M/S CHADHA AUTO AGENCIES,HUBLI vs. ITO, HUBLI

In respect of the assessment year 2008-09, the AO made an addition of Rs.4,82,318/- by applying the provisions of sec. 40(a)(ia) of the IT Act on the ground that the assessee incurred certain expenditure towards advertisement which attracts the provisions of & 712/Bang/2015 M/s.Chadha Auto Agencies Page 2 of 11 sec.194C of the Act. It is not in dispute that the assessee is a dealer in Hero Honda Motorcycle and spare parts. The assessee debited a sum of Rs.5,44,705/- under the head ‘advertisement’ which includes an amount of Rs.4,82,318/- paid to M/s.Hero Honda Motors Ltd.. The case of the assessee was that M/s.Hero Honda Motors Ltd., advertises their products and the total expenditure apportioned to several dealers. The assessee-company intimated to assessee-firm, by way of debit note that a sum of Rs.4,82,318/- was payable to M/s.Hero Honda Motors Ltd. Before the AO, it was contended that as per the provisions of sec.194C of the Act, payment made to any contractor for work done, which includes advertisement, is subject to deduction of tax at source whereas there was no payment to any contractor since the work was not carried out by the assessee or on behalf of the assessee; the company advertises their products and apportions to several dealers as per certain ratio and thus it is only payment made to the company and cannot be treated as payment made to any contractor.

The AO rejected the contentions of the assessee. According to the AO, the expression “work” includes advertisement and the assessee has debited the expenditure under the head ‘advertisement’ and hence the assessee is liable to deduct tax at source u/s 194C of the Act. The plea of the assessee was that it was payment made to the principal from time to time and M/s.Hero Honda Motors is not an advertising agency and hence it cannot said to have been payment made to any advertising agency, was rejected by the AO. & 712/Bang/2015 M/s.Chadha Auto Agencies Page 3 of 11 4. Aggrieved, assessee contended before the CIT(A) that the AO was not justified in invoking the provisions of sec. 40(a)(ia) of the Act since it was only payment made to a principal and cannot be treated as advertisement expenditure incurred by the assessee in the form of payment to any contractor. The ld.CIT(A) rejected the contentions of the assessee. In this regard, he observed that the amount debited and recovered by M/s.Hero Honda Motors has been classified by the assessee as advertisement expenditure. When the assessee itself classifies expenditure as ‘advertisement’ it was duty bound to make TDS on the said amount as per sec.194C of the Act. It may be noticed here that the assessee-firm placed before the ld.CIT(A) a copy of the certificate issued by M/s.Hero Honda Motors to submit that the assessee has not advertised; it was only responsible to the company to pay their share for promotion of their products. The ld.CIT(A) was of the opinion that even the certificate issued by M/s.Hero Honda Motors will not be of any help in view of the fact that it was classified as advertisement expenditure. He, therefore, concluded that the AO was justified in disallowing the same u/s 40(a)(ia). Further aggrieved, assessee is in appeal before the Tribunal.

During the course of assessment proceedings, the AO also noticed that an amount of Rs.3,99,562/- was debited under the head ‘building maintenance’ which includes addition to building. The relevant bills and vouchers were called for and upon perusal of the same, AO was of the opinion that the expenditure is to meet the & 712/Bang/2015 M/s.Chadha Auto Agencies Page 4 of 11 labour expenses incurred during the year in respect of the work carried out in the building and the assessee having capitalised the cost of materials purchased and labour charges, it cannot now be treated as revenue expenditure. He, accordingly, disallowed the claim of deduction of the said expenditure.

On an appeal filed by the assessee, ld.CIT(A) observed that the assessee having debited profit & loss account under the head ‘building maintenance’ and having regard to the observations of the AO, the expenditure has to be treated as capital in nature. He, however, directed the AO to allow depreciation as per law and compute the total income accordingly. Further aggrieved, assessee is in second appeal before this Tribunal.

Ground Nos.1, 5 and 7 are general in nature. Ground NO.6 is with regard to the levy of interest which is consequential in nature and therefore need not be considered separately.

Vide ground Nos.2 and 3, assessee contends that the CIT(A) erred in confirming the addition of Rs.4,82,318/- u/s 40(a)(ia). The learned counsel appearing on behalf of the assessee submitted that there was no direct payment to any advertising agency and it was only reimbursement to M/s.Hero Honda Motors which is the principal company engaged in manufacture of motor cycles and it is not undertaking advertisement contracts and as such provisions of sec.194C would not get attracted in the instant case. The learned counsel for the assessee also adverted attention of the bench to & 712/Bang/2015 M/s.Chadha Auto Agencies Page 5 of 11 pages 23 and 24 of the paper book, which is the letter dated 31/10/2011 addressed to the AO, to submit that as per the provisions of sec.194C, deductions should be made at the point of actual payments to the contractor and in this case tax was deducted by the company and therefore it is not necessary for the assessee to deduct tax as it is only reimbursing the expenditure incurred by the company. In this regard, reliance was placed upon an unreported decision of the Hon’ble Delhi High Court in the case of DLF Commercial Project Corporation wherein the court observed that when the payee therein has already deducted tax on various payments made by it to third parties and the payments made by the assessee being only reimbursement of expenses incurred by the payee, no tax is deductible by the assessee. (Income Tax Appeal No.627/2012 and 507/2013 dated 15/07/2015). It was, therefore, strongly submitted that tax authorities erred in treating reimbursement made by the assessee to the principal as a payment towards work contract. On the other hand, learned Departmental Representative relied upon the orders passed by the tax authorities and submitted that in this case, the assessee-firm treated it as advertisement expenditure and hence whosoever may be the ultimate payee, the assessee ought to have deducted tax at source while reimbursing the amount to M/s.Hero Honda Motors since it was reimbursement of advertisement expenditure which, in turn, is attracted by the provisions of sec.194C of the Act. & 712/Bang/2015 M/s.Chadha Auto Agencies Page 6 of 11 9. I have carefully considered the rival submissions and perused the record. The claim of the assessee is that M/s.Hero Honda Motors having engaged a contractor for advertisement of motorcycle and on payments made to such contractor, tax was deducted at source under the provisions of sec.194C of the Act. This contention of the assessee was not disputed by the learned Departmental Representative. It is also not in dispute that the assessee made reimbursement of its share to the principal company and it had not directly entered into advertisement contract with any the advertising agency. Under these circumstances, in the light of the decision of the Hon’ble Delhi High Court (supra) and also on the plain reading of the provisions of sec.194C of the Act, I am of the opinion that the provisions of sec.194C are not applicable in the instant case and consequently, the AO was not justified in making addition by applying the provisions of sec. 40(a)(ia) of the Act. In the result, the addition made by the AO is hereby deleted.

Vide ground No.4, assessee contends that the expenditure incurred towards building maintenance ought to have been treated as revenue in nature. Though the learned counsel for the assessee submitted that majority of the expenditure was revenue in nature, for the maintenance of the building, some portion of the expenditure was capital in nature, which was already capitalized no proof of bifurcation of such expenditure was not placed before the bench. Both the AO as well as the CIT(A) observed that the expenditure was in the nature of capital since it was towards purchase of material and & 712/Bang/2015 M/s.Chadha Auto Agencies Page 7 of 11 labour charges for construction of the building. In the absence of any material placed before the bench to contradict the findings of the CIT(A), I am of the opinion that the order passed by the CIT(A) does not call for any interference. Since the expenditure was treated as capital in nature, assessee is entitled to depreciation on such expenditure as per law.

As regards assessment year 2009-10, ground Nos.1, 7 and 9 are general in nature and do not require specific consideration. Ground No.8 is only consequential in nature.

Vide ground Nos.2 and 3, assessee contends that the amount reimbursed to M/s.Hero Honda Motors towards advertisement expenditure should not have been added by the AO by invoking the provisions of sec.194C read with sec. 40(a)(ia) of the Act. During the course of hearing, it was noticed that out of total expenditure of Rs.2,74,854/- only a sum of Rs.2,31,817/- was reimbursed to M/s.Hero Honda Motors and the balance amount was directly spent by the assessee towards advertisement, as reflected in the page 22 of the paper book. The learned counsel for the assessee submitted that as per provisions of sec.194C(5), if payment made to a contractor is less than Rs.30,000/- there is no need to deduct tax at source on such payment and thus even in respect of the balance payments there is no liability to deduct tax. It may be noticed that the total expenditure, other than reimbursement to M/s.Hero Honda & 712/Bang/2015 M/s.Chadha Auto Agencies Page 8 of 11 Motors, is Rs.43,037/- and the assessee has not furnished any details as to whether this payment was made to one party or to several parties. Since even at the second appellate stage, assessee has not furnished any details an adverse view needs to be taken in the matter by holding that the impugned expenditure of Rs.43,037/- is in excess of the limit specified u/s 194C(5) of the Act and therefore the assessee is liable to deduct tax at source and for non-deduction of tax, the amount equivalent thereto deserves to be added by applying the provisions of sec. 40(a)(ia) of the Act. However, as regards the reimbursement of expenditure of Rs.2,31,817/-, for the reasons given in this order in para 9 above, I hold that the provisions of sec.194C are not applicable and consequential addition made by the AO u/s 40(a)(ia) has no legs to stand. I, therefore, delete the addition of Rs.2,31,817/- out of the total addition of Rs.2,74,854/-.

Ground Nos.4 and 5 are referable to addition of Rs.46,518/- made by the AO. In this regard, the AO observed as under:

Aggrieved, assessee contended before the CIT(A) that the amount was duly credited to the bank interest and commission account and offered to tax and therefore the same should not have been added separately. The ld.CIT(A) observed that the AO had given sufficient opportunity to prove that the amount offered to tax and the amount referred to by the AO are one and the same. In fact, the AO, in the proposal dated 19/9/2011, specified that the assessee received Rs.33,185/- u/s 194A of the Act, Rs.13,333/- u/s 194C of the Act which was not accounted in the books of account whereas the assessee was referred to the commission of Rs.45,348/- received from the bank and credited to the profit and loss account which is different from the amounts referable to 194A and 194C of the Act. Since no explanation was filed even before the CIT(A), the CIT(A) affirmed the action of the AO. Even before the Tribunal, assessee could not furnish proper explanation to highlight that it has not received any commission and whatever was offered to tax was only the amount received from HDFC referable to taxes u/s 194A and 194C of the Act. In fact, the total sum referred by the AO works out to Rs.46,518/- whereas the assessee offered to tax commission amount of Rs.45,348/-. Even at this stage, no satisfactory & 712/Bang/2015 M/s.Chadha Auto Agencies Page 10 of 11 explanation was forthcoming. Under these circumstances, I have no other alternative except to uphold the order of the CIT(A) and accordingly ground Nos.4 and 5 are rejected.

Vide ground No.6, assessee contends that the CIT(A) erred in confirming an addition of Rs.26,515/- referable to excess credits in partners account i.e. Shri Sukhadev Singh, without appreciating the statement of the assessee. During the course of assessment proceedings, the AO noticed that as per TDS certificate issued by Hero Corporate in the name of the partner Shri Sukhdev. The total receipts workout to Rs.1,45,465/- whereas a sum of Rs.1,71,980/- was credited to the capital account of the partner thereby there was an excess credit to the tune of Rs.26,515/-. The assessee could not offer any explanation with regard to the differential figure and therefore the same was added as income of the assessee-firm. Before the CIT(A) it was contended that proper explanation was offered but the AO has not considered the explanation in correct perspective. However, at the time of hearing, no written submissions were furnished to explain the differential amount and, therefore, the CIT(A) affirmed the action of the AO. Further aggrieved, assessee is in appeal before the Tribunal.

The learned counsel for the assessee submitted that vide letter dated 7/10/2011 assessee explained the credits in the account of the partner Shri Sukhdev. Though the bench directed the assessee’s counsel to furnish copy of the same, it was not furnished. & 712/Bang/2015 M/s.Chadha Auto Agencies Page 11 of 11 At any rate, since amount was credited in the name of Shri Sukhdev and the assessee could not furnish convincing explanation with regard to the same, I am of the view that the addition as made by the AO and confirmed by the CIT(A) is in accordance with law. Under the circumstances, ground No.6 is rejected.

In the result, the appeals filed by the assessee-firm are partly allowed.