DEPUTY COMMISSIONER OF INCOME TAX-1(1)(2), MUMBAI vs. FORBES TECHNOSYS LIMITED , MUMBAI

Briefly the facts are, the assessee, a resident company, is engaged in the business of providing Information Technologies Enabled Services (ITES), trading and manufacturing of business automation machines etc. For the assessment year under consieration assessee filed its return of income 30.09.2013 declaring nil income after set off of brought forward losses. In course of assessment proceedings the Assessing Officer called upon the assessee to furnish details of various expenses debited to the profit & loss account. While verifying the details submitted by the assessee, he noticed that an amount of `. 27,50,000/– being provision made for travelling and conveyance expenses has been debited to profit & loss account on lump sum basis. Holding that provision made by the assessee is contingent in nature, the Assessing Officer disallowed the amount of `. 27,50,000/–. Assessee challenged the disallowance before learned Commissioner (Appeals). Ld. Being satisfied with the claim of assessee that the expenditure representing the provision made has crystallized during the year, learned Commissioner (Appeals) allowed assessee’s claim.

We have considered rival submissions and perused the material on record. Undisputedly, the Assessing Officer has disallowed the amount of `. 27,50,000/– on the reasoning that the expenditure has 3 M/s Forbes Technosys Ltd. not crystallized during the year and the provision made is of contingent nature. Before learned Commissioner (Appeals), it was submitted by the assessee that the amount represents the advances availed by the employees towards travel and conveyance expenses during the year. However, the employees did not furnish the claim before the end of the year. It was submitted, as per the practice followed, the employees submit their claim with regard to travel and conveyance expenses within a period of 3 to 4 months of travel and settled their advances or claim reimbursement towards additional expenditure incurred by them. From the aforesaid facts, it appears that the amount in dispute was actually paid to the employees during the year, though, the claims of the employees in respect of such expenditure were not received. However, that by itself does not make the provision for expenditure contingent in nature. The factual aspect of the issue was verified by ld. Commissioner (Appeals) and he has concluded that the expenditure has crystallized during the year. The Revenue has also not brought any material on record to show that any part of the aforesaid expenditure was claimed by the assessee in the succeeding assessment year. In view of the aforesaid, we do not find any infirmity in the decision of ld. Commissioner (Appeals) on the issue. Ground raised is dismissed.

In ground no. 2 to 6 the Revenue has challenged deletion of various disallowances made under section 40(a)(ia) in respect of the following expenditures debited to profit & loss account. i. Payment of rent `. 68,71,902/– ii. Payment of interest `. 15,00,000/– iii. Payment of contract labour charges `. 1,97,34,88/– iv. Payment for freight and forwarding charges `. 28,95,203/– v. Payment of sales commission `. ……….

Briefly the facts are, during assessment proceedings the Assessing Officer called upon the assessee to furnish the details of various expenditure as well as tax deducted at source while making payment for such expenditure. After verifying the details furnished by the assessee he found that while making payment towards the aforesaid expenditures, the assessee has either not deducted tax at the appropriate rate or has not at all deducted tax at source. Alleging that the assessee could not furnish any valid explanation for short deduction/non deduction of tax at source, he disallowed the aforesaid payments by invoking the provision of section 40(a)(ia) of the Act. The assessee challenged the disallowances before learned Commissioner (Appeals). As regards disallowance of expenditure incurred towards payment of rent, learned Commissioner (Appeals) found that in respect of OPC Assets Solution Private Ltd., and Rent Works India Pvt. Ltd.,. The assessee has deducted tax at source at a lower rate on the 5 M/s Forbes Technosys Ltd. basis of certificate issued by department allowing deduction of tax at lower rate. Thus, he observed, since the assessee has already deducted tax at an appropriate rate, no disallowance is required to be made. From the details furnished by the assessee he found that out of the total payment made towards rent amounting to `.1,13,92,537/–, at best, disallowance can be made for an amount of `. 45,20,625/–. Thus he restricted the disallowance in respect of payment of rent to the aforesaid amount. As regards, payment of interest of `. 15,00,000/– to Tata Capital Financial Services, ld. Commissioner (Appeals) found that the assessee had deducted tax at source under section 194J of the Act inadvertently instead of section 194A. However, he found that the rate of deduction of tax under both the sections is same i.e. 10 percent. Further, he found that the assessee has also furnished evidence showing deposit of TDS with the government account. Considering the above, he deleted the disallowance. As regards, payment of contract labour charges to Genius Consultants Limited, learned Commissioner (Appeals) noticed that the assessee has deducted tax at a lower rate on the basis of the certificate issued by the department allowing deduction of tax at a lower rate. Further, he observed, before him the assessee accepted that it has not deducted tax at appropriate rate for payment of `. 43,34,050/– and accordingly agreed for disallowance of the said amount. Considering the submissions of the assessee, learned 6 M/s Forbes Technosys Ltd. Commissioner (Appeals) restricted the disallowance of `. 43,34,050/–. As regards freight and forwarding charges paid of `. 28,95,203/–, Ld. Commissioner (Appeals) found that the payments are not in respect of freight and forwarding alone but includes reimbursement of octroi and entry taxes. Thus considering the submission of assessee learned Commissioner (Appeals) restricted the disallowance to `. 59,62,589/– as against `. 88,57,792/– made by the Assessing Officer. As regards disallowance of sales commission, learned Commissioner (Appeals) found that the payment represents incentives/turnover discounts given to the authorized channel partners by way of credit note subject to achievement of quarterly / annual targets. In this regard he also took note of assessee’s contention that the payment does not qualify either as fees for technical service or royalty and also the submission that the payment made would not qualify as brokerage or commission to bring it within the ambit of section 194H of the Act. After considering the submission of the assessee, learned Commissioner (Appeals) was convinced that the payment made would not attract TDS provision. Accordingly, he deleted the addition made by the Assessing Officer.

Contesting the deletion of disallowance made in respect of payment of rent, interest, contract labour charges, freight and forwarding charges, The basic contention of ld. Departmental Representative is, learned Commissioner (Appeals) has deleted part of the disallowance by entertaining additional evidences in violation of 7 M/s Forbes Technosys Ltd. Rule 46A of the Income Tax Act. He submitted, before the Assessing Officer the assessee did not produce any evidence. Whereas, before learned Commissioner (Appeals) assessee produced fresh evidences and without giving an opportunity to the Assessing Officer, learned Commissioner (Appeals) deleted the additions relying upon such evidences. Thus, he submitted the issue relating to aforesaid disallowances should be restored to the Assessing Officer for fresh adjudication after considering the evidences filed by the assessee. In so far as deletion of disallowance made in respect of sales commission, the learned Departmental Representative submitted, without recoding any finding whether there is a principle–agent relationship in existence or not, learned Commissioner (Appeals) has deleted the addition. Thus, he submitted, the decision of learned Commissioner (Appeals) should be reversed.

The Learned Authorised Representative strongly relying upon the decision of learned Commissioner (Appeals) submitted, no fresh evidences were entertained by learned Commissioner (Appeals) in violation of Rule 46A of the Act. He submitted, the power of learned Commissioner (Appeals) is co–terminus with the Assessing Officer. Therefore, in course of appeal proceeding, learned Commissioner (Appeals) can also make such a enquiry as he may deem fit for coming to a proper conclusion. He submitted, in exercise of such power learned Commissioner (Appeals) had enquired into the issues relating 8 M/s Forbes Technosys Ltd. to disallowance made under section 40(a)(ia) of the Act and thereafter granted partial relief to the assessee. Thus, he submitted, there is no flaw in the decision of learned Commissioner (Appeals) on the issue. As regards disallowance of sales commission, the learned Authorised Representative submitted, on factual verification learned Commissioner (Appeals) has found that the payment made is not in the nature of brokerage or commission. Therefore, he has deleted the disallowance.

We have considered rival submissions and perused the material on record. It is evident, the Assessing Officer has made disallowance under section 40(a)(ia) in respect of various payments made by the assessee during the year, either for short deduction of tax or non deduction of tax. The facts on record also make it clear that in respect of payment of rent, interest and contract labour charges, the assessee had deducted tax at a lower rate on the strength certificate issued by the department permitting deduction of tax at lower rate. In respect of freight and forwarding charges, part of the payment was towards reimbursement octroi/entry tax. It is also evident, in course of appeal proceeding, in response to query raised by learned Commissioner (Appeals), the assessee had furnished the certificates issued by the department permitting deduction of tax at lower rate. Further, the assessee has also furnished the details of payment made on which tax was deducted at the prescribed rate as per the certificate issued by the 9 M/s Forbes Technosys Ltd. department and the payments which were not covered under such certificate. Accordingly, the assessee itself has voluntarily agreed for disallowance of payment made without deduction of tax at the prescribed rate. On the basis of such details furnished by the assessee, learned Commissioner (Appeals) has sustained disallowance under section 40(a)(ia) of the Act to the extent the payments were not covered under the low deduction tax certificates issued by the department. When the low deduction tax certificates were issued by the department itself, there is no reason why learned Commissioner (Appeals) cannot take cognizance of those certificates and grant consequential relief to the assessee. In our view, the documentary evidences furnished by the assessee having been issued by the department itself cannot be considered to be in the nature of additional evidences so as to comply with the requirements of Rule 46A. In any case of the matter, the power of learned Commissioner (Appeals) being co–terminus with that of Assessing Officer, he is empowered under the provisions of the Act to conduct necessary enquiry which the Assessing Officer can conduct to ascertain the correct facts. In view of the aforesaid, we do not find any infirmity in the decision of learned Commissioner (Appeals). In so far as payment of freight and forwarding charges, the assessee had demonstrated before learned Commissioner (Appeals) that part of such payment is in the nature of reimbursement of octroi/entry taxes paid. Upon due