SRI SURESH KHATRI,KANPUR vs. INCOME TAX OFFICER- 3(4), KANPUR

Because the CIT(A) has not considered the provisions of section 200 and 201(1A) of the Act and has wrongly treated the assessee to be in default, the addition upheld be deleted.

Because the CIT(A) has failed to appreciate that the provisions of section 40(a)(ia) are to be read alongwith Chapter XVIIB of the Act, as referred to therein, wherein a person to whom the payment having been made, have declared the same in its income, then the provisions of section 40(a)(ia) would not be applicable, the order of the CIT(A) be quashed.

Because the CIT(A) has erred on fact and in law in upholding the addition of Rs.50,250/- being difference in the account of M/s. Eskay Sales Corporation, which addition is bad in law and be deleted.

Because the CIT(A) has erred on facts and in law in upholding the following disallowances, out of expenses, which disallowances made by the Assessing Officer are all contrary to facts bad in law and be deleted :

At the outset, Learned A. R. invited our attention to the fact that the appeal filed by the assessee is delayed by 36 days. He also invited our attention to the application dated 20/01/2018, filed by the assessee, for condonation of delay wherein the reasons for delay in filing the appeal have been explained stating that the assessee tied the folder in which the order was kept, with some other files and it got bundled with other records; and that the appeal could be filed only after it was traced, incurring the inordinate delay of thirty six days. It was prayed that the assessee was prevented by reasonable and sufficient cause in not filing the appeal within the prescribed time and therefore, the delay may be condoned and the appeal may be heard on merits. Learned D. R. had no objection to the condonation of delay. Finding the plausible sufficient cause for delay in

Ground Nos. 1 to 3 of the appeal relate to the disallowance of Rs.6,42,437/- for non deduction of tax at source u/s 40(a)(ia) of the Act on payment of ocean freight, made to non-resident shipping companies. The assessee is a proprietary concern and engaged in the business of manufacturing of leather and cotton items. During the year under consideration, the assessee had exported goods and made payment of Rs.6,42,437/- towards shipping expenses in the nature of freight. The Assessing Officer observed that the payments, made by the assessee, come within the purview of section 194C of the I.T. Act and accordingly the assessee was liable to deduct tax at source on these payments. The Assessing Officer disallowed Rs.6,42,437/- on the ground that the assessee failed to deduct TDS on payments made on account of freight as per the provisions of section 40(a)(ia) of the Act. Being aggrieved with the action of Assessing Officer, the assessee carried the matter in appeal before the CIT(A) who has also sustained the disallowance. Now the assessee is in appeal before us.

During the course of hearing, the learned Counsel for the assessee relied on CBDT Circular No. 723 dated 19/09/1995, placed at page 5 of the paper book, and submitted that the disallowance cannot be made in view of this Circular. Circular No. 723 is reproduced below:

Representations have been received regarding the scope of sections 172, 194C and 195 of the Income-tax Act, 1961, in connection with tax deduction at source from payments made to the foreign shipping companies or their agents.

Section 172 deals with shipping business of non-residents. Section 172(1) provides the mode of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non- resident, which carries passengers, livestock, mail or goods shipped at a port in India. An analysis of the provisions of section 172 would show that these provisions have to be applied to every journey a ship, belonging to or chartered by a non-resident, undertakes from any port in India. Section 172 is a self-contained code for the levy and recovery of the tax, ship- wise, and journeywise, and requires the filing of the return within a maximum time of thirty days from the date of departure of the ship.

The provisions of section 172 are to apply, notwithstanding anything contained in other ' provisions of the Act. Therefore, in such cases, the provisions of sections 194C and 195 relating to tax deduction at source are not applicable. The recovery of tax is to be regulated, for a voyage undertaken from any port in India by a ship under the provisions of section 172.

Section 194C deals with work contracts including carriage of goods and passengers by any mode of transport other than railways. This section applies to payments made by a person referred to in clauses (a) to (j) of sub-section (1) to any "resident" (termed as contractor). It is clear from the section that the area of operation of TDS is confined to payments made to any "resident". On the other hand, section 172 operates in the area of computation of profits from shipping business of non-residents. Thus, there is no overlapping in the areas of operation of these sections.

There would, however, be cases where payments are made to shipping agents of non-resident ship-owners or charterers for carriage of passengers etc., shipped at a port in India. Since, the agent acts on behalf of the non-resident ship-owner or charterer, he steps into the shoes of the principal. Accordingly, provisions of section 172 shall apply and those of sections 194C and 195 will not apply. '

From the reading of the above circular, it is clear that the disallowance was not required to be made. Accordingly, we delete the disallowance sustained by the CIT(A).

Ground No. 4 of the appeal relates to the addition of Rs.50,250/- made on account of difference between the opening balance in the account of M/s Eskay Sales Corporation and in the accounts of the assessee. Learned counsel for the assessee submitted before us that this difference is coming from last several years. Copy of account of M/s Eskay Sales Corporation, as appearing in the assessee’s books, are placed at pages 37 to 41 of the paper book. Learned counsel for the assessee submitted that the difference is being carried over from earlier years and it has to be adjusted/reconciled. He also submitted that the difference does not relate to the year under consideration. Keeping in view the above facts, we delete the addition sustained by CIT(A).

Ground No. 5 of the appeal relates to the disallowance of expenses on ad hoc basis. The Assessing Officer has disallowed 10% of travelling expenses and misc. expenses on ad hoc basis. Learned counsel for the assessee submitted before us that the Assessing Officer, without pointing out any discrepancy in the books of account, which are tax audited, has simply made ad hoc disallowance by holding that the assessee produced self-made debit vouchers and these expenses are not open to full verification and disallowed 10% of the total expenses under the head travelling expenses and misc. expenses. When the assessee carried the matter in appeal before learned CIT(A), he also upheld the action of the Assessing Officer. Learned A. R. submitted that in a number of cases, decided by this Bench and various High Courts, it has been held that ad hoc

Learned D. R., on the other hand, heavily relied on the orders of the authorities below.

We have heard the rival parties and have gone through the material placed on record. We find that Assessing Officer has made the disallowance simply by holding that the assessee produced ledger account of these expenses which are not open to full verification and hence has disallowed 10% out of various expenses. The Assessing Officer has nowhere pointed out any specific discrepancy in the books of account nor he has rejected the same. In our opinion, the Assessing Officer cannot make ad hoc disallowance. Hon'ble Calcutta High Court in the case of Ashok Surana vs. CIT [2016] 384 ITR 267 (Cal) has held as under:

It is pertinent to mention here that this order is being pronounced after a period of 90 days from the date of conclusion of the hearing. In this regard, we place reliance on the decision of co-ordinate bench of this Tribunal in the case of JSW Ltd in ITA Nos. 6264 & 6103/Mum/2018 dated 14.5.2020, wherein this issue has been addressed in detail allowing time to pronounce the order beyond 90 days from the date of conclusion of hearing by excluding the days for which the lockdown announced by the Government was in force. The relevant observations of the tribunal in the said binding precedent are as under:-

Respectfully following the aforesaid judicial precedent, we proceed to pronounce this order beyond a period of 90 days from the date of conclusion of hearing.

In the result, appeal of the assessee stands allowed.