COMMISSIONER OF INCOME TAX-III, vs. M/S. TELCO CONSTRUCTION

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 16TH DAY OF FEBRUARY 2021 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE NATARAJ RANGASWAMY I.T.A. NO.336 OF 2014 BETWEEN: 1. COMMISSIONER OF INCOME TAX-III

C.R. BUILDINGS, QUEENS ROAD

BANGALORE-560001. 2. DEPUTY COMMISSIONER OF INCOME TAX

CIRCLE-12(4), BANGALORE. .... APPELLANTS (BY MR. E.I. SANMATHI, ADV.,) AND: M/S. TELCO CONSTRUCTION EQUIPMENT CO. LTD., JUBLIEE BUILDING NO.45, MUSEUM ROAD BANGALORE-560038 PAN: AAACT90778B. ... RESPONDENT (BY MR. A. SHANKAR, SR. COUNSEL FOR MR. M. LAVA, ADV.,) - - - THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 07.03.2014 PASSED IN ITA NO.478/BANG/2012 FOR THE ASSESSMENT YEAR 2007-08, PRAYING TO:

2 (i) DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT. (ii) SET ASIDE THE APPELLATE ORDER DATED 07.03.2014 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, 'C' BENCH, BANGALORE IN APPEAL PROCEEDINGS NO. ITA NO.478/BANG/2012 FOR ASSESSMENT YEAR 2007-08. THIS I.T.A. COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short) has been filed by the revenue. The subject matter of the appeal pertains to the Assessment Year 2007-08. The appeal was admitted by a Bench of this Court vide order dated 27.07.2015 on the following substantial questions of law: "1. Whether in the facts and circumstances of the case, the Tribunal is justified in law by holding that the provisions of Section 194H would apply when the payments are made to the agents or credited to the agents' accounts whichever is earlier and not when the payment is credited to the provisions account even though the Explanation (iv)

3 of Section 194H states that "where any income is credited to any account, whether called "suspense account" or by any other name, in the books of accounts of the person liable to pay such income, such crediting shall be deemed to be income to the account of the payee and the provisions of this Section shall apply accordingly?"

"2. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law by holding that the consultancy charges paid cannot be treated as Capital Expenditure since the same has not resulted in creation of a new asset, despite itself holding that the expenditure incurred shall result in enduring benefit, which is the basic essence of the principle of treating any expenditure as a capital expenditure?". 2. Facts leading to filing of this appeal briefly stated are that the assessee is a limited company carrying on the business of manufacture, purchase and

4 sale of excavators, loaders, cranes, dumpers and spare parts, etc. The assessee filed its return of income on 27.01.2007 for the Assessment Year 2007-08 declaring an income of Rs.2,82,44,84,066/-. The return was processed under Section 143(1) of the Act. Thereafter, the case of the assessee was selected for scrutiny. The Assessing Officer completed the assessment and passed an order dated 30.12.2010 under Section 143(3) of the Act determining the total income at Rs.2,98,15,93,114/-. The Assessing Officer, in the order of assessment, made two additions namely expenditure claimed by the assessee was disallowed under Section 40(a)(ia) for non-deduction of tax at source for a sum of Rs.6,46,11,000/- and disallowance of 4/5th of the consultancy charges to an extent of Rs.9,24,98,048/-. 3. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals), who by an order dated 19.01.2012, allowed the appeal and deleted

5 the additions made by the Assessing Officer. The revenue filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal' for short). The Tribunal, by an order dated 07.03.2014, dismissed the appeal preferred by the revenue. In the aforesaid factual background, the revenue is in appeal before us. 4. Learned counsel for the revenue, while inviting the attention of this Court to Explanation (iv) to Section 194H of the Act, submitted that the assessee had debited an amount of Rs.6,46,11,000/- to profit and loss account pertaining to provision towards commission and since the assessee failed to comply with the provisions of Section 194H, no provision for deduction of tax at source was made. Therefore, the Assessing Authority, rightly invoked the provisions of Section 40(a)(ia) of the Act. It is also submitted that the provisions of Section 194H of the Act are attracted to the fact situation of the case as the conditions of Section 194H are fully

6 satisfied. It is also urged that due to debiting the said amount to the profit and loss account, the profit has come down and the amount is claimed as expenditure. Therefore, the payment of tax deducted at source ought to have been made. It is further submitted that making of payment is not necessary but debiting the amount will attract tax deducted at source provisions. 5. It is also urged that the consultancy charges paid by the assessee to M/s. Mckinsey and Co. was in respect of study report to relocate its sources and to increase the profitability of the Company and therefore, the same will result in enduring benefit to the assessee and as such the same has to be treated as capital expenditure. It is also pointed out from the copy of the management proposal and study of the same shows that consultancy services were engaged for profitability study of cost reduction initiative for sustained profitability which was conferring a benefit of enduring nature to the

7 assessee company over a period of time. Therefore, the same cannot be held as revenue expenditure. It is also urged that profitability of the assessee has increased due to said expenditure and the same is not a revenue expenditure. In support of aforesaid submission, reliance has been placed on the decisions in 'SHREE CHOUDHARY TRANSPORT COMPANY Vs. INCOME TAX OFFICER' (2020) 426 ITR 0289 (SC), 'THE DIRECTOR PRASAR BHARATI Vs. COMMISSIONER OF INCOME TAX' (2018) 403 ITR 0161 (SC) AND 'PINGLE INDUSTRIES LTD. Vs. COMMISSIONER OF INCOME TAX' (1960) 40 ITR 0067. 6. On the other hand, learned counsel for the assessee submitted that assessee has debited a sum of Rs.14,84,11,000/- as sales commission out of which a sum of Rs.6,46,11,000/- has been credited to a provision account which was part of his commission. It is pointed out that no part of said sum of Rs.6,46,11,000/-

8 was credited to any of the agent's accounts maintained with the assessee inasmuch as the amount was payable on matching concept and being in relation to receipts offered. It is further submitted that the assessee's nature of business is such which requires expenses definitely incurred for the purpose of business but due to peculiar factors of business, provision is made. It is further submitted that all corresponding TDS as and when due have been paid and TDS has been deducted. It is also pointed out that accrual of liabilities is certain on 31st March while vesting of right to receive by recipient is subject to certain conditions. It is further submitted that the tribunal rightly concluded that provisions of Section 194H read with Section 40(a)(ia) of the Act are not applicable to the fact situation of the case. It is also pointed out that similar provisions were made in the earlier years as well as subsequent years and the tax was not deducted at source on the provisions and the department has not made any

9 additions in respect of those provisions during the years in which return of income were selected for scrutiny assessment. In this connection, reference has been made to orders of assessment under Section 143(3) of the Act for Assessment Years 2005-06, 2006-07, 2008- 09 and 2009-10. 7. It is also urged that the assessee has to make a provision for expenditure to adhere to the matching concept and the tax can be deducted only if the party has been identified and a permanent account number is obtained from such party. It is impossible for the assessee to deduct TDS on the provisions when party has not been identified. Therefore, no adverse inference can be drawn as the assessee could not perform the impossible. It is further submitted that in light of 1st proviso to Section 40(a)(ia) of the Act which was inserted with effect from 01.04.2010, the disallowance under Section 40(a)(ia) of the Act is not required. It is further submitted that so far as issue with regard to

10 disallowance of consultancy charges is concerned, while considering the nature of expenditure to the capital or revenue the test to be applied is also whether there is any new asset being created or whether it is giving any enduring benefit and the tribunal has recorded a finding in favour of the assessee as the tribunal has found that no new asset has come into existence and the study was conducted only for improving the sales and profitability of the assessee. In support of aforesaid submissions, reliance has been placed on decisions in BHARAT EARTH MOVERS VS. CIT, (2000) 245 ITR 428 (SC), PARASHURAM POTTERY WORKS CO. LTD. VS. ITO, (1977) 106 ITR 1 (SC), LIFE INSURANCE CORPORATION VS. CIT, (1996) 219 ITR 410 (SC), TAPARIA TOOLS LTD. VS. JCIT, 372 ITR 605, STEAM NAVIGATION CO, (1953) (P) LTD. VS. CIT, (1965) 56 ITR 52 and EMPIRE JUTE CO. VS. CIT, (1980) 124 ITR 1 (SC).

11 8. We have considered the submissions made by learned counsel for the parties and have perused the record. The Supreme Court in RADHASOAMI SATSANG Vs. COMMISSIONER OF INCOME-TAX’ (1992) 60 TAXMAN 248 (SC) has held that even though principles of res judicata do not apply to income tax proceedings, but where a fundamental aspect permeating through the different Assessment Years has been found as the fact one way or the other and the parties have allowed the position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in subsequent year. Similar view has been taken by the Supreme Court in PARASHURAM POTTERY WORKS CO LTD. supra. In view of aforesaid well settled legal principles, we have perused the orders of assessment passed under Section 143(3) of the Act for Assessment Years 2005-06, 2006- 07, 2008-09 and 2009-10. From perusal of the aforesaid orders of assessment, similar provisions were made in

12 earlier years as well as subsequent years by the assessee and the TDS was not deducted on the provisions. However, the Department has not made any additions with regard to the provisions made during the years in which returns of income were selected for scrutiny assessment. Therefore, the first substantial question of law on the analogy of the principles laid down by the Supreme Court in the aforesaid decision is answered against the revenue and in favour of the assessee. 9. So far as second substantial question of law is concerned, the Commissioner of Income Tax (Appeals) has deleted the addition holding that the expenditure was incurred towards cost reduction initiative for sustained profitability and the provisions of Section 35D are not applicable to the case as it is not the case of pre initial activity or setting up of a new capital asset. The tribunal has affirmed the aforesaid finding in appeal and has held that consultancy fee paid

13 by the assessee is for the purposes of studying and preparing a strategy to reduce the cost of production by the assessee. It has further been held that no new asset has come into existence and the study conducted was only for improving the sales and profitability of the assessee and has upheld the order of the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) has placed reliance on the decision of the Supreme Court on EMPIRE JUTE CO supra. The aforesaid concurrent findings of fact have not been challenged on the ground of perversity. Thus, concurrent findings of fact which have been recorded on the aforesaid issue, could not be demonstrated to be perverse. Therefore, no interference is called with the aforesaid concurrent findings of fact in this appeal under Section 260A of the Act. [SEE: SYEDA RAHIMUNNISA VS. MALAN BI BY L.RS. AND ORS. (2016)10 SCC 315 and PRINCIPAL COMMISSIONER OF INCOME TAX, BANGALORE & ORS. VS. SOFTBRANDS INDIA

14 P. LTD., (2018) 406 ITR 513]. In view of aforementioned well settled legal principles, the second substantial question of law is also answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE RV/ss