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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI. B. R. BASKARAN & SMT. BEENA PILLAI
IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SHRI. B. R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No.1846/Bang/2019
Assessment Year : 2016-17
Ivorybrick Homes LLP, The Asst. Commissioner No.74, 75, VBHC House, Income Tax, Millers Road, Circle-1(2)(1), Vasanth Nagar, Vs. Bengaluru. Bengaluru-560 052.
PAN – AAEFI 4636 E APPELLANT RESPONDENT
: Shri C Sandeep, C.A Appellant by Respondent by : Shri Priyadarshi Mishra, Addl.CIT (DR)
Date of Hearing : 13-01-2021 Date of Pronouncement : 01-02-2021
ORDER PER BEENA PILLAI, JUDICIAL MEMBER
Present appeals have been filed by assessee against order dated 14/06/2019 passed by Ld.CIT(A)-1, Bangalore for assessment year 2016-17. “1. That the order of the learned Commissioner of Income Tax (Appeals) in so far it is prejudicial to the interests of the appellant, is bad and erroneous in law and against the facts and circumstances of the case.
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That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in confirming the disallowance u/s 40(a)(ia) of the Act just because the appellant had deducted tax at source u/s 194C as against S.194J as held by the lower authorities. 3. That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in holding that fees paid to M/s. VBHC Value Home Pvt Ltd is royalty attracting the provisions of S. 194J of the Act. 4. That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in holding that the appellant is not entitled to the benefit of second proviso to S.40(a)(ia). Each of the above grounds is without prejudice to one another and the appellant craves leave of the Hon'ble Income Tax Appellate Tribunal to add, delete, amend or otherwise modify one or more of the above grounds either before or at the time of hearing of this appeal.
Brief facts of the case are as under: 2. The assessee is an LLP, and filed original return of income on 17/10/2016. Subsequently, return was revised on 29/10/2017 declaring a loss of Rs.6,12,18,818/-. The Ld.AO noted that assessee is involved in real estate development. The case was picked up for limited scrutiny for following reasons: 1. large amount disallowed under section 40 (a) (ia) in ITR in comparison to tax audit report. 2. Low-income in comparison to high loads/advances/investment in shares appearing in the balance sheet. 3. Large any other amount allowable as deduction claimed in schedule BPO of the return 4. large investment in property (Form 26QB) as compared to total income.
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Taxable income shown in revised return is less than the taxable income shown in original return and large refund has been claimed. 3. The Ld.AO accordingly issued 143 (2) notice and 142 (1) of the act on assessee calling upon details. In response to statutory notices assessee furnished various details called for which was examined and placed on record.
During assessment proceedings, the Ld.AO observed that assessee had transacted with various parties during the year under consideration and incurred expenses under the head branding fee management fee and marketing expenses. The Ld.AO noted that assessee has deducted TDS under section 194C at 2% in respect of payment towards branding fee. Assessee was asked to justify why the branding fee should not be treated as royalty payment to VBHC Value Homes Pvt. Ltd., and liable for deduction of TDs under section 194J of the Act.
The explanation of assessee was not accepted by the Ld.AO and he concluded that the provisions of section 194J of the Act were attracted and tax should have been deducted by assessee at 10% as branding fee payment was in the nature of royalty paid to VBHC. As the assessee failed to comply with provisions of section 194J of the Act, Ld.AO invoked provisions of section 40 (a) (ia) of the Act and disallowed 10% of the branding fee paid to VBHC. The Ld.AO thus made an addition of Rs.1,30,40,810/-
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Aggrieved by the order passed by the Ld. AO, assessee preferred appeal before Ld. CIT (A).
During the appellate proceedings assessee submitted that the services provided by VBHC was in the nature of works contract and that assessee used the logo by its house logo and not the trademark registered by VBHC. It was also submitted that assessee had obtained certificate in Form 26A from the Chartered Accountant and the same was produced before the Ld.AO after completion of assessment, however Ld.AO did not take cognizance of the same.
After considering the submissions of assessee, the Ld.CIT(A) was of the opinion that use of logo would be in the nature of royalty and that, the financial statements filed by assessee indicates that marketing expenses, management fee and branding fee are being treated as separate items of expenditure while disclosing related party transaction in Note 24. He thus rejected the submission of assessee that marketing expenses and branding fee were one and the same. It was also observed by the Ld.CIT(A) that, as assessee is affecting its sales with VBHC logo, the payment made by assessee to the owner of the brand VBHC cannot be a payment falling under the scope of section 194C. He thus upheld observations of the Ld.AO, in treating the payment as royalty falling within the scope of section 194J of the Act.
In respect of Form 26A filed by assessee, the Ld.CIT(A) held that, as the form along with Annexure-A was not filed as per Rule
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31ACB of Income tax Rules, necessary verification of the form could not be carried out. It was held by the Ld.CIT(A) that filing of form before Ld.AO does not fulfil the conditions laid down in Rule 31ACB of Income tax Rules, and therefore no cognizance of the same could taken by the Ld.AO. He thus upheld observations of Ld.AO and confirmed the disallowance made under section 40(a)(ia) of the Act.
Aggrieved by order of the Ld.CIT(A), assessee is in appeal before us now.
The Ld.AR submitted that provisions of section 40 (a) (ia) of the Act are not applicable to the present facts of the case for short deduction of TDS, due to difference of opinion, as to the taxability of any income in the nature of payments falling under TDS provisions. He placed reliance on the decision of Hon’ble ITAT Kolkata bench in case of DCIT vs S.K.Tekriwal reported in (2011) 15 Taxmann.com 289. It was submitted that Hon’ble ITAT Kolkata held that no disallowance can be made by invoking section 40(a)(ia) of the Act if there is any short fall in deduction of tax due to difference of opinion as to the taxability of any expenditure or nature of payment falling under various TDS provisions. It was submitted that the decision of Hon’ble ITAT Kolkata in case of DCIT vs S.K.Tekriwal (supra) has been upheld by Hon’ble Calcutta High Court in (2014) 361 ITR 432.
Ld.AR submitted that branding fee paid to VBHC is towards grant of use of VBHC logo and for VBHC referring details of
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clients interested in buying flats/units, actual conveyance/transfer/execution of documents, to assist assessee on a best effort basis in obtaining all know your customer information and obtaining all the documents as required by law. Referring to Claus 4 of the agreement placed at page 25 of paper book, Ld.AR submitted that it is a bundle of services provided by VBHC to assessee for which a consolidated payments is agreed between assessee and VBHC.
Ld.AR also placed reliance on decision of coordinate bench of this Tribunal in case of Kishore Rao and Others (HUF) vs ITO in ITA No.1737/B/2013 for assessment year 2010-11. It is submitted that, decision by this Tribunal has been upheld by Hon’ble Karnataka High Court by order dated 17/03/2016 passed in ITA No. 660/2015.
On the contrary, the Ld.Sr.DR placed reliance on orders passed by authorities below.
We have perused submissions advanced by both sides in light of records placed before us.
It has been submitted that in the facts before us, there is a shortfall in deduction of tax at source due to difference in opinion, as to the taxability of any payment or nature of the payment made under the TDS provisions. It is also submitted that for this reason no disallowance could be made by invoking provisions of section 40(a)(ia) of the Act. Hon’ble Calcutta High
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Court in case of S.K.Tekriwal (supra) on identical facts analysed identical argument. Their Lordships considered the very same issue of applicability of provisions of section 40(a)(ia) of the Act, in a case where there was short deduction of tax at source on payment made to sub-contractors. Hon’ble Calcutta High Court held that if there is any short fall in deduction of tax due to difference in opinion on understanding of taxability of any item or nature of payment falling under various TDS provisions, no disallowance can be made by invoking provisions of section 40(a)(ia) of the Act. Hon’ble court held as under:
“2. The reasoning appearing at paragraph 6 of the judgment and/or order challenge reads as follows. "In the present case before us the assessee has deducted tax under Section 194C(2) of the Act being payments made to sub-contractors and it is not a case of non-deduction of tax or no deduction of tax as is the import of section 40a(ia) of the Act But the revenues contention is that the payments are in the nature of machinery hire charges failing under the head 'rent' and the previous provisions of section 1941 of the Act are applicable. According to revenue, the assessee has deducted tax @ 1% 2 under Section 194C(2) of the Act as against the actual deduction to be made at 10% under section 194I of the Act, thereby lesser deduction of tax The revenue has made out a case of lesser deduction of tax and that also under different head and accordingly disallowed the payments proportionately by invoking the pro visions of section 40(a)(ia) of the Act. The Ld CTT(Appea;) also argued that there is no word like failure used in section 40(a)(ia) of the Act and it referred to only non-deduction of fax and disallowance of such payments. According to him, it does not refer to genuineness of the payment or otherwise but addition under section 40(a)(ia) of the Act can be made even though payments are genuine but tax is not deducted as required under section 40(a)(ia) of the Act. We are of the view that the conditions laid down under section 40(a)(ia) of the Act for making addition is that fax 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) of the Act but where tax is deducted by the assessee, even under bonafide wrong
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impression, under wrong pro visions of TDS, the provisions of section 40(a)(ia) of the Act cannot be invoked. Here in the present case before us, the assessee has deducted tax under Section 194C(2) of the Act and not under Section 1941 of the Act and there is no allegation that this TDS is not deposited with the Government account. We are of the view that the pro visions 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 Govt. 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 deduct/on is not as required by or under the Act, but the facts is that this expression, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted , after deduction has not been paid on or before the due date specified in sub-section 3(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 payments falling under various TDS pro visions, the assessee can be declared to be an assessee in default under Section 201 of the Act and no disallowance can be made by invoking the pro visions of section 40(a)(ia) of the Act. Accordingly, we confirm the order of CIT (Appeals) allowing the claim of assessee and the issue of revenue appeal is dismissed" 3. We find no substantial question of law is involved in this case and therefore, we refuse to admit the appeal Accordingly, the appeal is dismissed.” 17. Admittedly, the present facts is not the case of no deduction of TDS and that assessee under a bona fide belief, deducted TDS at 2% under section 194C. It is also apparent from the agreement that it was a bundle of services that was rendered by VBHC to assessee against which a consolidated payment has been made.
Respectfully following the above decision, we are of the view that no disallowance could be made by invoking provisions of section 40(a)(ia) of the Act, if there is any short
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fall in the action of tax at source due to difference of understanding our opinion as to the taxability of any item or nature of payment falling under various TDS provisions.
Accordingly grounds raised by assessee stands allowed. In the result appeal filed by assessee stands allowed. Order pronounced in the open court on 1st February, 2021
Sd/- Sd/- (B. R. BASKARAN) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 1st February, 2021. /Vms/
Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore 6. Guard file By order
Assistant Registrar, ITAT, Bangalore
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Date Initial On Dragon 1. Draft dictated on Sr.PS 2. Draft placed before -2-2021 Sr.PS author -2-2021 3. Draft proposed & placed JM/AM before the second member -2-2021 4. Draft discussed/approved JM/AM by Second Member. -2-2021 5. Approved Draft comes to Sr.PS/PS the Sr.PS/PS 6. -2-2021 Sr.PS Kept for pronouncement on 7. -2-2021 Sr.PS Date of uploading the order on Website 8. If not uploaded, furnish -- Sr.PS the reason 9. File sent to the Bench -2-2021 Sr.PS Clerk 10. Date on which file goes to the AR 11. Date on which file goes to the Head Clerk. 12. Date of dispatch of Order. 13. Draft dictation sheets are No Sr.PS attached