AMBER DISTILLERIES LTD,MUMBAI vs. ITO 1(1)(1), MUMBAI

This is an appeal filed by the assessee and is directed against the order of the Ld. CIT(A)-1, Mumbai dated 26.3.2012 pertaining to A.Y.2008-09.

Only issue raised in the grounds of appeal is against the upholding the addition of Rs.43,37,889/- by the ld.CIT(A) made by the AO under section 40(a)(ia) of the Income tax Act, 1961 on account of disallowance u/s 37(1) of the Act in respect of share of profit transferred by the assessee to M/s National Industrial Corporation Ltd, hereinafter referred to as NICOL manufacture and sale of Indian made foreign liquor.

Facts of the case are that the assessee filed its e-return of income on 30.9.2008. The return was processed u/s 143(1) of the Act. Thereafter, scrutiny proceedings were initiated against the assessee and statutory notices under section 143(2) and 142(1) were issued and served upon the assessee. During the course of assessment proceedings, the AO noticed that the assessee had paid a sum of Rs.43,37,889/- to M/s National Industrial Corporation Ltd (NICOL) as share of profit to the said joint venture firm under joint venture agreement entered into by the assessee with M/s National Industrial Corporation Ltd wherein it has been provided that the assessee will manufacture the goods as per their specifications, entire purchases and sales would be under their instructions. It is also submitted before the AO that separate bank account in respect of joint venture business was maintained by the assessee and separate profit and loss account and balance sheet was drawn and if any profit is leftover after the profit to be retained by the assessee company as per the joint venture agreement, the excess profit was to be paid back NICOL. Thus, the agreement entered into by the parties is on Principal to Principal basis and not a partnership. The assessee showed the profit belonging to NICOL as payment under the joint venture of the profit under the head “Marketing expenses”. The confirmation from NIKOL was also produced before the AO to the effect that said profit were paid. The assessee submitted that the said payment was not liable to deduction of taxes at source and was rightly claimed by the assessee. The AO did not agree with the submissions and disallowed the claim of the assessee and made disallowance u/s 40(a)(ia) of the Act by making assessment vide order dated 29.12.2010 passed under section 143(3) of the Act by assessing the income at Rs.60,16,530/- by making various disallowances including the payment in question which is before the Bench. Aggrieved by the order of AO, the assessee preferred an appeal before the ld.CIT(A) who also dismissed the appeal of the assessee by holding and observing as under : “3.6 I have carefully considered the facts of the case, submission of the appellant and assessment order. The tax auditor after examining books of accounts and supporting details had categorized the payment of Rs.23,02,440/- to holding company as royalty payment. The appellant could not substantiate before AO and in appeal its plea that the expenses were in the nature of actual reimbursement. Even otherwise in the case of Association Cement Co. Ltd. VS. CIT 67 Taxrnan 346 (SC). Hon'ble Supreme Court has held that TDS is to be deducted even on in reimbursement of expenses. Thus the disallowance of Rs.23,02,440/-is confirmed.”

We have carefully considered the submissions of the parties, perused the material placed before us including the orders of authorities below. The ld. AR brought to our notice that NICOL was a joint venture partner and share of profit of joint venture was paid under joint venture agreement which was not liable for TDS. The ld. AR submitted that in view of second proviso to section 40(a)(ia) of the Act the condition is fulfilled by the NICOL disallowance u/s 40(a)(ia) was required be deleted. The ld. DR, on the other hand, objected to the argument of the ld.AR and strongly relied upon the orders of authorities below. From the facts discussed above and findings of the AO on the taxability in the hands of M/s NICOL, we are of the considered view that condition as laid down by the second proviso to section 40(a)(ia) of the Act were duly satisfied and accordingly, we set aside the order of ld.CIT(A) and direct he AO to delete the disallowance.

In the result, the appeal of the assessee is allowed for statistical purposes.