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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI S. JAYARAMAN
Per Sunil Kumar Yadav, Judicial Member These appeals are preferred by the assessee as well as revenue against the respective orders of the CITA. Since common issues are involved in these appeals, these appeals were heard together and are being disposed of through this consolidated order. We, however, prefer to adjudicate them one after the other.
ITA Nos. 51 & 71/Bang/2011
These appeals are preferred by the assessee as well as the revenue against the order of CITA for the AY 2005-06 on various grounds which are reproduced hereunder:-
“Grounds of Appeal in Assessee’s appeal (ITA 51/B/2011) 1. The order of the learned authorities below in so far as it is against the Appellant is opposed to law, weight of evidence, probabilities, facts and circumstances of the Appellant's case. 2. The assessment is bad in law as the mandatory conditions to assume jurisdiction under section 148 does not exist and consequently the assessment made is bad in law. 3. The issue of notice under section 148 of the Act during the pendency of a valid subsisting return is bad in law. 4. The assessing officer by issuing notice under section 148 of the Act has sought to extend the proceedings which is not permissible in law. 5. The order of assessment is bad in law in so far as the issues for which the assessing officer has not given the details
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 3 of 26 collected by him without putting to the appellant as the same are in violation of the principles of natural justice. 6. The Appellant denies itself to liable to be assessed on the total income determined by the authorities below as against an income of Rs.2,26,38,594/- returned by the Appellant under the facts and circumstances of the case. 7. The authorities below failed to appreciate that the cash payments to the tune of Rs. 1,11,56,360/- is for the purchase of arrack substantially from a Government company and the disallowance under section 40A(3) of the Act is bad in law under the facts and circumstances of the case. 8. The authorities below failed to appreciate that the exemption provided under rule 6DD is applicable to the appellant and hence ought not to have added the same in the assessment under the facts and circumstances of the case. 9. The authorities below are not justified in disallowing Vendor Commission u/s 40(a)(ia) of Rs.96,31,415/- on the facts and circumstances of the case. 10. The assessing officer failed to appreciate that the transaction between such Vendors and the appellant is that of purchase and sale and what was given to the vendors was trade discount and consequently the provisions would not apply at all to the case of the appellant under the facts and circumstances of the case. 11. The authorities below failed to appreciate that the said transaction of sales of arrack to the vendor do not fall within the ambit of chapter XVII B of the act and consequently no disallowance is warranted on the facts and circumstances of the case. The assessing officer also failed to appreciate that the authorities governing the provisions of Chapter XVII B have not passed any order in this regard. 12. The authorities below failed to appreciate the fact that disallowance under section 40(a)(ia) is permissible only if the deduction is claimed under section 30 to 38 of the Income-tax Act, 1961 under the facts and circumstances of the case. 13. The authorities below are not justified in disallowing Interest on account of diversion of funds on the facts and circumstances of
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 4 of 26 the case. The authorities below failed to appreciate that there was huge credit balance of the partners as a whole and no interest was charged by the firm to any of the partners for either debit or credit balance and the authorities below were not correct in sitting in judgment over the commercial expediency of the business man under the facts and circumstances of the case. 14. The Appellant denies itself liable to be charged to interest under section 234B and 234C of the Income Tax Act and requires to be cancelled on the facts and circumstances of the case. Further the levy is also bad in law as the period, rate and quantum on which levied are all not discernable and are wrong on the facts of the case. 15. The Appellant craves leave to add, alter, substitute and delete any or all of the grounds of appeal urged above. 16. For the above and other grounds to be urged during the hearing of the appeal the Appellant prays that the appeal be allowed in the interest of equity and justice.” Grounds of Appeal in Revenue’s appeal (ITA 71/B/2011) 1. The order of the Ld CIT(A) is opposed to law and facts of the case. 2. The Ld CITJA has not appreciated the fact that disallowance made u/s 40(a)(ia) was rightly done, as the assessee failed to deduct tax in view of the provisions of Sec 194H. 3. The Ld CIT(A) has not appreciated the fact that exception clauses provided as per Sec 194A(3) has not been provided to Sec 194H of the IT Act, vis-a-vis to the deduction of taxes at source and that the disallowance u/s 40(a)(ia) has been properly done while concluding the assessment proceedings. 4. The Ld CIT(A) has not appreciated the fact that, while making disallowance u/s 40(3)(ia), the definition for 'Commission & Brokerage' as provided in Explanation to Sec 194H of the IT Act, has been rightly followed in letter and Spirit as far as payment made to Canara Bank towards Bank Guarantee Commission.
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 5 of 26 5. The ld CIT(A) has not appreciated the fact that the assessee had diverted the funds availed from OD facilities to be utilized for purposes other than business and that the disallowance of interest has been rightly done. 6. The CIT(A) has failed to appreciate the fact that the disallowance of interest on debit balances has been rightly done and erred in directing the AO to delete the portion of interest on opening balances while working out the disallowance. For these reasons and that the grounds of appeal which may be urged at the time of hearing of appeal by the Hon'ble ITAT, the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer restored.” 3. During the course of hearing, the ld. counsel for the assessee has invited our attention that through the assessee's appeal, validity of the reopening of the assessment is challenged and once it is held that reopening is bad in law, no purpose would be served to deal with the issues on merit.
With regard to the validity of the reopening, the ld. counsel for the assessee has invited our attention to the fact that the original return u/s. 139(1) was filed on 31.10.2005 which was processed u/s. 143(1) by issuing an order dated 09.01.2006. However, time limit for issuance of notice u/s. 143(2) of the Act was upto 31.10.2006. and time limit for completing regular assessment as per section 153(1) of the Act was 31.10.2007. The due date for filing the revised return was 31.3.2007 and the revised return was filed on 30.11.2006 which was processed u/s. 143(1) vide its order dated 12.01.2007. Since the revised return was filed in time, the time limit for issuance of notice u/s. 143(2) with respect to revised return was available
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 6 of 26 upto 31.3.2008, but the AO issued a notice u/s. 148 on 16.05.2007. The time limit for issuance of notice u/s. 143(2) of the Act with respect to revised return was upto 30.11.2007 and for completing the regular assessment as per section 153(1) was upto 31.12.2007, but the AO issued notice u/s. 148 of the Act for reopening the assessment on 16.05.2007.
The ld. counsel for the assessee further contended that since notice u/s. 148 was not issued before the expiry of the period for issuance of notice u/s. 143(2) of the Act, notice issued u/s. 148 dated 16.5.2007 is bad in law and is liable to be quashed. In support of his contentions, he placed reliance on the following judgments:-
(1) Trustees of HEH the Nizam’s Supplementary Family Trust v. CIT, 242 ITR 381 (SC) (2) CIT v. Sambhudayal Dwarkadas, 218 ITR 123 (MP) (3) Jhunjhunwala Vanaspati Ltd. v. ACIT, 266 ITR 664 (All) (4) CIT v. K.M. Pachayappan, 304 ITR 264 (Mad) (5) CIT v. Qatalys Software Technologies Ltd., 308 ITR 249 (Mad) (6) Renuka Industries v. ITO in ITA No.187 of 2003, order dated 28.11.2007 (Karnataka High Court) (7) Super Spinning Mills Ltd. v. ACIT, 3 ITR [Trib] 258 (Chennai) (8) L.T. Karle & Co. in ITA No.364/Bang/2010, order dated 11.02.2011. (9) CIT v. Abad Fisheries, 65 DTR 370 (Kerala HC) (10) CIT v. Anajana Sabharwal, 71 DTR 313 (Allahabad HC)
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 7 of 26
The ld. counsel for the assessee further invited our attention to the
reasons recorded by the AO for reopening the assessment with the
submission that in the reasons recorded, the AO made a reference to the
original and revised return filed by the assessee. Though he has tried to
state that reopening was done to regularise the revised return, but in fact
the revised return was acknowledged by the AO as it was processed u/s.
143(1) vide order dated 12.01.2007. Therefore, there is no valid reason for
reopening the assessment.
The ld. DR, on the other hand, has contended that the original
return was processed u/s. 143(1) of the Act by the AO on 09.01.2006 and
demand notice of Rs.2,29,965 was served on the assessee. No notice u/s.
143(2) was issued to the appellant till 31.10.2006 and no revised return has
been filed u/s. 139(5) of the Act by the assessee till this date. Thus, as far
as original return is concerned, the assessment stood completed u/s.
143(1) of the Act. He further contended that if the AO had issued any
notice with reference to revised return fled subsequent to the completion of
assessment, the appellant would have again challenged the proceedings
by arguing that revised return was not a valid return. Therefore the AO has
mentioned correctly in the reasons recorded that revised return filed also
needs to be regularised. Thus, there was no assessment proceeding
pending in the appellant's case at the time of issuing notice u/s. 148 of the
Act.
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 8 of 26
In rebuttal, the ld. counsel for the assessee has contended that the
revised return filed by the assessee before the completion of regular
assessment was acknowledged by the AO as it was also assessed u/s.
143(1) vide order dated 12.01.2007. Therefore, it cannot be said that in
order to regularise the revised return, assessment was reopened. Once
the revised return filed by the assessee was duly recognised by the AO and
was processed u/s. 143(1), the time limit for issuing notice u/s. 143(2)
would be upto 30.11.2007, but the AO issued a notice u/s. 148 before
expiry of time limit for issuance of notice u/s. 143(2) of the Act.
Having carefully examined the orders of authorities below in the
light of rival submissions and the judgments referred to by the parties, we
find that undisputedly original return was fled on 31.10.2005 which was
processed u/s. 143(1) on 09.01.2006. Before expiry of time limit for
completing the assessment u/s. 143(3), the assessee has filed the revised return on 30.11.2006. This revised return was never treated as non est in
law by the AO as it was processed u/s. 143(1) by the AO vide order dated
12.01.2007. Copy of the revised return is available at page 53 of the
compilation and the order u/s. 143(1) dated 12.01.2007 is placed at page
55 of the compilation of the assessee. In the light of processing of revised
return u/s. 143(1), it cannot be said that revised return filed by the assessee was non est in law and it requires a proper regularisation by
issuing notice u/s. 148 of the Act.
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 9 of 26
After processing the return, the AO has formed a belief that as per
information from ADIT(Inv), the assessee has not disclosed certain amount
in its return originally filed, but before the AO could record the reasons,
assessee had already filed the revised return declaring additional income.
Once the assessee has already declared the additional income by filing a
revised return which was processed u/s. 143(1) of the Act, we find no merit
in the reasons recorded by the AO that certain income has escaped
assessment. Moreover, the notice u/s. 148 was issued before expiry of
time available for issuance of notice u/s. 143(2) of the Act with respect to
the revised return.
We have also examined the judgment of the Hon'ble Apex Court in the case of Trust of Trustees of HEH the Nizam’s Supplementary Family
Trust v. CIT, 242 ITR 381 (SC) in which it has been categorically held that
it is settled law that unless the return of income already fled is disposed of,
notice for reassessment u/s. 148 of the I.T. Act cannot be issued, i.e., no
reassessment proceedings can be initiated so long as assessment
proceedings pending on the basis of return already filed are not terminated.
Similar view was expressed by the Hon'ble Allahabad High Court in the case of Jhunjhunwala Vanaspati Ltd. v. ACIT, 266 ITR 664 (All) and in the
case of KLM Royal Dutch Airlines v. ADIT, 292 ITR 49 (Del). Their
Lordships of the Hon'ble Delhi High Court have again reiterated that since
returns of income had been filed and no order for assessment has been
finalised by the AO, there was no scope for invoking section 147 of the Act.
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 10 of 26
Therefore initiation of assessment proceedings u/s. 147 was irregular and
illegal. This view was further reiterated in other judgments referred to by
the assessee.
Turning to the facts of the present case, we find that original return
was filed by the assessee on 31.10.2005 which was processed u/s. 143(1)
on 9.1.2006. Later on, revised return was filed which was also processed
u/s. 143(1) of the Act vide order dated 12.01.2007. Therefore, returns filed
by the assessee were processed u/s. 143(1) and no proceeding of
assessment was pending.
Notice u/s. 148 was issued on 16.5.2007 after the processing of the
return u/s. 143(1) of the act. In the aforesaid judgments, it has been
repeatedly held that during the pendency of assessment proceedings,
notice u/s. 147 cannot be issued as the AO has an opportunity to examine
all sorts of queries whatever comes in his mind with regard to any sort of
escapement or undisclosed income. But in the instant case, when the
assessment was completed u/s. 143(1), no assessment proceeding was
pending, therefore, we are of the view that notice u/s. 148 was validly
issued.
Now the question arises whether the reasons recorded by the AO
for reopening the assessment are valid. In this regard, we have carefully
examined the reasons recorded by the AO and for the sake of reference,
we extract the same as under:-
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 11 of 26 “As per Infm recd from ADIT(Inv) Mysore in Ltr dt 13/02/07, the assessee had made deposits in UTI Bank to the tune of Rs.6943000/-. The deposits had earned Interest of Rs.241170/-. However these deposits and accrued interest have not been declared in the R.I. filed by the assessee on 31.10.05. Though the assessee has filed a revised Rt. on 30/11/06 to include the above, the addl income now offered, after enquiries made by the Dept, requires to be verified. The RI also has to be regularised. I have reason to believe that income to the extent of Deposits made of Rs. 6943000/- and accrued interest of Rs.241,170/- have escaped assessment as per provisions of sec. 147. Issue Notice u/s. 148.”
From a careful perusal of reasons recorded, it appears that on the basis of the report of ADIT(Inv), the AO has formed a belief that deposits in the UTI Bank of Rs.69,43,000 and the interest earned thereon were not disclosed by the assessee, therefore income escaped assessment. These reasons were recorded not only after the filing of revised return, but after the revised return was processed u/s. 143(1) of the Act. In the statement of income filed along with the revised return, the assessee has already offered the cash remittance to UTI Bank of Rs.69,43,000 and interest of Rs.2,41,170. Accordingly taxable income was worked out to Rs.2,26,38,594. This much of income was not only offered by filing a revised return (copy of revised return is available at page 53 of the compilation), but also the revised return was processed by the AO u/s. 143(1) of the Act and AO has taken the same amount as returned income of the assessee. Once the additional income declared by the assessee was processed u/s. 143(1), we are unable to understand on what basis the AO formed a belief that additional income has escaped assessment. We
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 12 of 26 are therefore of the view that there was no substantive material before the AO to form a belief that income has escaped assessment. Under these facts, we are of the considered view that reopening was not based on requisite cogent material. Accordingly we hold the reopening to be bad in law. Since reopening of assessment is held to be bad, the assessment framed consequent thereto deserves to be quashed and we accordingly quash the assessment framed consequent to bad reopening.
Since we have quashed the assessment on account of bad reopening, we find no justification to deal with the appeal of the assessee as well as revenue on merits. Accordingly the appeal of assessee is allowed and that of revenue is dismissed.
ITA Nos.52 & 72/Bang/2011
These cross appeals are preferred by the assessee and the revenue against the order of CIT(Appeals) for AY 2006-07 in which the order of CIT(Appeals) is assailed on the following grounds:-
Grounds of appeal in ITA No.52/Bang/2011 (Assessee’s appeal) “1. The order of the learned authorities below in so far as it is against the Appellant is opposed to law, weight of evidence, probabilities, facts and circumstances of the Appellant's case. 2. The Appellant denies itself to be liable to be assessed on the total income determined by the authorities below as against an income of Rs.1,02,61,515/- returned by the Appellant under the facts and circumstances of the case.
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 13 of 26 3. The authorities below are not justified in disallowing Vendor Commission u/s. 40(a)(ia) of Rs.32,69,190/- on the facts and circumstances of the case. 4. The authorities below failed to appreciate that the transaction between such Vendors and the appellant is that of purchase and sale and what was given to the vendors was trade discount and consequently the provisions would not apply at all to the case of the appellant under the facts and circumstances of the case. 5. The authorities below failed to appreciate that the said transaction of sales of arrack to the vendor do not fall within the ambit of chapter XVII B of the act and consequently no disallowance is warranted on the facts and circumstances of the case. The assessing officer also failed to appreciate that the authorities governing the provisions of Chapter XVII B have not passed any order in this regard. 6. The authorities below failed to appreciate the fact that disallowance under section 40(a)(ia) is permissible only if the deduction is claimed under section 30 to 38 of the Income-tax Act, 1961 under the facts and circumstances of the case. 7. The authorities below are not justified in disallowing Interest on account of diversion of funds on the facts and circumstances of the case. The authorities below failed to appreciate that there was huge credit balance of the partners as a whole and no interest was charged by the firm to any of the partners for either debit or credit balance and the authorities below were not correct in sitting in judgment over the commercial expediency of the business man under the facts and circumstances of the case. 8. The Appellant denies itself liable to be charged to interest under section 234B and 234D of the Income Tax Act and requires to be cancelled on the facts and circumstances of the case. Further the levy is also bad in law as the period, rate and quantum on which levied are all not disernable and are wrong on the facts of the case. 9. The Appellant craves leave to add, alter, substitute and delete any or all of the grounds of appeal urged above.
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 14 of 26 10. For the above and other grounds to be urged during the hearing of the appeal the Appellant prays that the appeal be allowed in the interest of equity and justice.” Grounds of appeal in ITA No.72/Bang/2011 (Revenue’s appeal) 1) The order of the Ld CIT(A) is opposed to law and facts of the case. 2) The Ld CIT(A) has not appreciated the fact that the disallowance made u/s 40(a)(ia) was rightly done, as the assessee failed to deduct tax in view of the provisions of Sec 194H. 3) The Ld. CIT(A) has not appreciated the fact that exception clauses provided as per Sec 194A(3) has not been provided to Sec 194H of the IT Act, vis-a-vis to the deduction of taxes at source and that the disallowance u/s 40(a)(ia) has been properly done while concluding the assessment proceedings. 4) The Ld. CIT(A) has not appreciated the fact that, while making disallowance u/s 40(a)(ia), the definition for 'Commission & Brokerage' as provided in Explanation to Sec 194H of the IT Act, has been rightly followed in letter and spirit as far as Payment made to Canara Bank towards Bank Guarantee Commission. 5) The ld CIT(A) has not appreciated the fact that the assessee had diverted the funds availed from OD facilities to be utilized for purposes other than business and that the disallowance of interest has been rightly done. 6) The CIT(A) has failed to appreciate the fact that the disallowance of interest on debit balances has been rightly done and erred in directing the AO to delete the portion of interest on opening balances while working out the disallowance. For these reasons and that the grounds of appeal which may be urged at the time of hearing of appeal by the Hon'ble ITAT, the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer restored."
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 15 of 26
ITA 52/Bang/2011
In assessee's appeal, ground Nos.1 & 2 are general in nature and
needs no adjudication, whereas ground Nos. 3 to 6 relate to the
disallowance of vendors commission of Rs.32,69,190 u/s. 40(a)(ia) of the
Act. The issue was examined in detail by the CIT(Appeals) while passing
the order for AY 2005-06 and following the said order, the CIT(A) has
confirmed disallowance in the instant case.
In order to understand the facts of the case, we have to look into the
order of the CIT(A) for AY 2005-06 wherefrom the facts are that the
assessee had debited a sum of Rs.32,69,190 in the nature of discount and
was claimed to be vendors commission. The AO had disallowed the
payment having invoked section 194H of the Act r.w. sec. 40(a)(ia) of the
Act for non-deduction of tax at source.
Aggrieved, the assessee preferred an appeal before the
CIT(Appeals) and contended that in the normal practice in the line of
business, the contractor has to supply arrack to various vending points or
locations in the respective operational areas as permitted by Govt. of
Karnataka. The vendor who sells the arrack would retain certain portion of
the sale proceeds and return the balance amount to the supplier i.e.,
appellant. In the case of the appellant, the arrack was supplied to vendor
at different points at Rs.13 per arrack packet and the vendor sold the
arrack packet at Rs.12.50 deducting a sum of Rs.0.50 as their charges.
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 16 of 26
The difference amount of Rs.0.50 was a trade discount that was given to
the vendor. Though amount of sale price is Rs.13 in the books of account,
the appellant's actually remittance will be only Rs.12.50 per pkt., hence no
actual amount was paid to the vendors, instead a trade discount was given.
It was further contended that since no amount is being paid to the vendor,
the provisions of TDS does not apply.
It was further contended that provisions of section 194H of the Act
being tax deduction at source on commission or brokerage will not apply,
since the appellant makes direct sales to the vendor and appellant receives
net sales from the vendors at various vending points. In the instant case,
the appellant supplies arrack to the shops at various points and collects the
sale proceeds and thereafter the vendor sells the same at the price at
which the Government authorities approved. The difference between sale
proceeds received and the actual amount of sale shown in the books is
commission, but the actual aspect of payment is in the nature of trade
discount. It was further contended that the appellant ought to have
reduced the said difference amount from the sales in the profit & loss
account, but by mistake he did not do it. It was however contended that the
real transaction should be seen and one should not go with entries in the
books of account. Reliance was also placed upon the judgment of Hon'ble Apex Court in the case of Prakash Cotton Mills Pvt. Ltd. reported in 201
ITR 684 (SC).
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 17 of 26
The CIT(A) re-examined the claim of the assessee and has agreed
to the proposition that nomenclature given by the assessee to a particular
transaction is not conclusive proof of true nature of the transaction. The
only issue is true nature of transaction between the appellant and the
vendors. The CIT(A), however, did not agree with the other contentions of
the assessee that vendors were dealing with the appellant on principal to
principal basis and they were also duly authorised to transact any
sale/purchase of arrack, therefore, it is not proper to say that they were not
authorised by the Government to effect sales of arrack. Since the
assessee has not paid any payment of commission to the vendors, it was
not required to deduct tax at source as per the provisions of section
40(a)(ia) of the Act. Therefore disallowance made by the revenue
authorities are not proper.
On the other hand, the ld. DR has placed reliance upon the order of
CIT(A).
Having carefully examined the orders of lower authorities in the light
of rival submissions, we find that there is no dispute with regard to legal
position that nomenclature given by the assessee to a particular transaction
is not conclusive proof of true nature of the transaction. The nature of
transaction has to be looked into by the relevant evidence available. There
is no dispute that assessee had been supplying arrack to different vendors
at different vending points. Now the question arises whether the assessee
has made the sales to different vendors on a principal to principal basis, or
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 18 of 26
whether different vendors were acting as agents of assessee. The
assessee has categorically stated that vending points are the locations in
the respective operational area which were also permitted by Govt. of
Karnataka to sell arrack at the rate prescribed by Govt. It was also stated
that all stocks were approved and licensed by Govt. of Karnataka and
these facts were not controverted by the CIT(Appeals) in his order. He has
simply concluded that vendors were not having licence, therefore, they
were not competent to sell arrack and were acting on behalf of assessee as
commission agents. Since the assessee has a taken a categorical stand
that it is supplying arrack to different vendors at different points or locations
in the respective operational areas as permitted by Govt. of Karnataka and
the shops of vendors are duly authorised by Govt. of Karnataka, it is all the
more necessary to examine the facts whether the assessee has sold arrack
on principal to principal basis to these vendors, or vendors were acting as
commission agents of the assessee. If it is established that assessee has
issued invoices in the name of vendors and supplied arrack to them, the
transaction would be on principal to principal basis and the vendors cannot
be held to be commission agents of the assessee. Nomenclature to the
difference in receipt of sale proceeds and sale consideration is irrelevant.
But these aspects were not examined by the lower authorities. Since the
assessee has taken a categorical stand before the CIT(Appeals) that the
vendors were duly authorised and approved by the Govt. of Karnataka to
transact in arrack, the CIT(A) should have examined as to how sale of
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 19 of 26
arrack was effected and in whose favour invoice was raised. Therefore, we
are of the opinion that this issue requires fresh adjudication by the AO.
Accordingly we set aside the order of the CIT(Appeals) in this regard and
restore the matter back to the Assessing Officer for fresh adjudication.
Ground No.7 relate to disallowance of interest and in this regard, it is
noticed that AO has made interest disallowance of Rs.6,61,782 with
respect to diversion of funds. This issue was also examined in AY 2005-06
and following the order of CIT(A) for AY 2005-06, the CIT(A) has restored
the matter to the AO to recompute the disallowance of interest as per
opening debit balances in the partners account.
We have carefully examined the order of CIT(A) for AY 2005-06
where the issue was examined in detail and we find that the CIT(A) has
directed the AO to recompute the interest disallowance as per opening
debit balances in the partners capital account. We do not find any infirmity
in the directions of the CIT(A). Accordingly, we confirm the order of CIT(A)
as recomputation is to be done by the AO. Accordingly, this ground of
assessee is dismissed.
So far as ground No.8 is concerned, it is consequential in nature and
needs no independent adjudication.
ITA 72/Bang/2011
In the revenue's appeal, ground Nos.1 to 4 relate to disallowance of
commission & brokerage for non-deduction of tax at source. The
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 20 of 26
CIT(Appeals) has also followed the earlier order for AY 2005-06 wherein
the issue was discussed at length.
The ld. DR placed reliance on the order of AO in this regard and
whereas the ld. counsel for the assessee has contended that the issue was
examined in detail by the CIT(A), therefore no interference is called for.
From a careful perusal of the record, we find that the AO had made
the disallowance of Rs.90,08,515 towards bank guarantee commission.
The assessee was asked to explain the nature of expenses and in
response thereto it was stated that when guarantee commission was paid
to Canara Bank for bank guarantee obtained in respect of license granted
by Govt. of Karnataka. The assessee has got bank guarantee from Canara
Bank of Rs. 45 crores during the FY 2005-06 relevant to AY 2006-07.
Further, as per the terms of agreement, the assessee has paid bank
guarantee commission @ 2% of the total guarantee amount. Since the
assessee has not deducted TDS while making bank guarantee commission
to Canara Bank as required under the provisions of section 194H, the AO
has made disallowance having invoked the provisions of section 40(a)(ia)
of the Act, against which an appeal was filed, and the CIT(A) held that bank
guarantee commission is basically in the nature of interest for a credit
facility which may or may not be utilised and it does not create any type of
principal-agent relationship so as to attract the provisions of section 194H
of the Act. It was further contended that payment towards bank guarantee
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 21 of 26
commission has been made by the assessee during the year and there is
no provision as on 31.3.2005 and hence provisions of section 40(a)(ia) of
the Act is not applicable since no amounts are due and payable as on
31.3.2005. It was further contended that since assessee has not made any
payment of commission to the bankers and commission is deducted by the
bankers from the account of the assessee, the provisions of section
40(a)(ia) of the Act cannot be invoked.
The ld. DR placed reliance upon the order of the AO.
We have carefully examined the rival submissions and we find that
the CIT(Appeals) is right in holding that bank guarantee commission is
basically in the nature of interest for a credit facility which may or may not
be utilised and it does not create any type of principal-agent relationship so
as to attract the provisions of section 194H of the Act. Since the CIT(A)
has properly adjudicated the issue, we find no infirmity in his order and we
accordingly confirm the same.
Accordingly, the appeal of the revenue is dismissed and that of the
assessee is partly allowed for statistical purposes.
ITA Nos.53 & 73/Bang/2011
These cross appeals are preferred by the assessee as well as the revenue against the order of CIT(Appeals) pertaining to AY 2007-08 inter
alia on the following grounds:-
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 22 of 26
ITA No.53/Bang/2011 (Assessee’s appeal) “1. The order of the learned authorities below in so far as it is against the Appellant is opposed to law, weight of evidence, probabilities, facts and circumstances of the Appellant's case. 2. The Appellant denies itself to be liable to be assessed on the total income determined by the authorities below as against an income of Rs.2,19,48,618/- returned by the Appellant under the facts and circumstances of the case. 3. The authorities below are not justified in disallowing the professional charges paid of Rs. 2,70,000/- u/s 40(a)(ia) of the Act on the facts and circumstances of the case. 4. The authorities below failed to appreciate the fact that disallowance under section 40(a)(ia) is permissible only if the deduction is claimed under section 30 to 38 of the Income-tax Act, 1961 under the facts and circumstances of the case. 5. The authorities below are not justified in law in disallowing a sum of Rs. 1,44,216/- being 20% of the total telephone expenses debited in the profit and loss account under the facts and circumstances of the case. 6. The authorities below failed to appreciate the fact that consent cannot confer jurisdiction and hence the admission made by the authorised representative is not binding under the facts and circumstances of the case. 7. The Appellant denies itself liable to be charged to interest under section 234B and 234D of the Income Tax Act and requires to be cancelled on the facts and circumstances of the case. Further the levy is also bad in law as the period, rate and quantum on which levied are all not disernable and are wrong on the facts of the case. 8. The Appellant craves leave to add, alter, substitute and delete any or all of the grounds of appeal urged above.
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 23 of 26 9. For the above and other grounds to be urged during the hearing of the appeal the Appellant prays that the appeal be allowed in the interest of equity and justice.”
ITA No.73/Bang/2011 (Revenue’s appeal) 1) The order of the Ld CIT(A) IS opposed to law and facts of the case. 2) The Ld CIT(A) has not appreciated the fact that the disallowance made u/s 40(a)(ia) was rightly done, as the assessee failed to deduct tax in view of the provisions of Sec 194H. 3) The Ld. CIT(A) has not appreciated the fact that exception clauses provided as per Sec 194A(3) has not been provided to Section 194H of the IT ACT, vis-a-vis to the deduction of taxes at source and that the disallowance u/s 40(a)(ia) has been properly done while concluding the assessment proceedings. 4) The Ld. CIT(A) has not appreciated the fact that, while making disallowance u/s 40(a)(ia), the definition for 'Commission & Brokerage' as provided in Explanation to Sec 194H of the IT Act, has been rightly followed in letter and spirit as far as Payment made to Canara bank towards Bank Guarantee Commission. For these reasons and that the grounds of appeal which may be urged at the time of hearing of appeal by the Hon'ble ITAT, the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer restored.”
ITA 53/Bang/2011 35. In the assessee’s appeal, ground Nos.1 & 2 are general in nature, whereas ground Nos.3 & 4 relate to the disallowance of professional charges paid of Rs.2,70,000 u/s. 40(a)(ia) of the Act. On perusal of the record, we find that the AO has disallowed payment of Rs.2,70,000 made to three professionals viz., Shri Vittal, Shri K.R. Prasad and Shri N.
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 24 of 26
Shivakumar. Since TDS was not deducted, the AO has disallowed the
payments. The assessee preferred appeal before the CIT(Appeals), but
did not find favour with him.
Now the assessee is in appeal with the submission that the
recipients have shown the receipt in their books of account and have also
offered the same to tax in respect of professional charges. Therefore, the
assessee cannot be held to be in default and the provisions of section
40(a)(ia) cannot be invoked in view of second proviso to section 40(a)(ia) of
the Act.
The ld. counsel for the assessee further contended that when the
recipients have paid the taxes, the assessee cannot be held to be in default
and disallowance u/s. 40(a)(ia) cannot be made.
The ld. DR placed reliance upon the order of CIT(Appeals).
Having carefully examined the orders of lower authorities in the light
of rival submissions, we find that now the provisions of section 201(1) and
section 40(a)(ia) has been toned down by subsequent amendments and as
per second provisio to section 40(a)(ia), when the assessee is not in
default, it is to be presumed that assessee has deducted and paid the
taxes. This aspect was not examined by the CIT(A). Therefore, we are of
the view that let this issue be examined in the light of the amended
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 25 of 26
provisions of section 40(a)(ia) of the Act by the Assessing Officer.
Accordingly, this issue is restored to the file of the Assessing Officer.
Ground No.5 relates to the disallowance of telephone expenses. In
this regard, we find that the AO has disallowed 20% of the total claim
towards telephone expenses on account of personal use. Since the
possibility of personal use of telephone cannot be ruled out, some
disallowance has to be made. However, the disallowance made by the AO
is on the higher side and we restrict the same to 10% of the total claim of
expenses.
Ground No.6 is general in nature and needs no independent
adjudication. Similar is the position with regard to ground Nos.8 & 9.
Accordingly, this appeal of the assessee is disposed of.
ITA No.73/Bang/2011
In the revenue’s appeal, the revenue has assailed the order of
CIT(Appeals) in deleting the disallowance made on account of commission
& brokerage. This aspect was examined by us in the foregoing appeals.
We, therefore, following the same, decide the issue in favour of the
assessee and against the revenue.
ITA Nos. 51 to 53/Bang/2011 & 71 to 73/Bang/2011 Page 26 of 26 44. In the result, the appeals of the assessee are partly allowed for statistical purposes and that of the revenue are dismissed.
Pronounced in the open court on this 06th day of January, 2017.
Sd/- Sd/-
( S. JAYARAMAN ) (SUNIL KUMAR YADAV ) Accountant Member Judicial Member
Bangalore, Dated, the 06th January, 2017.
/D S/
Copy to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order
Assistant Registrar, ITAT, Bangalore.