F.L.SMIDTH MINERALS P LTD.,CHENNAI vs. DCIT, CHENNAI

आदेश /O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

Relying the decision of Madras High Court in the case of Rotork Controls India Ltd – 293 ITR 311, he held that considering the nature of the liability, which is yet to crystallise but loaded with uncertainty of the event to cause a liability, there is no justification to accept the plea of the assessee to allow the provisions for warranty which is actually a contingent liability. Further, in the assessment made for assessment year 2007-08, the AO found that the assessee has debited sub-contract expenses at Rs. 8,86,329/- and provision for labour charges at Rs. 19,45,739/- , both by way of provisions , and the assessee has not deducted TDS on this amount . The Assessing Officer invoked section 40(a)(ia) and disallowed them. Further, in the assessment made for assessment year 2007-08, the AO disallowed Rs. 91,68,864/-, the payments made towards sales commission to Mehrtash Trading Enterprises (LLC) and Rs. 27,08,506/- towards royalty paid to FFE Minerals Corporate, USA , as they were made without deducting tax at source u/s. 40(a)(ia).

Aggrieved, the assessee filed appeals before the CIT(A).

With regard to the issues of sub-contract expenses at Rs. 8,86,329/- and provision for labour charges at Rs. 19,45,739/- in ay 2007-08,after considering the assessee’s reply etc, the CIT(A) held that the assessee’s action does not obliterate from the statutory responsibility of deducting and remitting TDS, if any. The provisions for sub-contract expenses and provision for labour charges are falling u/s.s 30 to 38 and are also liable for TDS.

Since, the assessee failed to deduct the TDS on these provisions, violation u/s. 40(a)(ia) has been committed and consequently, the CIT(A) held that assessee is ineligible to claim them as deduction. However, the accepting the alternate claim of the assessee, the CIT(A) directed the AO to examine this claim and allow the necessary deduction in the financial year(s), where the assessee has actually deducted and remitted the TDS into Government account, subject to verification and assessee’s furnishing of necessary evidence. Aggrieved against these orders, the assessee filed these appeals.

Since, they are inter-connected, they are heard together and disposed by a common order.

4.1 On the disallowance of expenses u/s. 14A r.w.r. 8D:

The AR pleaded that the Ld. CIT(A) erred in confirming the disallowance to the extent of 5% u/s. 14A(1) relying on the decision in the matter of Celebrity Fashions Ltd., which is wholly inapplicable in the circumstances of the present case. Per contra, the DR relied on the orders of the CIT(A). We heard the rival contentions. We hold that even prior to assessment year 2008-09 (Pre Rule 8D era), the nature of disallowances specified u/s. 14A(1) has to be made on a rational basis. This tribunal held in large number of its decisions that the reasonable basis for the disallowance u/s. 14A should be 2% of the exempt income earned in the year 2007 and before. Therefore, the AO is directed to determine the expenses attributable to the exempt income, at the rate 2% of the total exempt income for the assessment years 2005-06 & 07-08,respectively.

4.2 Disallowance of provision for warranty:

With regard to disallowance made on the provision for warranty in assessment year 2005-06, the DR submitted that the CIT(A) ought have appreciated that as per Apex Court’s decision relied on, the provision towards warranty arrived at on a scientific basis is only allowable and not any lump sum provision (uncertain liability), the provision made by the assesse is not scientifically arrived figure and it should have satisfied the important aspects observed by the Hon’ble Supreme Court viz,

(i) Provisioning which relates to present obligation (ii) It arises out of obligating events (iii) It involves outflow of resources and lastly (iv) It involves reliable estimation of obligation.

The AR submitted that the Jurisdictional High Court in its own case in TCA No. 30 of 2010 dated 03.06.2013 set aside the order of the Tribunal and allowed the assessee’s appeal. We have considered the rival submissions and gone through the orders. The assessee had made provision for warranty at Rs. 7,50,41,484/- in the books of account and the AO refused to allow it for the reason that this provision for warranty was credited without any scientific reasons. Thus, the contention of the assessee is that the provision is an ascertained liability, whereas, the revenue observed it as contingent liability.

It is clear from the assessment order that the assessee could not explain the methodology and calculation of the provisions on the basis of the satisfactory aspects of Apex Court in the case of Rotork Controls India Ltd. (Supra). In the circumstances, we are of the opinion that the matter has to be re- examined as to whether the methodology adopted for creating provision is in the light of the observations made by the Supreme Court. Therefore, we set aside the order of the CIT(A) and remit this issue to the file of the AO for re- examination after affording adequate opportunity for being heard to the assessee. Thus, the Revenue’s cross appeal is treated as allowed for statistical purposes.

4.3 On the disallowances of provision of sub-contract expenses and provision of labour charges u/s. 40(a)(ia):

We have considered the rival contentions. The assessee submitted that these amounts are provision for the sub-contract works and the labour works completed, respectively. But, the assessee is yet to receive the invoices from the said sub-contractors/sub-labours/their contractors as on 31.03.2007. In view of that the assessee made provisions for these expenses and debited in the P&L Account. In the subsequent year i.e., after 01.04.2007 ,when the actual invoices were received, the provision was reversed and the amounts were directly credited to the respective sub-contractors account/respective persons account and necessary TDS was also deducted and remitted to the Government account. It is clear that the assessee had made provision for sub- contract and provision of labour/their contractors in the books of accounts.

As per section 40(a)(ia) r.w.s. 194C, it is clear that the TDS has to be made at the time of credit of such sum to the account of the contractor or at the time of payments thereof in cash or by issue of cheque or draft or by any other mode, whichever is earlier. It is clear that when the assesse has made the provisions i.e., when it has credited such sum to the account of the sub- contractors/labour/their contractors, it should have deducted TDS but failed to do so. In view of that, the findings recorded by the CIT(A) do not require any interfere on these grounds. Further, we find merit in the decision of the CIT (A) in allowing the alternate claim by directing the AO to examine as to whether the impugned amounts were subsequently directly credited to the respective sub-contractors account/respective persons account, necessary TDS was deducted and remitted to the Government in the subsequent year and if so to allow necessary deduction in the financial year(s), wherein the assessee has actually has deducted and remitted the TDS into Government account subject to verification and the assessee furnishing of necessary evidence.

4.4 With respect to the disallowance made u/s. u/s. 40(a)(ia):

With respect to the disallowances made u/s. 40(a)(ia)on the commission paid to Mehrtash Trading Enterprises (LLC) and the royalty paid to FFE Minerals Corporate, USA, without deducting the TDS, we find that, though the assessee has raised substantive appeal grounds viz No 4 & 5 before the CIT(A), the CIT(A) has not adjudicated them. In view of that these issues are remitted back to the CIT(A). The CIT(A) after affording due opportunity to the assessee, shall pass a speaking order on these issues.

Order pronounced on Thursday, the 03rd day of August, 2017 at Chennai.