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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI DUVVURU RL REDDY, HON‟BLE & SHRI S BALAKRISHNAN, HON‟BLE
Per contra, the Ld. DR relied on the order of the Ld. AO and argued in support of the same.
We have heard both the sides and perused the material available on record and the case laws relied on by the Ld. AR and the Ld. DR. The Hon‟ble Delhi High Court in the case of 14 Commissioner of Income Tax vs. Ansal Land Mark Township (P) Ltd (supra) has held in para 13 as follows:
“13. Turning to the decision of the Agra Bench of ITAT in Rajiv Kumar Agarwal v. ACIT (supra) , the Court finds that it has undertaken a thorough analysis of the second proviso to Section 40 (a)(ia) of the Act and also sought to explain the rationale behind its insertion. In particular, the Court would like to refer to para 9 of the said order which reads as under:
"On a conceptual note, primary justification for such a disallowance is that such a denial of deduction is to compensate for the loss of revenue by corresponding income not being taken into account in computation of taxable income in the hands of the recipients of the payments. Such a policy motivated deduction restrictions should, therefore, not come into play when an assessee is able to establish that there is no actual loss of revenue. This disallowance does deincentivize not deducting tax at source, when such tax deductions are due, but, so far as the legal framework is concerned, this provision is not for the purpose of penalizing for the tax deduction at source lapses. There are separate penal provisions to that effect. Deincentivizing a lapse and punishing a lapse are two different things and have distinctly different, and sometimes mutually exclusive, connotations. When we appreciate the object of scheme of section 40(a)(ia), as on the statute, and to examine whether or not, on a "fair, just and equitable" interpretation of law- as is the guidance from Hon'ble Delhi High Court on interpretation of this legal provision, in our humble understanding, it could not be an "intended consequence" to disallow the expenditure, due to non deduction of tax at source, even in a situation in which corresponding income is brought to tax in the hands of the recipient. The scheme of Section 40(a)(ia), as we see it, is aimed at ensuring that an expenditure should not be allowed as deduction in the hands of an assessee in a situation in which income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. It is not, in our considered view, a penalty for tax withholding lapse but it is a sort of compensatory deduction restriction for an income going untaxed due to tax withholding lapse. The penalty for tax withholding lapse per se is separately provided for in Section 271 C, and, section 40(a)(ia) does not add to the same. The provisions of Section 40(a)(ia), as they existed prior to insertion of second proviso thereto, went much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the 15 assessee's tax withholding lapses did not result in any loss to the exchequer. Now that the legislature has been compassionate enough to cure these shortcomings of provision, and thus obviate the unintended hardships, such an amendment in law, in view of the well settled legal position to the effect that a curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically, the insertion of second proviso must be given retrospective effect from the point of time when the related legal provision was introduced. In view of these discussions, as also for the detailed reasons set out earlier, we cannot subscribe to the view that it could have been an "intended consequence" to punish the assessees for non deduction of tax at source by declining the deduction in respect of related payments, even when the corresponding income is duly brought to tax. That will be going much beyond the obvious intention of the section. Accordingly, we hold that the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No.2) Act, 2004."
In the instant case, the assessee has filed Form-26A prescribed under Rule 31ACB of the IT Rules, 1962. The argument of the Ld. AR deserves consideration in the light of the ratio laid down in the case of Commissioner of Income Tax vs. Ansal Land Mark Township (P) Ltd (supra). Further, it is also not established by the Revenue that when the assessee failed to deduct the whole or any part of the tax in accordance with the provisions of Chapter-XVII-B is not deemed to be an assessee in default under the first proviso to section 201 of the Act. We are therefore inclined to judicially follow the ratio laid down in the case of Commissioner of Income Tax vs. Ansal Land Mark
16 Township (P) Ltd (supra) and thereby the addition made U/s. 40(a)(ia) on this count also deserves to be deleted.
With respect to Ground No.3 on the deletion of addition of Rs. 14,41,000/- by the Ld. CIT(A) being the interest relating to capital work-in-progress, the Ld. DR submitted that no cash flow statement was submitted by the assessee to substantiate that interest free funds were used for the purpose of capital work-in- progress. He therefore pleaded that the order of the Ld. AO be upheld.
Per contra, the Ld. AR submitted that cash flow statements were presented to the Ld. AO along with the financial statements. The Ld. AR also referred to cash flow statement available on page 11 of the paper book. The Ld. AR invited our attention to the net cash generated by operating activities which stood at Rs. 38,58,79,722/- for the impugned assessment year. Further, the Ld. AR also referred to Issued, subscribed and paid-up capital which is detailed in Schedule-2.1 available in page No. 16 of the paper book which stood at Rs. 87,19,12,640/-. On this ground, the Ld. AR heavily relied on the decision of the Hon‟ble High Court of Bombay in the case of CIT vs. HDFC Bank Limited in 17 Income Tax Appeal No. 330 of 2012 dated 23/07/2014. The Ld. AR also placed reliance on the following case laws:
CIT vs. Reliance Utilities & Power Ltd (2009) 313 ITR 340 (Bom.) 2. CIT vs. HDFC Bank Limited (2016) 383 ITR 529 (Bom.) 3. S.P. Jaiswal Estates (P.) Ltd vs. CIT (2012) 140 ITD 19 (Mumbai ITAT)
Further, the Ld. AR also submitted that the capital work-in- progress in page No. 9 of the paper book stood at Rs. 2,36,04,888/- whereas own funds included the cash generated from operations stood at Rs. 83,76,74,466/- and Rs. 38,58,79,722/- respectively. Therefore he pleaded that own funds should be assumed to be used for the capital work-in-progress and no interest disallowance is warranted.
We have heard both the sides and perused the material available on record and the orders of the Ld. Revenue Authorities. Admittedly, the assessee has incurred Rs. 2.36 Crs as on 31/3/2012 as capital work-in-progress during the impugned assessment year. It is also not in dispute that the assessee has availed borrowed funds for its operations. Further, it is also not disputed about the availability of own funds (Rs. 83,76,74,466/-) and cash generation from the operations of the 18 assessee during the impugned assessment year (Rs. 38,58,79,722/-) totaling to Rs.1,22,35,54,188/- whereas the capital work-in-progress incurred by the assessee is Rs. 2,36,04,888/-. The Hon‟ble High Court of Bombay in the case of CIT vs. HDFC Bank Limited (supra) by relying on the decision in the case of CIT vs. Reliance Utilities and Power Ltd reported in (2009) 313 ITR 340 (Bom.) held as under:
“4.……….From the order of the ITAT, the Revenue approached this Court by way of an Appeal. After examining the entire factual matrix of the matter and the law on the subject, this Court held as under :- "If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT (1997) 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (1982) 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.'s case (1982) 134 ITR 219 the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle, therefore, would be that if there were funds available both interest-free and over draft
19 and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company if the interest-free funds were sufficient to meet the investment. In this case this presumption is established considering the finding of fact both by the Commissioner of Income- tax (Appeals) and the Income-tax Appellate Tribunal."(emphasis supplied) 5. We find that the facts of the present case are squarely covered by the judgment in the case of Reliance Utilities and Power Ltd. (supra). The finding of fact given by the ITAT in the present case is that the Assessee's own funds and other non-interest bearing funds were more than the investment in the tax-free securities. This factual position is not one that is disputed. In the present case, undisputedly the Assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, as per the judgment of this Court in the case of Reliance Utilities and Power Ltd.(supra), it would have to be presumed that the investment made by the Assessee would be out of the interest-free funds available with the Assessee. We therefore, are unable to agree with the submission of Mr Suresh Kumar that the Tribunal had erred in dismissing the Appeal of the Revenue on this ground. We do not find that question (A) gives rise to any substantial question of law and is therefore rejected.”
Judicially following the ratio laid down in the case of CIT vs. HDFC Bank Limited (surpa), we are of the opinion that it can be safely assumed that the assessee has incurred capital work-in- progress out of its own interest free funds and hence no interest disallowance U/s. 37 of the Act is required. We therefore direct the Ld. AO to delete addition. Accordingly, this ground raised by the Revenue is dismissed.
20 19. In the result, appeal of the Revenue is dismissed.
Pronounced in the open Court on 12th April, 2024.
Sd/- Sd/- (दुव्िूरु आर.एलरेड्डी) (एस बालाकृष्णन) (DUVVURU RL REDDY) (S.BALAKRISHNAN) न्याधयक सदस्य/JUDICIAL MEMBER लेखा सदस्य/ACCOUNTANT MEMBER Dated : 12.04.2024 OKK - SPS Copy of the order forwarded to:- धनधााररती/ The Assessee–M/s. Vizag Seaport Pvt Ltd., Administrative 1. Block, S4 Gallery, Port Area, Visakhapatnam – 530035, Andhra Pradesh. राजस्ि/The Revenue –Asst. Commissioner of Income Tax, Circle-5(1), 2. 2nd Floor, Direct Taxes Building, MVP Colony, Visakhapatnam, Andhra Pradesh.
The Principal Commissioner of Income Tax, आयकरआयुक्त (अपील)/ The Commissioner of Income Tax 4. धिभागीयप्रधतधनधध, आयकरअपीलीयअधधकरण, धिशाखापटणम/ DR,ITAT, 5. Visakhapatnam गाडाफ़ाईल / Guard file 6. आदेशानुसार / BY ORDER
Sr. Private Secretary ITAT, Visakhapatnam