BOSCJ LIMITED,BANGALORE vs. DCIT, BANGALORE

PER SHRI INTURI RAMA RAO, AM :

This appeal by the assessee is directed against the order of the CIT(A),LTU,

Bangalore dated 31-07-2014 for the assessment year : 2008-09.

“1. That the order of the ld.CIT(A), LTU, Bangalore (CIT- A) for short) is bad in law to the extent challenged thereon. 2. On the facts and circumstances of the case, whether the AO justify in making the addition of Rs.95,48,855/-

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3.That the ld.CITA) erred in holding that the assessee had liability to deduct tax at source from the amounts credited to provision account, even in respect of those items which were subsequently written back, either partially or fully and further erred in coming to the following conclusion inpara-5 on page-06 of impugned order which is extracted below; Where the provisioned amount as higher than the invoiced amount, the balance has clearly not suffered tax. Since it has been held (Supra) that the liability for tx deduction existed o n the company at the time of making the provision the default for non-deduction of tax at source is to be limited only to the surplus over and above the invoice amount”. 4. That theld.CIT(A) ought to have accepted assessee’s plea that, the word ‘credit’ n section 195, 194C, 194J etc. refers to constructive credit and when assessee disallows voluntarily certain items gets effaced ab initio and consequently the assessee would not have had any obligation to deduct tax at source on those items u/s 95, 194C, 194J etc. 5. Without prejudice, that the ld. CIT(A) ought to appreciate the general legal principles that the assessee cannot be subjected to double disadvantage for a single failure and when assessee disallows voluntarily u/s 40(a)(i) or 40(a)(ia) and pays tax on the same, again he cannot be made liable to

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pay tax aga9in u/s 201(1) by treating him as assessee in default. 6. For these and other grounds that may be urged at the time of hearing, the assessee prays for appropriate relief”.

incorporated under the provision of the Companies Act. It is engaged in the

business of manufacture and sale of Injection equipments, auto electric items,

portable electric power tools etc. The Income-Tax Officer (TDS) herein after

referred to as TDS Officer had noticed from the state of total income filed for the

assessment year 2012-13 that the assessee company made suo-mottu

disallowances u/s 40(a)(i) and 40(a)(ia) of the IT Act, 1961 in respect of which no

TDS was made. The TDS Officer vide letter dated 30-07-2013 had called upon the

assessee company to furnish the details of payment made and the TDS deducted

and remitted to the Central Government account. In response to this, the

assessee company vide its letter 24-01-2014 submitted the details to the TDS

Officer. From the details furnished, the TDS Officer noticed that in respect of

expenses an amount of Rs.1,96,84,115/- a provision was created and the same

was disallowed under the provisions of Sec.40(a)(i)(ia) of the IT Act, 1961 in

computation of total income filed for the assessment year 2012-13. It was

submitted that out of Rs.1,96,84,115/- and for an amount of Rs.1,79,36,713/-no

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invoices were received. Therefore, the said amount was reversed in the beginning

of the next accounting year. It was the contention of the assessee company that

no TDS is required to be made. The contention of the aassesee company was not

accepted by the TDS Officer by holding that the system of accounting followed by

the assessee company is faulty and does not enable any verification and held

since the assesee company is following mercantile system of accounting, the TDS

should have been deducted on the provisions made and accordingly, the TDS

Officer held that the assessee is ‘assessee in default’ u/s 201(1) of the IT Act and

remanded TDS of Rs.17,93,677/- apart from interest of Rs.4,24,965/-.

LTU, Bangalore who vide impugned order confirmed action of the of the AO by

holding that the suo-mottu disallowance under the provisions of sec.40(a)(ia) of

the Act, does not absolve the assessee company of the responsibility of deducting

tax at source. However, learned CITA) directed the TDS Officer to exclude those

amounts in respect of which TDS has been made on the dates on which invoices

have been raised.

counsel for the assessee company submitted and explained during the course of

hearing that the procedure adopted in the books of accounts, accounting the

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expenditure which are outstanding as on 31st March of every financial year. It

was submitted that the assessee company incurred certain expenditure towards

service support charges, professional charges etc. where invoices have been

raised by service provider or vendor and are acknowledged by the assessee

company, were accounted in the books of accounts or the payments are made

after duly complaining the provisions of TDS under Chapter XVII-B of the IT Act,

1961.

raised any invoices nor acknowledgement by the assessee company made a

provision for such expenses on a scientific basis and such provision was debited to

its P&L account, on conformity with the provisions of accounting standard 29-

pertaining to provisions, contingent liabilities and contingent assets issued by the

Institute of Chartered Accountant of India (CAI) and such provision was reversed

in the beginning of the next accounting year. It was further submitted that it is

mandatory to provide such provisions in terms of accounting standard-29 issued

by the CAI. The learned counsel for the assessee company made the following

submissions;

a) That no income had accrued to the payees and a mere provision was

made in the books of accounts at the year end. The very fact that the provision

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was reversed in the beginning of the next accounting year goes to show that no

income had accrued to the payee and therefore, there is no liability to deduct TDS

on the basis of mere provision.

b) The payees as well as the exact amount payable to them are not

identifiable and therefore, no liability to deduct tax at source.

c) The existence/accrual of income in the hands of payee is a pre-condition

to fasten the liability of tax deduction at source in the hands of the payer and the

last limb of his arguments is that the provisions of sec.195 stipulates that the

payer has to deduct tax at source at the earlier point of time either at the time of

crediting to the payee account or at the time of payment of income to the payee.

The phrase “whichever is earlier” would mean that both the events i.e crediting

the amount to the account of payee and payment to the assessee must

necessarily occur. Therefore, when there was no payment made the question of

deducting TDS at the time of crediting does not arise. Learned counsel for the

assessee also placed reliance on the CBDT’s Instruction No.1215(F.No.385/61/78-

IT(B) dated 08-11-1978.

Sec.195, the liability to deduct tax at source had arisen the moment the amount

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is credited in the books of accounts, irrespective of fact whether the amount is

paid or not. He further submitted that the provision of taxing statutes should be

construed strictly that there is no place for any inference and therefore, he

supported the orders of lower authorities.

end of the year and the same were reversed in the beginning of the next

accounting year. The short point that arises for our consideration is whether the

liability for deduction of tax at source has arisen the moment the amount is

credited in the books of accounts. Having regard in the scheme of tax deducted

at source, under Chapter-XVII-B of the IT Act, we are of the considered opinion

that the liability to deduct tax at source arises only when there is accrual of

income in the hands of the payee. We are holding so, keeping in view the ratio

laid down by the Hon’ble Apex Court in the case of M/s GE India Technology

Centre P. Ltd. Vs. CIT and another 327 ITR 456 (SC) wherein the Hon’ble

Supreme Court held that if payment is not assessable to tax there is no question

of tax at source being deducted. The relevant portion of the judgment is

reproduced as under :-

“If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to

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be accepted then we are obliterating the words “chargeable under the provisions of the Act” in section 195(1). The said expression in section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not so assessable, there is no question of TAS being deducted. One more aspect needs to be highlighted. Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of provisions of Chapter XVII one finds use of different expressions, however, the expression “sum chargeable under the provisions of the Act” is used only in section 195. For example, section 194C casts an obligation to deduct TAS in respect of “ any sum paid to any resident”. Similarly, sections 194EE and 194F, inter alia, provide for deduction of tax in respect of “ any amount” referred to in the specified provisions. In none of the provisions we find the expression “ sum chargeable under the provisions of the Act”, which as stated above, is an expression used only in section 195(1). Therefore this court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Section 195(2) is not merely a provision to provide information to

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the Income tax Officer (TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a non-resident. Therefore, section 195 has to be read in conformity with the charging provisions, i.e section 4,5 and 9. This reasoning flows from the words “ sum chargeable under the provisions of the Act” in section 195 (1). The fact that the Revenue has not obtained any information per se cannot be a ground to construe section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression “ sum chargeable under the provisions of the Act” from section 195(1). While interpreting a section one has to give weightage to every word used in that section. While interpreting the provisions of the Income Tax Act one cannot read the charging sections of that Act de hors the machinery sections. The Act is to be read as an integrated code. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of CIT vs. Eli Lilly and Co.

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(India) (P) Ltd. (2009) 312 ITR 225 the provisions for deduction of TAS which are in Chapter XVII dealing with collection of taxes and the charging provisions of the Income Tax Act form one single integral, inseparable code and, therefore, the provisions relating to TDS apply only to those sums which are “ chargeable to tax” under the Income-Tax Act. It is true that the judgment in Eli Lilly (2009) 312 ITR 225 was confined to section 192 of the Income Tax Act. However, there is some similarity between the two. If one looks at section 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income “chargeable under the head salaries”. Similarly section 195 imposes a statutory obligation on any person responsible for paying to a non- resident any sum “ chargeable under the provisions of the Act”. Which expression, as stated above, do not find place in other sections of Chapter XVII. It is in this sense that we hold that the Income Tax Act constitutes one single integral inseparable code. Hence, the provisions relating to TDS applies only to those sums which are chargeable to tax under the Income tax Act. If the contention of the Department that any person making payment to a non- resident is necessarily required to deduct TAS then the consequence would be that the Department would be entitled to appropriate the moneys deposited by the payer even if the sum paid is not chargeable to tax because

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there is no provision in the Income-tax Act by which a payer can obtain refund. Section 237 read with section 199 implies that only the recipient of the sum i.e. the payee could seek a refund. It must therefore follow, if the Department is right, that the law requires tax to be deducted on all payments, the payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words “ chargeable under the provisions of the Act” to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, section 195(2) provides a remedy by which a person may seek a determination of the “appropriate proportion of such sum so chargeable” where a proportion of the sum so chargeable is liable to tax. The entire basis of the Department’s contention is based on administrative convenience in support of its interpretation. According to the Department, huge seepage of revenue can take place if persons making payments to non- residents are free to deduct TAS or not to deduct TAS. It is the case of the Department that section 195(2) , as

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interpreted by the High Court would plug the loophole as the said interpretation requires the payer to make a declaration before the Income tax Officer (TDS) of payments made to non-residents. In other words, according to the Department, section 195(2) is a provision by which the payer is required to inform the Department of the remittances he makes to non-residents by which the Department is able to keep track of the remittances being made to non-residents outside India. We find no merit in these contentions. As stated hereinabove, section 195(1) uses the expression “ sum chargeable under the provisions of the Act”. We need to give weightage to those words. Further, section 195 uses the word “payer” and not the word “assessee”. The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfill the statutory obligation under section 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default. The above-mentioned contention of the Department is based on an apprehension which is ill founded. The payer is also an assessee under the ordinary provisions of the Income Tax Act. When the payer remits an amount to a non-resident out of India he claims deduction or allowances under the Income Tax Act for the said sum as an ‘ expenditure’ . Under Section 40(a)(i), inserted, vide Finance Act, 1988, with effect from April 1,

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1989, payment in respect of royalty, fees for technical services or other sums chargeable under the Income Tax Act would not get the benefit of deduction if the assessee fails to deduct TAS in respect of payments outside India which are chargeable under the Income-tax Act. This provision ensures effective compliance with section 195 of the Income tax Act relating to tax deduction at source in respect of payments outside India in respect of royalties, fees or other sums chargeable under the Income Tax Act. In a given case where the payer is an assessee he will definitely claim deduction under the Income-tax Act for such remittance and on inquiry if the Assessing Officer finds that the sums remitted outside India come within the definition of royalty or fees for technical service or other sums chargeable under the Income-tax Act then it would be open to the Assessing Officer to disallow such claim for deduction. Similarly, vide the Finance Act, 2008, with effect from April 1, 2008, sub-section (6) has been inserted in section 195 which requires the payer to furnish information relating to payment of any sum in such form and manner as may be prescribed by the Board. This provision is brought into force only from April 1, 2008. It will only apply for the period with which we are concerned in these cases before us. Therefore, in our view, there are adequate safeguards in the Act which would prevent revenue leakage. Applicability of the judgment in the case

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of Transmission Corporation (supra) In Transmission Corporation’s case (1999) 239 ITR 587(SC) a nonresident had entered into a composite contract with the resident party making the payments. The said composite contract not only comprised supply of plant, machinery and equipment in India, but also comprised the installation and commissioning of the same in India. It was admitted that the erection and commissioning of plant and machinery in India gave rise to income taxable in India. It was, therefore, clear even to the payer that payments required to be made by him to the non-resident included an element of income which was exigible to tax in India. The only issue raised in that case was whether TDS was applicable only to pure income payments and not to composite payments which had an element of income embedded or incorporated in them. The controversy before us in this batch of cases is, therefore, quite different. In Transmission Corporation case (1999) 239 ITR 587 (SC) it was held that TAS was liable to be deducted by the payer on the gross amount if such payment included in it an amount which was exigible to tax in India. It was held that if the payer wanted to deduct TAS not on the gross amount but on the lesser amount on the footing that only a portion of the payment made represented ‘ income chargeable to tax in India’ then it was necessary for him to make an application under section 195(2) of the Act to the

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Income Tax Officer (TDS) and obtain his permission for deducting TAS at lesser amount. Thus, it was held by this court that if the payer had a doubt as to the amount to be deducted as TAS he could approach the Income-tax Officer (TDS) to compute the amount which was liable to be deducted at source. In our view , section 195(2) is based on the “principle of proportionality””. The said sub section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of ‘income’ chargeable to tax in India. It is in this context that the Supreme Court stated, ‘if no such application is filed, income tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ’sum’ to deduct tax thereon before making payment. He has to discharge the obligation to TDS”. If one reads the observation of the Supreme Court, the words ‘ such sum’ clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this court in Transmission Corporation case (1999) 239 ITR 587 (SC) which are put in italics have been completely, with respect misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all ’ chargeable to

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tax in India’., then no TAS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of section 195(1) which in clear terms lay down that tax at source is deductable only from “ sums chargeable” under the provisions of the Income Tax Act, i.e. chargeable under sections 4,5 and 9 of the Income Tax Act.”

the fact that the provisions were made at the year end is reversed in the

beginning of the next accounting year goes to show that there was no income

accrued. Mere entries in the books of accounts does not establish the accrual of

income in the hands of the payee as held by the Hon’ble Supreme Court in the

case of CIT Vs M/s Shoorji Vallabhdas & Co. 46 ITR 144 wherein it was held as

follows;

“ That the subsequent agreement had altered the rate of commission in such a way as to make the income which really accrued to the assessee different from what had been entered in the books of account. This was nota case of a gift by the assessee to the managed companies of a portion of income which had already accrued, but an agreement to receive a lessor remuneration than what had been agreed upon. The assessee had in fact received only the lesser

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amount in spite of the entries in the account books, and this lesser amount alone was taxable. Income-tax is a levy on income. Though the Income-tax Act, takes into accounts two points of time at which the liability to tax is attracted, viz. the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a ‘hypothetical income;, which does not materialize. Where income has, in fact, been received and is subsequently, given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account”.

Thus, having regard to the ratio laid down by the Hon’ble Apex Court, it

cannot be said that income had accrued in the hands of the payee. We, therefore,

hold that there was no liability in the hands of the assessee company to deduct

TDS, merely on the provisions made at the year end. Hence, the assessee

company cannot be treated as ‘assessee in default’ for not deducting tax at source

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and therefore, we allow the grounds of appeal filed by the assessee company in this

regard.

allowed.

Order pronounced in the open Court on the 1st March, 2016.

Sd/- Sd/- (ASHA VIJAYARAGHAVAN) (INTURI RAMARAO) JUDICIAL MEMER ACCOUNTANT MEMBER Bangalore: D a t e d : 01-03-2016 am Copy to : 1 Appellant 2 Respondent 3. CIT(A), Bangalore 4. CIT, Bangalore 5. DR, ITAT, Bangalore 6. Guard File

By order AR, ITAT, B’lore.