assessee by : Shri Manish Shah, A.R Revenue by : Shri Vidhyut Trivedi, Sr. D.R सुनवाई क� तार�ख/Date of Hearing : 27/05/2020 घोषणा क� तार�ख /Date of Pronouncement: 08/07/2020 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the assessee against the order of the Learned Commissioner of Income Tax (Appeals)-2, Ahmedabad [Ld. CIT(A) in short], dated 26/11/2014 arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") dated 11/03/2013 relevant to Assessment Year (A.Y) 2010-11.
The assessee has raised the following grounds of appeal: 1. The learned C.I.T.(Appeals) has erred in confirming disallowance u/s.40(a)(ia) of the Act for Rs.2,13,832/- being freight charges paid without deduction of tax to M/s. Associated Carriers Ltd. Page 1 of 10
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1.1 The learned C.I.T.(Appeals) failed to appreciate the fact that the similar disallowance was deleted by his predecessor in Asst. Year 2009-10 and therefore, ought to have allowed the deduction for expenses. 1.2 The learned C.I.T.(Appeals) has failed to consider the fact that the payee M/s. Associated Carriers is merely an arranger of transporters and there is no contract between assessee and payee and in the circumstances, no liability to deduct tax. 1.3 The learned C.I.T.(Appeals) erred in confirming the disallowance by ignoring the fact that the PAN of party was submitted and in view of amendment, no TDS is required to be deducted from payment made to transporter having PAN. 2. The learned C.I.T.(Appeals) has erred in confirming disallowance of interest expenses for Rs.7,16,4687- on account of alleged diversion of borrowed fund for purposes other than business purpose. 2.1 The learned C.I.T.(Appeals) has failed to consider the fact that during the year, there was no advance as opening debit balance was reduced at the close of the year. 2.2 The learned C.I.T.(Appeals) failed to appreciate that there is no direct nexus between borrowed funds and amount advanced to sister concerns. 2.3 Without prejudice to ground taken herein above, the assessee prays that the C.I.T.(Appeals) ought to have considered the spare funds available with the assessee and could have made disallowance on the remaining amount. The appellant reserves its right to add, amend, alter or modify any of the grounds stated hereinabove either before or at the time of hearing.
The assessee in ground No. 1 has challenged the disallowance made by the AO and confirmed by the learned CIT (A) for the transport/freight expenses amounting to Rs. 2,13,832/- paid to the arranger of the transporter.
2.1 The briefly stated facts are that the assessee in the present case is an individual and engaged in the business of Manufacturing and trading of engineering hardware. The assessee in the year under consideration paid transport expenses amounting to Rs. 2,13,832/- to Associated Road Carriers Limited (for short ARCL). The assessee on such payment has not deducted the TDS under the provisions of section 194C of the Act. Therefore the AO disallowed the same and added to the total income of the assessee.
Aggrieved assessee preferred an appeal to the learned CIT (A) and contested against the disallowance made by the AO on various grounds. But the learned CIT Page 2 of 10
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(A) disagreed with the contentions of the assessee and therefore confirmed the order of the AO.
Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us.
The learned AR before us filed a paper book running from pages 1 to 118 and besides reiterating the submission made before the authorities below also contended that there was an amendment under the provisions of section 194C of the Act which directs that the assessee is outside the purview of the provisions of the TDS if the transporter furnishes PAN to the assessee. Such amendment was applicable with effect from 1 October 2009 and therefore the payment for the transport expenses after 30 September 2009 cannot be disallowed on account of non-deduction of TDS as the assessee obtained the PAN from the transporter. The learned AR further conceded the fact that the assessee after obtaining the PAN from the transporter did not furnish the same to the Administrative Commissioner of Income Tax as required under the provisions of section 194C(7) of the Act . As per the learned AR such requirement was procedural /directory in nature and therefore even the assessee fails to furnish the same to the Administrative Commissioner, the impugned expenses claimed by the assessee cannot be disallowed for non- deduction of TDS.
4.1 Regarding the payment of freight/transport expenses pertaining to the period up to 30 September 2009 prior to the amendment of section 194C(6) of the Act, the learned AR contended that there was the similar disallowance made by the AO in the immediate preceding assessment year and the same was deleted by the learned CIT (A). Therefore, he was of the view that the principles of consistency can be applied to such payment.
On the other hand, the learned DR vehemently supported the order of the authorities below. Page 3 of 10
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We have heard the rival contentions of both the parties and perused the materials available on record. In the present appeal, the issue for the disallowance of the transport expenses amounting to Rs. 2,13,832/- paid to ARCL can be separated into 2 parts as detailed under: i. Payment of transport/freight charges paid up to 30 September 2009 prior to the amendment brought under the provisions of section 194C of the Act amounting to Rs. 93,310 only. ii. Payment of transport/freight charges paid post amendment under the provisions of section 194C of the Act, i.e. after 30 September 2009 amounting to Rs. 1,20,522/-. 6.1 First, we take up the issue relating to the payment made for the transport charges after 30 September 2009 amounting to ₹ 1,20,522 only. In this connection we find that the provisions of section 194C (6) and (7) have direct bearing on the issue on hand, as applicable in the year under consideration, which reads as under: (6) No deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, on furnishing of his Permanent Account Number, to the person paying or crediting such sum. (7) The person responsible for paying or crediting any sum to the person referred to in sub-section (6) shall furnish, to the prescribed income-tax authority or the person authorised by it, such particulars, in such form and within such time as may be prescribed.
6.2 A plain reading of the provisions of subsection 6 of section 194C of the Act reveals that the assessee shall not deduct any TDS on the payment made to the contractor engaged in the business of plying, hiring or leasing goods carriages, on furnishing of his PAN to the assessee. There is no ambiguity about the fact that contractor has furnished its PAN to the assessee as evident from the page number 13 of the paper book where the copy of the PAN is placed. As such the contractor has discharged its liability by furnishing PAN to the assessee for non-deduction of TDS under section 194C (6) of the Act. Accordingly the assessee did not deduct the TDS.
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6.3 We also note that the requirement under sub-section 7 of section 194C of the Act for furnishing PAN to the prescribed authority within the prescribed time and form is procedural in nature as held by the ITAT Ahmedabad in the case of Vali bhai Khan bhai Mankad Vs. DCIT reported in 12 taxmann.com 160. The relevant portion of the order is reproduced as under: The conditions laid down under section 40(a)( ia) for making addition is that tax is deductible at source and such tax has not been deducted. If both the conditions are satisfied then such payment can be disallowed under section 40(a)( ia). In other words where tax is not deductible addition under section 40(a)( ia) cannot be made. From this it follows that second proviso to section 194C(3)(i) alone would be operative for deciding whether tax is deductible or not deductible. Non-furnishing of Form No. 15J to the Commissioner is an act posterior in time to payments made to sub-contractors. This cannot by itself, undo the eligibility of exemption created by second proviso by virtue of which sub-contractors have submitted Form No. 15-I. The deductibility of tax is, therefore, confined or limited to applicability of second proviso only because it is at that point of time of assessee has to decide whether it has to deduct the tax or not. Where Form No. 15-I are not submitted, it has to deduct the tax. Conversely where Form No. 15-I is submitted to the assessee by the sub-contractors, the tax is not deductible and once tax is not deductible no addition under section 40(a)( ia) can be made. From this it follows that third proviso to section 194C(3)(1) which requires the assessee to submit Form No. 15J is only procedural formality and cannot undo what has been done by second proviso.
Thus in view of the above, if the assessee failed to furnish the requisite form to the prescribed authority within the time, he cannot be made subject to the disallowance of transport expenses on account of non-deduction of TDS. Accordingly, we hold that there cannot be any disallowance of the transport expenses incurred by the assessee after 30th September 2009.
6.4 Now coming to the transport expenses incurred by the assessee up to 30 September 2009 amounting to Rs. 93,310/-, in this regard we note that same reasoning can be applied as discussed above for holding that the assessee is not liable to deduct the TDS once he has obtained the PAN of the transporter. In this connection we draw our support and our guidance from the order of the Cuttuck Tribunal in the case of Govind Ram Gupta v JCIT reported in 32 taxmann.com 111. The relevant part of the order is reproduced as under: The intention of the assessee was from the very beginning that having taken sub-contract for transportation, it was the assessee's endeavour to engage trucks and obtain Permanent Account Number as per the provisions of section 194C(6) as clarified with effect from 1-10-
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2009 when no deduction was to be made having obtained Permanent Account Number as mentioned by the Assessing Officer himself. A procedural or the technical defect on the assessee could not be considered for deeming provisions under section 40(a)(ia) which only indicates that only those amounts are to be subjected to disallowance on which tax was deductible. Here the assessee has established before the Assessing Officer that the tax was not to be deducted when the law provides that on furnishing of his Permanent Account Number the assessee was not to deduct tax at source on the payments made to them. Therefore, the disallowance under section 40(a)(ia) could not have been made when the nondeduction of tax at source as per the finding of fact by the Assessing Officer would have made the assessee-in-default as per the provisions of section 201.
In view of the above, we hold that the expenses claimed by the assessee on account of transport charges cannot be disallowed on account of non-deduction of TDS under section 194C of the Act. Hence the ground of appeal of the assessee is allowed.
The 2nd issue raised by the assessee is that the learned CIT (A) erred in confirming the disallowance made by the AO for Rs. 7,16,466/- representing the amount of interest on the amount advanced as interest-free advance & loans.
7.1 The assessee in the year under consideration has claimed interest expenses amounting to Rs 14,79,652/- on the money borrowed from the bank and the relatives. The assessee at the same time has advanced money to two concerns in which the father of the assessee is proprietor being a related party within the meaning of section 40A(2)(b) of the Act, without charging any interest from them. The details of the loans and advance stand as under:
Sr.No. Name of the Opening Bal Transaction Closing person to Rs Balance whom loans and advances given Debit Credit Debit 1. Eeteel 79,58,170/- 36,30,401/- 67,22,790/- 48,65,780/- Hardwares Dr.
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Spring lock 5,94,254/- 50,50,648/- 50,57,264/- 5,67,637/- Engineering Dr. Industries
7.2 The assessee during the assessment proceedings claimed that it had its own interest free funds amounting to ₹ 26,25,970/- lakhs (Rs. 23,01,006/- Lacs as share capital and Rs. 3,24,964/- as depreciation) which has been utilized for advancing such loan to the aforesaid proprietary concerns. The assessee besides the above also contended that it has advanced money to the said firms for commercial expediency. Accordingly the assessee contended that there cannot be any allegation against him for the diversion of interest-bearing fund for non-commercial purposes. However, the AO found that the major money has been advanced to the party out of OD account. Accordingly he was of the view that the assessee has diverted his interest-bearing loan fund for non-commercial purposes.
7.3 The AO also found that the own fund of the assessee has already been invested in the debtors and stock as reflected in his balance sheet as on 31st March 2010 amounting to Rs. 23,49,016 and Rs. 64,89,832 respectively against the creditor balance of Rs 8,05,917/- only .
7.4 Therefore, the AO computed the amount of proportionate interest on such advances amounting to Rs. 7,16,468/- and disallowed the same by adding to the total income of the assessee.
Aggrieved assessee preferred an appeal to the learned CIT (A) and reiterated the contentions as made before the AO. However, the learned CIT (A) disregarded the contention of the assessee and confirmed the order of the AO by observing as under: On a careful consideration of the entire facts of the case, it is noted that the appellant has not been able to establish any commercial expediency for giving the interest free loans to the related parties. The AO has given clear factual findings and has also dealt with the submissions and claims of the appellant. It has been clearly mentioned that the cheques for these loans were issued from the CC account which was clearly interest-bearing at the rate of 15%. The AO has also mentioned that the capital balance was blocked in the closing Page 7 of 10
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stock. Further, it has been mentioned by the AO that the loan has been given to the concern of his father. Regarding, the other loan to Eeteel Hardwares and Spring Lock Engineering Industries the appellant has failed to give any reason for commercial expediency before the AO as well as during the course of appellate proceedings. It has been clearly mentioned by the AO that the loans given to this concern were also from the interest-bearing funds. The reliance placed by the appellant on the judgement of honourable Supreme Court in the case of S.A Builders Ltd. is therefore not applicable and in respectfully distinguished. In view of the above discussion the disallowance made by the AO is upheld.
Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us.
The learned AR before us contended that the amount has been advanced for the commercial purposes and therefore there cannot be any disallowance of interest expenses. The learned AR in support of his contention drew our attention on the ledger of Job charges paid to the firms which are placed on pages 1-5 of the additional paper book. The learned AR in support of his contention referred to the judgment of the Hon’ble Bombay High Court in the case of Pr. CIT vs. Sesa Resouces Limited reported in 404 ITR 707.
On the other hand the learned DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. The facts of the case are not in dispute and therefore we are not referring the same for the sake of brevity and convenience.
11.1 The 1st issue arises for our adjudication whether the assessee has given loans and advances without interest to the specified persons for the commercial purposes. On perusal of the ledgers filed by the assessee, we note that the assessee has advanced loan to these parties amounting to Rs. 54,33,417/- which was adjusted against the job work charges amounting to Rs. 1,18,400/- in the financial year 2011- 12. As such we note that a small amount of gross advances was adjusted against the job work charges which is not very significant and that too after a period of 2 Page 8 of 10
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years. Thus considering the financial transactions as discussed above, it cannot be said that the amount of loan and advances was given for the commercial purposes.
11.2 It is also important to note that in both the firms the father of the assessee is a proprietor. The assessee has also taken the interest-bearing loan from his father. This fact can be verified from the order of the AO which is reproduced as under: The assessee has stated that the interest may not be charged as the amount was given for commercial expediency, however he has not given any explanation as to what was the commercial expediency for giving loans to the concern of his father who himself has given unsecured loans of rs.3,80,656/- on which the assessee has given interest. If the father was in need of the fund the same relative would have given the loans, and interest bearing fund should have been utilized by his father. Instead, for obvious reasons the assessee has preferred to give loans interest free.
11.3 Thus it is transpired that the assessee on one hand is advancing interest free loans and advances to his father proprietary concern and on the other hand the assessee is paying interest on the loan obtained from his father.
11.4 Coming to the case law relied by the assessee we note that the principles laid down by the Hon’ble Bombay High Court in the case of Pr. CIT Vs Sesa Resources Limited (supra) cannot be applied to the case on hand as it is distinguishable on facts. In that case, the assessee being a body corporate has advanced loan & advances without interest to other body corporate. Therefore the Hon’ble High Court held that there cannot be any personal element in the transaction of loans and advances without interest being entered between the body corporates. However in the case on hand it is a transaction between the individual assessee and the Proprietary concerns of the father of the assessee. Accordingly we are of the view that the facts are different from the present case with the facts of the case referred by the learned AR of the assessee.
11.5 However, we find force in the argument of the learned AR of the assessee that there cannot be any disallowance of any interest expenses for the amount advanced to the aforesaid firms without any interest to the extent of the amount
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available with the assessee in the form of capital. Accordingly we direct the AO to work out the amount of loans and advances given without interest after reducing the own fund in the form of capital of the assessee from the said amount. Thus the ground of appeal of the assessee is partly allowed.
In the result the appeal of the assessee is partly allowed.
Order pronounced in the Court on 08/07/2020 at Ahmedabad.
-Sd- -Sd- (Ms MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 08/07/2020 Manish
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