PR COMMISSIONER OF INCOME TAX-6 vs. M/S SUBEX TECHNOLOGIES LTD

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 21ST DAY OF DECEMBER 2020 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD I.T.A. NO.180 OF 2017 BETWEEN: 1. PR. COMMISSIONER OF INCOME TAX-6

BMTC COMPLEX, KORMANGALA

BANGALORE. 2. THE JOINT COMMISSIONER OF INCOME TAX

(OSD), CIRCLE-12(3), BENGALURU. ... APPELLANTS (BY SRI. E.I. SANMATHI, ADV.,) AND: M/S. SUBEX TECHNOLOGIES LTD NO.999, 9TH MAIN, HSR LAYOUT SECTOR-7, BENGALURU-560102 PAN:AAICS9433Q. ... RESPONDENT (BY SRI. CHYTHANYA K.K. ADV.) - - - THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 29.07.2016 PASSED IN IT(IT)A NO.715/BANG/2014 FOR THE ASSESSMENT YEAR 2008- 09, PRAYING TO: (I) DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT.

2 (II) SET ASIDE THE APPELLATE ORDERS DATED 29.07.2016 THE ITAT, 'C' BENCH, BENGALURU, IN IT(IT)A NO.715/B/2014 FOR ASSESSMENT YEAR 2008-09 AND TO GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE. THIS ITA COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment year 2008-09. The appeal was initially admitted by a bench of this Court vide order dated 03.01.2018 on the following substantial question of law: "Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in setting aside the disallowance made under section 40(a)(ia) of the Act by holding that assessee made only journal entries in the books and as such it does not require deduction of TDS even when the assessing authority has rightly held that the assessee required to deduct TDS towards payments made sub-

3 contractor as per section 195 of the Act and non deduction of TDS attracts section 40(a)(ia) of the Act?". 2. Thereafter, after hearing the parties, by an order passed today, the substantial question of law was re framed as under: Whether on the facts and in the circumstances of the case, the tribunal is right in law in holding that expense of Rs.624,983,348/- to Subex Technologies Inc (STI) is merely a journal entry and as invoking of Section 40(a)(ia) read with Section 195 of the Act does not arise ignoring the contents of the agreement entered into by the assessee with STI coupled with other documentary evidence brought on record by the Assessing Authority and when assessee had failed to substantiate its claim that the said amount is paid towards reimbursement of expenses and when Commissioner of Income Tax (Appeals) rightly confirmed the said disallowance after appreciation of aforesaid materials?

4 3. Facts leading to filing of this appeal briefly stated are that assessee is engaged in the development, sales and service of software products. Under a scheme of arrangement approved by this court, the service business of the assessee's parent company i.e., Subex Technologies Inc (STI) was transferred to the assessee for a consideration of Rs.31,00,00,000/-. Out of the aggregate consideration of Rs.31,00,00,000/-, an amount of Rs.28,00,00,000/- Crores was treated as interest fee unsecured loan payable on demand by the transferor company in the books of accounts of the assessee for balance amount of Rs.30,00,00,000/- fully paid up equity shares of Rs.10/- each were issued to the transferor. The assessee filed the return for the Assessment Year 2008-09 on 06.09.2008 in which total income of Rs.1,70,10,894/- was declared. The case was selected for scrutiny and notices under Section 143(2) dated 21.08.2009 and Section 142(1) dated 04.06.2010 and 12.08.2010 were issued and served on the

5 assessee. 4. The Assessing Officer on perusal of the statement of accounts, noticed that assessee has debited a sum of Rs.62,49,85,438/- as sub contract charges under the head of 'personnel cost' as per profit and loss account. Thereupon the show cause notice was issued as to why the aforesaid payment should not be disallowed under Section 40(a)(i) of the Act. The Assessing Officer by an order dated 29.12.2011 held that the assessee has not established by substantial evidence that no services were made available by Subex Technologies Inc (STI) and mere reliance on the case law on the existence of an agreement on the parties does not validate the assessee's claim. The Assessing Officer therefore, by invoking Section 40(a)(i) of the Act made an addition of Rs.62,49,85,348/-. The aforesaid order was upheld by the Commissioner of Income Tax (Appeals) vide order dated 25.02.2014. Thereupon the assessee filed an appeal before the Income Tax

6 Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The tribunal by an order dated 29.07.2016 inter alia held that income and expenses recorded in the books of Subex Technologies Inc (STI) between the period from 01.09.2007 to 31.03.2008 were recorded in the books of the assessee by way of journal entry and therefore, there was no need for deduction of tax at source under Section 195 of the Act and it was held that the authorities erred in disallowing the amount in question under Section 40(a)(ia) of the Act. Accordingly, the appeal preferred by the assessee was allowed. In the aforesaid factual background, the revenue has filed this appeal. 5. Learned counsel for the revenue submitted that the Assessing Authority as well as the Commissioner of Income Tax (Appeals) have categorically held that the assessee has failed to establish the claim with substantial evidence that no services were made available by Subex Technologies Inc

7 (STI) to it and has merely produced invoices detailing out the transactions to show that they were raised in connection with providing of services claimed by the assessee and the said amount is paid towards reimbursement of expenses. It is also urged that the tribunal ought to have appreciated that the assessee had failed to discharge the burden. It is also argued that the tribunal ought to have determined the question whether the claim of the assessee has been established or not but, the tribunal without analyzing the findings recorded by the Assessing Authority as well as the Commissioner of Income Tax (Appeals) has held that the entry in question is a journal entry and allowed the appeal. It is submitted that the finding recorded by the tribunal is perverse and it has failed to consider the issue whether sub contract charges are liable for deduction at source by examining contents of agreement and provisions stipulated in Section 40(a)(i), Explanation (i) to (vi) read with Section 195 and Section 9 of the

8 Act. It is further submitted that the tribunal has failed to record any findings with regard to nature of services. Therefore, the matter deserves to be remitted to the tribunal as it is a final fact finding authority. 6. On the other hand, learned counsel for the assessee submitted that on 01.04.2009 Subex Limited entered into an agreement with Subex Technologies Inc (STI) and the aforesaid agreement was produced before the Assessing Authority as well as Commissioner of Income Tax (Appeals). It is further submitted that condition precedent for invoking Section 40(a)(ia) of the Act was not satisfied as the assessee was neither the person responsible for making payment nor had made payment. It is further submitted that the seller was responsible for making payment. In this connections, our attention was invited to Section 204 of the Act. It is also urged that paragraphs 8, 10 and 13 of the order passed by the tribunal deserves to be read together and the instant case does not call for remand as the matter

9 has become barred by limitation. In support of aforesaid submission, reliance has been placed on decision of High court of Rajasthan in 'CIT VS. DAULAT ENTERPRISES', (2018) 94 TAXMANN.COM 261 (Rajasthan), which was affirmed by Supreme Court. It is also argued that the person who has paid money is responsible to deduct tax and pay the same to the government and no tax at source has to be deducted in the absence of any oral / written agreement. 7. We have considered the submissions made by learned counsel for the parties and have perused the record. The Assessing Authority inter alia held that even though opportunities were given to the assessee to substantiate its claim, however, the assessee has only relied on several decisions without establishing its claim by producing the documents called for, which would support its claim. The Assessing Authority for the reasons recorded in para 3.3 to para 6 has rejected the claim of the assessee under Section 40(a)(i) of the Act.

10 The aforesaid finding has been affirmed by the Commissioner of Income Tax (Appeals) for the reasons assigned in para 6.2 to para 7. However, the tribunal has not adverted either to the findings recorded by the Assessing Officer or the Commissioner of Income Tax (Appeals). It is well settled in law that even a quasi judicial authority is required to assign reasons in support of its order. 8. It has been held by the Supreme court in ‘VICTORIA MEMORIAL HALL vs. HOWRAH GANATANTRIK NAGRIK’, 2010 (3) SCC 732, reasons were held to be the heartbeat of every conclusion, apart from being an essential feature of the principles of natural justice, that ensure transparency and fairness, in the decision making process. [SEE: ‘MAYA DEVI VS. RAJ KUMARI BATRA AND OTHERS’, (2010) 9 SCC 486, ‘SANT LAL GUPTA AND OTHERS VS. MODERN CO- OPERATIVE GROUP HOUSING SOCIETY LIMITED AND OTHERS’, (2010) 13 SCC 336, ‘UNION OF INDIA AND

11 ANOTHER VS. TALWINDER SINGH’, (2012) 5 SCC 480, and ‘UNION OF INDIA VS. RAVINDER KUMAR’, (2015) 12 SCC 291.] 9. In the backdrop of aforesaid well settled principles, we may advert to the order of the tribunal and the relevant extract viz., para 13 of the order is reproduced below for the facility of reference: 13. We have heard the rival submissions and perused the material on record. We find that the income and expenses recorded in the books of Subex Ltd., in intervening period between 01.09.2007 and 31.03.2008 were recorded in the assessee's books by way of journal entry. We have perused the relevant ledger account extracts of the expenses of Rs.624,983,348 to STI is merely a journal entry and hence the need for tax deduction at source under Section 195 of the Act does not arise and the lower authorities have erred in disallowing the impugned amount under Section 40(a)(ia) of the Act.

12 10. Thus, from perusal of the aforesaid paragraph, it is evident that the tribunal has merely recorded its conclusion and has not assigned any reasons in support of the conclusion. Thus, for the aforementioned reasons, the impugned order dated passed by the tribunal is hereby quashed. The substantial question of law is answered accordingly. The tribunal is directed to decide the claim of the assessee under Section 40(a)(ia) of the Act afresh on the basis of the material available on record and on the basis of the reasoning assigned by the Assessing Officer as well as Commissioner of Income Tax (Appeals) and shall also advert to the issue whether the condition precedent for invocation of Section 40(a)(ia) of the Act have been fulfilled in the fact situation of the case. In the result, the appeal is disposed of. Sd/- JUDGE Sd/- JUDGE ss