ACIT, NEW DELHI vs. SHRI DINESH KUMAR MATHUR, NEW DELHI

The grounds of appeal are as under:-

The assessee is a proprietor of M/s Alankar Creations engaged in the business of manufacture and export of garments and accessories. The assessee filed his return of income on 30/9/2008 disclosing a total income of Rs.49,2,099/- during the scrutiny assessment proceedings the Assessing Officer noted that the assessee claimed the payment of Rs.3,19,66,460/-to its sister concern M/s Akriti Creations Pvt. Ltd. by way of reimbursement of expenses but had failed to deduct tax on this payment. The Assessing Officer was of the opinion that there was a liability to deduct tax u/s 194C of the Income Tax Act, 1961 on the contractual payment of reimbursement of manufacturing expenses. The Assessing Officer, therefore, proposed to disallow the payment of Rs.3,19,66,460/- u/s 40(a) (ia) of the Income Tax Act, 1961. The assessee contended before the Assessing Officer that M/s Akriti Creations Pvt. Ltd. raised separate monthly bills for the reimbursement of expenses and for the management charges at 5% of the actual expenses incurred. The assessee submitted before the Assessing Officer that there was no element of profit or income in the reimbursement of expenses and hence no liability for deduction of tax arose. The assessee also relied upon the judgment of ITAT Delhi in the case of Dr. Wilmar Schwabe India Pvt. Ltd. (3 SOT 71), wherein the Tribunal held that reimbursement of expenses was not covered under section 194J of the Income Tax Act, 1961 as in that case separate bills were raised for actual expenses and for technical/professional fees. However, the Assessing Officer distinguished the ratio of the judgment, holding that it pertained to a case of reimbursement of fees for professional/technical services under section 194J of the Income Tax Act, 1961, as against the assessee’s case which was covered under section 194C of the Income Tax Act, 1961. The Assessing Officer further noted from the balance-sheet of M/s Akriti Creations Pvt. Ltd. that there was no segregation of expenses incurred on behalf of the M/s Alankar creations and no separation of receipt from M/s Alankar Creations into reimbursement and management charges. The Assessing Officer observed that the basis of bills raised for reimbursement of expenses was not clear and relied upon the judgment of the Hon’ble Apex Court in the case of Associated Cement Co. Vs. CIT [1993] 201 ITR 0435, wherein the Hon’ble Apex Court held that the person responsible for deduction of tax has to deduct from the entire sum paid or credited and not merely from the income component of the same. The Assessing Officer also relied on CBDT Circular No. 715 dated 8/8/1995 the total amount paid on account of reimbursement of expenses of Rs.3,19,66,460/- was disallowed u/s 40(a) (ia) of the Income Tax Act, 1961.

Aggrieved, by the said order the assessee filed appeal before the CIT(A). The CIT(A) held that the amount of 2% required to be deducted by the buyer out of the some credited to the account or paid to the contractor has to be confined to his income component out of that sum. The same was held by the Hon’ble Apex Court in the case of Associated Cement Company, the CIT(A) held that the Assessing Officer relied on CBDT Circular No. 715, wherein it was clarified that the deduction of tax at source u/s 194C and 194J of the Income Tax Act, 1961 has to be made out all the cross amount of the bill including reimbursement for actual expenses. The assessee on the other hand relied on a number of judgments including Hon’ble Apex Court and Jurisdictional High Court. The Hon’ble Delhi High Court in the judgment reported at 323 ITR 130 held that no liability for deduction of tax at source arose u/s 195 of the Income Tax Act, 1961 in the case of mobilization and de-mobilization cost reimbursement to a no resident not being taxable in India. Hence, disallowance u/s 40(a) (ia) of the Income Tax Act, 1961 did not arises. The CIT(A) has taken into account all the relevant audited accounts and reimbursement of manufacturing expenses of the assessee company as well as of the sister concern. Thus, the CIT (A) allowed the appeal of the assessee and deleted the addition made by the Assessing Officer.

The DR further relied upon the Assessing Officer’s order and stated that the CIT(A) failed to appreciate the evidence taken on record by the Assessing Officer and prayed that the CIT(A)’s order should be set aside.

The AR relied upon the Ld. CIT(A)’s order and stated that the Ld. CIT(A) has taken into consideration all the contentions and the factual aspects of the assessee’s case. The AR also relied upon the various cases laws.

We have perused all the records and proceedings as well as heard both the parties. The Assessing Officer did not dispute the genuineness of the reimbursement of expenses to M/s. Akriti Creations Pvt. Ltd. There are no adverse comments or findings of the Assessing Officer in this regard and did not dispute the fact that the reimbursement of expenses were for the purposes of the business of the assessee which are allowable under Chapter IV-D of the Income Tax Act, 1961. In the case of M/s. Akriti Creations Pvt. Ltd. the concerned Assessing Officer did not dispute their claim that there was no profit element in the reimbursement of expenses received from the present assessee. Thus the Assessing Officer in both the cases accepted that these are genuine reimbursement of expenses and there was no profit element and hence no income liable to tax was contained therein. The Hon’ble Delhi High Court in case of Van Oord ACZ India (P) Ltd. vs. Commissioner of Income Tax [2010] 323 ITR 130 (Delhi) held that liability to deduct at source arises only when the sum is paid to the non-resident was chargeable to tax. Once that was chargeable to tax, it was not for the assessee to find out how much amount of the receipts was chargeable to tax, but it was the obligation of the assessee to deduct the tax at source on the entire sum paid by the assessee to the recipient. Under Section 195, the obligation to deduct tax at source was attracted only when the payment was chargeable to tax in India. Thus as pointed out by the CIT(A) in the order the Hon’ble Delhi High Court held that no liability for deduction of tax at source arose under Section 195 in the case of mobilization and demobilization costs reimbursed to a non-resident, not being taxable in India, hence disallowance under Section 40(a)(ia) did not arise. Recently, in case of CIT vs. Ansal Land Mark Township (P) Ltd. [2015] 61 taxmann.com 45 (Delhi) Decided on 03.09.2015 by the Hon’ble Delhi High Court, it was held that what is common to both proviso to Section 40(a)(ia) and Section 210(1) of the Act is that as long as the payee/resident has filed its return of income disclosing the payment received by and in which the income earned by it is embedded and has also paid tax on such income, the assessee would not be treated as a person in default. As far as the present case is concerned, it is not disputed by the Revenue that the payee has filed returns and offered the sum received to tax. In view of this the order of the CIT(A) is upheld.

In the result, the appeal of the Revenue is dismissed.