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Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: HONBLE KUL BHARAT & HONBLE MANISH BORAD
arising out of the order u/s 143(3) of the Act dated 30.03.2015 framed by DCIT-1(1), Bhopal.
In assessee has raised following grounds of appeal;
1)That on the facts and in the circumstances of the case, the decision of the learned appellate authority is contrary to the law, without jurisdiction, materially irregular and unsustainable in law as well as on facts and that all the findings recorded in the order are incorrect. 2)That on the facts and in the circumstances of the case, proper and meaningful opportunity has not been provided to the assessee to put up its defense, The orders of the learned authorities below violate the principles of natural justice. Hence the same is bad in law and therefore be cancelled. 3)That on the facts and in the circumstance of the case and the law, the findings of the learned authorities below that the assessee's claim of General expenses and Travelling expenses is unverifiable in nature are wholly wrong and incorrect and opposed to facts hence such findings be quashed and the adhoc addition for the alleged unverifiable expenses of Rs. 17,06,811 be kindly deleted. 4)That on the facts and in the circumstances of the case, the levy of interest u/s 234A, 234B & 234C is unlawful and without jurisdiction, therefore, the same be kindly deleted.
Som Distilleries & Breweries Ltd & ITA No.516/Ind/2018 3. Through ITA No.516/Ind/2018 revenue has raised following grounds of appeal;
"On the facts and in the circumstances of the case, the CIT(Appeal) has erred in:
"Whether on facts and circumstances of the case, the Ld. CIT(A) was justified in upholding that the second proviso to section 40(a)(ia) is retrospective in nature and is applicable in the case of the assessee"?
2. "Whether on facts and circumstances of the case, Ld. CIT(A) was justified in deleting the disallowance u/s 40(a)(ia) in A.Y. 2012-13, when United Breweries Ltd. filed return of income on 07.02.2014 and therefore, the expense was allowable in A.Y. 2014-15 as per second proviso of section 40(a)(ia) of Income Tax Act, 1961, if the contention of Ld. CIT(A) that second proviso to section 40(a)(ia) is retrospective in nature is accepted"?
The appellant reserves his right to add, amend or alter the grounds of appeal on or before the date,
Brief facts of the case as culled out from the records are that the assessee company is engaged in the business of manufacturing of beer & bottling of Indian Made Foreign Liquor. Return of income was filed on 21.12.2012 declaring total income at Rs.12,67,29,170/-.
Case picked up for scrutiny followed by serving of notices u/s 143(2) and 142(1) of the Act along with detailed questionnaire. After considering the submission filed by the assessee income assessed at Som Distilleries & Breweries Ltd & ITA No.516/Ind/2018 Rs. 20,81,15,187/- after making disallowance u/s 40(a)(ia) of the Act for non deduction of tax at source u/s 194 J of the Act on royalty paid to M/s. United Breweries at Rs.7,96,79,206/- and ad-hoc disallowance @5% of the expenses at Rs.17,06,811/- . Aggrieved assessee went on appeal before the Ld. CIT(A) and partly succeeded.
5. Now both the assessee and revenue are in appeal before the Tribunal.
First we will take up the assessee’s appeal wherein the sole grievance is against the finding of Ld. CIT(A) confirming the ad-hoc disallowance of Rs.17,06,811/-.
Ld. Counsel for the assessee at the outset referred and relied on the decision of the Co-ordinate Bench in the case of Brilliant Estate Pvt. Ltd V/s DCIT dated 13.12.2018, decision of Co-ordinate Bench of Delhi in the case of ACIT V/s Modi Rubber Limited ITA No.1952/Del/2014 dated 15.05.2018 and decision of Hon’ ble High Court of Delhi in the case of Friends Clearing Agency (P) Ltd V/s CIT (2011) 9 taxmann.com 238 (Delhi) contending that no ad-hoc disallowance can be made.
Som Distilleries & Breweries Ltd & ITA No.516/Ind/2018 8. Per contra Ld. Departmental Representative vehemently argued supporting the orders of lower authorities.
We have heard rival contentions and perused the records placed before us. The grievance of the assessee in its appeal is solely focused towards the disallowance of Rs.17,06,811/- made by the Ld. A.O @ 5% of the travelling and general expenses which is confirmed by the Ld. CIT(A). Ld. A.O made this addition on noticing that some of the vouchers were missing, some were self made and some were not maintained properly. No specific instances has been noted in the assessment order which could show that the assessee has claimed excess expenses and genuineness of expenses were doubted. Books of accounts of the company are duly audited and income of Rs/12,67,29,170/- is declared and offered to tax.
It transpires from the assessment order that, the Ld. A.O while examining the records during the course of assessment on test check basis on observing few incomplete vouchers and self made vouchers for claim of expenses, most of which may have incurred in cash, made such disallowance. For raising doubts against the genuineness of expenses claimed by the assessee Ld. A.O has to give 5 Som Distilleries & Breweries Ltd & ITA No.516/Ind/2018 sound finding because making disallowance is a charge against the assessee company that its records are incomplete. This is not the case of partnership firm where the partners have claimed their expenses as part of the business expenditure which may have some element of personal nature. Assessee is a limited company having a huge turnover and have offered significant income. Such ad-hoc disallowance of 5% should not be a mere formality on the part of the Ld. A.O to make some addition. If any such addition are made, then they should stand as a rock with a clear expressive finding. In the instant case it is missing. Such type of ad-hoc disallowance have also been deleted by the Co-ordinate bench in their decision in the case of Brilliant Estate Pvt. Ltd V/s DCIT (supra), decision of Co- ordinate Bench of Delhi in the case of ACIT V/s Modi Rubber Limited (supra) and also by Hon’ble High Court of Delhi in the case of Friends Clearing Agency (P) Ltd V/s CIT (supra).
We therefore respectfully following above decisions above and in view of finding given herein above and in the facts and circumstances of the case find no reason to sustain the ad-hoc disallowance. We accordingly delete the disallowance of expenses of Rs.17,06,811/- Som Distilleries & Breweries Ltd & ITA No.516/Ind/2018 and allow the sole issue and also the appeal of the assessee.
Now we take up revenue’s appeal No.516/Ind/2018. The sole grievance is against the deletion of disallowance made u/s 40(a)(ia) of the Act by Ld. CIT(A). This disallowance was made by the Ld. A.O u/s 40(a)(ia) for non deduction of tax at source u/s 194 J of the Act on Royalty paid at Rs.7,96,79,206/- to United Breweries Ltd. Ld. CIT(A) deleted this addition after following various judgments setting aside the issue to the file of Ld. A.O for examining the fact that whether the payee i.e. United Breweries Ltd has offered the royalty income of Rs.7,96,79,206/- as income and paid due taxes thereof.
Now Revenue is in appeal before the Tribunal.
At the outset Ld. Departmental Representative though supported the order of Ld. A.O could not controvert the fact that the issue is squarely covered against the revenue by various judgments calling for deletion of disallowance u/s 40(a)(ia) in the given case.
14. On the other hand Ld. Counsel for the assessee supported the order of Ld. CIT(A).
Som Distilleries & Breweries Ltd & ITA No.516/Ind/2018
We have heard rival contentions and perused the records placed before us. The Ld. A.O has made disallowance u/s 40(a)(ia) of the Act for non deduction of tax at source u/s 194J of the Act on royalty paid to United Breweries Ltd at Rs.7,96,79,206/-. Ld. CIT(A) deleted the disallowance referring and relying on various decisions observing as follows;
5.6 I have gone through the judicial decisions cited by the appellant.
5.7 In the case of Rajeev Kumar Agarwal Vs. Addl. CIT reported in 165 ITJ 228, the ITAT, Agra has held that insertion of second proviso to section 40(a)(ia) was declaratory and curative in nature and it has retrospective effect from the date on which 40 (a)(ia) was inserted. The ITAT has held as under:
9. On a conceptual note, primary justification for such a disallowance is that such a denial of deduction is to compensate for the loss of revenue by corresponding income not being taken into account in computation of taxable income in the hands of the recipients of the payments. Such a policy motivated deduction restrictions should, therefore, not come into play when an assessee is able to establish that there is no actual loss of revenue. This disallowance does deincentivize not deducting tax at source, when such tax deductions are due, but, so far as the legal framework is concerned, this provision is not for the purpose of penalizing for the tax deduction at Source lapses. There are separate penal provisions to that effect. Deincentivizing a lapse and punishing a lapse are two different things Som Distilleries & Breweries Ltd & ITA No.516/Ind/2018
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)(ia), 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 271 C, and, section 40(a)(ia) does not add to the same. The provisions of Section 40(a) (ia), 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 Som Distilleries & Breweries Ltd & ITA No.516/Ind/2018 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 the 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.
5.8 Hon'ble Delhi High Court in the case of CIT Vs. Ansal Landmark Township Put Ltd in also held that second proviso to section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2015. In this case, the assessee made payment to Ansal Properties and Infrastructure Ltd. which payment, according to the Revenue, ought to have been made only after deducting tax at source under Section 194J of the Act. Before the ITAT, it was urged by the Assessee that in view of the insertion of the second proviso to Section 40(a) (ia) of the Act, the payment made could not have been disallowed. Reliance was placed on the decision of the Agra Bench of ITAT in ITA No. 337/ Agra/2013 (Rajiu Kumar Agarwal Vs. ACIT) in which it was held that the second proviso to Section 40 (a) (ia) of the Act is declaratory and curative in nature and should be given retrospective effect from 1 st April 2005. The Tribunal accepted the assessee's plea. On appeal by the department to the High Court HELD dismissing the appeal:
"(i) The second proviso to Section 40(a) (ia) was inserted by the Finance Act 2012 with effect from 1st April 2013. The effect of the Som Distilleries & Breweries Ltd & ITA No.516/Ind/2018 said proviso is to introduce a legal fiction where an Assessee fails to deduct tax in accordance with the provisions of Chapter XVII B. Where such Assessee is deemed not to be an assessee in default in terms of the first proviso to sub-Section (1) of Section 201 of the Act, then, in such event, "it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to In the said proviso". The first proviso to Section 210 (l) 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.
(ii) What is common to both the provisos to Section 40 (a) (ia) and Section 210 (1) of the Act is that the as long as the payee/resident (which in this case is ALIP) has filed its return of income disclosing the payment received by and in which the income earned by it is embedded and has also paid tax on such income, the Assessee would not be treated as a person in default. As far as the present case is concerned, it is not disputed by the Revenue that the payee has filed returns and offered the sum received to tax. 11 Som Distilleries & Breweries Ltd & ITA No.516/Ind/2018 (iii) Turning to the decision of the Agra Bench of ITAT in Rajiv Kumar Agarwal v. ACIT (supra), the Court finds that it has undertaken a thorough analysis of the second proviso to Section 40 (a)(ia) of the Act and also sought to explain the rationale behind its insertion. In particular, the Court would like to refer to para 9 of the said order which reads as under: "On a conceptual note, primary justification for such a disallowance is that such a denial of deduction is to compensate for the loss of revenue by corresponding income not being taken into account in computation of taxable income in the hands of the recipients of the payments. Such a policy motivated deduction restrictions should, therefore, not come into play when an assessee is able to establish that there is no actual loss of revenue. This disallowance does deincentivize not deducting tax at source, when such tax deductions are due, but, so far as the legal Jramework is concerned, this provision is not for the purpose of penalizing for the tax deduction at Source lapses. There are separate penal provisions to that effect. 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 provtsto« 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)(ia), 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 Som Distilleries & Breweries Ltd ITA No.495/Ind/2018 & ITA No.516/Ind/2018 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 providedfor in Section 271 C, and, section 40(a)(ia) does not add to the same. The provisions of Section 40(a) (ia), 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 the 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.
The Court is of the view that the above reasoning of the Agra Bench of ITAT as regards the rationale behind the insertion of the second proviso to Section 40(a) (ia) of the Act and its conclusion that 13 Som Distilleries & Breweries Ltd & ITA No.516/Ind/2018
the said proviso is declaratory and curative and has retrospective effect from 1st April 2005, merits acceptance ... "
5.9 The ITAT, Bangalore in the case of Shri G. Shankar Vs. ACIT in has held that second proviso to section 40 (a)(ia) is retrospective in operation w.e.f. 01.04.2005. Relying upon decisions of co-ordinate benches of Tribunal in the case of DCIT Vs. Anand Marakala (ITA No. 1584/Bang/2012) and S.M. Anand Vs. ACIT (ITA No. 1831/Bang/2013) wherein it was held that insertion of the second proviso to section 40(a)(ia) should be read retrospectively from 01.04.2005 and not prospectively from 01.04.2013, the ITAT held that the provision of section 40(a)(ia) were not attracted since the payee / recipient has accounted for, declared and offered for taxation the payment received.
5.10 Similar view has been taken by ITAT, Mumbai in Dr. Adi R. Nazir Vs. ACIT(ITA No. 1056/Mum/2011). It held:
We have heard the rival submissions and perused the material before us. Undisputed facts of the case that the assessee had made payment of Rs. 2.40 lakhs to his son without deducting tax at source, that the AO had disallowed the said amount invoking the provisions of section 40(a)(ia) of the Act. We find that the Hon'ble Karnataka High Court in the case of Santosh Kumar Shetty (supra) has held that second proviso to section 40(1)(ia) is retrospective. Therefore We hold that if the deductee pays the tax no disallowance should be made uls 40(a)(ia) of the Act. We find that Hon'ble Karnataka High Court had referred to the judgment delivered by the Hon 'ble Gujarat High Court in the case of Om Prakash R. Chaudhary in the Tax Appeal No. 41212013. Considering the fact that son of the assessee had paid the Som Distilleries & Breweries Ltd & ITA No.516/Ind/2018
tax on the professional fees and respectfully following the judgment of the High Court of Karnataka (supra), we decide the effective ground of appeal in favour of the assessee.
5.11 The Hon 'ble Karnataka High Court in CIT Vs. Santosh Kumar Shetty (ITA No. 590/2013) concurred with the decision of Hon 'ble Gujrat High Court in the case of CIT Vs. Omprakash R. Choudhary (ITA No. 412/2013) on this issue and held as under:
We are in the respectful agreement with the view expressed by the Gujarat High Court in giving retrospective operation to the said amendment notwithstanding that the parliament has expressly stated that it comes into effect from 01.04.2010. The said amendment is curative in nature. The tribunal committed an error in holding it as prospective. The substantial questions of law is answered infavour of the assessee and against the revenue.
5.12 Similar view has been taken by ITAT, Indore in the case of Chandana Chopda Vs. ITO (2016) (28 ITJ 484).
5.13 The Jurisdictional Appellate Tribunal, Indore recently in its decision dated 10.01.2018 in the case of Malwa Educational Service Society Vs. ACIT reported in 32 ITJ 187 (Ind-Trib) held as follows:
"11. We have heard the rival contentions, the assessee has relied upon the Judgment of Hon'ble Delhi High Court in the case of CIT vs. Ansallandmark (Supra). The Hon 'ble High Court has confirmed the findings of the Tribunal that if the recipient had offered the payment for taxation no disallowance u/s 40(a)(ia) canbe made "
5.14 In view of the above discussed decisions of High Courts and Som Distilleries & Breweries Ltd & ITA No.516/Ind/2018 subsequent decisions of various benches of ITAT including jurisdictional ITAT, Indore Bench, it is concluded that the A.O·. was not justified in relying upon the decision of ITAT, Cochin in the case of The Ramanthali Service Co-operative Bank Lid., Vs. ITQ. Accordingly, it is now a settled law that the second proviso to section 40(a)(ia) inserted by Finance Act, 2012 is retrospective in nature. Therefore, if the payee has paid tax on this income and has shown in its return of income and requisite certificate under first proviso to sub section (1) of section 201 of the Act has been filed during assessment proceedings, no disallowance was justified ix] s 194J r.w.s 40(a)(ia). The A.O. is therefore, directed to delete the disallowance / addition after verifying that the payee has paid tax on this income and has shown in its return of Income.
5.15 These grounds of appeal are allowed subject to above verification by the A.O.
16. The above finding of Ld. CIT(A) in the light of various judgments states that second proviso of Section 40(a) inserted by Finance Act 2012 is detrimental and curative in nature and it has retrospective effect from the date from which 40(a)(ia) of the Act was inserted. Ld. Departmental Representative failed to rebut the finding of Ld. CIT(A) by placing any contrary decision in favour of the revenue. We also find that in the case of Malwa Education Service Society V/s ACIT order dated 10.01.2018 adjudicating similar type of issue, have decided as follows; 16 Som Distilleries & Breweries Ltd ITA No.495/Ind/2018 & ITA No.516/Ind/2018 “11. We have heard the rival contentions, the assessee has relied upon the Judgment of Hon’ble Delhi High Court in the case of CIT vs. Ansal landmark (supra). The Hon’ble High Court has confirmed the findings of the Tribunal that if the recipient had offered the payment for taxation no disallowance u/s 40(1)(ia) can be made. Respectfully, following the same we hereby set aside this issue to the file of the AO to verify whether the recipients have offered the payment made to them for tax. These grounds of the assessee are partly allowed for statistical purpose.”
17. We therefore, respectfully following the decisions referred above in the finding of Ld. CIT(A) as well as the decision referred by us in the case of Malwa Education Service Society V/s ACIT (supra) find no infirmity in the finding of Ld.CIT(A) setting aside the issue to the file of Ld. A.O to carry out verification with the documentary evidence and certificate of Chartered Accountant to be placed by the assessee in order to prove that M/s. United Breweries Ltd have included the alleged royalty payment of Rs.7,96,79,206/- as part of its revenue and offered it for tax in the return of income filed for Assessment Year 2012-13. If the Ld. A.O is satisfied to this extent, then no disallowance u/s 40(a)(ia) will be called for alleged disallowance of Rs.7,96,79,206/-.
18. Accordingly Ground No. 1 of the revenue’s appeal stands dismissed since we have confirmed the finding of Ld. CIT(A) 17 Som Distilleries & Breweries Ltd & ITA No.516/Ind/2018 upholding that the second proviso to Section 40(a)(ia) is retrospective in nature and is applicable in the case of the assessee.
19. As far as Ground No.2 is concerned the same is allowed for statistical purpose as per our direction given herein above wherein we have directed the Ld. A.O to carry out necessary verification in order to satisfy that the alleged payment of royalty has been shown as income by M/s United Breweries Ltd in the return of income for Assessment Year 2012-13 and offered to tax. Needless to mention that proper opportunity of being heard should be provided to the assessee. In the result Ground No.2 of the revenue is allowed for statistical purpose.
In the result appeal of the assessee is allowed and that of revenue is partly allowed for statistical purpose.
The order pronounced in the open Court on 24.10.2019.