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Income Tax Appellate Tribunal, DELHI BENCH “B”: NEW DELHI
Before: SHRI I.C.SUDHIR & SHRI PRASHANT MAHARISHI
Assessee by : Sh. Anuj Arora, CIT DR Revenue by: Sh. GC Srivatava, Adv Sh. Anubhav Jain, Adv Sh. Daksh S. Bhardwaj, Adv Date of Hearing 27/10/2016 Date of pronouncement 23/01/2017 O R D E R PER PRASHANT MAHARISHI, A. M. This is an appeal filed by the revenue and cross objection filed by the 1. assessee against the order of the ld CIT(A)-II, Dehradun dated 25.10.2012 for the Assessment Year 2008-09. The revenue has raised the following grounds of appeal:-
2. Whether on the facts and circumstances of the case, the CIT(A) has “i. erred in admitting the additional evidence filed disregarding the fact that the assessee had failed to discharge its onus of substantiating its claim for expenses with vouchers and supporting documents and proof of IDS deducted, attracting disallowance under section 40a (ia) before the AO in violation of Rule S 46A(1) of the Income Tax Rules 1962 without any finding regarding the evidence adduced before him to establish the genuineness of the claims.
Page 2 of 10 ii. Whether on the facts and circumstances of the case the CIT (A) had erred in not adjudication and ignoring the grounds that while expenses ha\/e been claimed by assessee commensurate income has not been offered to lax and it had not disclosed information regarding its operating income. iii. Whether on the facts and circumstances of the case, the CIT(A) has erred in deleting the addition of Rs 216,72,397/- on account of disallowance of Salary expenditure, disregarding the fact that the assessee had failed to discharge its onus of substantiating its claim for expenses with vouchers and supporting documents and proof of IDS deducted, attracting disallowance under section 40a (ia.) without any finding regarding the evidence adduced before him to establish the genuineness of the claim. iv. Whether on the facts and circumstances of the case, the CIT(A) has erred in deleting the addition of Rs 18,23,10,445/- on account of 'overheads' by disregarding the fact that the assessee had failed to discharge its onus by substantiating its claim for expenses with vouchers and supporting documents and proof of IDS deducted, attracting disallowance under section 40a (ia.) without any finding regarding the evidence adduced before him to establish the genuineness of the claim. v. Whether on the facts and circumstances of the case, the CIT(A) has erred in deleting 50% of the addition of Rs.81,32,598, on account of 'Other Expenses' i e. communication, consultancy, entertainment, occupancy chargers, offshore services, I travelling costs, ignoring the fact that that the assessee had failed to discharge its onus j by substantiating its claim for expenses with vouchers and supporting documents and proof of IDS deducted, attracting disallowance under section 40a (ia.) relying on . "sample vouchers" especially when there was cessation of the business activity and assessee had not offered the commensurate income thereto for tax. vi. Whether On the facts and circumstances of the case, the CIT(A) has erred in deleting the addition of Rs 290,43,021//- on account of 'Unrealised foreign Exchange Loss' by incorrectly relying on decision of ONGC Vs CIT, 230 CTR 313 (SC). when the facts -n this case are that disallowance was made since assessee was not been able to provide any evidence and details with regard to claim of unrealized foreign exchange loss during the assessment proceeding and has not filed the same even before the CIT(A), without any finding regarding the evidence adduced before him to establish the genuineness of the claim. vii. Whether on the facts and circumstances of the case, the CIT(A) has erred in deleting 50% of the addition of Rs18634138/- on a/c of material cost and 50% of the addition of Rs.215,44,287/ on a/c of sub-contractor cost ,on ad-hoc basis when the assessee had failed to discharge its onus of substantiating its claim for expenses with vouchers and supporting documents and proof of TDS deducted, attracting disallowance under section 40a (ia.), without any finding regarding the Page 3 of 10 evidence adduced before him to establish the genuineness of the claim. viii. Whether on the facts and circumstances of the case the CIT (A) had erred in relying upon the ITAT decision in assessee's own case citing Article 12 of India-USA DTAA and taxing the same at the beneficial rate of 15% ignoring the fact that the Department had not accepted the decision of ITAT and reference had been filed before the Hon'ble High Court of Uttarakhand. ix. Whether on the facts and circumstances of the case, the CIT (A) has erred in deleting the interest charged u/s 234B by relying upon the decision of the Hon'ble Delhi High Court in the case of Jacabs Civil Incorporation/ Mitsubishi Corporation (2010) ITR 578 {Delhi} which has not been accepted by the department against which SLP has been filed before the Hon’ble Supreme Court.”
The assessee has raised the following grounds of appeal:- “1. erred in disallowing 50% of material cost amounting to INR 18,634,128 without appreciating the fact that these expenses were incurred for the purpose of its business in India; 2. erred, in disallowing 50% of sub-contractor cost amounting to INR 21,544,287 without appreciating the fact that these expenses were incurred for the purpose of its business in India; 3. erred in disallowing 50% of the other expenses (such as communication expenses, consultancy charges, service charges, occupancy charges, travelling cost, etc) amounting to INR 8,132,598 by wrongly holding that there is complete cessation of business activities without assigning the adequate reasons for the same; 4. erred in not adjudicating the erroneous amounts of INR 29,117 as against the actual amount of INR 17,953 considered by the learned Assessing officer for disallowing the fringe benefits tax while computing the taxable income of the Appellant;”
4. Brief facts of the case are that assessee is a non-resident company incorporated under the laws of Australia. During the year it was awarded a works contract from ONGC to construct platform as per the scope of the work. It was submitted by the assessee that it has not earned any income during the year from operations in India. However, during the course of assessment proceedings it was noted that assessee has claimed operating expenses of Rs. 215331401/- and there is no income. The nature of the expenses claimed by the assessee were salaries, fixed assets written off, consultancy, office administration, sales tax, overheads, audit fees and insurance expenses. According to the ld Assessing Officer assessee could not substantiate some of the expenditure despite repeated queries from the Page 4 of 10 Assessing Officer and as no revenue has been received by the assessee as stated that the contract with the ONGC got terminated on 04.06.2007, the ld Assessing Officer made disallowance of salaries of Rs. 21672397/-, overhead of Rs. 182310445/-, material cost of Rs. 18634128/-, fixed assets written off of Rs. 9107348/- along with other disallowances and issued draft assessment order on 30.12.2010. As the assessee did not file any objection before the Dispute Resolution Panel a final assessment order u/s 143(3) of the Act was passed on 24.02.2011 determining taxable income of the assessee at Rs. 84934319/- against returned income of Rs.Nil. On appeal before the ld CIT(A) the assessee contested disallowance of the expenses. However, ld CIT(A) after obtaining the remand report has deleted the disallowance with respect to salary and tax expenses and with respect to other expenses 50% disallowance was confirmed. In view of this the revenue is in appeal before us contesting the disallowance deleted by the ld CIT(A). The other disallowances with respect to foreign exchange loss are also contested. The ld CIT(A) also directed the AO to not to charge interest u/s 234B and 234C of the Act . This issue is also contested by revenue. The revenue has also aggrieved by the order of the ld CIT(A) where the following the order of the special bench in the case of the assessee in 130 ITD 137 he has decided the issue about the taxability of interest received by the appellant on income tax refunds applying the beneficial rate of 15% as per article 12 India-Austria DTAA. The assessee has filed cross objection contesting the disallowance confirmed by the ld CIT(A) up to 50% of material cost, sub-contractor cost and other expenses.
The ld DR submitted on the appeal of the revenue contesting ground Nos. 1 to 7 submitting that the ld CIT(A) has admitted fresh evidence. He further submitted that assessee has not shown any income but has claimed the expenditure as deduction. He further submitted that the first appellate authority has also not followed Rule 46A of the income Tax Rules. He further referred extensively to the remand report dated 08.02.2012. In view of this, he submitted that matter needs to be set aside on these grounds of appeal
6. The ld AR submitted that letter dated 04.10.2011 is the complete submission made by the assessee before the ld C IT(A) along with relevant annexures. He further submitted that a letter dated 24.10.2011 along with all the Page 5 of 10 annexures before the ld CIT(A). He further referred that the Ld. assessing officer had issued notices on 03/12/2010 and 22/12/2010 asking appellant to make submission on 14/12/2010 and 27/12/2010 respectively. He submitted that the entire questionnaire issued by the Ld. assessing officer were elaborate and wanted extensive details. He further stated that during the year the contract was terminated and therefore most of the questions were not relevant for the year under consideration. He stated that the assessee has submitted most of the details during the course of assessment proceedings backed by the audited financial statement, tax audit report and other documents. Despite this the Ld. assessing officer has disallowed the all the expenditure. He further stated that the assessee is located in Australia and had no presence in India at the time of the assessment proceedings for the purpose of coordination and college and of information. He further stated that all the accounts are duly audited and therefore the incurring of the expenditure and quantification of those expenses are not in doubt. As the assessing officer has provided very short period for the submission of the detailed the Ld. CIT (A) is justifiably admitted the additional evidences filed by the assessee and therefore the provisions of rule 46A of the income tax rules are properly followed.
7. On the issue of allowability of expenditure he submitted that salary expenditure has been allowed in full by the Ld. CIT appeal after verification of the expenditure, which pertained only for 1st quarter of year. He further stated that statutory liabilities paid by the assessee are required to be allowed and therefore similarly CIT (A) has correctly allowed that expenditure. On the other expenditure he submitted that Ld. CIT appeal has allowed 50% of the expenditure but balance disallowance confirmed by him of the same @ 50% of the expenditure is incorrect. He stated that though there is a complete cessation of the business activities lawful expenditure should have been allowed by the Ld. 1st appellate authority. On the issue of disallowance of foreign exchange loss he submitted that issue is now squarely covered in favour of assessee and CIT appeal has followed the decision of Hon’ble Supreme Court in case of ONGC versus CIT 230 CTR 313 and therefore no fault can be found in that particular order. Therefore, in the Page 6 of 10 end he contended that Ld. CIT appeal has erred in confirming the disallowance to the extent of 50% of some of the expenditure.
We have carefully considered the rival contentions. The 1st ground of the appeal of the revenue is against the admission of the additional evidence by the Ld. 1st appellate authority in violation of rule 46A of the income tax rules. The provisions of Rule 46A of the IT Rules 19622 provides that if the assessing officer has made the order appealed against without giving sufficient opportunity to appellant to adduce evidence relevant to any ground of appeal then Ld. 1st appellate authority is entitled to admit additional evidences. According to the information contained in the order itself the assessee is a non-resident company incorporated under the laws of Australia and the work order was terminated on 4th of June 2007. The assessment proceedings took place after October 2010 and culminated in order under section 143 (3) of the income tax act on 24/02/2011. The assessee has contended that Ld. assessing officer has issued notices on 03/12/2010 and 22/12/2010 asking substantial details, which were supposed to be replied by 14/12/2010 and 27/12/2010 respectively. In the remand report submitted by the Ld. assessing officer on 08/02/2012, before the 1st appellate authority, it was stated that assessee was given opportunities on 16/11/2010, 14/12/2010 and 27/12/2010. According to us, the Ld. assessing officer gave opportunity at a very short intervals. If it is further to be noted that first notice was issued to the assessee only on 22.10.2010 and thereafter, within three months the LD AO granted various opportunities. The last opportunity was granted on 27.2.2010 as per order sheet entry; however, the order was passed only on 24.02.2011. All sequence of events coupled with non-residential status of the assessee , fact of closure of the business since 04.06.2007 shows that adequate opportunity was not given to the assessee. Further, the ground of appeal of revenue also challenges about genuineness of claim. In remand report submitted by ld AO such claim was raised only with respect to the work has been abandoned by the assessee in May 2007. We have noted that while admitting the evidence and adjudicating on those evidences ld first appellate authority has taken due care of these facts specifically while deleting the disallowance on salary and taxes and partially upholding the disallowance with respect to other expenditure. In view of this we dismiss Page 7 of 10 ground No. 1 of the appeal of the revenue against admission of additional evidence by the assessee under Rule 46A (1) of the IT Rules 1962.
9. Ground Nos. 2 to 5 and ground No. 7 were with respect to the partial deletion of disallowances of certain expenses.
10. On this the ld DR relied upon the order of ld Assessing Officer and vehemently contested for setting aside issue to file of the ld AO . The ld AR submitted that the ld CIT (A) has deleted the disallowance on 11. relevant facts. We have carefully considered the rival contentions. The ld CIT(A) vide para 12. 3.3 has allowed the claim of the salary holding that salary expenditure pertains to first quarter of the year only and the taxes are statutory liabilities. These two expenditure have been allowed in full. While restricting the disallowance to 50% of other expenses in para 3.4 and para 5, such as material cost and sub-contractor cost, ld first appellate authority decided the issue considering sample vouchers were filed before him , complete details of expenses not submitted before him, therefore he held that it cannot be denied that there is complete cessation of the business activity of the assessee. Therefore, he has taken a reasonable view between the two extremes of complete disallowance and complete allowance by restricting the claim to the extent of 50%. The ld DR could not explain that the portion allowed by the ld CIT (A) is unreasonable and ld AR could not point out that when the complete information is not available how the ratio applied by ld CIT (A) is unreasonable. Further, we do not find any infirmity in the order of the ld CIT(A) against the disallowance of Rs. 40488421/- setting aside to the file of the ld AO for verification that the TDS dues have been paid during the FY 2007-08 relevant to AY 2008-09 and then allow the expenses as would legally be due to the appellant. In view of this we dismiss ground No. 2 to 5 and 7 of the appeal of the revenue Ground No. 6 of the appeal of the revenue was against the disallowance of 13. Rs. 29043021/- allowed by ld CIT (A) with respect to unrealized foreign exchange loss.
14. The ld DR and ld AR agreed that the issue is now squarely covered by the decision of Hon'ble Supreme Court in case of ONGC Vs. CIT 230 CTR 31. In view of this we do not find any infirmity in the order of the ld CIT (A) in Page 8 of 10 allowing the above claim. In the result the ground No. 6 of the appeal of the revenue is dismissed.
Ground No. 8 of the appeal of the revenue is with respect to the decision of the ld CIT(A) in relying upon the ITAT decision in assessee’s own case regarding taxability of interest of IT refund and thereby applying the provisions of Article 12 of Indo-US DTAA and taxing the same @15%. The ld DR submitted that now the issue is decided in favour of the revenue by 16. the decision Hon'ble Utarkhand High Court in case of DIT Vs. Pride Foramer SAS 40 Taxmann. Com. The ld AR vehemently submitted that order in case of assessee may be 17. followed. We have carefully considered the rival contentions. The above issue is now 18. squarely covered in favor of the revenue by the decision of Hon'ble Utarkhand High Court in case of DIT Vs. Pride Foramer SAS 40 Taxmann. Com wherein it has been held that interest earned in India on the refund of income tax is not covered by sub article 1 and 2 of Article 12 of treaty. The Hon'ble Uttrakhand High Court once again in BJ Services and Co. Middle East Ltd. Vs. ACIT has held that where the assessee is carrying on business through a permanent establishment in India, interest on income tax refund is taxable at business income under Article 6 of DTAA. In view of the above decisions of the jurisdictional High Court the decision of the special bench is no more relevant. In view of above we reverse the decision of the ld first appellate authority and hold that interest on income tax refund is chargeable to tax in the hands of the assessee under Article 7 of the treaty as business income, and is not covered by the provisions of Article 11(2) of the Indo-Australia DTAA. Therefore, such income is not chargeable to tax at concessional rate of 15% but would be chargeable as business income. In view of this ground No. 8 of the appeal of the revenue is allowed. Ground No. 9 of the appeal of the revenue is against deletion of the interest 19. u/s 234B of the Income Tax Act. The ld DR submitted that as the issue is contested before the Hon'ble Supreme Court this ground of appeal has been raised despite the decision of Hon'ble Delhi High Court. Ld AR vehemently supported that now the Hon’ble Delhi High Court, which 20. the ld CIT (A) has followed, covers the issue.