M/S. D.M.L. EXIM PVT. LTD.,,RAJKOT-GUJARAT vs. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-5,, RAJKOT-GUJARAT

The Ground No. 1 relates to deletion of disallowance made on account of contract cancellation amounting to Rs. 2,80,05,500/-.

At the time of hearing of the instant appeal the Ld. AR appearing for the assessee took us to the details annexed to the Paper Book regarding the contract cancellation charges of the assessee company which we have carefully gone through. We have also perused the sales contract entered into by and between the assessee and the other parties annexed to the Paper Book filed before us.

The case of the assessee is this that it is in the business of export of cotton and other agricultural products to various countries and while procuring the export orders the appellant enters into contract proforma invoice with the proposed purchasers of the foreign country specifying therein the terms of the contract of goods, the time period of supply and the rate. Failure of the terms of contract though results in more loss the same dispute is settled with the proposed buyer by paying the cancellation charges or by getting the details as the case may be. Therefore, the contract cancellation charges are in the nature of payment for failure to oblige contractual terms and conditions resulting in settlement of contracts at a price of lower than pre-determined price and thus the appellant had to make payment as per terms of contract. The cancellation of the contract was in respect of supply of goods in which the appellant deals. It is the appellant who knows his business and he knows when to enter into a contract and when to exit. Taking into consideration this particular aspect of the matter the Ld. CIT(A) justified such cancellation of contracts by the appellant which according to him a part and parcel of the regular export business.

Ground No.2 relates to disallowance of Rs. 9,73,33,826/- being export commission paid to non-resident agents, u/s. 40(a)(ia) on the ground of non-deduction of TDS.

At the time of hearing of the instant appeal Ld. DR relied upon the order passed by the Ld. AO.

On the other hand, the Ld. Counsel appearing for the assessee submitted before us that the AO himself has accepted the fact that the payment of commission is made to non-resident by referring to 195(1) of the Act. It was further pointed out that the respondent had paid commissions on foreign parties for rendering services for soliciting customers for its export business activities. Such particular fact has not been considered by the Ld. AO in its proper perspective and the assessee has been made liable to deduct tax at source u/s. 194H of the Act. He has further relied upon the judgment passed by the Co-ordinate Bench in ITA No. 573/Rjt/2014 for A.Y. 2010-11 where the similar disallowance has been deleted. Reliance was also placed on the decision passed by the Hon’ble Section 195 of the Act clearly provides that unless the income is liable to be taxed in India there is no obligation to withhold the taxes in India. Further, the basic condition under Section 9 of the Act with respect to income accruing and arising in India namely connection with the property in India or control and management vested in India, are not satisfied in the present case. The commission expenses paid on export sales to a non-resident admittedly for services rendered outside India is not coming under the purview of Sec. 40(a)(ia) of the Act. It is relevant to mention that the ‘commission’ simpliciter is not fees for technical services under Section 9(1)(vii) of the Act and same being the nature of business

In this respect, we have considered the judgment passed by the Hon’ble Co-ordinate Bench in ITA No. 573/Rjt/2014 in assessee’s own case for A.Y. 2010-11; while dealing with the identical issue upon making the following observation such disallowance was deleted. The following observation is as follows:- “2. To adjudicate on this appeal, only a few material and undisputed facts need to be taken note of. During the assessment proceedings, the Assessing Officer noted that the assessee has deducted tax under section 194C from the payment aggregating to Rs.67,84,807/- to the Customs House Agents whereas according to the Assessing Officer, tax was deductible under section 194J. The Assessing Officer was thus of the view that there was a short deduction of tax at source from these payments. It was in this backdrop he came to the conclusion that there was failure to deduct tax at source from payments to the Customs House Agents and accordingly the same is to be disallowed under section 40(a)(ia) of the Act. Aggrieved by the disallowance so made, the assessee carried the matter in appeal before the ld. CIT(A). It was, inter alia, contended by the assessee that the disallowance under section 40(a)(ia) cannot be resorted to in the case of short deduction of tax at source, even if any and, therefore, the impugned disallowance is unsustainable in law. Reliance was placed on Hon’ble High Court of Calcutta in the case of CIT vs. S.K. Tekriwal, 260 CTR 73. Accepting these arguments, learned CIT(A) deleted the impugned disallowance and justified his stand as follows :- “7. While holding that the payments made to CHAs are liable for tax deduction at source u/s. 194J of the IT Act, 1961, the issue at hand is whether the assessing officer is justified to disallow the entire payment made to CHAs at Rs.67,84,807/- u/s. 40(a)(ia) of the IT Act, 1961 on the ground that the appellant has deducted the tax on the impugned payments u/s. 194C @ 2% as against stipulated deduction of tax @ 10% u/s. 194J of the IT Act, 1961. The assessing officer has not made any notable discussion on this issue. However, on the other hand, the authorized representative has cited the judgement of Hon’ble High Court of Calcutta in the case of CIT vs. S.K. Tekriwal 260 CTR 0073, wherein it has been held that “Expenses are not liable to be disallowed u/s 40(a)(ia) on account of short deduction of tax at source”. The relevant paragraph of the judgement is reproduced hereunder for the sake of brevity: “We are of the view that the provisions of section 40(a)(ia) of the Act has two limbs one is where, inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into Government Account. There is nothing in the said section to treat, inter alia, the assessee as defaulter where there is a shortfall in deduction. With regard to the shortfall, it cannot be assumed that there is a default as the deduction is not ITA Nos.27/RJT/2016& 360,315/Rjt/2015 A.Y.2011-12,2012-13 as required by or under the Act, but the facts is that this expression, on which tax is deductible at source under chapter XIVV-B and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in sub-section (1) of section 139. This section 40(a)(ia) of the Act refers only to the duty to deduct tax and pay to government account. If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payment falling under various TDS provisions, the assessee can be declared to be an assessee in default u/s. 201 of the Act and no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act.”

Apart from the above citation, the authorised representative has cited the following judgements to buttress his arguments that the disallowance u/s. 40(a)(ia) is not warranted when the tax deduction at sources was incorrectly me under a different section which resulted in the shortfall. · Hon’ble ITAT Delhi ‘E’ Bench in the case of Glaxo Smithkline Consumer Healthcare Ltd. vs. ITO 12 SOT 221 (Delhi) · Hon’ble Bombay High Court in the case of CIT vs. Jivanlal Lalloobhai& Co. 206 ITR 548 (Bom) · Hon’ble ITAT, Mumbai “B” Bench in the case of ACIT vs. Merchant Shipping Services (P) Ltd. 129 ITD 109 (Mumbai) · Hon’ble ITAT Mumabi in the case of DCIT vs. Chandabhoy & Jassobhoy 49 SOT 448 (Mumbai)

Respectfully following the above judgement, I am also of the view that in a case like this, where the appellant has deducted tax at source in respect of the payments made to CHAs @ 2% under section 194C, when it is required to be made @10% u/s. 194J of the IT Act, 1961, the provisions of section 40(a)(ia) of the IT Act, 1961 cannot be made applicable. As held by the Hon’ble High Court of Calcutta in the above referred case that if there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payment falling under various TDS provisions, the assessee can be declared to be an assessee in default u/s. 201 of the Act and no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act. Therefore, the disallowance made by the assessing officer cannot be sustained. The addition made at Rs.67,84,807/- on account of disallowance of payments made to CHAs u/s. 40(a)(ia) of the IT Act, 1961 stands deleted. This ground of appeal is allowed.”

Aggrieved by the relief so granted by the ld. CIT(A), the Assessing Officer is in appeal before us.

We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. We are not inclined to disturb the very well reasoned conclusions arrived at by the ld. CIT(A) as he has explained at length a binding judicial precedent for the proposition that a short deduction of tax at source, even if any, cannot be visited with the disallowance under section 40(a)(ia) of the Act. Therefore, the disallowance was unsustainable in law and the ld. CIT(A) was quite justified in deleting the impugned disallowance. We approve and uphold the erudite and well reasoned stand taken by the ld. CIT(A) and decline to interfere in the matter.”

In the result, Tax Appeal is dismissed.”

We find that the ratio laid down by all the above judgments holding that when the commission has been paid to foreign parties for rendering services admittedly abroad for soliciting customers for its export business activities, the appellant is not liable for short deduction of tax at source and therefore disallowance made on this score under Section 40(a)(ia) is not permissible. Hence, keeping in mind such judicial precedent we find no infirmity in the order passed by the Ld. CIT(A) in deleting the disallowance made by the Ld. AO under Section 40(a)(ia) of the Act holding that such commission is not fees for technical services under Section 9(1)(vii) of the act and the same being in nature of business income for recipient of income/payee/non-residents is not taxable in India in terms Sec. 9(1)(i) in the absence of business connection in India, so as to warrant interference. We, therefore, find no merit in the issue raised by the Revenue. Hence, the same is dismissed.

The next ground relates to deletion of disallowance of foreign exchange fluctuation of Rs. 46,28,828/-.

At the time of hearing of the instant appeal the Ld. DR relied upon the order passed by the Ld. AO.

On the other hand, the Ld. Counsel appearing for the assessee submitted before us that the issue is squarely covered by the judgment passed by the Hon’ble Juri ictional High Court in the case of CIT vs. Panchmahal Steel Ltd.

We have heard the respective parties, we have also perused the relevant materials available on record including the orders passed by the authorities below. It appears that the assessee made the following submission before the Ld. AO:- “Normally when we confirm any export sale contract, to prevent any future loss due to change in exchange rates we book (hedge) dollars from our Banker Oriental Bank of Commerce where we have document discounting limits. Latter on we submit the documents for collection/discount against this dollar booking contracts. Firstly we only sales the dollars and never purchase dollars. After dollar booking we give sales documents for collection/discount. Before the expiry of the contract if we cannot submit the documents then the unutilized part of contract is settled by the bank. Thus the forward contracts done by us are only one sided and only for the purpose of hedging and not the purpose of doing any speculative gain or loss. Thus if we book dollar for latter period then we get more rate i.e. we get premium as per RBI & Banking premium rules. Similarly if we give the documents against future period of booking then the bank get back the premium of the same and this charges they debit to our account under the head of Forward Contract early delivery charges. Thus the forward contract early delivery charges paid by us are just return back of excess premium which we get at the time of booking of dollar. This amount is not at all speculative but it is routine practice and part and partial of the banking and export business transactions.”

This ground of appeal relates to deletion of disallowance of Rs. 6,02,976/- under Section 14 A of the Act.

The brief facts regarding the issue is this that during the course of assessment proceeding upon perusal of the final accounts and the balance sheet it was found that the assessee made investments which are likely to generate exempt income which will not form part of the gross total income . No expenses, however, were activated by the assessee towards earning of this income.

The assessment proceeding was finalised upon making disallowance of Rs. 6,02,976/- out of the interest expenses of Rs. 9,90,30,159/- by invoking the provision of Sec. 14 A r.w.r 8D of the Income Tax Act, 1961. This particular disallowance was made on the contemplation that the appellant may receive income not chargeable to tax from the investment of Rs. 63,25,000/- as appearing in the balance sheet. However, the same was deleted by the First Appellate Authority before the appellate proceeding.

At the time of hearing of the instant appeal Ld. DR relied upon the order passed by the Ld. AO.

On the other hand, the Ld. Counsel appearing for the assessee submitted before us that the provision of sub- Section 1 of Sec. 14 A of the Act has not been complied with by recording satisfaction as to the correctness of the claim of the assessee in respect of such expenditure in relation to the income which does not form part of the total income under the Act, the addition made thereof by the Ld.AO is bad in law and deletion

The case of the assessee before the 1st appellate authority is this that since without recording satisfaction as contemplated in sub-section 1 of Sec. 14 of the Act, the Ld. AO proceeded to made disallowance under Section 14 A by applying provision of Rule 8D and as such the same is not permissible in the eyes of law and thus not sustainable. It appears that the Ld. CIT-A relying upon the series of judgements deleted the addition made by the Ld.AO in view of the particular fact that the Ld.AO has not made any observation and/or deliberation by recording satisfaction so as to the correctness of the claim of the assessee in respect of the expenditure in relation to income which does not form part of the total income under the Act which is a precondition for applying the method under Section 14A r.w.r 8D for disallowing the expenses. The judgement passed by the Hon’ble Juri ictional High Court in the case of CIT vs. Gujarat State Fertilisers and Chemicals Ltd. reported in 2013, 36 taxman.com 557 was also considered by the Ld. CIT-A where it was held that where the assessee had more funds than investment in shares and borrowed funds were not proved to be used for sale, disallowance of 10% of exempt dividend income was unsustainable. Apart from that the order passed by the Co-ordinate 287 was also taken care of by the Ld. CIT-A. The operative for portion of the same is as follows:- “If no expenditure is incurred in relation to exempt income, no disallowance can be made under section 14A.”

The first ground of appeal basically relates to deletion of disallowance of export commission of Rs. 21,60,87,454/- under Section 40(A)(ia) of the Act.

The identical issue has already been dealt with by us in ITA No. 27/Rjt/2016 for A.Y. 2012-13 and in the absence of any changed

The next ground of appeal relates to deletion of disallowance made on account of contract cancellation charges amounting to Rs. 10,04,33,270. The identical issue has already been dealt with by us in ITA No. 27/Rjt/2016 for A.Y. 2012-13 and in the absence of any changed circumstances the same shall apply mutatis mutandis. Hence, this ground of appeal preferred by the Revenue is also dismissed.

The sole ground of the assessee in this appeal relates to the confirmation of disallowance of bad debt/forfeiture of advance of Rs. 60,07,108/-. The assessee prays otherwise.

We have heard the submissions made by the respective parties. We have also perused the relevant materials available on record.

On the other hand, the case of the Revenue is this that such a claim is not allowable in terms of the provision 36(1)(vii) and 36(2)(i) of the Act. According to the Revenue in order to claim a bad debt the twin conditions to be fulfilled i.e. the amount is written off as the bad debts in the books of account of the assessee and such bad debts or part thereof has been taken into consideration in income of the assessee’s previous year in which the amount of bad debt or part whereof is written off or of an earlier year. Such condition, however, was not fulfilled by the assessee as of the case made

We have also considered the judgment passed by the Hon’ble Bombay High Court in the case of Narandas Mathuradas &Co. vs. CIT reported in 35 ITR 461. While dealing with the identical issue the Hon’ble Court was pleased to observe as follows:- “3. Therefore, we must approach this question not from any technical point of view, but from the broad commercial aspect of the matter, and what we have really to decide is whether in arriving at the profits and gains of a business carried on by the assessee it would be permissible to him to deduct this particular loss in order to arrive at the true profits of the business. It should be borne in mind that this expenditure is not claimed as any specific allowance falling under sub-section (2) of section 10. The contention of the assessee is that this is a trading loss and the true profits of his business which are subject to tax cannot be ascertained unless this deduction is permitted to him.

The argument of Mr. Joshi is that this deposit was made by the assessee not for the purpose of earning profits built for the purpose of obtaining a business which would make it possible to earn profits. In other words, his contention is that the payment of this deposit is antecedent to and de hors the business which the assessee carried on and which yielded profits to him. Apart from authorities to which we shall presently turn, the contention does not seem to be tenable. This is not a case where the assessee makes this deposit in order to acquire a business, nor is this a case where an amount is deposited as a sort of a temporary investment yielding interest, the deposit being necessary in order that the assessee should be permitted to carry on a particular business. The assessee already has his business. His businesses to sell various commodities and in the course of this business, not de hors it, he submits a tender to the railway company. It is one of the terms of the tender that he must make the deposit. Therefore the making of the deposit is incidental to the business which he is carrying on. This is not a case where it is suggested that the assessee committed a breach of the contract fraudulently or that he deliberately failed to discharge his obligation under the contract. The failure to deliver the goods to the railway company was incidental to the business. It is something which would happen in any business and which would happen to any businessman. Therefore, looking at the matter on principle and from a broad point of view that we have suggested, it seems to us that this is a trading loss and the assessee is entitled to deduct it from his profits in order that the assessable profits can be ascertained.

The two authorities on which Mr. Joshi relied are both decisions of the Privy Council, and as will be noticed, the facts in those two cases were entirely different. The first is Tata Hydro-Electric Agencies Ltd. v. Commissioners of Income-tax. That is the well known case and it is in the context of the facts there that the Privy Council said at page 209 :

Now, in the first place, the Privy Council was not considering the case of a trading loss. The Privy Council was considering a specific allowance claimed under the provisions of section 10 (2) of the Income-tax Act, and even in deciding that the Privy Council felt difficulty, and were not made in the process of earning profits. They did not arise out of any transactions in the conduct of their business. That the assessees had to make those payments no doubt affected the eliminated yield in money to them for their business but the is not the statutory criterion. The obligation to make these payments was undertaken by the assessees in consideration of their acquisition of the right and opportunity to earn profits, that is, of the right of conduct the business, and not for the purpose of producing profits in the conduct of the business. Now, this according to Mr. Joshi is the criterion and the ratio. Assuming that is the criterion and the ratio, surely that is not applicable to the facts before us. How can it possible be said in this case that this deposit was made by the assessee in order to acquire the right to conduct the business and not for the purpose of producing profits in the conduct of the business ? The business was already being carried on by the assessee. This was a transaction in that business. It is in order to put through that transaction that the deposit was necessary.

The second case referred to by Mr. Joshi is Commissioner of Income-tax v. Motiram Nandram. In that case the assessees were carrying on business of cloth, yarn and money-lending and they wanted to start a new business and for that purpose they deposited with an oil company Rs. 50,000. In consideration of that the assessees were appointed organizing agents of the oil company for five years for a particular area. They were to recommend the selling agents and the sales were to be conducted by these selling agents, but the assesses were to receive certain commission on all goods sold by the selling agents within the area and also on all sales effected in the area by the company. The deposit was to yield interest at 7 per cent. Part of the deposit was repaid and then the company went into liquidation, and the assessees claimed the part of the deposit which was lost to them and that claim was rejected by the Privy Council. Now, in the first place, the Privy Council took the view that the deposit was made by the assessees for the purpose of being permitted to engage in a business and that must be considered to be a purpose of securing an enduring benefit of a capital nature. Therefore, on the facts of that case where the assessees were launching upon a new business and they could only start this business by making this deposit, the Privy Council observed that by making the deposit they were getting a capital asset of an enduring nature, the capital asset being the business. Mr. Joshi says that in this case also by making the deposit the assessee is obtaining a business. But that is not correct. It is true that under the Income-tax law even a single venture may be business, but his is not a case of a single venture. As we have pointed out before, it is in the course of the business which the assessee had been carrying on that it entered into this particular transaction. So this is neither a case of acquiring a new business, nor acquiring a joint nature. Further, at page 138 Sir George Rankin, who delivered the judgment of the Privy Council, points out that the deposit of Rs. 50,000 may be looked upon as a temporary investment because it yielded interest while it remained with the oil company. That feature is also absent in the case before us. Nobody can suggest that the deposit was made by the assessee as a temporary investment with the railway company. It was expressly made as an earnest; as security for carrying out the particular contract. Their Lordships also say

The result is that we must answer the question submitted to us in the affirmative. The Commissioner to pay the costs.

Question answered in the affirmative.”

In the combined results, (i) ITA No. 27/Rjt/2016- Department’s Appeal is dismissed. (ii) ITA No. 360/Rjt/2015- Department’s Appeal is dismissed. (iii) ITA No. 315/Rjt/2016- Assessee’s Appeal is Allowed.

Before parting we would like to make certain observation relating to the issue cropped up under present scenario of Covid-19 pandemic as to whether when the hearing of the matter was concluded on 25.02.2020 the order can be pronounced today i.e. on 27.07.2020. The issue has already been discussed by the Co-ordinate Bench in the case of DCIT vs. JSW Ltd. (ITA Nos. 6264 & 6103/Mum/2018) pronounced on 14.05.2020 in the light of which it is well within the time limit permitted under Rule 34(5) of the Appellate Tribunal Rules, 1963 in view of the following observations made therein:

On the basis of the observation made in the aforesaid judgment we exclude the period of lockdown while computing the limitation provided under Rule 34(5) of the Income Tax (Appellate Tribunal) Rule 1963. Order is, thus, pronounced in the open court.

In the combined results, (i) ITA No. 27/Rjt/2016- Department’s Appeal is dismissed. (ii) ITA No. 360/Rjt/2015- Department’s Appeal is dismissed. (iii) ITA No. 315/Rjt/2016- Assessee’s Appeal is Allowed. This Order pronounced in Open Court on 28/07/2020 (WASEEM AHMED) (MADHUMITA ROY) ACCOUNTANTMEMBER JUDICIALMEMBER Dated 28/07/2020Tanmay Datta, Sr. PS

""यथ" / The Respondent. 3. संबं"धत आयकर आयु"त / Concerned CIT आयकर आयु"त(अपील) / The CIT(A)- 4. 5. "वभागीय ""त"न"ध, आयकर अपील"य अ"धकरण,राजोकट/DR,ITAT, Rajkot गाड" फाईल / Guard file. 6. आदेशानुसार/BY ORDER,