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Income Tax Appellate Tribunal, ‘C’ BENCH, BENGALURU
O R D E R
Per PAVAN KUMAR GADALE, JM :
The assessee has filed appeal against the order of the CIT(A), Bangalore-9, Bangalore, passed u/s 143(3) and 250 of the Income-tax Act,1961 ['the Act' for short].
At the time of hearing, ld. AR submitted that ground No.1 is general in nature, whereas ground Nos.2.1 to 2.4 are in respect of deduction u/s 80-IB(10) of the Act and ground No.3.1 to 3.3 are in regard to disallowance u/s 40(a)(ia) of Page 2 of 14 the Act and ground No.4 is respect of interest levied u/s 234A and 234B of the Act.
Brief facts of the case are that the assessee is a partnership firm engaged in the business of developing and constructing residential and commercial building projects. For assessment year 2014-15 the assessee-firm has filed return of income disclosing income of Rs.8,90,84,580/- after claiming deduction u/s 80IB of the Act of Rs.1,91,93,385/-. The case was selected for scrutiny and notices u/s 143(2) and 142(1) were issued. In response, ld. AR of the assessee appeared from time to time and made submissions on claim of deduction u/s 80IB(10) of the Act, Whereas AO dealt on the disputed issue at para.5 of the order and submissions of the assessee on 11/11/2016 for allowing the claim u/s 80IB(10) of the Act. Further Ld. AR submitted that in the assessee’s own case for assessment years 2009-10 and 2010- 11, the co-ordinate bench of Tribunal has allowed deduction u/s 80IB(10) proportionately to profits derived from sale of residential unit whose built up area is less than 1500 sq.ft. Even though some of the residential units in the very same project exceeded the built-up area of 1500 sq.ft. But the revenue has filed an appeal against the Tribunal order in the Hon’ble High Court of Karnataka. Hence, AO has made Page 3 of 14 proportionate disallowance of the claim as the Tribunal decision in the assessee’s case for earlier year’s is pending before the jurisdictional High Court of Karnataka. On the second issue, the assessee has made provision for expenses in the books of account whereas AO is of opinion that the claim cannot be allowed as the assessee failed to deduct tax at source and applied provisions of section 40(a)(ia) of the Act and disallowed the expenses and assessed the total income of Rs.2,49,81,990/- and passed order u/s 143(3) of the Act dated 29/12/2016 and whereas CIT(A) has confirmed the action of the AO and dismissed the assessee’s appeal.
Aggrieved by the order of CIT(A), the assessee has filed an appeal before the Tribunal. At the time of hearing, the ld. AR submitted that the disallowances are confirmed by the CIT(A)which is bad in law on proportionate deduction u/s 80IB of the Act and was allowed in earlier years and disallowance of provision for expenses whereas no bills/invoice were raised in the current year and supported the arguments with judicial decisions. Contra, learned DR supported the order of the CIT(A).
We heard rival submissions and perused material on record. Prima facie, ld. AR’s submissions are on two disputed issues. One in respect of claim allowable u/s 80IB of the Act Page 4 of 14 and second disallowance of provision for expenses u/s 40(a)(ia) of the Act. On the first disputed issue, the ld. AR submitted that the disputed issue is dealt by the Hon’ble Tribunal in favour of the assessee in assessee’s own case for assessment year 2009-10 in & 654/Bang/2013 dated 11/4/2014, Page 9 & 10. We found the claim of deduction u/s 80IB of the Act was dealt in Revenue’s appeal in paras.10 and 11 which reads as under:
10.3.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decision relied on by the learned Authorised Representative of the assessee (supra). We find that the single issue in Revenue's appeal, against the allowability of proportionate deduction under section 80 IB(10) of the Act, was considered and held in favour of the assessee by a co- ordinate bench of this Tribunal in the assessee's own cast for Assessment Yecr 2009-10(supra) wherein at pare 11 thereof it has been held as under :- “11. We have considered the rival submissions. As far as the appeal of the revenue is concerned, we are of the view that the question. as to whether deduction u/s. 80IB(10) of the Act has to be allowed proportionate to the profits derived from sale of residential units whose built-up area is less than 1500 Sq.ft. even though some of the residential units in the very same project exceeds the built-up area of 1500 sq.ft the same has been decided by the Hon’ble High Court of Karnataka in the case of CIT v. SJR Builders in of 2010 dated 19.03.12. The Hon’ble High Court has taken the view confirming the order of the Tribunal, by holding that where residential units exceed the built up area of 1500 sq.ft., Page 5 of 14 such units, such units may be excluded for deduction, but the assessee will not lose the benefit of deduction u/s. 801B(10) in its entirety. It is only with reference to the flats which is more than the prescribed area that the assessee will lose the benefit of deduction. The Tribunal in its -decision had followed the ruling of the Special Bench of the Tribunal in the case of Brahma Associates v. JCIT (313 ITR (AT) 268 (Rune) (SB). Several other decisions of various benches of the Tribunal were filed in the paper book taking similar view. In view of the aforesaid decision of the Hon'ble High Court of Karnataka, we are not making any reference to those decisions. In view of the aforesaid decision of the Hon'ble Karnataka High Court, we are of the view that there is no merit in the appeals of the revenue and the same are dismissed.
10.3.2 Respectfully following the decision of the Hon'ble High Court of Karn there is no merit in this appeal of revenue and therefore dismiss the grounds raised
11. In the result, Revenue’s appeal for assessment year 2010-11 is dismissed.” We, considering the facts in the present case are identical to earlier years and follow the precedence and direct the AO to grant deduction u/s 80IB(10) of the Act. In respect of second disputed issue, on non- deduction of TDS. On provision for expenses, the contentions of the ld. AR that no bills/invoices were raised by the parties. Hence, there is no liability to pay the amount. But as an Accounting Policy, the assessee has made provision in the books of account. We found this disputed issue was dealt by the co-ordinate bench in ITA Page 6 of 14 No.3/Bang/2015 dated 25/5/2016 in the case of M/s. TE Connectivity India Pvt. Ltd. vs. ITO(LTU)(TDS) at page 4 and 5 at para. 6 and 7 which reads as under: “6. We heard the rival submissions and perused material on record. The issue in appeal relates to the liability of the assessee-company to deduct tax at source on provisions made as at the end of the accounting year. The undisputed fact is that the provisions, made at the end of the accounting year are reversed in the beginning of the next year. No payees are identified. The exact amount of liability also cannot be quantified. The provisions are made merely on for Management Information System. In our considered opinion, liability to deduct tax at source does not arise. In identical circumstances, the Hon’ble Tribunal in the case of M/s.Bosch Ltd. vs. ITO in dated 01/03/2016, to which one of us i.e. the Accountant Member is the author of the order, held as follows: “9. The undisputed facts in this case are that he provisions were made at the end of the year and the same were reversed in the beginning of the next accounting year. The short point that arises for our consideration is whether the liability for deduction of tax at source has arisen the moment the amount is credited in the books of accounts. Having regard in the scheme of tax deducted at source, under Chapter- XVII-B of the IT Act, we are of the considered opinion that the liability to deduct tax at source arises only when there is accrual of income in the hands of the payee. We are holding so, keeping in view the ratio laid down by the Hon’ble Apex Court in the case of M/s GE India Technology Centre P. Ltd. Vs. CIT and another 327 ITR 456 (SC) wherein the Hon’ble Supreme Court held that if payment is not assessable to tax there is no question of tax at source being deducted. The relevant portion of the judgment is reproduced as under :- “If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words Page 7 of 14 “chargeable under the provisions of the Act” in section 195(1). The said expression in section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not so assessable, there is no question of TAS being deducted. One more aspect needs to be highlighted. Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of provisions of Chapter XVII one finds use of different expressions, however, the expression “sum chargeable under the provisions of the Act” is used only in section 195. For example, section 194C casts an obligation to deduct TAS in respect of “ any sum paid to any resident”. Similarly, sections 194EE and 194F, inter alia, provide for deduction of tax in respect of “ any amount” referred to in the specified provisions. In none of the provisions we find the expression “ sum chargeable under the provisions of the Act”, which as stated above, is an expression used only in section 195(1). Therefore this court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Section 195(2) is not merely a provision to provide information to the Income tax Officer (TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a non-resident. Therefore, section 195 has to be read in conformity with the charging provisions, i.e section 4,5 and 9. This reasoning flows from the words “ sum chargeable under the provisions of the Act” in section 195 (1). The fact that the Revenue has not obtained any information per se cannot be a ground to construe section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression “ sum chargeable under the provisions of the Act” from section 195(1). While interpreting a section one has to Page 8 of 14 give weightage to every word used in that section. While interpreting the provisions of the Income Tax Act one cannot read the charging sections of that Act de hors the machinery sections. The Act is to be read as an integrated code. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of CIT vs. Eli Lilly and Co. (India) (P) Ltd. (2009) 312 ITR 225 the provisions for deduction of TAS which are in Chapter XVII dealing with collection of taxes and the charging provisions of the Income Tax Act form one single integral, inseparable code and, therefore, the provisions relating to TDS apply only to those sums which are “ chargeable to tax” under the Income-Tax Act. It is true that the judgment in Eli Lilly (2009) 312 ITR 225 was confined to section 192 of the Income Tax Act. However, there is some similarity between the two. If one looks at section 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income “chargeable under the head salaries”. Similarly section 195 imposes a statutory obligation on any person responsible for paying to a non-resident any sum “ chargeable under the provisions of the Act”. Which expression, as stated above, do not find place in other sections of Chapter XVII. It is in this sense that we hold that the Income Tax Act constitutes one single integral inseparable code. Hence, the provisions relating to TDS applies only to those sums which are chargeable to tax under the Income tax Act. If the contention of the Department that any person making payment to a non-resident is necessarily required to deduct TAS then the consequence would be that the Department would be entitled to appropriate the moneys deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the Income-tax Act by which a payer can obtain refund. Section 237 read with section 199 implies that only the recipient of the sum i.e. the payee could seek a refund. It must therefore follow, if the Department is right, that the law requires tax to be deducted on all payments, the payer, therefore, has to deduct and pay tax, even if the so- called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words “ chargeable under the provisions of the Act” to be omitted, it also leads to an absurd consequence. The interpretation Page 9 of 14 placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, section 195(2) provides a remedy by which a person may seek a determination of the “appropriate proportion of such sum so chargeable” where a proportion of the sum so chargeable is liable to tax. The entire basis of the Department’s contention is based on administrative convenience in support of its interpretation. According to the Department, huge seepage of revenue can take place if persons making payments to non-residents are free to deduct TAS or not to deduct TAS. It is the case of the Department that section 195(2) , as interpreted by the High Court would plug the loophole as the said interpretation requires the payer to make a declaration before the Income tax Officer (TDS) of payments made to non-residents. In other words, according to the Department, section 195(2) is a provision by which the payer is required to inform the Department of the remittances he makes to non-residents by which the Department is able to keep track of the remittances being made to non-residents outside India. We find no merit in these contentions. As stated hereinabove, section 195(1) uses the expression “ sum chargeable under the provisions of the Act”. We need to give weightage to those words. Further, section 195 uses the word “payer” and not the word “assessee”. The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfill the statutory obligation under section 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default. The above- mentioned contention of the Department is based on an apprehension which is ill founded. The payer is also an assessee under the ordinary provisions of the Income Tax Act. When the payer remits an amount to a non-resident out of India he claims deduction or allowances under the Income Tax Act for the said sum as an ‘ expenditure’ . Under Section 40(a)(i), inserted, vide Finance Act, 1988, with effect from April 1, 1989, payment in respect of royalty, fees for technical services or other sums chargeable under the Income Tax Act would not get the benefit of deduction if the assessee fails to deduct TAS in respect of payments outside India which are chargeable Page 10 of 14 under the Income-tax Act. This provision ensures effective compliance with section 195 of the Income tax Act relating to tax deduction at source in respect of payments outside India in respect of royalties, fees or other sums chargeable under the Income Tax Act. In a given case where the payer is an assessee he will definitely claim deduction under the Income-tax Act for such remittance and on inquiry if the Assessing Officer finds that the sums remitted outside India come within the definition of royalty or fees for technical service or other sums chargeable under the Income-tax Act then it would be open to the Assessing Officer to disallow such claim for deduction. Similarly, vide the Finance Act, 2008, with effect from April 1, 2008, sub-section (6) has been inserted in section 195 which requires the payer to furnish information relating to payment of any sum in such form and manner as may be prescribed by the Board. This provision is brought into force only from April 1, 2008. It will only apply for the period with which we are concerned in these cases before us. Therefore, in our view, there are adequate safeguards in the Act which would prevent revenue leakage. Applicability of the judgment in the case of Transmission Corporation (supra) In Transmission Corporation’s case (1999) 239 ITR 587(SC) a nonresident had entered into a composite contract with the resident party making the payments. The said composite contract not only comprised supply of plant, machinery and equipment in India, but also comprised the installation and commissioning of the same in India. It was admitted that the erection and commissioning of plant and machinery in India gave rise to income taxable in India. It was, therefore, clear even to the payer that payments required to be made by him to the non-resident included an element of income which was exigible to tax in India. The only issue raised in that case was whether TDS was applicable only to pure income payments and not to composite payments which had an element of income embedded or incorporated in them. The controversy before us in this batch of cases is, therefore, quite different. In Transmission Corporation case (1999) 239 ITR 587 (SC) it was held that TAS was liable to be deducted by the payer on the gross amount if such payment included in it an amount which was exigible to tax in India. It was held that if the payer wanted to deduct TAS not on the gross amount but on the lesser amount on Page 11 of 14 the footing that only a portion of the payment made represented ‘ income chargeable to tax in India’ then it was necessary for him to make an application under section 195(2) of the Act to the Income Tax Officer (TDS) and obtain his permission for deducting TAS at lesser amount. Thus, it was held by this court that if the payer had a doubt as to the amount to be deducted as TAS he could approach the Income-tax Officer (TDS) to compute the amount which was liable to be deducted at source. In our view , section 195(2) is based on the “principle of proportionality””. The said sub section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of ‘income’ chargeable to tax in India. It is in this context that the Supreme Court stated, ‘if no such application is filed, income tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ’sum’ to deduct tax thereon before making payment. He has to discharge the obligation to TDS”. If one reads the observation of the Supreme Court, the words ‘ such sum’ clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this court in Transmission Corporation case (1999) 239 ITR 587 (SC) which are put in italics have been completely, with respect misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all ’ chargeable to tax in India’., then no TAS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of section 195(1) which in clear terms lay down that tax at source is deductable only from “ sums chargeable” under the provisions of the Income Tax Act, i.e. chargeable under sections 4,5 and 9 of the Income Tax Act.”
Now to determine where there was income accrued or not considering the fact that the provisions were made at the year end is reversed in the beginning of the next accounting year goes to show that there was no income accrued. Mere entries in the books of accounts does not establish the accrual of income in the hands of the payee as Page 12 of 14 held by the Hon’ble Supreme Court in the case of CIT Vs M/s Shoorji Vallabhdas & Co. 46 ITR 144 wherein it was held as follows; “ That the subsequent agreement had altered the rate of commission in such a way as to make the income which really accrued to the assessee different from what had been entered in the books of account. This was nota case of a gift by the assessee to the managed companies of a portion of income which had already accrued, but an agreement to receive a lessor remuneration than what had been agreed upon. The assessee had in fact received only the lesser amount in spite of the entries in the account books, and this lesser amount alone was taxable. Income-tax is a levy on income. Though the Income-tax Act, takes into accounts two points of time at which the liability to tax is attracted, viz. the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a ‘hypothetical income;, which does not materialize. Where income has, in fact, been received and is subsequently, given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account”. Thus, having regard to the ratio laid down by the Hon’ble Apex Court, it cannot be said that income had accrued in the hands of the payee. We, therefore, hold that there was no liability in the hands of the assessee company to deduct TDS, merely on the provisions made at the year end. Hence, the assessee company cannot be treated as ‘assessee in default’ for not deducting tax at source and therefore, we allow the grounds of appeal filed by the assessee company in this regard.”
Page 13 of 14 The Hon’ble High Court of Karnataka in the case of Karnataka Power Transmission Corporation Ltd. vs. DCIT (2016) 383 ITR 59(Karn) held that for the purpose of deducting tax at source, the income which finally par takes character of income alone is allowable for deduction of income-tax. If the amount is not considered to be income in the hands of the deductee, the provisions of tax deduction at source would not be made applicable. The relevant paragraph of the judgment is as under: “We have examined the applicability of section 194A of the Act to the present case. Section 194A of the Act mandates the tax deductor to deduct "income- tax" on "any income by way of interest other than income by way of interest on securities". The phrase “any income" and "income-tax thereon" if read harmoniously, it would indicate that the interest which finally partakes the character of income, alone is liable for deduction of be income-tax on that income by wav of interest. If the said interest is not finally considered to be an income of the deductee, as per reversal entries of the provision in the present case, section 194A(1) of the Act would not be made applicable. In other words, if no income is attributable to the payee, there is no liability to deduct tax at source in the hands of the tax deductor. In view of the admitted fact that interest being not paid to the payees (suppliers) being reversed in the books of account, we are of the considered opinion that there would be no liability to deduct tax as no income accrued to the payees (suppliers). It is true that in the case of Ericsson Communication Limited (supra), the Delhi High Court was dealing with the case of section 195 of the Act wherein obligation of a person to deduct tax at source would be applicable to the "income chargeable under the Act". Absence of such words "chargeable to tax" under the provisions of section 194A of the Act would not empower the authorities to invoke the provisions of section 201(1) and 201(1A) of the Act ignoring the words ‘any income by way of interest. ” Respectfully following the above order, we hold that the assessee-company is not liable to deduct tax at source as no income has accrued in the hands of the payee.
Page 14 of 14 7. In the result, the appeal filed by the assessee- company is allowed.” We also support our view relying on the decision of the Hon’ble Gujarat High Court in the case of Principal CIT vs. Sanghi Infrastructure Ltd. (257 Taxman 371)(Guj.) where provision for expense claim was held as under: