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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: HON’BLE SHRI C.N. PRASAD, JM & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
Per Manoj Kumar Aggarwal (Accountant Member) : 1. Aforesaid appeals by assessee for Assessment Years [AY] 2010- 11 and 2011-12 contest separate orders of first appellate authority. Since common issues are involved, we proceed to dispose-off the same by way of this common order for the sake of convenience & brevity. 2.1 The assessee contest the order of Ld. Commissioner of Income- Tax (Appeals)-54, Mumbai, [CIT(A)], Appeal No. CIT(A)-41/ACCC-38/IT- 227/13-14, New No. CIT(A)-54/ACCC-38/IT-50A/13-14 dated 30/05/2017 on following grounds of appeal: -
1. The Ld CIT(A) erred in upholding the disallowance of Rs.5,40,700/- out of total disallowance of Rs.19,70,02,520/- made by the Ld Assessing Officer (AO) under section 40(a)(ia) of the 1 T Act.
2. The Ld. CIT(A) erred in sustaining the disallowance of Rs.61,82,771/- out of the disallowance of an amount of Rs.7,80,53,944/- made by the Ld AO out of interest expenses without appreciating the facts and circumstances properly.
3. The Ld CIT(A) erred in confirming the disallowance of Rs.1,05,98,736/- out of the disallowance made by the AO out of purchases without appreciating that the expenses were fully verifiable and books of account were duly audited.
4. The Ld CIT(A) erred in not deciding the issue of deduction of Rs.15,000/- claimed under Chapter VIA and contested by way of the Additional Ground of Appeal.
5. The above grounds of appeal are without prejudice to one another,
6. The appellant craves leave to furnish Additional Evidence which may be relevant to the above Grounds of Appeal in course of the appeal proceedings.
2.2 The assessment for impugned AY was framed by Ld. Assistant Commissioner of Income Tax-Central Circle-38, Mumbai [AO] in scrutiny assessment u/s. 143(3) on 26/03/2013 wherein the income of the assessee was determined at Rs.8695.35 Lacs after certain additions / disallowances as against returned income of Rs.0.25 Lacs e-filed by the assessee on 15/10/2010. Upon, further appeal, Ld. first appellate -44/Mum/2017 M/s. Vidyut Metallics Private Limited Assessment Years :2010-11 & 2011-12 authority has provided substantial relief to the assessee. It appears that no appeal has been preferred by the revenue against the same and therefore, the matter, to that extent, has already attained finality. The assessee being resident corporate entity was stated to be engaged in manufacturing and trading of safety razor blades, shaving systems and razor blade manufacturing machines. With this background, we proceed to adjudicate the assessee’s appeal as argued before us. 2.3 As evident from grounds of appeal
, the following quantum additions as sustained in the impugned order are the subject matter of present appeal before us: - No. Nature of Addition Amount Rs. (Rounded Off)
1. Disallowance u/s 40(a)(ia) Rs.5.40 Lacs 2. Disallowance of interest exp. Rs.61.82 Lacs 3. Disallowance of Purchases Rs.105.98 Lacs
4. Deduction under Chapter VIA Rs.0.15 Lacs 3.1 Facts qua disallowance u/s 40(a)(ia) are that a TDS Survey was conducted on assessee by DCIT(TDS) on 14/01/2010 wherein it transpired that the assessee was liable to deduct and pay tax at source [TDS] of Rs.644.59 Lacs out of which it had paid only Rs.447.58 Lacs before due date of filing of return of income. Since no details / evidence of deposit of differential amount i.e. Rs.197 Lacs was submitted by assessee, Ld. AO worked out corresponding disallowance of Rs.1970 Lacs since the assessee was required to deduct tax at source mostly @10%. 3.2 Before Ld. first appellate authority, the assessee submitted additional evidences u/r 46A in the shape of order u/s 201(1) / 201(1A) and contended that there was short-deduction of tax only to the extent of -44/Mum/2017 M/s. Vidyut Metallics Private Limited Assessment Years :2010-11 & 2011-12 Rs.3,090/- and its TDS payment liability was Nil and therefore, disallowance was not justified. Accordingly, a remand report was called from Ld. AO wherein Ld. AO, after considering the same, re-quantified the disallowance at Rs.5.40 Lacs. Although the assessee reiterated that there was no TDS default and the impugned disallowance was not justified, however, Ld. CIT(A) confirmed disallowance to the extent of Rs.5.40 Lacs, against which the assessee is in further appeal before us. 3.3 Before us, the Ld. Authorized Representative for assessee [AR] again submitted that there was no default of TDS by the assessee as evident from order u/s 201(1) / 201(1A) and therefore, aforesaid disallowance was not justified. The Ld. AR pleaded for another opportunity to substantiate its stand, in this regard. Per Contra, Ld. Departmental Representative [DR] submitted that the assessee failed to substantiate the same even during remand proceedings and therefore the disallowance was justified. 3.4 Upon careful consideration, keeping in view the submissions made by the assessee that there was no TDS default, the matter being factual one, we deem it fit to restore this matter of disallowance of Rs.5.40 Lacs back to the file of Ld. AO with a direction to the assessee to substantiate his stand as per the submissions. Accordingly, this ground stands allowed for statistical purposes. 4.1 The interest disallowance was made by Ld. AO, since it was noted that as against interest-bearing funds of Rs.174.63 Crores, the assessee had Capital Work-in-progress of Rs.22.64 Crores, advanced interest-free loans for Rs.31.40 Crores and made investments in shares to the tune of Rs.1.06 Crores, all of which being for non-business purposes, called for -44/Mum/2017 M/s. Vidyut Metallics Private Limited Assessment Years :2010-11 & 2011-12 proportionate interest disallowance. Accordingly, an aggregate interest disallowance of Rs.7.80 Crores was made u/s 37(1) / 36(1)(iii) & 14A out of total interest expenditure of Rs.27.71 Crores debited by the assessee to Profit & Loss Account. 4.2 The disallowance was agitated by the assessee before first appellate authority by adducing certain additional evidences u/r 46A, which were subject matter of remand proceedings before Ld. AO. The Ld. AO, after due consideration of factual matrix, opined that no disallowance u/s 37(1) or 14A was warranted but disallowance on account of inter-company business deposits of Rs.4.77 Crores advanced to group concerns purportedly as advance for job charges, royalty could not be treated as business advances and therefore, disallowance to that extent was justified. Resultantly, the proportionate disallowance was worked out against advance of Rs.4.77 Crores which came to Rs.61.82 Lacs. The same upon confirmation by first appellate authority is under appeal before us. 4.3 The Ld. AR, drawing our attention to assessee’s financial statements, submitted that assessee’s own funds in the shape of Share Capital & Reserves far exceeded the interest-free advances granted by the assessee and therefore a presumption was to be drawn in assessee’s favor that own funds were used to make those advances. For this proposition, reliance has been placed on the judgement of Hon’ble Bombay High Court rendered in CIT Vs. Reliance Utilities & Power Ltd. [178 Taxman 135] & CIT Vs. HDFC Bank Ltd. [49 Taxman.com 335]. To strengthen the assessee’s claim, it was also submitted that the stated advances represent advance job charges & advance royalty payments, -44/Mum/2017 M/s. Vidyut Metallics Private Limited Assessment Years :2010-11 & 2011-12 being for business purposes and therefore, the disallowance u/s 36(1)(iii) was not justified. The Ld. DR supported the working arrived at by Ld. AO. 4.4 After due consideration, the bench found certain credence in both the submissions made by Ld. AR since no disallowance u/s 36(1)(iii) was warranted against business advances. Secondly, the perusal of financial statements reveals that the assessee has overall Reserves of approx. 93 Crores which far exceeds the investments / advances made by the assessee. Therefore, keeping in view the submissions made, we deem it fit to restore the matter of disallowance u/s 36(1)(iii) for Rs.61.82 Lacs back to the file of Ld. AO with a direction to the assessee to substantiate his stand as per the submissions. This ground also stands allowed for statistical purposes. 5.1 During assessment proceedings, it transpired that the assessee claimed purchases of Rs.179.49 Crores on account of raw-material, stores & spares, packing material and finished / semi-finished goods and debited the same under the head material consumed. Pursuant to receipt of certain information from Sales Tax Department, Maharashtra, it transpired that the assessee obtained bogus purchase bills from various parties. Accordingly, the assessee was directed to substantiate the purchase transactions exceeding Rs.10 Lacs. Notices were also sent u/s 133(6) to few suppliers, on test-check basis, to confirm the transactions. The perusal of replies against the same reveal that there was purchase difference of Rs.212.03 Lacs in the account of 7 parties, the details of which have already been extracted at para 5.4 of the assessment order. The other purchases aggregating to Rs.675.49 Lacs -44/Mum/2017 M/s. Vidyut Metallics Private Limited Assessment Years :2010-11 & 2011-12 stated to be made from 13 parties, was held to be non-genuine since the parties did not exist at the given addresses and the assessee also did not submit satisfactory proof in support of the same. Resultantly, full disallowance was made against these purchases of Rs.675.49 Lacs whereas adhoc 25% of balance purchases was disallowed which worked out to Rs.4318.56 Lacs. The aggregate disallowance under this head, thus worked out to Rs.4994.06 Lacs. 5.2 The Ld. first appellate authority, after considering the remand report, confirmed disallowance to the extent of Rs.105.98 Lacs and deleted the balance disallowance, against which the assessee is in further appeal before us. The disallowance as confirmed by Ld. CIT(A) arises out of the following parties: - No. Name of Party Amount (Rs.) Reason for Confirmation
1. M/s Gajanan Automobiles Rs.85,635/- Reconciliation difference 2. M/s Bombay Ammonia & Rs.26,963/- Reconciliation Chemical Company difference 3. M/s Raj Enterprises Rs.1,15,143/- Reconciliation difference
4. Alleged bogus purchases from Rs.1,03,70,995/- Non-existent 5 parties parties Total Rs.1,05,98,736/- 5.3 The Ld. AR agitated the additions made on this account and pleaded for deletion of the same which has been controverted by Ld. DR on factual findings of lower authorities. 5.4 Upon due consideration, we find that the assessee is a corporate entity and made aggregate purchases of Rs.179.49 Crores during the impugned AY and therefore, in such a case, minor accounting discrepancies could not be ruled out. The books of accounts were ITA No.5243-44/Mum/2017 M/s. Vidyut Metallics Private Limited Assessment Years :2010-11 & 2011-12 subject to Audit for the impugned AY. Therefore, the disallowance of purchases listed at serial no. 1 to 3 being reconciliation differences, in our opinion, is not justified. Hence, we delete the same. The ground stands allowed to that extent. 5.5 Regarding alleged bogus purchases of Rs.103.70 Lacs, it is undisputed fact that the said parties have been found to be non-existent at the given address. Notices sent u/s 133(6) has not elicited any satisfactory response and the assessee failed to produce any of the party for confirmation of account. The delivery of material could not be substantiated by the assessee with lorry receipts, transportation details, gate pass etc. However, at the same time, there could be no sale without actual purchase of material keeping in view the assessee’s nature of business. The assessee was in possession of primary purchase documents. Keeping in view the same, we estimate the additions @10% of alleged bogus purchases which works out to Rs.10,37,100/-. The balance addition stands deleted. The ground stands partly allowed.
In ground number 4, the assessee is aggrieved by non-granting of deduction under Chapter VIA for Rs.15,000/-. The issue has remained to be adjudicated in the impugned order. Therefore, Ld. AO is directed to verify the same and allow the same, if found admissible as per law. This ground stand allowed for statistical purposes.
7. Resultantly, the appeal stands partly allowed for statistical purposes. AY 2011-12 8. The assessee has been assessed in this AY on similar lines u/s 143(3) on 28/03/2014. The interest disallowance of Rs.43.52 Lacs & -44/Mum/2017 M/s. Vidyut Metallics Private Limited Assessment Years :2010-11 & 2011-12 purchase disallowance of Rs.1.39 Lacs as sustained by first appellate authority are under appeal before us. 9.1 The perusal of impugned order reveal that interest disallowance of Rs.43.52 Lacs represent interest on late payment of tax deducted at Source [TDS]. The same been disallowed since in terms of judgment of Hon’ble Madras High Court rendered in CIT Vs Chennai Properties & Investment Ltd. [105 Taxman 346], interest paid u/s 201(1A) would not assume the character of business expenditure and therefore could not be regarded as a compensatory payment and hence, not allowable. 9.2 The Ld. AR placed reliance on the recent decision of this Tribunal rendered in Mukund Ltd. Vs. ITO [101 Taxmann.com 214] whereas Ld. DR submitted that the matter stood against the assessee by the decision of Hon’ble Madras High Court as relied upon by first appellate authority. 9.3 We have carefully considered the same. We find that Ld. CIT(A) has relied upon the order of Hon’ble Madras High Court rendered in CIT Vs Chennai Properties & Investment Ltd. [105 Taxman 346] whereas Ld. AR has relied upon the decision of this Tribunal rendered in Mukund Ltd. Vs. ITO [supra]. Upon perusal of the decision of Hon’ble Madras High Court, it transpires that the same, inter-alia, places reliance on the judgment of Hon’ble Bombay High Court rendered in Ferro Alloys Corpn. Ltd.Vs. CIT [196 ITR 406] wherein our jurisdictional High Court has concluded the matter in favor of revenue by observing as under: - V.A. Mohta, J.—At the instance of the assessee, the following question of law is referred for the opinion of this court under section 256(1) of the Income-tax Act, 1961: "Whether, on the facts and in the circumstances of the case, the claim for deduction of interest levied under section 220(2) of Rs. 6,03,168, interest levied under section 215 of Rs. 1,38,506 and interest levied under section 201(1A) of Rs. 66,590 was -44/Mum/2017 M/s. Vidyut Metallics Private Limited Assessment Years :2010-11 & 2011-12 rightly rejected as not allowable under section 37 of the Income-tax Act, 1961, for the assessment year 1976-77?" The assessee was required to pay the following amounts as interest. Rs. 6,03,168 under section 220(2), Rs. 1,38,506 under section 215, and Rs. 66,590 under section 201(1A) of the Income-tax Act. These amounts were claimed as business expenditure under section 37 of the Income-tax Act. The Income-tax Officer, the Commissioner in first appeal and the Tribunal in second appeal, rejected the said claim as not allowable under section 37 and it is against the above basic undisputed background that the question has been referred. The point stands concluded against the assessee by the consistent view of this court right from Aruna Mills Ltd. v. CIT [1957] 31 ITR 153 to CIT v. Ghatkopar Estate and Finance Corporation ( P) Ltd. [1989] 177 ITR 222 (Bom). The Delhi High Court in the case of Bharat Commerce Industries Ltd. v. CIT [1985] 153 ITR 275 and the Kerala High Court in the case of Federal Bank Ltd. v. CIT [1989] 180 ITR 37 , have also taken the same view. Very fairly, Shri Bhide, learned counsel for the assessee, informs us that there is no decision which has taken a contrary view. The reference has been made only because the special leave petition against the Delhi High Court decision in Bharat Commerce Industries Ltd.'s case [1985] 153 ITR 275 is pending before the Supreme Court. We see no reason for keeping this reference pending indefinitely for that reason. Under the circumstances, we record the answer in the affirmative. No order as to costs.
It is noted that Special Leave Petition [SLP] filed by the assessee against the decision of Hon’ble Delhi High Court as referred to above has already been dismissed by Hon’ble Apex Court in [1998] 98 Taxman 151 and the same has already attained finality. The relevant observations of Hon’ble Madras High Court could be extracted in the following manner: - 4. Section 201 deals with the consequences of the failure to deduct the amount of tax which is required to be deducted by an assessee from the payments made by it to the extent required under the Act. The deduction at source is required to be made on salary under section 192 of the Act, on interest paid on securities under section 193 of the Act, on dividends under section 194 of the Act, on interest other than interest on securities under section 194A, and on the other payments referred to in section 195 of the Act. Section 198 of the Act provides that tax so deducted is to be shown for the purpose of computing the income of the recipient of the amount in respect of which the tax has been deducted, as the income of such recipient and credit for the amount of the tax so deducted is to be given to such recipient under section 199 of the Act. -44/Mum/2017 M/s. Vidyut Metallics Private Limited Assessment Years :2010-11 & 2011-12 5. Section 200 of the Act imposes a duty on the person deducting tax to pay within the prescribed time the sum so deducted to the credit of the Central Government or as the Board directs.
6. The consequences of failure to deduct or failure to remit the amount deducted as required under the Act are set out in section 201.
If the payer does not deduct or remit the tax, he would be deemed to be an assessee in default in respect of the tax. Such person, however, is not liable to a penalty under section 221, if the ITO is satisfied that the failure to deduct or remit was for too good and sufficient reasons. Sub-section (1A) of section 201 without prejudice to the provisions of sub-section (1) provides that the person who fails to deduct or remit the amount of deduction in the manner required under the Act is liable to pay interest at the rates specified in that sub-section from the date on which tax was deductible to the date on which such tax is actually paid.
The liability for deduction of tax arises by reason of the provisions of the Act. Under section 201, the consequence of failure to comply with the same renders that person liable to be deemed as an assessee in default with all the consequences attached thereto. The liability to pay interest on the amount not deducted or deducted but not paid, is directly related to the failure to deduct or remit the amount. The amount required to be deducted is the amount payable as income-tax. The interest paid for the period of delay takes colour from the nature of the principal amount required to be paid but not paid within time. The principal amount here would be the income-tax and the interest payable for delayed payment is the consequence of failure to pay the tax and in the circumstances, in the nature of a penalty though not described as such in sub-section (1A) of section 201. The fact that the income-tax required to be remitted was not income-tax payable by the assessee, but is ultimately for the benefit of and to the credit of the recipient of the income on which that tax is payable, does not in any manner alter the character of the payment, namely, its character as income-tax.
The learned counsel for the revenue submitted, placing strong reliance on the recent decision of the Supreme Court in the case of Bharat Commerce & Industries Ltd. v. CIT[1998] 230 ITR 733/ 98 Taxman 151, that payments required to be made by way of income-tax under the Income-tax Act are not deductible as expenditure and the further amounts which a person may be required to pay by reason of failure to comply with the provisions requiring the payment of the tax are also amounts which cannot be regarded as deductible expenditure under section 37 of the Act.
In that case, the question considered was as to whether interest paid on delayed payment of income-tax and surtax by way of instalments on income voluntarily disclosed under the Voluntary Disclosure of Income and Wealth Act, 1976, is not in any way an expense incurred wholly or exclusively for the purpose of the assessee's business. The Court held that "When interest is paid for committing a default in respect of the statutory liability to pay advance tax, the amount paid and the expenditure incurred in that connection is not in any way connected with preserving or promoting the business of the assessee . . . . The liability in the case of payment of income-tax and interest for delayed payment of income-tax or advance tax arises on the computation of the profits and gains of business". The Court further held that "Under the Income-tax Act, the payment of such interest is inextricably connected with the assessee's tax liability. If income-tax itself is not a permissible deduction under section 37, any interest payable for default committed by the assessee in -44/Mum/2017 M/s. Vidyut Metallics Private Limited Assessment Years :2010-11 & 2011-12 discharging his statutory obligation under the Income-tax Act, which is calculated with reference to the tax on income, cannot be allowed as deduction".
Before holding so, the Court considered the decision of the Apex Court in the case of Mahalakshmi Sugar Mills Co. v. CIT[1980] 123 ITR 429 / 3 Taxman 52 , a decision rendered by the three learned Judges of the Apex Court and held that the ratio of that judgment had no application to the case before it in the case of Bharat Commerce & Industries Ltd. (supra). The assessee in the case of Mahalakshmi Sugar Mills Co. (supra) had claimed deduction of interest paid on arrears of sugarcane cess. The payment of sugarcane cess, as it was observed by the Court in the case of Bharat Commerce & Industries Ltd. (supra), is very much a part of the assessee's business expense and any interest on arrears of cess would, therefore, take colour from the cess which is payable, that it was an indirect tax which had to be paid in the course of carrying on business.
The learned counsel for the assessee placed reliance on the judgment of the Apex Court in the case of Mahalakshmi Sugar Mills Co. (supra). As pointed out by the Apex Court in its later judgment in the case of Bharat Commerce & Industries Ltd. (supra), the cess which was considered in the case of Mahalakshmi Sugar Mills Co. (supra) was an indirect tax payable in the course of the business of the assessee and the interest paid on the arrears on the cess took colour from the cess which was paid.
The learned counsel for the revenue also referred to the decision of the Bombay High Court in the case of Ferro Alloys Corpn. Ltd. v. CIT[1992] 196 ITR 406 and the decision of the Calcutta High Court in the case of Martin & Harris (P.) Ltd. v. CIT[1994] 73 Taxman 555. It was held in those cases that the interest paid under section 201(1A) was not deductible as business expenditure under section 37.
As already noticed, the payment of interest which takes colour from the nature of the levy with reference to which such interest is paid and the tax required to be paid but not paid in time, which rendered (sic) the assessee liable for payment of interest, was in the nature of a direct tax and in settlement of the income-tax payable under the Income-tax Act. The interest paid under section 201(1A), therefore, would not assume the character of business expenditure and cannot be regarded as a compensatory payment as contended by the learned counsel for the assessee.
The counsel for the assessee in support of his submission that the interest paid by the assessee was merely compensatory in character besides relying on the case of Mahalakshmi Sugar Mills Co. (supra) also relied on the decisions of the Apex Court in the cases of Prakash Cotton Mills (P.) Ltd. v. CIT[1993] 201 ITR 684 / 67 Taxman 546 ; Malwa Vanaspati & Chemical Co. v. CIT[1997] 225 ITR 383 and CIT v. Ahmedabad Cotton Mfg. Co. Ltd. v. CIT[1994] 205 ITR 163. In all those cases, the Court was concerned with an indirect tax payable by the assessee in the course of its business and admissible as business expenditure. Further, liability for interest which had been incurred by the assessee therein was regarded as compensatory in nature and allowable as business expenditure.
The ratio of those cases is not applicable here. Income-tax is not allowable as business expenditure. The amount deducted as tax is not an item of expenditure. The amount not deducted and remitted has the character of tax and has to be remitted to the State and cannot be utilised by the assessee for its own business. The Supreme Court in the case of Bharat Commerce & Industries Ltd. (supra) rejected the argument advanced by the assessee that retention of money payable to -44/Mum/2017 M/s. Vidyut Metallics Private Limited Assessment Years :2010-11 & 2011-12 the State as tax or income-tax would augment the capital of the assessee and the expenditure incurred, namely, interest paid for the period of such retention, would assume the character of business expenditure. The Court held that an assessee could not possibly claim that it was borrowing from the State the amounts payable by it as income-tax and utilising the same as capitalization in its business, to contend that the interest paid for the period of delay in payment of tax amounted to a business expenditure.
The question referred to us, therefore, is required to be and is answered in the negative, in favour of the revenue and against the assessee. The revenue shall be entitled to costs in the sum of Rs. 1,000.
Further, it is noted that the cited decision of Mumbai Tribunal in Mukund Ltd. Vs. ITO [supra] has not considered any of the above decisions. Therefore, respectfully following the judicial wisdom of Hon’ble High Courts, we confirm the view taken by first appellate authority in the impugned order and hold that interest on late payment of TDS could not be allowed to the assessee u/s 37(1). We order so. The ground stands dismissed.
10. The second ground of the appeal is related with addition of Rs.1.39 Lacs on account of alleged bogus purchases stated to be made from 2 parties. Facts & circumstances being pari-materia the same as in AY 2010-11, taking the same view, we estimate the additions @10% which works out to Rs.13,925/-. The balance additions stand deleted. The ground stand partly allowed.
11. Resultantly, the appeal stands partly allowed in terms of our above order.
Conclusion 12. stands partly allowed. -44/Mum/2017 M/s. Vidyut Metallics Private Limited Assessment Years :2010-11 & 2011-12 Order pronounced in the open court on 19th March, 2019.
Sd/- Sd/- (C.N. Prasad) (Manoj Kumar Aggarwal) �ाियक सद� / Judicial Member लेखा सद� / Accountant Member मुंबई Mumbai; िदनांक Dated : 19/03/2019 Sr.PS, Jaisy Varghese आदेशकी�ितिलिपअ�ेिषत/Copy of the Order forwarded to : अपीलाथ�/ The Appellant 1. ��थ�/ The Respondent 2. आयकरआयु�(अपील) / The CIT(A) 3. आयकरआयु�/ CIT– concerned 4. िवभागीय�ितिनिध, आयकरअपीलीयअिधकरण, मुंबई/ DR, ITAT, Mumbai 5. गाड�फाईल / Guard File 6.