KULODAY TECHNOPACK P. LTD,MUMBAI vs. ITO 8(2)(2), MUMBAI

आदेश / O R D E R

PER RAMIT KOCHAR, Accountant Member These two appeals, filed by the assessee, being ITA No. 3300/Mum/2013 & I.T.A. No. 2423/Mum/2014 are directed against two separate appellate orders dated 26.03.2013 and 14.02.2014 respectively passed by learned Commissioner of Income Tax (Appeals)-17, Mumbai (hereinafter called “the CIT(A)”), for assessment year 2009-10 & 2010-11 respectively, appellate proceedings had arisen before learned CIT(A) from two separate assessment orders dated 30.11.2011 and 20.03.2013 respectively

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passed by learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income-tax Act, 1961 (hereinafter called “the Act”) for assessment years 2009-10 and 2010-11 respectively. 2. First we shall proceed to adjudicate assessee‟s appeal in ITA no. 3300/Mum/2013 for assessment year 2009-10. It is placed on record that the assessee filed rectification application with learned CIT(A) u/s 154 to rectify certain mistakes apparent from record in the appellate order of learned CIT(A) which was rectified by learned CIT(A) vide order dated 25-04-2013 u/s 154, which is placed on record. The grounds of appeal raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) for assessment year 2009-10 read as under:-

“1. On the Facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) - 17, Mumbai erred in holding that amount paid by way of demurrage charges or handling charges or any amount of similar nature of Rs. 9,60,431/- are covered u/s. 194C and TDS was deductible on the same.

The Appellant therefore prays the disallowance be deleted. 2. On the Facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) - 17, Mumbai erred in upholding disallowance of handling charges or any amount of similar nature of Rs. 9,60,431/ u/s. 40(a)(ia) of the Income Tax Act,1961. The Appellant therefore prays the disallowance be deleted. Appellant craves leave to add, alter, amend, delete and / or modify any or all of the aforesaid grounds of appeal either at the time of hearing or at any time before the date of hearing.

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above circular no taxes are required to be deducted at source under section 194C or u/s 195 by virtue of Section 172(1) for payment made to non- resident shipping companies or their resident agents or representative on export freight as provision of section 172 applies in these cases and provision of 194C and 195 will not apply.

The A.O rejected the contention of the assessee as the assessee failed to prove that the payment of export freights have been actually paid to non- resident shipping companies or its shipping agents in India. Hence, the A.O held that the circular quoted by assessee is not applicable. It was also observed by the AO that the assessee has not submitted an exemption certificate from deduction of income-tax at source issued by the Income Tax Department in favour of shipping companies or their Indian agents. Thus, it was observed by the AO that the assessee‟s freight shall be disallowable u/s 40(a)(ia) as the assessee has nor deducted income-tax at source u/s 194C. Further, it was observed by the A.O that the said bills submitted by the assessee includes fees, Bill of Lading Fee, TCH Fees , document charges etc. which are not ocean freight as claimed by the assessee. Further, it was observed by the A.O that shipping company has levied service tax on the bills which in the opinion of A.O goes on to prove that services are rendered in India and hence provisions of Section 194C are applicable. Since , the assessee has not deducted income-tax at source on the export freight amounting of Rs.59,99,109/- the same was disallowed by the A.O u/s 40(a)(ia) and added to the income of the assessee , vide assessment order dated 30.11.2011 passed by the AO u/s 143(3).

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keeping in view CBDT circular no. 723 dated 19.09.1995 r.w.s. 172 of the Act. The assessee submitted that the service tax has been charged only on the terminal handling charges and document charges and not on ocean freight. The assessee relied on certain cases laws which are mentioned in the appellate order of learned CIT(A) page no. 8 to 9 . It was submitted that the certain payments have been made to agents of non-resident shipping companies which are in the nature of reimbursement of expenses as mentioned in the said bills which were raised as debit note which does not warrant any deduction of income-tax at source. It was submitted that these are only reimbursement of expenses which can be verified from freight certificate issued by Non-Resident shipping companies . It was submitted that the agent has raised an bill for reimbursement of expenses which are ultimately paid by these agents to non-resident shipping companies and the payments are covered by provisions of Section 172. The assessee made an application u/r 46A of the Income-tax Rules , 1962 for admission of additional evidences. The learned CIT(A) forwarded additional evidences filed by the assessee to the A.O for submitting remand report. The A.O objected to the admission of the additional evidences as the AO submitted in remand report that adequate opportunity of being heard was given to the assessee during the assessment proceedings. The AO also objected to the contention of the assessee that these are reimbursement of expenses as in the opinion of the AO no evidences has been brought on record by the assessee to substantiate the same. It was also objected by the A.O in remand report that assessee have not made payment directly to the shipping companies but to clearing and forwarding agents who have made payments to the agents of ship liners, which payments may include profit element for clearing and forwarding agents as it could not be analysed whether the same payments are made by clearing and forwarding agent to shipping companies without their profits. The A.O objected to the payment as the same was made to Shri Balaji Shipping Corporation who in turn paid to the Indian agents of shipping companies. It was also observed that no exemption certificate is issued by Income Tax Department in favour of Shri Balaji Shipping Corporation to whom actual payment of ocean freight charges of Rs. 49,38,689/- was made. It was also observed by the AO that freight charges include service charges of Rs. 9,60,431/- ( excluding service tax) which is

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over and above ocean freight paid. The copy of remand report was forwarded by learned CIT(A) to the assessee for comments.

It was submitted by the assessee in reply to remand report that the assessee has not deducted income-tax at source on export freight as payment have been made to resident agents of non resident shipping company . It was submitted that all exemption certificates issued by the I T Department in favour of non resident shipping companies were submitted as additional evidences before learned CIT(A) which were forwarded for remand report by learned CIT(A) to the AO. It was submitted that during the course of assessment proceedings only sample copies of freight bills and exemption certificates were submitted and if the AO had asked for the complete details , it would have been furnished. The assessee relied upon circular no. 723 dated 19.09.1995 and provision of section 172 of the Act. It was submitted that export freight payments are made to Indian agents to non-resident shipping companies who have made payment to non-resident shipping companies on behalf of the assessee and thus the assessee is merely reimbursing the expenses which does not warrant deduction of income-tax at source u/s 194C and 195. It was submitted that these are merely reimbursement of expenses and there is no profit element which can be seen from the debit notes being raised by Shri Balaji Shiping Corporation instead of invoices, and the amount in debit note matches with amount mentioned in freight certificates issued by non-resident shipping companies which proves that these are only reimbursement of expenses and not liable for deduction of income-tax at source u/s 194C. The assessee relied upon certain case laws which are listed in page no . 13 to 15 of the appellate order dated 26-03-2013 passed by learned CIT(A). With respect to other service charges of Rs.9,60,431/- (excluding service tax of Rs. 99,989/-) included in the figure of freight , the assessee submitted that there is no requirement of deduction of income-tax at source u/s 194C even on these payments relying upon the provision of section 172(8) .

The learned CIT(A) admitted additional evidences and accepted the contentions of the assessee so far as export freight of Rs.49,38,689/- is concerned . The learned CIT(A) observed that the assessee has now produced entire bills pertaining to export freight expenses as additional evidences

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which goes to the root of the matter and remand report was called from A.O. The learned CIT(A) observed that the expenses incurred by the assessee are paid to an Indian agent who in turn has paid the same amount to the non- resident shipping company or its representative in India. It was observed that bill amount raised by the agent and the bill of non-resident shipping company are the same . It was observed that the agent has also mentioned on the bill that it is the amount paid by it on behalf of the assessee. So far as acceptability of the export freight of Rs. 49,38,689/- which is accepted by learned CIT-(A), it is not brought on record by both the parties before us that Revenue has come in appeal before the tribunal so far as relief granted by learned CIT(A) and hence the said issue of ocean freight payments without deduction of income-tax at source u/s 194C has reached finality , and now the issue survives for our consideration is the balance payment of other service charges of Rs. 9,60,431/- paid to the agents of non-resident shipping companies , the learned CIT(A) upheld said addition of Rs.9,60,431/- as was made by the AO vide appellate order dated 26.03.2013 passed by learned CIT(A), by holding as under:-

“ 5.11 It can be seen from the above that the payment made to non-resident Shipping Company or their agents are not covered by 194C. Therefore the issue of non deduction of TDS and Ocean Freight charges and other charges paid on behalf of appellant to the agent of the representative of the resident shipping company is decided in favour of the appellant. However it is seen that the Freight Charges of Rs.59,99,109/- also includes however, service charges of Rs. 9,60,431/- (excluding the service tax of Rs. 99,989/-). This expenditure is other than the Ocean Freight paid and the provisions of sec. 194C of the Act are applicable on this amount on which the appellant should have deducted TDS. Since the same has not been done, the stand of the AO to that extent is upheld and the balance amount is deleted following the decisions mentioned above. Hence the ground of appeal of the appellant is partly allowed.”

Thus learned CIT-(A) granted part relief to the assessee so far as payments of ocean freight is concerned and so far as part relief granted by learned CIT-(A) is concerned, the Revenue has not come in appeal before the tribunal and

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the matter has thus reached finality, while the other service charges of Rs. 9,60,431/- paid by the assessee is subject matter of adjudication before the tribunal.

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issued by the CBDT on 19.09.1995 clearly stipulates that with respect to the payments made to the Indian agents or authorized representative on behalf of foreign shipping companies for carriage of goods, passengers, livestock or mail shipped at a port in India by a ship are not covered for deduction of tax at source under provision of 194C and 195 . The CIT(A) has already granted relief to the assessee for ocean freight of Rs. 49,38,689/- paid by the assessee to these Indian agents of non-resident shipping companies towards the ocean freight while rest of the amount of Rs. 9,60,431/- paid towards other service charges were disallowed by the CIT(A) by invoking provision of section 40(a)(ia) as assessee has not deducted income-tax at source on such payments. The Revenue has not come in appeal against part relief granted by learned CIT(A), thus it is accepted by Revenue that these ocean freights were paid ultimately to non-resident shipping companies. The only issue survives is the payment of Rs. 9,60,431/- paid to these agents of non- resident shipping companies , who have raised these service charges vide same debit notes wherein ocean freight is debited. The said non-resident shipping companies have confirmed vide freight certificates to have received the same amount of other service charges which are mainly terminal handling charges, documentation charges, demurrage etc. from these agents. We have observed that provision of Section 172(8) also stipulate that other charges such as demurrage or handling charges or any other amount of similar nature are also covered by provision of section 172(2) by virtue of provisions of Section 172(8), which by virtue of CBDT circular no 723 dated 19.09.1995 shall take it also out of provision of Section 194C for deduction of tax at source. As discussed above, the non resident shipping companies have given two freight certificates w.r.t. each bill raised by Balaji Shipping Corporation , the first pertain to ocean freight which is already accepted by learned CIT(A) while granting relief to the assessee and Revenue is not in appeal against relief granted by learned CIT(A) , and the second freight certificate is w.r.t. THC charges and documentation charges which are acknowledged to be received by non resident shipping companies , thus it leaves no doubt that these are merely reimbursement of expenses as also claimed by Shri Balaji Corporation vide debit note and are in the nature of payment referred to in Section 172(8) and hence are covered by provision of Section 172(2) and no income-tax was required to be deducted at source u/s 194C keeping in view special provisions relating to taxability of non resident

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shipping companies who have to discharge their liabilities towards income tax before leaving port or to make satisfactory arrangements for payment of taxes as are contained in Section 172 and Section 44B. The circular no. 723 issued by the CBDT on 19.09.1995 also supports the stand of the assessee that with respect to the ocean freight , demurrage charge, handling charges or other amount of similar nature which are paid to the Indian agents or authorized representative of non-resident shipping company who carry passengers, livestock,mail or goods shipped at port in India are not covered for deduction of tax at source under provision of 194C and 195 . Thus, keeping in view ratio of decision in the case of V.S Dempo & Company Ltd.(supra) and in the light of the provision of section 172(8) , explanation 2 to sub-section 2 to Section 44B read with afore stated circular no. 723 dated 19.09.1995, we hold that the issue is covered in favour of the assessee and we order deletion of the disallowance of Rs. 9,60,431/- u/s 40(a)(ia) as made by the AO which was later confirmed by learned CIT(A). The assessee succeeds on this ground. We order accordingly.

Assessment year 2010-11-Assessee’s appeal in ITA No.2423/Mum/2014

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“3. On the facts and in the circumstances of the case and in law, the Ld.CIT-(A)-17, Mumbai erred in upholding the disallowance of Clearing & Forwarding charges amounting to Rs.55,94,324/-, which Your Honour is requested to delete.

The A.O. observed that merely making a claim that these are reimbursement of expenses will not make them out of ambit of provisions of the 1961 Act concerning deduction of income-tax at source. These reimbursement of expenses included such as transport charges(none of the bills of transportation had PAN of the transporter) , packing charges etc. on which

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income-tax was required to be deducted at source as per provision of Section 194C . It was also the observations and finding of the AO that these persons to whom payments were made by the assessee towards reimbursements of expenses have also did not deducted income-tax at source from these payments , which was confirmed by CA of the assessee before the AO during the course of hearing held on 04.03.2013. The assessee also did not deducted income-tax at source on these payments. The AO observed that in effect while the payments were subject to income-tax deduction at source as per provisions of the 1961 Act but neither the assessee deducted income-tax at source nor the persons to whom the assessee made payments for such reimbursement deducted income-tax at source. The AO thus disallowed expenses incurred by the assessee towards clearing and forwarding expenses of Rs.55,94,324/- by invoking provisions of Section 40(a)(ia) of the Act for failure to deduct income-tax at source as per provision of section 194C, vide assessment order dated 20-03-2013 passed by the AO u/s 143(3).

“ 3.3.1 I have carefully considered the submissions and contention of the Ld. AR of the appellant and also carefully gone through the facts and explanation given by the Ld. AR of the appellant as well as the Ld. A.O. In this case the Ld. AO has made the additions u/s. 40(a)(ia) on the ground that the clearing and forwarding expenses were not subjected to deduction of TDS as was required u/s. 194C of the Act. The Ld. AR of the appellant submitted that it is purely reimbursement expenses and agency charges to M/s. Sureways Shipping Solutions and it is a settled principle of law that reimbursement expenses are not subjected to TDS. I find that the payments given by the appellant to M/s. Sureways Shipping Solutions includes the expenses on account of packing charges, etc.. The fact that the expenses solely reimbursed are not included of any profit element is not ruled out. The appellant on its own has not made any averment. The fact that the agency charges does not include any element of profits

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embedded therein, under the circumstances it is difficult to accept the principle of law that reimbursement of expenses are not subjected to TDS. Further, the case laws relied upon by the Ld. AR of the appellant deals with the situation were the assessee was not able to give the clear cut evidence to indicate that it is a case of pure reimbursement expenses and no personal element is involved. However, I find that neither before me nor before the Ld. AO, the appellant was able to give evidence to that effect except stating in general that it is a reimbursement expenses and not subjected to tax. In view of the foregoing, I do not find any merit in the argument of the Ld. AO. This ground of appeal is thus dismissed.”

DETAILS OF CLEARING & FORWARDING (IMPORT) AND AGENCY CHARGES AS AT 31.03.10 RUPEES

Clearing Agency PARTICULARS & Clearing TOTAL Forwarding Charges Gaurav Agencies 20,838.00 2,206.00 23,044.00

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Mahavir Shipping Agency 3,61,933.00 16,159.00 3,78,092.00

Sureways Shipping Solutions 52,11,553.00 1,93,285.00 54,04,838.00

TOTAL 55,94,324.00 2,11,650.00 58,05,974.00 It is thus the claim of the assessee that it has dully deducted income-tax at source on agency clearing charges to the tune of Rs. 2,11,650/- by complying with applicable provisions of 1961 Act, while it is claim of the assessee that income-tax has not been deducted at source on clearing and forwarding expenses to the tune of 55,94,324/- as it is claimed that this is merely reimbursement of the expenses . Our attention was drawn to page no. 352 to 548 wherein such invoices for clearing and forwarding expenses has been placed issued by the C &F agents and thus it is prayed that disallowance made by the A.O need to be deleted. He relied upon the following decisions in support of his contentions that reimbursement of expenses cannot be subjected to deduction of income-tax at source provisions under the 1961 Act:-

Sr. No Description 1. Pri. CIT v. Consumer Marketing (India) P. Ltd. [2015] 64 Taxmann.com 16 (Gujarat) 2. CIT v. Opera Global P. Ltd [2014] 52 Taxmann.com 299 (Delhi) 3. ITO v. Dr. Willmar Schwabe India P. Ltd. [2005] 3 SOT 71 (DELHI) 4. Om Satya Exim P. Ltd v. ITO ITA no. 1335/Ahd/2010 5. ACIT v. P.P overseas ITA no. 733/Mum/2010

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16.We have heard both the parties and also perused the material on record including decisions relied upon . We have observed that the clearing and forwarding charges of Rs. 55,94,324/- were paid to C&F Agents for clearing the consignments of import of goods and were disallowed u/s 40(a)(ia) by the authorities below as assessee has not deducted income-tax at source u/s 194C . The assessee claimed that the said clearing and forwarding expenses were in the nature of reimbursement of expenses and hence no income-tax is required to be deducted at source under the provisions of Section 194C of the Act. The said details as are placed at page 56/paper book are reproduced as under:-

DETAILS OF CLEARING & FORWARDING (IMPORT) AND AGENCY CHARGES AS AT 31.03.10 RUPEES

Clearing Agency PARTICULARS Clearing TOTAL & Forwarding Charges Gaurav Agencies 20,838.00 2,206.00 23,044.00

Mahavir Shipping Agency 3,61,933.00 16,159.00 3,78,092.00

Sureways Shipping Solutions 52,11,553.00 1,93,285.00 54,04,838.00

TOTAL 55,94,324.00 2,11,650.00 58,05,974.00

The assessee has however deducted income-tax at source as applicable on agency charges for which separate invoices are raised by C & F Agents. The assessee claimed that these clearing and forwarding charges are actual expenses reimbursed to C& F Agents and hence there is no requirement of deduction of income-tax at source on these payments u/s 194C. It is admitted position that even the said C & F agents have also not deducted income-tax at source while eventually making these payments to the third party service providers on behalf of the assessee. The assessee has placed on record various invoices raised by the clearing and forwarding agents which

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are placed in paper book/ page 350-548. We have carefully gone through these invoices and have observed from the invoices that the clearing and forwarding agents have raised bills for expenses which were incurred by C & F Agents as agents of the assessee for clearing the import shipments of the assessee but there is no evidence that they are in-fact actual expenses in the nature of reimbursements and there is no element of profit retained by C & F Agent as the receipts/supporting bills issued by various third party service providers to the assessee through C & F Agents are not furnished . Secondly, it is a matter of record that the said C & F Agent had also not deducted any tax at source while making payments to various third party service providers who have provided services to the assessee through its C & F Agents. On perusal of invoices of these C& F Agents especially Sureways Shipping Solutions who have handled maximum import consignments for the assessee, we have observed that major payments were towards transport charges, port charges, terminal handling charges, consolidated charges, other charges which in our considered view are subject to provision of applicability of income-tax deduction at source under the provisions of Chapter XVII-B . The said C&F agent no doubt are independent contractors but when they execute the contracted work on behalf of principal by dealing with outside parties such as shipping companies, airlines, port authorities , custom authorities , warehousing companies, transport companies etc, they only act in the capacity of an agent of the principal and represent principals before such third party authorities/service provider .The said C & F Agents while acting as an agents for the assessee have also not deducted income-tax at source under Chapter XVII-B which in our considered view has led to an anomalous situation wherein no tax has been eventually deducted at source under Chapter XVII-B either by principals ( i.e. assessee) or by its agents ( C& F Agents) which has admittedly happened in defiance of the provisions of the 1961 Act concerning deduction of income-tax at source. It is anomalous because had the assessee made direct payment to service providers for such expenses say for transport charges, port charges, loading/unloading , packing/unpacking of consignments or rent , it would have deducted income-tax at source on these payments under chapter XVII-B, while the payments when are made and routed through C & F Agents who are acting as an agents on behalf of the assessee, neither assessee nor C&F Agents have deducted income-tax at source under Chapter XVII-B on these

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payments . The provisions of deduction of income-tax at source are not only provisions stipulating one of the modes of recovery/collection of income-tax at source itself while payment is being made by the payer to the payee but is also an anti avoidance measure to keep tab and consolidate information by the Revenue about the recipient of the income which is captured in I T Database through statement of TDS filed by payer enabling Revenue to know the recipient of income at the stage when the payer makes the payment to the payee after deduction of income-tax , which information help revenue to plug evasion of taxes and broad-basing tax base of the economy. The Courts will not lean towards any measure or attempt which perpetuate or encourage evasion of taxes. Thus, had it been purely reimbursements of expenses which were otherwise not subjected to rigours of deduction of income-tax at source , situation would have been entirely different as in that situation there would have been no occasion to deduct income tax at source either by assessee nor by its C & F agents and merely because the invoices have been raised by C & F agents for reimbursement of these expenses could not have brought the same within the purview and ambit of Chapter XVII-B as the said expenses would have been ab-initio not within ambit of Chapter XVII- B, but here in the instant appeal before us most of these expenses which are covered by invoices raised by C & F agents are within purview and ambit of Chapter XVII-B but non-compliance has taken place as neither assessee nor C & F agents have deducted income-tax at source. It is important to mention that it is the assessee who has debited these expenses in its Profit and Loss account and claimed the benefit of these expenses against income before the Revenue , while C & F agent has merely acted as an intermediary. The principal is responsible for the action of agents done in the normal course of agency business and the assessee cannot absolve itself from its liability of non-deduction of income-tax at source by claiming that it is merely reimbursement of expenses paid to C & F agents or to claim that it was solely the responsibility of C & F agents to have deducted income tax at source on the grounds that ultimate payments were made to theird party service providers by the C & F agents acting as an agent of the principal (i.e. assessee) albeit on behalf of assessee. Thus, when an agent acts on behalf of the principal with third parties, he creates a relationship between the principal and the third person. For contracts entered into through an agent , the principal becomes bound towards a third person as if he entered into

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the contract himself . Section 226 of the Indian Contract Act, 1872 stipulates as under:

“ S.226 Effect of agency on contacts with third persons- Contract entered into through an agent and obligations arising from the acts done by an agent, may be enforced in the same manner,and will have the same legal consequences, as if the contracts had been entered into and the acts done by the principal in person.” Thus, the assessee as principal cannot absolve itself from the deductibility of income-tax at source for failure by its C & F Agents to deduct income-tax at source as the contracts are entered into by C&F agents with third parties on behalf of the assessee which binds assessee as principal. In-fact the assessee is the person responsible for deducting income-tax at source within provisions of Chapter XVII-B with respect to such payments made by the C & F agent as intermediary . Reference is drawn to the decision of Hon’ble Delhi High Court in the case of CIT v Cargo Linkers(2008) 218 CTR 695(Delhi). These contracts in the instant case entered into by C& F agents with service providers have been entered into in the normal course of agency and it cannot be said C& F agent exceeded his authority or has committed any fraud or wrong against a third person by entering these contracts. Now, adverting to the decisions relied upon , we have observed that the assesse relied upon following decisions :

Sr. No Description 1. Pri. CIT v. Consumer Marketing (India) P. Ltd. [2015] 64 Taxmann.com 16 (Gujarat) 2. CIT v. Opera Global P. Ltd [2014] 52 Taxmann.com 299 (Delhi) 3. ITO v. Dr. Willmar Schwabe India P. Ltd. [2005] 3 SOT 71 (DELHI) 4. Om Satya Exim P. Ltd v. ITO ITA no. 1335/Ahd/2010 5. ACIT v. P.P overseas ITA no. 733/Mum/2010

(a) In the case of Pr.CIT v. Consumer Marketing (India) Private Limited(supra) relied upon by the assessee , Hon‟ble Gujarat High Court held that no tax is required to be deducted at source on reimbursement of expenses where separate bills were raised, in this case the C & F agent has sought reimbursement of expenses by raising debit note along with

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necessary bills/receipts/supporting evidences issued by third party service providers , while in the instant case there are no supporting bills/receipt/evidences from third party service provider which are enclosed by C & F agents in its invoice for reimbursement of expenses as to come to the conclusion that there is no element of profit embedded in these expenses claimed by C & F agent.It was also brought to the notice of the Court that part of expenses are not subject to provisions of deductibility of tax at source under Chapter XVII-B. The Hon‟ble High Court came to the conclusion that no question of law much less a substantial question of law arises in that case and the appeal of the Revenue stood dismissed. Thus, this case is distinguishable.

(b) In the case of CIT v. Opera Global Private Limited(supra) relied upon by the assessee , the tax-payer has paid Rs. 48.61 lacs to C & F Agent towards air freight for export of goods for which separate invoices were raised by C & F Agents. The Hon‟ble Courts held that air freight on export of goods is not subject to provisions as contained in Chapter XVII-B concerning deduction of income tax at source and secondly it was undisputed that these air freights invoices do not have any profit or commission embedded for the C & F Agents but in the instant case payments were made to C& F agents which are prima-facie subject to provision of income-tax deduction at sources as are contained in Chapter-XVII-B and it is also not known whether there is any profit earned by C & F agents from these expenses claimed to be reimbursed as no supporting bills/invoices issued by third party service provider are enclosed. Thus, this case is also distinguishable.

(c) In the case of Dr. William Scwabe India Private Limited(supra) payments were made towards reimbursement of expenses towards car maintenance, as the taxpayer was required to provide vehicle to the professional to carry out professional work and to bear the said cost as per terms of contract and since no vehicle was provided , the consultant hired the vehicle and claimed actual expenses by raising separate bills and in this case also there is finding that there are no profit earned by the consultant in claiming reimbursement of actual expenses . The tribunal held based on factual matrix of the case that no tax is required

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to be deducted at source on these payments towards reimbursement of actual expenses towards car maintenance.

(d) In the case of Om Satya Exim Private Limited(supra) relied upon by the assessee , the tribunal decided the issue on finding that there was no income embedded in the reimbursement of these expenses which were claimed by C&F Agents.

(e) In the case of P.P.Overseas(supra) relied upon by the assessee, there was a finding of fact that payments made by C& F agents are towards custom duty,DEPB license etc. which were liability of the assessee and were merely collected by C & F agents and in any case they did not attracted provisions of Section 194C.

We have observed that Mumbai-tribunal has decided similar issue in details in the case of ITO v. Rajeshwaree Shipping & Logistics (2017) 83 taxmann.com 262 (Mum-trib.) , as under :

“8. We have considered the submissions of the parties and perused the material available on record. On a perusal of the assessment order, it is very much clear that in the course of assessment proceedings, the assessee has furnished every necessary details in respect of payment of Rs. 3,28,88,794 made to CFS/ICD operating under JNPT/BPT. On a perusal of the relevant details/documentary evidences, it is found that before the Assessing Officer, the assessee has not only produced the bills raised by the CFS/ICD on the assessee but also the bills raised by the assessee on the importers towards expenditure incurred on behalf of them. It is also noticed, in the final invoice drawn by the CFS/ICD submitted before the Assessing Officer all particulars of transactions were noted such as importer's address, liner code, vessels particulars of transaction, vessels' name and item code, description, rate charged, etc. These facts prove that the payment made by the assessee to the CFS/ICD were for/on behalf of importer of goods to whom the assessee rendered services as custom house agent. In fact, on a perusal of the observations made in the assessment order would reveal that the Assessing Officer has also accepted the fact that the assessee has made the payments to CFS/ICDs on behalf of its clients/importers as a custom house agent. The only reason for which the Assessing Officer has treated the payments to be subject to deduction of tax is, the assessee has directly paid them to the CFS/ICDS and it has received payments from the importer who have also not deducted tax at source on such payments made to the assessee. In our view, non- deduction of tax by the importers on the payments made to the assessee would not fasten the liability on the assessee under section 194C. When the Assessing Officer admits the fact that the assessee has made payments to

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CFS/ICD on behalf of importer as a custom house agent and the documentary evidence produced by the assessee also proves such fact, the Assessing Officer cannot disallow the payments under section 40(a)(ia) alleging non-deduction of tax by the assessee. When the expenditure/payment does not relate to the assessee, merely because the assessee has made payments on behalf of its client would not attract the liability of deduction of tax on the assessee. More so, when the assessee has not claimed such payments as expenditure by debiting to its Profit & Loss account. When the payments were made by the assessee on behalf of the importer and subsequently the assessee has raised bills for such payments on actual basis apart from separate bills raised for agency commission and it is evident that importers have reimbursed such expenditure to the assessee on actual basis and has also separately paid agency commission as per the bills raised, the payment to CFS/ICD logically has to be treated as expenditure of importers and not the assessee. Therefore, as a natural corollary if there was any default in deduction of tax on such payments, made to the CFS/ICDs, the liability should be on the person claiming the payment as expenditure. The assessee having never claimed these payments as expenditure, provisions of section 40(a)(ia) are not attracted. Even otherwise also, if the entire issue is looked at rationally and dispassionately it is to be noticed that during the relevant previous year, assessee has earned gross commission income of Rs. 83,47,952, which has been shown in the Profit & Loss account and the Assessing Officer has also not disputed the income shown by the assessee. Therefore, for earning such income of Rs. 83,47,952, neither the assessee can be expected to have incurred expenditure of more than Rs. 3 crore nor the disallowance can be made of that amount. In fact, the Tribunal, Mumbai Bench, in Rank Shipping Agency (P.) Ltd., (supra), while deciding identical issue of applicability of TDS provisions to payments made by a custom house agent on behalf of importers held as under:— "9. We have considered submissions of ld representatives of parties and orders of authorities below.

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also observe that department has not disputed the submissions made by the assessee before ld CIT(A) that assessee rendered 2351 jobs resulting in voluminous business transactions and the AO called for various details of the payments in less than 5 working days. We agree that it is not possible for computing the details in a short span of time and no adverse inference could be drawn for not able to furnish the same. Considering the facts of the case and the reasons as given by ld CIT(A), mentioned hereinabove, we hold that there is no reason to interfere with the order of ld CIT(A) in deleting the said addition of Rs.18,79,38,741 made by the AO. Accordingly, Ground Nos. 1 & 2 taken by department is rejected."

'2.5. If the observation made in the assessment order, conclusion drawn in the impugned order, material available on record and the assertion made by the ld. Respective counsel, if kept in juxtaposition and analyzed, we note that the ld. Commissioner of Income tax (Appeals) has placed reliance upon various judicial pronouncements from various Benches of the Tribunal like Hah Logistics v. DCIT (ITA No.1864/Del./2011) order dated 04th November 2011 from Delhi Tribunal, DCIT v. Jay Kay Freighters Pvt. Ltd. (ITA No.3407/Del/2011) order dated 08/08/2012, Hon'ble Delhi High Court in CIT v. Cargo Linkers [2008] 218 CTR 695, where in the Hon'ble Court held that the assessee being a C& F agent, is an intermediary, who booked cargo for and on behalf of importers and exporters and facilitated the contract for carrying goods, therefore not liable to withhold tax u/s 194C from payments made towards air freight on behalf of its customers, decided in favour of the assessee. We are in agreement with the conclusion drawn by the ld. Commissioner of Income tax (Appeals) because such person who acts as an agent has no liability to deduct tax at source because he is acting merely as an intermediary between the airlines/shipping lines as also custodians of goods on one hand and the importers/exporters on the other. The contract is between the parties and not with the agent. The invoices and other shipping documents are in the names of importer/exporter and the assessee merely receives funds and disburses to the airline/shipping lines till clearance by the customs. The statutory warehousing charges is also the sole liability of the clients and the assessee merely defrays the expenses on behalf of the clients, thus, the assessee/agents are not liable to deduct tax u/s 194C of the Act. Thus, it is unjustified on the part of the Assessing Officer to hold the assessee as "assessee in default". The privity of contract is between the clients and not with the assessee. There was no contract between the assessee and the authorities rather the assessee is working as a facilitator/agent between the parties and the authorities. It is well understood that TDS is deductable u/s 194C on the payments made to the contractors/sub- contractors thus the basic premise for deducting tax is on the contracting parties. In the absence of any contractual relationship between the assessee and airlines/shipping lines/Authorities the assessee agent is not liable to withhold tax/deduct tax u/s 194C of the Act. Our view is fortified by the decision of the Kolkata Bench in S.K. Asgar v. ITO (ITA No.2000/K/2009) order dated 31/08/2010 and ITO v. S.S. Impex (ITA No.997/K/2011) order dated 23/09/2011, the decision in Bhagwati Steels (326 ITR 108) and the ratio laid down in

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CIT v. United Rice Land Ltd. [2010] 322 ITR 294 (P & H). It is also noted that the ld. Commissioner of Income tax (Appeals) has dealt with the individual fee/payment/charges and the conclusion arrived at therein is identical. It is worth quoting that the Hon'ble Apex Court in Hindustan Coca Cola Beverages Pvt. Ltd. v. CIT (293 ITR 226) held that where the deductee concerns have already paid taxes on the payments made by the assessee payer then the Department could not deduct tax from the deductor on the same income by treating the latter to be an "assessee in default". Similarly, in the present case, the payees have offered the corresponding income in their returns, therefore, the alleged TDS liabilities, raised upon the assessee was not enforceable. Ratio laid down in Ramkrishna Vedanta Math v. ITO (ITA No.477/Kol/2012) order dated 31/07/2012 by the Kolkata Bench of the Tribunal supports our view. We note that the freight charges, detention charges and de-stuffing charges, etc. were paid to foreign lines or to their agents or shipping lines for transportation of cargo thus the privity of contract is not between the assessee and foreign lines/shipping lines to whom such charges were paid, thus, the assessee cannot be held to be a person responsible to deduct tax on such payments while acting for his clients. The Hon'ble Delhi High Court in CIT v. Cargo Linkers held that since the contract was between the exporter and shipping lines and the assessee was merely working as intermediary/agent, therefore, he is not a person responsible to deduct tax in terms of section 194 C of the Act. In view of these facts, we find no infirmity in conclusion drawn by the ld. Commissioner of Income tax (Appeals).

2.6. So far as, survey fee is concerned, it is paid to the persons or agencies appointed by CCSP's who conduct inspection of the goods. Inspection of cargo is integral step for custom clearance. Likewise seal wire charges are paid to local labour operating within the customs notified premises to seal/unseal the cargo/container, thus, such payments are paid on behalf of the client and the assessee is merely acting as intermediator for the smooth clearance on behalf of the clients. Identical is the situation for crane/fork lift charges. Reliance can be placed upon the decision in ACIT v. Accenture Services (P) Ltd. (Mumbai Bench of the Tribunal) and GIRDCO Ltd. v. ACIT (Cuttack Bench of the Tribunal). Respectfully following the decisions discussed hereinabove and also discussed in the impugned order, we find no infirmity in the conclusion drawn by the ld. Commissioner of Income tax (Appeals). The impugned orders are upheld.'

Thus, based on our above discussion we hold that the assessee was in-fact liable to deduct income-tax at source for payments made through C&F agents for the expenses incurred through C & F agents as the said C & F agent are merely acting 22

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as an agents being intermediary between the assessee and third party service provider and it is in-fact the assessee who was claiming these expenses in its P&L. No doubt these C & F Agents are independent contractors but once they deal with third party service providers such as custom authorities, port authorities, warehousing authorities, transporters and other service providers for clearance of import shipments , they only act as an agent on behalf of their principals i.e. the assessee and there action with third party service providers bounds the assessee done in the normal course of agency. Hence in our considered view, this matter need to set aside and restore to the file of the AO to identify the disallowance u/s 40(a)(ia) which requires analysis of nature of each of the expenses covered by invoice raised by C&F agents and their coverage by provisions of Chapter XVII-B. Hence, in our considered the matter need to be set aside and restored to the file of the AO for necessary analysis of various such expenses incurred by agent on behalf of principal and applicability of provisions of deduction of income-tax at source to these expenses to work out disallowance u/s 40(a)(ia) read with provisions of Chapter XVII-B . The AO shall de-novo adjudicate the issue on merits in accordance with law . The AO shall also keep in view ratio of judgment of Hon‟ble Delhi High Court in the case of CIT v. Ansal Landmark Township Private Limited ( 2016 ) 234 taxman 825(Delhi) while at time of de-novo determination of the issue on merits in accordance with law, however the onus shall be on the assessee to bring on record evidences that the ultimate payments made by C&F agents to the payee have been offered by them to tax. Needless to say that the assessee will be allowed adequate and proper opportunity of being heard by the AO in accordance with law as per principles of natural justice in accordance with law. The assessee shall be allowed by the AO to file necessary evidences and explanations in course of de-novo proceedings which shall be admitted by the AO in the interest of justice and thereafter adjudicated on merits in accordance with law. It is also to be put on record that SLP has been filed by Revenue with Hon‟ble Supreme Court against decision of Hon‟ble Delhi High Court in the case of CIT v. Ansal Landmark Township Private Limited ( 2016 ) 234 taxman 825(Delhi) wherein Leave has been granted by Hon‟ble Supreme Court ( (2016) 242 taxman 5(SC). This disposes of ground no. 3 raised by the assessee. We order accordingly.

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bearing capital which was invested in the capital work in progress of Rs. 1,00,30,557/- and Loans and Advances of Rs. 2,47,65,136/-. it was also observed that sundry debtors includes debts of sister concern to the tune of Rs. 58,49,788/- out of which debts of Rs. 33,29,618/- is owed by Kuloday convertor for more than six months . Thus it was observed by the AO that assessee is using interest bearing advances for the purpose of advancing interest free loan. Similar issue came up in assessment year 2009-10 wherein the interest was disallowed. The assessee submitted that interest of Rs. 22,94,272/- was capitalised towards fixed assets. It was submitted that the assessee has availed interest free unsecured loans which were used for investment in capital WIP and giving advances to the suppliers. It was observed by the A.O that advanced to supplier of Rs.2,47,65,137/- , the advances totalling of Rs.2,36,39,313/- from eleven parties did not result in any business in future and money was eventually returned back. The A.O disallowed 12% as interest on such „loans and advances‟ to the tune of Rs.2,36,39,313/- and sundry debtors owed by sister concern to the tune of Rs. 58,49,788/- , wherein the disallowance was worked out of Rs. 35,38,692/- u/s 36(1)(iii) for utilising interest bearing funds for non income generating activities, vide assessment order dated 20-03-2013 passed by the AO u/s 143(3) .

“4.3.1 I have carefully considered the submissions and contention of the Ld. AR of the appellant and also carefully gone through the facts and explanation given by the Ld. AR of the appellant as well as the Ld. AO. Similar issue has arisen for consideration of my Ld. Predecessor in the appellant's own case for AY 2009-10, wherein my Ld. Predecessor in his order dated 26.03.2013 at paras 4.3, 4.4 and 4.5 has held as under: 4.3 Further, the appellant has mentioned that own funds were utilized for the capital work-in-progress. The appellant had its own capital and reserves totalling to Rs. 1,68,52;747/- and the capital work-in-progress was only Rs.64,75,125/-. The comparison of the increase in the interest

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cost during the year is only Rs. 4,48,729/-, whereas the increase in the bank charges is approximately of Rs. 17 lakhs. The appellant has relied on the following case laws. i. Ahuja Platinium Properties Pvt. Ltd. Vs. CIT (ITA T Mumbai) ii. CIT vs. Reliance Utilities and Power Ltd., 313 ITR 340 (Bom) iii. DCIT vs. Core Health Care Ltd. 289 ITR 194 (SC) 4.4 In the above cases, it is pertinent to note the decision given by the Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd., wherein the Hon'ble High Court has held that, "if there are interest free funds available an assessee is sufficient to meet its investment and at the same time, the assessee has raised loans then it can be presumed that the investments were from the interest free funds available."

4.5 In the instant case, the AO has not proved that the interest free funds were actually utilized for the purpose of capital work-in-progress. It is also important to note that the appellant has reserves which are more than the capital work-in-progress. Further, the AO has also not checked with the banks for what purposes the loan was sanctioned and whether such amount was used for the capital work-in-progress. In the absence of such evidence, the stand taken by the AO cannot be upheld and the ground of appeal of the appellant is allowed." 4.3.2 In view of the above decision of my Ld. Predecessor and the facts remaining the same for the instant appeal also, however, I find that the Ld. AO has clearly brought on record the fact that the interest bearing funds are utilised for acquiring new assets including capital work-In- Progress as also providing interest free loans. It is a matter of fact that the appellant had provided interest free loans to other parties to the tune of Rs. 2,36,39,313/- and advances to supplier stands at Rs.2,36,39,313/- and advances to supplier stands at Rs. 2,47,65,136/- as per Schedule-10 of balance sheet. It includes advances for expenses, capital work in progress and for purchasing of goods and other loans. The appellant has advanced a loan to its sister concern amounting to Rs.58,49,788/-. It was submitted by the appellant that it had to pay to its sister concern namely M/s. Kuloday Udyog amounting to Rs. 33,25,000/ - which was shown under the head

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'Unsecured Loan' and no interest has been paid to such loan. Therefore, there is net balance of Rs. 8,04,829/- payable to M/s. Kuloday Udyog and disallowance of interest @ 12% is not correct. I find that the position in this regard is well settled by the Hon'ble Punjab & Haryana High Court in the case of Abhishek Industries Ltd. In the case of CIT vs. Abhishek Industries Ltd. (2006) 286 ITR 1 (P&H) the Hon'ble High Court held as under:- "Besides raising substantial amount of term loan which, according to the assessee, is required to be repaid as per the fixed schedule agreed to at the time of disbursement of loan, there was substantial amount of loan in the form of working capital which was not required to be returned after any specified period. Rather, the same is use of money in day-to-day working of the company and usually there remains a debit balance in the account of the company which bears interest only to the extent of debit balance in the account. In such a situation, in case the assessee had not advanced 'loans to its sister- concern on interest-free basis, even if the alleged surplus amount could not be repaid to the financial institution before the scheduled date as far as the term loan is concerned, but the interest being paid by the assessee on the working capital could have certainly been saved to that extent. It can very well be held that borrowing of the funds by the company to that extent was not for the purpose of business and there is nothing on record to suggest that amounts were advanced to sister-concern. to advance some - business object. Rather, the same is in the nature of funds being provided to sister- concern which are closely-held to earn) on business and earn income thereon without incurring any cost of fund or without even investing anything. If the assessee had to transfer the money in the form of interest-free loan from one company to another close company, the same could very well be in the manner by introducing less capital in one company and by investing the balance amount in the other company as capital because according to the assessee, it had share capital funds of its own which could be given to other. sister- concern. It is not, at all, possible to accept such a plea raised by the assessee. As far as the issue of establishment of nexus of the funds borrowed vis-a-vis the funds diverted towards sister-concern on interest-free basis is concerned, the stand of the assessee that the onus

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of proving the nexus of funds available with the assessee with the funds advanced to the sister-concerns unthout interest is on the Revenue is not correct. Sec. 36(1)(iii) provides for deduction of interest on the loans raised for business purposes. Once the assessee claims any such deduction in the books of account, the onus will be on the assessee to satisfy the AO that whatever loans were raised by the assessee, the same were used for business purposes. If in the process of examination of genuineness of such a deduction, it transpires that the assessee had advanced certain funds to sister-concerns or any other person without any interest, there would be very heavy onus on the assessee to be discharged before the AO to the effect that in spite of pending term loans and working capital loans on which the assessee is incurring liability to pay interest, still there was justification to advance loans to sister-concerns for non-business purposes without any interest and accordingly, the assessee should be allotted deduction of interest being paid on the loans raised by it to that extent. Even the plea of nexus of loans raised by the assessee with the funds advanced to the sister concerns on interest free basis, may be it is pleaded to be out of sale proceeds or share capital or different account cannot be accepted. Entire money in a business entity comes in a common kitty. The monies received as share capital, as term loan, as working capital loan, as sale proceeds etc. do not have any different colour. Whatever are the receipts in the business, that have the colour of business receipts and have no separate identification. Sources has no concern whatsoever. The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to sister concern without carrying any interest for non-business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had some surplus amount which, according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister concern free of interest. This would result in not presenting true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister concern would be enjoying the benefits thereof. It cannot possibly be held that the funds

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to the extent diverted to sister concerns or other persons free of interest were required by the assessee for the purpose of its business and loans to that extent were required to be raised. We do not subscribe to the theory of direct nexus of the funds between borrowings of the funds and diversion thereof for non business purposes. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under Section 36(1)(iii). If the plea of the assessee is accepted that the interest free advances made to the sister concerns for non- business purposes was out of its own funds in the form of capital introduced in business, that again will show a camouflage by the assessee as at the time of raising of loan, the assessee will show the figures of capital introduced by it as a margin for loans being raised and after the loans are raised, when substantial amount is diverted to sister concerns for non-business purposes without interest, a plea is sought to be raised that the amount advanced was out of its capital, which in fact stood exhausted in setting up of the unit. Such a plea may be acceptable at a stage when no loans had been raised by the assessee at the time of disbursement of funds. This would depend on facts of each case. Section 106 of the Indian Evidence Act or the principles analogous thereto places the burden in respect thereof upon the assessee, as the facts are within its special knowledge. However, a presumption may be raised in a given case as to why an assessee who for the purpose of running its business is required to borrow money from banks and other financial institutions would be giving loan to its subsidiary companies and that too when it pays a heavy interest to its lenders, it would claim no or little interest from its subsidiaries. if the amount is advanced from a mixed account or share capital or sale proceeds or profits etc., the same would not be termed as diversion of borrowed capital or that the revenue had not been able to establish nexus of the funds advanced to the sister concerns with the borrowed funds. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under

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Section 36(1)(iii) of the Act. Such borrowings to that extent cannot possibly be held for the purpose of business but for supplementing the cash diverted without deriving any benefit out of it. Accordingly, the assessee will not be entitled to claim deduction of the interest on the borrowings to the extent those are diverted to sister concerns or other persons without interest. K. Somasundaram & Bros.vs. CIT (1999) 153 CTR (Mad) 153: (1999) 238 ITR 939 (Mad), CIT vs. M.S. Venkateswaran (1997) 141 CTR (Mad) 510 : (1996) 222 ITR 163 (Mad), CIT vs. P. Ganu Rao & Sons (1989) 77 CTR (Mad) 28 : (1990) 185 ITR 324 (Mad), CIT vs V.I. Baby & Co. (2002) 174 CTR (Ker) 164 : (2002) 254 ITR 248 (Ker), CIT vs, Motor General Finance Ltd. (2002) 173 CTR (Del) 123 : (2002) 254 ITR 449 (Del), CIT vs. H.R. Sugar Factory (P) Ltd. (1990) 87 CTR (All) 132 : (1991) 187 ITR 363 (All), Indian Metals and Ferro Alloys Ltd. vs. CIT (1992) 193 ITR 344 (Ori), CIT vs. H.R. Sugar Factory (1991) 190 ITR 349 (All), S.A. Builders Ltd. vs. CIT & Anr. (2004) 269 ITR 535 (P&H), CIT vs. Saraya Sugar Mills (P) Ltd. (1993) 110 CTR (All) 23: (1993) 201 ITR 181 (All), Phaltan Sugar Works Ltd. vs. CIT (1995) 127 CTR (Bom) 359 : (1994) 208 ITR 989 (Bom), Phaltan Sugar Works Ltd. vs. CIT (1994) 122 CTR (Bom) 344: (1995) 215 ITR 582 (Bom), Elmer Havell Electrics & Ors. vs. CIT & Anr. (2005) 197 CTR (Del) 316 : (2005) 277 ITR 549 (Del) and C1T vs. Sujanni Textiles (P) Ltd. (1998) 147 CTR (Mad) 417: (1997) 225 ITR 560 (Mad) relied on; Veecumsees vs. CIT (1996) 133 CTR (SC) 500 : (1996) 9 SCC 25 distinguished; CIT vs. Orissa Cement Ltd. (2001) 252 ITR 878 (Del), CIT vs. Tin Box Co. (2003) 182 CTR (Del) 171 : (2003) 260 ITR 637 (Del), CIT vs. Radico Khaitan Ltd. (2005) 194 CTR (All) 451 : (2005) 274 ITR 354 (All), CIT vs. Prem Heavy Engineering Works (P) Ltd. (2006) 150 Taxman 90 (All), CIT vs. Britannia Industries Ltd. (2005) 198 CTR (Cal) 426 ': (2006) 280 ITR 525 (Cal) and R.D. Joshi & Co. vs. CIT (2001) 171 CTR (MP) 33: (2001) 251 ITR 332 (MP) dissented from." Therefore, once appellant has borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts have been advanced to sister-concerns without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be

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disallowed; onus is on the assessee to prove the nexus between the borrowed funds and the funds advanced to others without interest. 4.3.3 In view of the foregoing, I find that the addition made by the Ld. AO is absolutely correct. I therefore respectfully differ with the decision taken by my Ld. Predecessor in the appellant's own case for AY 2009- 10 as reported supra. Accordingly, this ground of appeal is thus dismissed.”

DETAILS OF INTEREST FREE OWN FUNDS

PARTICULARS AMOUNT Share Capital 1,50,00,000.00 Reserves 77,41,839.13

Interest free unsecured loans 1,32,13,684.15

TOTAL 3,59,55,523.28

The learned counsel for the assessee , thus , contended that interest free funds were utilised for the purposes of making interest free loans and advances. The assessee relied upon the decision of the Hon‟ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd. (2009) 313 ITR 340(Bom.) and decision of Hon‟ble Bombay High Court in the case of HDFC Bank Ltd v. DCIT reported in (2016) 383 ITR 529(Bom). The learned counsel for the assessee prayed that the matter may be set aside to the file of the AO wherein the assessee will demonstrate before the AO with reference to the books of accounts that interest free funds available with the assessee were utilised for making payments for interest free loans and advances. The 30

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Ld. DR on the other hand submitted that assessee has to prove with reference to books of accounts that the assessee has utilised interest bearing funds for the purposes of business of assessee and he relied upon the decision of the Hon‟ble Supreme Court in the case of S.A Builders Ltd. (2007) 288 ITR 1(SC). Thus, it was fairly submitted by both the parties that this issue can be restored to AO for verification of contention of the assessee on merits in accordance with law. 20. We have considered rival contentions and perused the material on record including case laws. The authorities below have disallowed interest expenses to the tune of Rs. 35,38,692/- on the grounds interest bearing funds have been diverted for granting interest free loans and advances. . The claim of the assessee is that the amounts were advanced to the said parties out of the interest free funds which were available with the assessee which were to the tune of Rs.3.59 crores as detailed hereunder(page 43/pb) :

DETAILS OF INTEREST FREE OWN FUNDS

PARTICULARS AMOUNT Share Capital 1,50,00,000.00 Reserves 77,41,839.13

Interest free unsecured loans 1,32,13,684.15

TOTAL 3,59,55,523.28

Thus, the assessee has contended that no interest bearing funds were utilised for advancing interest free loans and advances and interest free funds available with the assessee were utilised for advancing interest free loans and advances on which disallowance were made being loans and advances of Rs. 2,36,39,313/- advanced by the assessee and sundry debt owed by the sister concerns of Rs. 58,49,788/-. This contention of the assessee needs verification by the A.O. and hence the matter/issue is restored to the file of the A.O for necessary determination of the issue on merits in accordance with law and also with reference to books of accounts of the assessee. Both the parties have also fairly agreed that this contention

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of the assessee needs verification and matter can be restored to the file of the AO for necessary verification and enquiry. The assessee has also relied upon the decision of the Hon‟ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd. (2009) 313 ITR 340(Bom.) and decision of Hon‟ble Bombay High Court in the case of HDFC Bank Ltd v. DCIT reported in (2016) 383 ITR 529(Bom). Needless to say that A.O shall provide proper and adequate opportunity of being heard to the assessee in accordance with principles of natural justice in accordance with law. The assessee shall be allowed by the AO to file necessary evidences and explanation in its support in denovo proceedings which shall be admitted by the AO and adjudicated on merits in accordance with law. We order accordingly. 21. Ground No.5- The A.O observed that assessee has increased authorized share capital from Rs.50 lack to 1.5 crores . The assessee was asked to furnish detail of expenditure incurred in connection with such capital increase . The assessee submitted that it has incurred expenditure of Rs. 87,500/- in connection with share capital increase out of which only one- fifth amounting of Rs. 17,500/- were debited to P&L account as Miscellaneous Expenses. The assessee submitted that it is setting up a new manufacturing unit and hence capital base was enhanced to establish new manufacturing unit and hence expenditure incurred for increasing share capital is allowable u/s. 35D of the Act. The A.O disallowed the said expenses by holding the same to be capital in nature as expenditure incurred for increasing capital has to be capital expenditure, by relying upon following decisions :-

i) Brook Bond India Ltd. v. CIT(1997) 91 Taxman 26(SC) ii) Bombay Burmah Trading Corporation Ltd v. ITO (1983) 12 Taxman 178 (Bom) iii) Punjab State Industrial Development Carp Ltd v. CIT(1997) 93 Taxman 5 (SC) iv) Shree Digvijay Cement Co. Ltd. v. CIT (1982) 138 ITR 45 (Guj) v) Bharat Carban & Ribbon Mfg Co. Ltd v. CIT (1981) 127 ITR 239 (Delhi) vi) Vazir Sultan Tabacco Co. Ltd. v. CIT(1988) 41 Taxman 7 (AP) vii) Metro General Credits Ltd. v. CIT(1996) 221 ITR 99 (Mad)

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22 . Aggrieved, the assessee filed an appeal with learned CIT(A) who dismissed the appeal of the assessee by holding as under:-

“6.3.1. I have carefully considered the submissions and contention of the Ld. AR of the appellant and also carefully gone through the facts and explanation given by the Ld. AR of the appellant as well as the Ld. AO. I find that the issue is clearly covered by the decision of Hon'ble Supreme Court in the case of Brook Bond India Ltd. vs. CIT (1997) 91 Taxman 26 (SC) that any amount incurred by the appellant for increase in its share capital, that this is not the domain of capital expenditure. I therefore find no infirmity in the order of the Ld. AO who while discussing in detail in para 7 of the assessment has disallowed the expenditure being capital in nature. This ground of appal is thus dismissed 23. Aggrieved by appellate order dated 14-02-2014 passed by learned CIT(A), the assessee has filed an appeal with the tribunal. 24. The learned counsel for the assessee drew our attention to the orders of the authorities below with respect of the disallowance of Rs. 17,500/- on account of share issue expenses which was claimed to have been incurred towards expansion of capital for setting up new undertaking at Daman for which it was submitted that land has been acquired and building was constructed which is shown as capital work in progress. The learned counsel for the assessee submitted that assessee has spend this money in expending fees paid to ROC for increasing authorised capital from Rs 50 lasc to Rs 1.50 crores wherein total Rs 87,500/- was paid and it was claimed that 1/5 of the said expenses are allowable u/s. 35D of the Act. It was submitted that contention of the assessee that enhanced capital base was utilised for for extension of undertaking can be verified by the A.O and it is prayed that the matter may set aside to the file of the A.O for necessary verifications of the contention of the assessee. 25. The Ld. D.R relied upon order of authorities below and submitted that the contention of the assessee that the increased capital base was utilised for setting up new undertaking at Daman and that these expenses are in-

I.T.A. No. 3300/Mum/2013 & 2423/Mum/2014

fact allowable need verification and enquiry by the AO and that the matter can be set aside to AO for necessary verifications/enquiry . 26. We have heard both the parties and also perused the material on record including decision relied upon by the parties . We are of considered view that the assessee has paid ROC fee of Rs. 87,500/- for increase in authorised share capital of the assessee from Rs. 50 lacs to Rs 1.50 crores . The assessee has claimed 1/5 of the said expenses as allowable u/s 35D as it is claimed that the assessee is setting up new undertaking at Daman for which necessary land has been taken, building was under construction and the said amount spent for new undertaking at Daman which is claimed to be extension of undertaking was shown under the head capital work in progress.Thus, it is claimed that increased capital base is used for setting up new undertaking at Daman which is by way of expansion of capacity . Our attention was also drawn to the schedule of fixed assets which is placed in paper book page no. 7 wherein capital WIP was shown at Rs. 1.65 crores as at 31-03-2010 and addition to land has been shown to be Rs. 17.04 lacs during previous year relevant to the impugned assessment year. Reference is drawn to Provisions of Section 35D which stipulates as under:

―[Amortisation of certain preliminary expenses. 35D. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2),— (i) before the commencement of his business, or (ii) after the commencement of his business, in connection with the extension of his [***] undertaking or in connection with his setting up a new [***] unit, the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the [***] undertaking is completed or the new [***] unit commences production or operation :

[Provided that where an assessee incurs after the 31st day of March, 1998, any expenditure specified in sub-section (2), the provisions of this sub-section shall have effect as if for the words "an amount equal to one-tenth of such expenditure for each of the ten successive previous years", the words "an

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amount equal to one-fifth of such expenditure for each of the five successive previous years" had been substituted.] (2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely :— (a) expenditure in connection with—

(i) preparation of feasibility report;

(ii) preparation of project report;

(iii) conducting market survey or any other survey necessary for the business of the assessee;

(iv) engineering services relating to the business of the assessee :

Provided that the work in connection with the preparation of the feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services referred to in this clause is carried out by the assessee himself or by a concern which is for the time being approved in this behalf by the Board;

(b) legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee;

(c) where the assessee is a company, also expenditure—

(i) by way of legal charges for drafting the Memorandum and Articles of Association of the company;

(ii) on printing of the Memorandum and Articles of Association;

(iii) by way of fees for registering the company under the provisions of the Companies Act, 1956 (1 of 1956);

(iv) in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus;

(d) such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provision of this Act) as may be prescribed. (3) Where the aggregate amount of the expenditure referred to in sub-section (2) exceeds an amount calculated at two and one-half per cent— (a) of the cost of the project, or

(b) where the assessee is an Indian company, at the option of the company, of the capital

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employed in the business of the company, the excess shall be ignored for the purpose of computing the deduction allowable under sub- section (1) : [Provided that where the aggregate amount of expenditure referred to in sub-section (2) is incurred after the 31st day of March, 1998, the provisions of this sub-section shall have effect as if for the words "two and one-half per cent", the words "five per cent" had been substituted.] Explanation.—In this sub-section— (a) "cost of the project" means—

(i) in a case referred to in clause (i) of sub-section (1), the actual cost of the fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are shown in the books of the assessee as on the last day of the previous year in which the business of the assessee commences;

(ii) in a case referred to in clause (ii) of sub-section (1), the actual cost of the fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are shown in the books of the assessee as on the last day of the previous year in which the extension of the [***] undertaking is completed or, as the case may be, the new [***] unit commences production or operation, in so far as such fixed assets have been acquired or developed in connection with the extension of the [***] undertaking or the setting up of the new [***] unit of the assessee;

(b) "capital employed in the business of the company" means—

(i) in a case referred to in clause (i) of sub-section (1), the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the previous year in which the business of the company commences;

(ii) in a case referred to in clause (ii) of sub-section (1), the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the previous year in which the extension of the [***] undertaking is completed or, as the case may be, the new [***] unit commences production or operation, in so far as such capital, debentures and long-term borrowings have been issued or obtained in connection with the extension of the [***] undertaking or the setting up of the new [***] unit of the company;

(c) "long-term borrowings" means—

(i) any moneys borrowed by the company from Government or the Industrial Finance Corporation of India or the Industrial Credit and Investment Corporation of India or any other financial institution 57[which is eligible for deduction under

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clause (viii) of sub-section (1) of section 36] or any banking institution (not being a financial institution referred to above), or

(ii) any moneys borrowed or debt incurred by it in a foreign country in respect of the purchase outside India of capital plant and machinery, where the terms under which such moneys are borrowed or the debt is incurred provide for the repayment thereof during a period of not less than seven years. (4) Where the assessee is a person other than a company or a co-operative society, no deduction shall be admissible under sub-section (1) unless the accounts of the assessee for the year or years in which the expenditure specified in sub-section (2) is incurred have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of income for the first year in which the deduction under this section is claimed, the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed. (5) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is transferred, before the expiry of the period of ten years specified in sub- section (1), to another Indian company in a scheme of amalgamation,— (i) no deduction shall be admissible under sub-section (1) in the case of the amalgamating company for the previous year in which the amalgamation takes place; and

(ii) the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the amalgamation had not taken place. [(5A) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is transferred, before the expiry of the period specified in sub-section (1), to another company in a scheme of demerger,— (i) no deduction shall be admissible under sub-section (1) in the case of the demerged company for the previous year in which the demerger takes place; and

(ii) the provisions of this section shall, as far as may be, apply to the resulting company, as they would have applied to the demerged company, if the demerger had not taken place.] (6) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure specified in sub-section (2), the expenditure in respect of which deduction is so allowed shall not qualify for deduction under any other provision of this Act for the same or any other assessment year.]‖

The onus is on the assessee to prove that the said expenses fall within the ambit of allowability of Section 35D of the Act and all the conditions are met which are stipulated u/s 35D more so fee is paid to ROC at the time of increase in share capital from Rs 50 lacs to Rs. 150 lacs and not at the time

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of registering the company and also condition which stipulate that the expenses will be allowed u/s 35D towards extension of the undertaking in the year when the said extension is completed or the new unit commences production. The assessee has to bring on record cogent evidences strictly in accordance with provisions of Section 35D before its claim is allowed and the onus squarely lays on the assessee.These claims and contention of the assessee as to that there was a extension of undertaking and the said expenses are allowable u/s. 35D need verification by the A.O and hence the matter is set aside and restored to the file of the A.O for necessary de-novo determination of the issue on merits in accordance with law . Needless to say that proper and adequate opportunity of being heard shall be provided by the AO to the assessee in accordance with principles of natural justice in accordance with law.The assessee shall be allowed to submit the evidences and explanations which shall be admitted by the AO and adjudicated thereafter on merits in accordance with law. We order accordingly. 27. In the result, appeal of the assessee in ITA No. 2423/Mum/2014 for assessment year 2010-11 is partly allowed as indicated above.

Order pronounced in the open court on 29.09.2017 आदेश की घोषणा खुऱे न्यायाऱय में ददनांकः 29.09.2017 को की गई ।

Sd/- Sd/- (JOGINDER SINGH ) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER

Mumbai, dated: 29.09.2017

I.T.A. No. 3300/Mum/2013 & 2423/Mum/2014

copy to… 1. The appellant 2. The Respondent 3. The CIT(A) – Concerned, Mumbai 4. The CIT- Concerned, Mumbai 5. The DR Bench, E 6. Master File // Tue copy// BY ORDER DY/ASSTT. REGISTRAR ITAT, MUMBAI Draft dictated on 22-09-2017 Sr PS 2 Draft placed before Author on Sr PS 26-09-2017 3 Draft proposed & Place before the 2nd 29-09-2017 JM/AM member 4 Draft discussed/approved by 2nd JM/AM Member 5 Approved draft comes to the Sr PS Sr.PS 6 Kept for pronouncement on -09-2017 Sr PS 7 File sent to the Bench Clerk -09-2017 Sr PS 8 Date on which file goes to the Head Clerk 9 Date on which file goes to the AR 10 Date of dispatch Sr PS