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Income Tax Appellate Tribunal, : ‘C’ BENCH, KOLKATA
Before: Shri J. Sudhakar Reddy & Shri S.S.Viswanethra Ravi
Shri S.S.Viswanethra Ravi, JM:
This appeal by the Revenue is against the order dt. 07-10- 2014 of the CIT-A, VI, Kolkata for the A.Y 2004-05.
Brief facts of the case are that the assessee is a company and engaged in the business of manufacturing and trading in ceramics tiles under the name & style “M/s. Somany Ceramics Ltd” ( formerly known as M/s. SPL Ltd.). The assessee filed its return of income for the A.Y under consideration declaring loss of (-) Rs.9,95,92,165/-. The AO accepted the loss and the assessment was completed u/s. 143(3) of the Act on 15-12-2006. Thereafter, the AO reopened the said assessment stating that the assessee understated its income and hence income liable to tax has escaped assessment. In the re- assessment proceedings the AO had disallowed certain claims made by the assessee and had also made certain additions to total income of the assessee vide his order dt. 18-12-09 passed u/s. 143/147 of the Act. These are as follows :- i) Deferred revenue expenditure Rs.71,71,319/- ii) Long term capital loss Rs. 2,97,59,409/- iii) Non-inclusion of interest Rs.1,00,00,000/-, and iv) Non deduction of TDS Rs.1,68,40,499/-
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Ground no. 1 is relating to deletion of disallowance on account of Deferred revenue expenditure.
The AO found that the assessee claimed a deduction of Rs.71,71,319/- towards deferred revenue expenses. The AO held that the said claim is in the nature of capital and therefore, the same is not allowable as a deduction in computing the income of the assessee.
Before the CIT-A, the assessee claimed deduction of 1/5th of 5. the deferred revenue expenditure. The assessee acquired technical know-how for increasing its business performance. It claimed that the said expenses are deferred revenue in nature and 1/5th of this expenses had been claimed in the earlier year and was allowed by the AO in an order passed u/s. 143(3) of the Act. He opined that that on the principle of consistency his claim is to be allowed. In support of the contention, the assessee relied on the followings:- Radhasoami Satsang Vs. CIT 193 ITR 321(SC) Madras Industrial Investment Corprn Vs. CIT 225 ITR 802(Mad)
Considering the above, the CIT-A deleted the impugned addition as made by the AO by stating as under:- “4. The second ground relates to disallowance of Rs.71,71,319/ being 1/5th of deferred revenue expenses, claimed in the computation of returned income. Note 8 of the schedule 18 of ‘notes on accounts’ had mentioned that intangible assets of Rs.70,91,078/ on account of expenditure on ‘enhancement of business performance’ and Rs. 1,77,85,834/ on account of ‘technical knowhow fees’, totaling to Rs.2,48,76,912/ being balances standing as deferred revenue expenditure was fully charged. When this was pointed out to the appellant, it was stated in reply that the assessee company had incurred certain business expenditure to increase the business performance in earlier years. Since the amount of expenditure was substantial, the Board of Directors considered that it was appropriate to write off the same over a number of years. The assessing officer observed that there was no provision to allow such deferred revenue expenses. He accordingly disallowed 1/5th deduction claimed at Rs.71 ,71 ,319/. 4.1. The appellant has made following submission the matter: "This ground has been taken against the disallowance of Rs 71,71,319/ being part of the technical know how fees and part of the advertisement and business enhancement expenses as deferred revenue expenses. The appellant co has been carrying on the business of manufacturing tiles and other items for more than 35 years. Time to time it had to acquire technical know how for the process of its production to increase efficiency and quality. For increasing business performance the assessee had to incur business enhancement expenditure in the form of advertisement etc. These expenses are revenue in nature and there is no doubt that the same is allowable.
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The facts in brief are that the assessee had incurred certain expenses like advertisement etc in earlier year in 200102 and in 200203 with the sole objective to enhance business performance. Further in the year 19992000, 200001 and in 200102 the assessee has acquired certain technical know how for the basic purpose of producing different design of its product, to run its business according to the market requirement. These expenses were an integral part of the profit making process. The nature of expenses are nothing but revenue in nature. Since the amount of expenditure on such know how and sales /business promotion expenses were substantial the board of directors thought it appropriate to write the same off over a period of time. Any expenditure being incurred by the assessee during the course of business to enhance its business performance is nothing but revenue expenses. A series of judgements are in favour of such proposition. There is no doubt about if being the revenue expenses as no new asset was created in that year. Even then the company as a matter of accounting principle decided to defer its write off.
Now sir, writing off a revenue expenses over more than one financial year can not alter the character of the expenses. Revenue expenses is nothing but always remains revenue. Similar is the situation with expenses on acquisition of technical know how in the process of production. As a matter of policy by the company these technical know how is charged in the profit and loss account in 5/6 years. This practice is not knew to the assessee nor new to the department. Year after year the same has been accordingly allowed by the revenue to your assessee company.
We enclose herewith a chart showing details (marked Annexure A) of both "business enhancement expenses and technical fees amount" being coming since earlier year and its allowance in such earlier assessment year. Relevant pages are also enclosed.
During the year considering the fast changes in the company decided to write off the balance in this year not by debiting the P/ reducing the same from past general reserve and clarified the whole situation in the notes to account. This is fact on record. But of course while computing the income the relevant proportion of the aforesaid expenses were duly claimed as per consistency being followed by the assessee company. There is no question of any disallowance all of a sudden. There amount has been rightly claimed.
The ld AO has disallowed the aforesaid revenue expenses holding the same as capital in nature, vide para 8.2 at page 5 of the re asst order and at para 8.4 the Id AO says that deferred revenue expenses are unallowable. Both these reasons are incorrect and beyond the proposition of law.
Firstly these expenses are undoubtedly revenue expenditure and secondly deferred revenue expenses is not a new concept to the revenue. The concept of spreading the revenue expenses over a number of years were held to be correct procedure both for the legitimate reason of matching concept and for true arrival of taxable profit.
The apex court in 11 Madras Industrial Investment Corporation v CIT 225 ITR 802 ( SC) has uphold the concept of spread over the expenses in number of years. Further In Amtrex Appliances Ltd 094 TT) 396 the Ahmedabad Bench of ITAT has held the lumpsum payment for acquisition of a design to be revenue expenses and has also allowed the sales promotion expenses as deferred revenue expenses Moreover, sir, this is not the first year of claim. It has been allowed regularly in all earlier years. Disallowing the same in one particular year whereas to allow the same in all other years are against the principle of consistency too. The disallowance therefore be deleted.”
4.2. It is noted that the year under consideration was not the first year in which deduction in respect of 1/5th of deferred revenue expenses had been claimed. Similar claim was made in earlier years and had allowed by the department. While it is true that the principle of res judicata does not strictly apply in the income tax assessment, the principle of consistency is nevertheless important. It has been held by the Hon'ble Supreme Court in the case of Radhasoami Satsang Vs. CIT 193 ITR 321 that :
“We are aware of the fact that strictly speaking res judicata does not apply to Income tax proceedings. Again each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. We are therefore, of the view that these appeals should be allowed. "
Thus, it follows that unless there is any material change in facts of the case or the view taken in the earlier year is patently erroneous, same view should be taken in the
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subsequent years. It is not the case of assessing officer that the expenses were capital in nature or otherwise not allowable. He has only objected to their spreading over a number of years. However, Hon'ble Supreme Court has accepted the concept of spread over in the case of Madras Industrial Investment Corporation v. CIT 225 ITR 802. Considering this, as well as the fact that similar deduction has been allowed in the earlier years, I am of the view that the assessing officer was not justified in disallowing the claim of Rs.71,71,319/ being 1/5th of total deferred revenue expenses. The disallowance is accordingly deleted.”
Aggrieved, the revenue is in appeal before us and contended that the action of the CIT-A in allowing such deduction was not correct. He relied on the order of the AO.
On other hand, the ld.AR supported the impugned order of the CIT-A and referred to para 4 of the order of the CIT-A.
Heard rival submissions and perused the record. We find that the revenue has accepted and allowed 1/5th of the some expenditure in the earlier years as claimed by the assessee. The CIT-A found satisfied on perusal of record that no material changes caused effect in respect of facts involved the issue in hand. The ld. DR did not bring on record any decision contrary to the finding of the CIT-A.
In view of above, we find no infirmity in the impugned order of the CIT-A. We uphold the same. Ground no. 1 raised by the revenue is dismissed.
Ground no. 2 raised by the revenue is in relation to holding as long term capital loss.
According to AO, in order to implement the terms of settlement approved by the Hon’ble High Court of Calcutta the assessee adjusted the requirement from general reserve. He held that long term capital loss of Rs.2,97,59,407/- is notional and denied the claim of carry forward of long term capital loss.
Before the CIT-A, it was contended that in pursuance of terms of settlement as decided by the Hon’ble High Court of Calcutta, the assessee transferred 12,99,300 equity shares and 8,20,700 preference shares in M/s. Somani Evergreen Knits Ltd @ Rs. 10/-
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each aggregating to Rs.2,12,00,000/- in the name of individual at Re. 1/- per share. The CIT-A considering the submissions of assessee together with the decision of the Hon’ble High Court of Calcutta and held that the said loss is not notional in nature and allowed the carry forward long term capital loss.
Before us the ld. DR relied on the order of AO. On the other hand, the ld. AR reiterated his same submissions made before the CIT-A and referred to the order of the Hon’ble High Court of Calcutta available at page-9 of the paper book.
Heard both the parties and perused the record including the order of Hon’ble High Court of Calcutta regarding ‘terms of settlement’. We find that the Hon’ble High Court of Calcutta vide its order passed on the ‘terms of settlement’ between the companies as set out therein. Vide Para 16 of the said order at page 18, 39080 shares held in the name of Arvind Kumar Somany, Surendra Kumar Somany, Surendra Kumar Somany (HUF), Miss Nitya Somany, Arvind Kumar Somany (HUF), M/s. Vicky Investments Ltd and M/s. SIL shall without any further act or deed stand transferred to, vested in and registered in favour of SR Continental Ltd, who shall be making the aforesaid payment of Rs.3,90,800/- as per the schedule set out therein.
On perusal of the order of the CIT-A, we find that the disputed loss has arisen on account of transfer of shares and debentures in terms of said settlement approved by Hon’ble High Court. The CIT-A examined the record and found that cost of share was made in terms of approval of the Hon’ble High Court of Calcutta. Relevant portion of order of the CIT-A is reproduced herein below:- “6.2. I have considered facts of the case. It is undisputed, that the loss under consideration has arisen on account of transfer of shares and debentures as per terms of settlement approved by High Court. The shares were held by the appellant company since the long time and their cost was duly reflected in the balance sheet. The price at which they were transferred has been subsequently determined by Hon'ble High Court. Therefore, neither the incidence of sale, nor the cost and sale price of the shares, is in doubt. This being the position, there was no reason to not accept the resultant capital loss. The assessing officer has stated in a cryptic manner that the loss was contingent in nature. However, the term 'contingent' refers to situation where the something may or
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may not occur depending upon some uncertain event. In the appellant case, loss has actually occurred due to the transaction under consideration. Merely because the transaction was on account of High Court order, the same cannot be dismissed as contingent. On the contrary, the appellant was bound to follow order of Hon’ble High Court. Nor there was any need for the appellant to justify the price of sale with reference to break up value etc., since it had no control over the price which was decided by Hon’ble High Court. It is also interesting to note that assessing officer has not specifically disallowed the long term capital loss as nongenuine but merely denied its carried forward. Once a loss has been assessed for a year, there is not provision to deny its carried forward to the subsequent year. As discussed earlier, the loss under consideration cannot be considered as nongenuine. The assessing officer is therefore directed to allow carried forward of the same. “
We are of the view that the CIT-A was correct in directing the AO to carry forward the said loss as the genuineness of the loss had been upheld. We find no infirmity in the impugned order of the CIT-A. Ground no. 2 raised by the revenue is dismissed.
Ground no. 3 relates to deletion of addition on account of loans.
The AO observed that the assessee has given a loan of Rs. 3,04,45,954/- (including interest of Rs. 81,95,954/- accounted for till 31-03-2000) to a corporate body. The assessee received Rs. 1 crore as full and final settlement. The remaining amount of Rs.2,04,45,954/- was charged to general reserve fund. The AO added the same to the total income of the assessee under the head ‘income from other sources’.
Before the CIT-A, the assessee contended that the assessee suffered a loss as the assessee got less than the amount advanced in view of full and final settlement. The assessee made a claim of loss of Rs.81,95,954/- as bad debt written off.
The CIT-A considering the above held that the addition of Rs. 1 crore is not justified and rejected the claim of bad debt written off to an extent of Rs.81,95,954/-.
The ld. DR relied on the order of the AO.
On the other hand, the ld. AR referred to terms of settlement provided by the Hon’ble High Court of Calcutta.
Heard both the parties and perused the record. According to assessee an amount of Rs.3,04,45,954/- was outstanding. However,
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in terms of settlement the assessee received only Rs. 1 crore as full and final settlement. The assessee contended that it suffered loss and as such made a claim of bad debt written off for the interest portion. The CIT-A considering the submissions of assessee granted the benefit of bad debt written off. We find that the amount recovered by the assessee is less than the principal amount as given by assessee under loan. The assessee recovered an amount of Rs. 1 crore out of total dues of Rs. 3,04,45,954/- only the interest portion of Rs.81,95,954/- which is part of Rs.3,04,45,954/- was claimed as bad debt. The same was allowed by the ld. CIT(A). We find no infirmity in the impugned order of the CIT-A. Ground no. 3 raised by the revenue is dismissed.
Ground no. 4 is relating to deletion of addition made on account of non deduction of TDS.
The AO found that the assessee could not discharge the onus to prove why the TDS could not be deducted and as such disallowed an amount of Rs.1,68,40,499/- u/s. 40(a)(ia) of the Act.
Before the CIT-A, the assessee submitted that the AO added the amount of Rs. 1,68,40,499/- u/s. 40(a)(ia) of the Act even without looking into the correct facts and details. Before him the assessee submitted a copy of F Form, wherein on four items, foreign technician charges Rs.36,37,271/-, Technical fees Rs. 96,50,860/-, Royalty Rs. 14,87,088/- due TDS was deducted and paid and it was factually incorrect in saying that TDS has not been deducted. There is no question of invoking the provisions of section 40(a)(ia). Payments made to NRI is being dealt by section 40(a)(i) and not by 40(a)(ia) of the Act. Even otherwise the TDS was deducted and paid and therefore there is no question of any disallowance. Before the CIT-A the assessee submitted that for balance amount of Rs. 20,65,280/- towards commission paid to foreign selling agents, they have no PE and these agents have rendered services outside India in connection
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with the business. This commission on sales paid to person residing outside India and for services rendered outside India, they are not taxable in India and hence in terms of section 195 of the Act no TDS is attracted.
After considering the above the CIT-A deleted the disallowance made u/s. 40(a)(ia) of the Act.
The ld. DR relied on the order of the AO. On the other hand, the ld. AR submits that the issue on hand is covered by the order dt. 04-03-2016 of this Co-ordinate Bench of this Tribunal in the case of M/s. HSIL Ltd. On identical facts and issue Copy of the same is placed on record.
Heard rival submissions and perused the record. The AO found that the assessee paid an amount of Rs.20,65,280/- on account of commission to selling agents, who are based abroad and has no permanent establishment in India. The CIT-A examined the issue in detail and considering the submissions of assessee held that the services were rendered wholly outside India and no business income accrued or arose in India. Therefore, the assessee was not required to deduct tax on the payment made to them. The ld. DR did not bring on record any contrary judgment to the judgments relied upon by the ld. CIT(A). We find that the CIT-A discussed the issue thoroughly. Relevant portion of which is reproduced herein below for better understanding:- “8.2 The assessing officer has invoked section 40 (a) (ia) in respect of payments made to foreign nationals. For such situation, the correct section would have been section 40(a)(i) and not 40(a) (ia). That apart, as per the material on record, on foreign technicians' service charges of RS.36,37,271/, technical knowhow fee of RS.96,50,8601 and royalty or RS.14,87,088/, tax had been duly deducted and deposited within the prescribed time. The balance amount of Rs.20,65,280/ was on account of commission to selling agents. It is seen that such commission was paid to the persons based abroad who had no permanent establishment in India and commission had as such neither accrued nor was received in India. Next question comes, as to whether the same can be deemed to accrue or arise in India. As per clause (i) of section 9(1) following income is deemed to have accrued or arisen in India: "All income accruing / arisen whether directly or indirectly through or from any business connection in India or through or from abroad in India or through or from any asset source of income in India or through a transfer of capital asset situated in India" Explanation1 to the said section provide that:
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“(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause accrued or arisen in India shall be only such part of the income as reasonably attributed to the operations carried out in India. "
Thus, it follows from explanation 1 to section 9(1)(1)(i) that in a business where none of the operations is carried out in India, no part of its income is deemed to accrue or arise in India. As per undisputed facts in the appellant's case, no operation was carried out by the nonresident agents in India. Therefore, it would be erroneous to hold that the entire commission income had accrued or arisen in India. In the appellant's case, entire rendering of services of agents had taken place outside India as such customers were based abroad. The commission was also paid to the account held abroad. Therefore, there is no operation which is carried out in India for, which any income can be reasonably attributed. This principle has been upheld by the Apex court in the M/s. IshikawajmaHarima Heavy Industries Ltd Vs DIT (288 ITR 408) and CIT Vs M/s. Hyundal Heavy Industries Co Ltd (291 ITR 482) On the issue of commission to foreign based agent, similar view has been taken by the Apex court in the case of CIT vs M/s.Toshoku Ltd (125 ITR 525 (SC). Similar view has been taken by Delhi High Court in the case of CIT Vs M/s. EON Technology (P) Ltd (15 Taxmann.com 391). Even the CBDT's Circular No. 163 dated 29.05.1975 and Circular No.786 dated 07.02.2000 make it clear that when no activity is carried out by nonresident commission agent in India, no income is arisen in India. This principle has been upheld in several tribunal decisions such as DCIT Circle 1 (1) Hyderabad vs M/s. Divi's Laboratories Ltd (12 Taxmann.com 103). It may also be mentioned that commission paid to agent does not fall in purview of fees for technical services etc. where explanation to section 9(2) has provided that such income of nonresident shall be deemed to accrue or arise in India under clause (v),(vi) and (vii) of sub section(1) whether or not the nonresident has rendered services in India. Therefore, payment or commission is not governed by the said explanation and can be deemed to accrue or arise only if certain services have been rendered in India. The commission earned by the agents was in nature of business income and since it had been paid to the persons not having any permanent establishment in India and the services were rendered wholly outside India, no business income can be treated as accrued or deemed to accrue in India. Therefore, the appellant was not required to deduct tax on the payment made to them. Therefore, it is clear that the appellant has deducted tax whereever due and the payments on which no tax was deducted were not liable to TDS. Considering this, the disallowance u/s 40 (a) (ia) is deleted.”
Further, we find that the similar issue basing on identical facts was decided by the Co-ordinate Bench of this Tribunal in the case of M/s. HSIL Ltd vide its order dt. 04-03-2016 and the relevant portion of which is reproduced herein below:- “7. During the assessment proceedings, the AO found that Rs.1,38,03,604/ was paid to nonresident towards commission in foreign currency and the AO disallowed abovesaid amount under section 40(a)(ia) of the Act.
Before the CIT(A), as aggrieved by above, the assessee contended that payment made to nonresidents agents TDS is not deductible in view of the Circular no.786 dt: 27.2.2000 issued by the CBDT and as per the section 195 of the Act. Considering the same, the CIT(A) deleted the disallowance of Rs.1,38,03,604/ made by the AO.
Before us, the ld. DR relied on the order of the AO. The ld. AR for the assessee relied on the order of the CIT(A).
Heard both representative and perused the record. We noted that all the nonresident agents were located in other countries and did not have any kind activity, whatsoever in India and admittedly they were nonresidents of India and cannot be taxed in India. The nature of business being that the orders were placed and procured by them from abroad and the payments towards commissions by the assessee were made in foreign currencies by remitting the monies to them at their respective places. It is evident the services for which the payments towards commission were paid to them were caused outside India and no income accrued to them in India on account of the said services. The monies received by them which were credited to their accounts were also outside India. It is noted that the assessee does business in export and on such export sales are made through various agents
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located in foreign countries. For facilitating the export sales in the foreign countries the assessee has to pay commission to these oversees agents. Therefore, applicability of section 195 of the Act and deducting tax at source is not required from commission payments made to these nonresident agents. The assessee has claimed support in CBDT circular no. 786 dated 27.02.2000. But, the AO not satisfied with the assessee’s contentions and on the ground of non production of any evidence to show that the foreign agents do not have any establishment in India and the services have been rendered by them outside India. CITA examined the agreements with the nonresident agents and it is seen that these parties are rendering the services for the assessee’s company in their countries. We are of the opinion that since the commission has been paid to nonresident agents for services rendered outside India and the same is not chargeable to tax in India under the Act. Therefore, in our opinion, the CITA has rightly observed that the tax is not required to be deducted on payments made to them as per section 195 of the Act and with Circular No:786 dt:07.02.2000 issued by the CBDT. All the parties are nonresidents and for deducting tax at source is not required and therefore, in view of the discussion above, we are of the opinion that the disallowance of Rs.l,38,03,604/ made by the AO is not justified and we confirm the order of CITA and ground raised by the assessee is allowed.
In view of above, we find no infirmity in the impugned order of the CIT-A. Accordingly ground no. 4 raised by the revenue is dismissed.
In the result, the appeal filed by the revenue is dismissed. Order pronounced in the open court on 19-07-2018
Sd/- Sd/- J. Sudhakar Reddy S.S. Viswanethra Ravi Accountant Member Judicial Member
Dated :19-07-2018
**PP(Sr.P.S.) Copy of the order forwarded to: 1. Appellant/Revenue : Deputy Commissioner of Income-tax, Cir-5(1), Kolkata, P-7 Chowringhee Square, Kolkata-69. 2 Respondent/Assessee: M/s. Somany Ceramics Ltd. (formerly known as SPL Ltd) 2 Red Cross Place, Kolkata-700 001. 3. The CIT(A), Kolkata 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata
/True Copy, By order Sr.P.S,H.O.O, ITAT.Kol