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Income Tax Appellate Tribunal, “B” BENCH KOLKATA
Before: SHRI RAJPAL YADAV & SHRI GIRISH AGRAWAL
O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the assessee is against the revision order of Ld. Pr. CIT, Kolkata-2, vide order No. ITBA/REV/F/REV5/2022- 23/1051646401(1) dated 30.03.2023 passed against the assessment order by Assessing Officer, e-Assessment Centre, Delhi u/s. 143(3) read with sections 143(3A) and 143(3B) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 02.03.2021 for AY 2018-19.
Assessee has raised six grounds, all of which relate to assumption of jurisdiction by the Ld. Pr. CIT for invoking revisionary
Gloster Ltd. AY 2018-19 proceeding u/s. 263 of the Act and passing the impugned order thereon. Grounds are not reproduced for the sake of brevity.
Brief facts of the case are that assessee filed its return of income on 26.10.2018 reporting total income as nil under the normal provisions of the Act after setting off of brought forward capital loss of Rs.51,18,308/- and unabsorbed depreciation of Rs.37,39,15,037/- and a book profit of Rs.75,65,73,185/- u/s. 115JB of the Act. Assessee is a manufacturer and exporter of all types of jute and allied products for interior decoration, packaging of industrial and agricultural produce. Case of the assessee was selected for complete scrutiny which was completed by passing an order u/s. 143(3) read with section 143(3A) and 143(3B) of the Act dated 02.02.2021. In the said assessment, the income assessed under the normal provisions of the Act remained at nil. The book profit u/s. 115JB of the Act was assessed at Rs.76,54,55,742/-. Subsequently, on examination of the assessment records, Ld. Pr. CIT found that it is a prima facie case of assessment being erroneous in so far as prejudicial to the interest of revenue for the following two reasons: (i) Assessee had paid commission of Rs.3,50,00,000/- to its Executive Chairman & Managing Director on which tax at source u/s. 194J was not deducted and, therefore, this amount was sought to be disallowed u/s. 40(a)(ia) of the Act, which Ld. AO failed to do so and has thus resulted in incorrect allowance of the expenditure. (ii) Assessee had claimed set off of short term capital loss of Rs.45,50,456/- pertaining to AY 2015-16 and long term capital loss of Rs.5,77,842/- pertaining to AY 2017-18 which according to the Ld. Pr. CIT had been allowed to be set off against the business income which is not in accordance with the provisions of section 74 of the Act Gloster Ltd. AY 2018-19 rendering the assessment order to be erroneous in so far as it is prejudicial to the interest of revenue. 3.1. Pursuant to these two reasons, a notice u/s. 263 of the Act dated 12.12.2022 was issued on the assessee. Assessee furnished its reply objecting to the initiation of revisionary proceeding. After considering the submissions of the assessee, Ld. Pr. CIT observed that AO had not made any enquiry or verification on the two issues thus, owing to lack of enquiry for verification as contained in Explanation 2(a) to sec. 263, the assessment order is erroneous in so far as prejudicial to the interest of revenue. He thus, set aside the said assessment order and directed the AO to consider the submission of the assessee and verify the same from its books of account to reframe the assessment afresh after providing the assessee opportunity of being heard. 3.2. Aggrieved, assessee is in appeal before the Tribunal.
Before us, Ld. Counsel for the assessee has placed on record a paper book containing 173 pages to corroborate the contentions made before the authorities below. Ld. Counsel for the assessee submitted that Mr. Hemant Bangur was the Executive Chairman of the assessee and Mr. D. C. Baheti was the Managing Director who are both whole time directors i.e. employees of the assessee company during the year under consideration. Both had been appointed for a fixed term and were entitled to monthly salary, perquisite, provident fund, gratuity and performance based commission. These are verified facts contained in directors’ report and report on corporate governance forming part of the annual report placed on record in the paper book. On the issue relating to non-deduction of tax at source on the commission which has been accounted as payable to both the whole time directors, amounting to Rs. 2 Cr. to Mr. Hemant Bangur and Gloster Ltd. AY 2018-19 Rs.1.5 Cr. to Mr. D. C. Baheti, it was submitted that these have been shown as outstanding and payable as on 31.03.2018 for which proper disclosure is made in Note No. 35(d) of the audited financial statement. The said commission is paid in subsequent years subject to TDS based on percentage of net profit as specified in section 197 of the Companies Act, 2013. Ld. Counsel contended that commission payable to whole time directors who are employees is chargeable under the head salary on which tax is deductible at source u/s. 192 on payment basis alone. In the year under consideration, the commission to the two whole time directors has been accounted as payable and accordingly reported in the annual report. In this respect, he referred to the disclosure made in report of corporate governance at page 60 of the paper book which is extracted below:
Whole Time directors Name of Salary (Rs.) Benefits Commission Service Notice Severance the (Rs.) (Rs.) Contract period Fees Director Sri 1,02,06,000 32,40,000 2,00,00,000 3 years 3 months Nil Hemant w.e.f. Bangur, 01.04.2018 Executive Chairman Sri 1,04,48,000 86,31,000 1,50,00,000 5 years 3 months Nil Dharmam w.e.f. Chand 01.04.2018 Baheti, Managing Director Payable in 2018-19 for 2017-18.
4.1. On the above, Ld. Counsel submitted that section 17(1) defines salary to include bonus, commission etc. Relevant provisions of section 17(1) are reproduced below : “17(1) “salary” includes— (i) wages; (ii) any annuity or pension; (iii) any gratuity; (iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages; (v) any advance of salary; 9 [(va) any payment received by an employee in respect of any period of leave not availed of by him;] (vi) the annual accretion to the balance at the credit of an Gloster Ltd. AY 2018-19 employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under rule 6 of Part A of the Fourth Schedule; (vii) the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of rule 11 of Part A of the Fourth Schedule of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under sub-rule (4) thereof; and [(viii) the contribution made by the [Central Government or any other employer] in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD; (ix) the contribution made by the Central government in the previous year, to the Agniveer Corpus Fund account of an individual enrolled in the Agnipath Scheme referred to in section 80CCH.” (emphasis supplied by us by underline) 4.2. Ld. Counsel also referred to relevant extract of section 192(1) which specifically mentions that the tax is to be deducted on the income chargeable under the head salaries on the basis of rules in force for the financial year in which the payment is made. Section 192(1) is extracted as under: “192. Salary.—(1) Any person responsible for paying any income chargeable under the head “Salaries” shall, at the time of payment, deduct income-tax1 *** on the amount payable at the average rate of income-tax2 *** computed on the basis of the 3 [rates in force] for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.” 4.3. In contrast to provision contained in section 192, Ld. Counsel referred to the provisions of section 194J(ba) which provides for deduction of tax at source for commission payable to directors who are not employees of the company which is to be done at the time of payment or credit whichever is earlier. The relevant extracts of section 194J are as under: “1 [194J. Fees for professional or technical services.—(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of— (a) fees for professional services, or (b) fees for technical services, 2 [or] 3 [(ba) any remuneration or fees or commission by whatever name called, other than those on which tax is deductible under section 192, to a director of a company, or] 2 [(c) royalty, or (d) any sum referred to in clause (va) of section 28,] shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to 4 [ten per cent.] of such sum as income-tax on income comprised therein:” (emphasis supplied by us by underline)
4.4. Thus, based on the above statutory provisions and facts of the case, Ld. Counsel submitted that TDS on the commission payable to a whole time director is applicable as per section 192 which is on payment basis and not u/s. 194J as alleged by the Ld. AO. The commission accounted for in the books for AY 2018-19 was paid in the subsequent year i.e. in AY 2019-20 whereupon TDS was done. To demonstrate this, copies of TDS certificate in Form 16 for both the whole time directors which included the impugned amount of commission was placed on record whereby TDS was done u/s.
192. Assessee had also placed on record the break up of salary for both the persons to demonstrate inclusion of amount of commission paid in the subsequent year. 4.5. Ld. Counsel also referred to section 40(a)(ia) of the Act to assert that the disallowance under this provision is to be made of the sum payable on which tax is deductible at source in Chapter XVIIB. According to him, in the present case, keeping the provisions u/s. 192 for juxtaposition, no tax was deductible on the commission which has been accounted as payable in the year under consideration and, therefore, there was no disallowance which was warranted as alleged by the Ld. Pr CIT. The relevant extract of section 40(a)(ia) of the Act is as under: “(ia) 7 [thirty per cent of any sum payable to a resident], on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, 8 [has not been paid on or before the due date specified in sub-section (1) of section 139:]” (emphasis supplied by us by underline) 4.6. On the second issue relating to set off of short term capital loss and long term capital loss from the business income, Ld counsel submitted that the assessment on this issue has been correctly done and total income rightfully Gloster Ltd. AY 2018-19 calculated though the presentation of the same has led to an adverse inference by the Ld. Pr. CIT. He submitted that in the assessment order, Ld. AO after making certain addition/disallowance while computing the business income has computed gross total income and shown set off of aggregate unabsorbed depreciation and brought forward short term capital loss and long term capital loss against gross total income without providing the bifurcation in the body of the assessment order as to the income against which set off has been granted. It is thus, acknowledged that AO has not provided the bifurcation of set off of brought forward capital loss and unabsorbed depreciation against the business income and capital gains separately but has shown on a total basis. He demonstrated evidently from the computation of income filed by the assessee and the computation of income done by the AO that assessee has correctly claimed the set off of brought forward capital loss which is in accordance with section 74 of the Act.
Per contra, Ld. CIT, DR submitted that section 40(a)(ia) of the Act deals with disallowance on sums payable on which tax is deductible and the assessee has failed to do so. Further, he submitted that Ld. Pr. CIT has observed that there is no clarity as to whether commission is included in the salary computation of the subsequent year on which tax has been deducted. He further placed reliance on the order of Ld. Pr. CIT and submitted that no prejudice is caused to the assessee since Ld. Pr. CIT has directed the AO to examine the issue afresh and pass the assessment order accordingly.
Gloster Ltd. AY 2018-19 6. We have heard the rival contentions and perused the material available on record. It is a fact on record that assessee has accounted for the commission to the two whole time directors in accordance with the provisions contained in section 197 of the Companies Act, 2013 as payable for which appropriate disclosures have been made in its audited financial statement and annual report placed on record. We extract below the details of remuneration of directors and key managerial personnel as contained in director’s report placed in the paper book.
6.1. Also, assessee has evidently demonstrated that commission has been paid in the subsequent year which formed part of income from salaries in the hands of the two whole time directors on which tax has been deducted at source u/s.
With these facts, the provisions contained in section 17(1) read with 192 covers the case of the assessee whereby commission forms part of the salary in the hands of the employee and is subjected to tax at source on payment basis in the year in which it is paid. The disallowance u/s. 40(a)(ia) is triggered where TDS is not done on any sum payable on which tax is deductible at source under chapters XVIIB. In the present factual matrix, we
Gloster Ltd. AY 2018-19 note that by applying the provisions of section 192 tax was not deductible during the year under consideration on the commission which has been accounted as payable since it relates to the two whole time directors who are the employees of the assessee company and commission in these two cases falls under the head salaries in accordance with section 17(1) of the Act. On the above stated observations and findings, we hold that there is nothing erroneous and no prejudice caused to the interest of the revenue on this issue and, therefore, assumption of jurisdiction for revisionary proceeding u/s. 263 is not justified in accordance with the provisions of the Act.
6.2. On the second issue relating to set off of brought forward short term and long term capital loss from the business income not in accordance with section 74, we have perused the computation of income furnished by the assessee and the computation sheet made by the AO. We find that it is only an issue relating to arithmetic presentation in arriving at the computation of total assessed income. The submissions made by the Ld. Counsel in this respect hold good whereby the AO has computed it on a total basis without giving bifurcation of set off of brought forward capital loss and unabsorbed depreciation which led the Ld. Pr. CIT to form a belief that on this issue the order is erroneous and prejudicial to the interest of revenue. We agree with the submissions made by the Ld. Counsel which evidently demonstrates that the set off of brought forward capital loss has been done in accordance with the provisions of section 74 since in the computation made by the assessee the bifurcation has been done and set off claimed from each head of income separately whereas in the computation made by the AO, the set off has been done on a total basis, both giving the same result i.e. total assessed income under the normal provisions of the Act at nil. Thus, on this issue also the Gloster Ltd. AY 2018-19 assumption of jurisdiction for revisionary proceeding u/s. 263 is not justified. Accordingly, on the two issues raised by the Ld. Pr. CIT in the impugned revisionary proceeding, no action u/s. 263 of the Act is justifiable which in our considered view cannot be sustained in the present facts and circumstances of the case. We, therefore, quash the impugned order u/s. 263 of the Act and allow the grounds raised by the assessee.
In the result, appeal of the assessee is allowed.