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Income Tax Appellate Tribunal, AHMEDABAD “D” BENCH, AHMEDABAD
Per Pramod Kumar AM:
This appeal by the assessee is directed against the order of the Commissioner of Income-tax (Appeals)-III, Baroda dated 29.05.2014 passed for Assessment Year 2010-11.
In ground nos. 1 to 4, the assessee appellant has raised the following grievances:-
Ld. CIT (A) erred in law and on facts in confirming disallowance made by AO of Rs. 82,72,500/- consultancy charges paid to the holding company towards usage of facilities like, office premises, manpower, infrastructure, marketing, liaison work and expenses incurred on behalf of the appellant. Ld. CIT(A) ought to have deleted such disallowance by AO holding it as dividend payment in garb of reimbursement of expenses. It be so held now.
Ld. CIT (A) erred in law and on facts in confirming disallowance made by AO of Rs. 85,41,931/- towards helicopter rental charges incurred by the
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holding company on behalf of appellant as per terms of Board Resolution. Ld. CIT (A) ought to have deleted such disallowance of expenses incurred for the purpose of business. It be so held now. 3. Ld. CIT (A) erred in law and on facts in upholding disallowance made by AO of consultancy charges and helicopter rental charges invoking section 40A(2)(b) of the Act without bringing any evidence of such payment being excessive or unreasonable on record. Ld. CIT (A) ought to have deleted disallowance of expenses not proved to be unreasonable. It be so held now. 4. Both the lower authorities erred in law and on facts in not appreciating the submissions that no disallowance invoking provisions of section 40A(2)(b) of the Act is deserved to be made when both the parties are exigible to lax on maximum marginal, rate without any loss of revenue. It be so held now.
Learned representatives fairly agree that the above grievances are covered, in favour of the assessee, by the decision dated 7th December, 2016 of the Co- ordinate Bench in assessee’s own case for the assessment years 2008-09 and 2009-10 wherein the Tribunal has, inter alia, observed as follows:-
“17. We find that Hon’ble jurisdictional High Court in the case of PWS Engineers Limited vs. DCIT (Tax Appeal No.209 of 2015) has, inter alia, observed as follows :-
“6. We have heard learned counsel for the parties. The question of applicability of Section40A(2) of the Act to the restricted disallowance of Rs.47,90,178/-- is already concluded by this Court by the said order dated 31.3.2015. We may therefore, proceed on that basis. Despite this, the question that still survives is whether the Revenue can tax the same income in the hands of the company on which the Directors had already paid the tax at the same rate at which the company would have been liable to be assessed. In this context, we may recall that consistently before Assessing Officer, CIT(Appeals) and Tribunal, the assessee had canvassed that all the four Directors who had received such remuneration, were taxed in the highest bracket of 30%; at the same rate at which the assessee company at the relevant time was assessed. In fact, the assessee had demonstrated before CIT(Appeals) that the tax liability of the company on such disputed remuneration amount was exactly the same as the tax the four Directors had paid to the Revenue. To these factual aspects, even the Revenue has, at no stage raised any dispute. We may therefore, proceed on the basis that the element of excessive remuneration represents that income of the company which was eventually taxed in the hands of the Directors at the same rate at which; had it not been so distributed; would have been taxed in the hands of the company. In that view of the matter, the question of revenue neutrality would immediately arise. A certain income has already been taxed in the hands of the Directors.
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Permitting the Revenue to tax the same income again at the same rate in the hands of the principal payer would amount to double taxation. Only on this count, we answer question in favour of the appellant assessee and against Revenue, allow the Appeal and set aside the order of the Tribunal. The Tax Appeal is disposed of accordingly.”
In the present case, there is no dispute that the amount has already been brought to tax, in the hands of the recipient, the same rate of tax as applicable on this assessee. Learned Departmental Representative has not even disputed this fundamental factual aspect. In this view of the matter, and in the light of the law laid down by Hon’ble jurisdictional High Court, we direct the Assessing officer to delete the impugned disallowance of Rs.1,25,00,050/-.
...... ......
We have noted that so far as the 40A(2)(b) disallowance is concerned, the issue is covered by Hon’ble jurisdictional High Court’s judgement in the case of PWS Engineers Limited (supra) which has been discussed in detail in paragraph nos.17 and 18 of this order. There is no reason to take any other view of the matter than the view so taken in assessee’s own case for the assessment year 2008-09 as the payment is also made to the same entity, though there is a change in the name of the company in this year. As regards the genuineness of the expenditure, we find that there is an arrangement on record that helicopter charges are to be borne equally between the assessee and Tatva Global Environmental Limited, and that related payments are actually made to Indo Pacific Aviation Limited. The debit note and payment details are placed before us. The expenditure, therefore, cannot be said to be bogus or fictitious. The only issue is apportionment of expenses between the assessee and Tatva Global Environmental Limited but then that issue, in the light of Hon’ble jurisdictional High Court’s judgement in the case of PWS Engineers (supra) and on the given facts is academic. As for the marketing and promotional expenses, we have noted that all along similar payments have been allowed as deduction in part and no disallowance under section 37(1) is resorted to. In any case, there was no specific requisition about details which has not been complied with and the observations made by the authorities below proceed on vague generalities. It has also been stated that since the assessee has made profits, such payments may be camouflage to make payments of defacto dividend without payment of dividend distribution tax. Such a speculation is also devoid of any basis, and, as held by a co- ordinate bench in the case of Arihantam Infraprojects Pvt. Ltd. vs. JCIT [(2016) 156 ITD 425 (Pune)], this kind of a speculation or doubt cannot be reason enough to disallow the expenditure involving payment to holding company. In view of these discussions, we delete this disallowance as well.”
Respectfully following the views so expressed by the co-ordinate bench, we uphold the grievances of the assessee and delete the disallowances of
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Rs.1,68,14,431/- in respect of consultancy charges and of Rs.85,41,931/- in respect of helicopter charges.
Ground nos. 1 to 4 are thus allowed.
Ground no. 5 is general in nature and does not call for any adjudication.
In ground no.6, the assessee has raised the following grievances:-
Ld. CIT(A) erred in law and on facts in confirming disallowance by AO of Rs.5,15,830/- claimed as prior period expenses. Ld. CIT(A) ought to have allowed expenses though of prior period but quantified only during the year under consideration. It be so held now.
Learned counsel for the assessee fairly accepts that this issue is covered, against the assessee, by Tribunal’s order in assessee’s own case for the assessment year 2008-09. We, therefore, reject this ground of appeal.
Ground no.6 is thus dismissed.
In ground no.7, the grievance raised by the assessee is as follows:-
Ld. CIT(A) erred in law and on facts in confirming disallowance made by AO of Rs.12,44,184/- invoking provisions of section 40(a)(ia) of the Act for non deduction of tax from machinery hire charges. Ld. CIT(A) ought to have allowed reimbursement of expenses. It be so held now.
Learned representatives fairly agree that the issue is now covered, in favour of the assessee in principle, by a co-ordinate Bench decision in the case of RKP & Co vs. ITO (ITA No.106/RP/2016; order dated 24.06.2016) wherein the matter was remitted to the file of the Assessing Officer for factual verification as to whether or not the recipient has discharged his tax liability in respect of income embedded in these payments, and, if so, disallowance was to be deleted. While doing so, co- ordinate bench has observed as follows:-
“4. We find that Hon’ble Delhi High Court has specifically approved the stand taken by a coordinate bench of this Tribunal, in the case of Rajeev Kumar Agarwal Vs ACIT [(2014) 149 ITD 363 (Agra)], and upheld the action of the Tribunal in following the same.
………………………. 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
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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 view of the above discussions, we deem it fit and proper to remit the matter to the file of the Assessing Officer for fresh adjudication in the light of our above observations and after carrying out necessary verifications regarding related payments having been taken into account by the recipients in computation of their income, regarding payment of taxes in respect of such income and regarding filing of the related income tax returns by the recipients. While giving effect to these directions, the Assessing Officer shall give due and fair opportunity of hearing to the assessee, decide the matter in accordance with the law and by way of a speaking order. We order so
In effect thus, Their Lordships have approved the action of the Tribunal in remitting the matter to the file of the Assessing Officer with a direction to ascertain whether the recipient has taken into account related payments into computation of his income and offering the same to tax, and, if so, delete the disallowance under section 40(a)(ia) in respect of the same.
When, however, we asked the learned Departmental Representative as to why we should also not remit the matter to the file of the Assessing Officer, with the same directions, he, alongwith his senior colleague Shri Darhan Singh, who happens to be the CIT(A) authoring the impugned order and who was on duty as CIT(DR) before us, had three points to make- first, that there are decisions in support of the stand of the Assessing Officer’s stand, by way of Hon’ble Kerala High Court’s decision in the case of Thomas George Muthoot Vs CIT [(2015) 63 taxmann.com 99 (Kerala)]; second, that even if insertion of second proviso to Section 40(a)(ia) can be construed as retrospective in effect, the corresponding rule in the Income Tax Rules 1962 is not, and has not been held to be, retrospective, and the second proviso to Section 40(a)(ia) cannot, therefore, be give retrospective effect; and, third, that there is no decision on this issue by Hon’ble jurisdictional High Court and, as such, the stand of the Assessing Officer cannot be faulted.
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As for Hon’ble Kerala High Court’s decision in the case of Thomas George Muthoot (supra), undoubtedly, outside the jurisdiction of Hon’ble Kerala High Court and outside the jurisdiction of Hon’ble Delhi High Court- which has decided the issue in favour of the assessee, there are conflicting decisions on the issue of restrospectivity of second proviso to Section 40(a)(ia). It is thus evident that views of these two High Courts are in direct conflict with each other. Clearly, therefore, there is no meeting ground between these two judgments. The difficulty arises as to which of the Hon’ble non jurisdictional High Court is to be followed by us in the present situation. It will be wholly inappropriate for us to choose views of one of the High Courts based on our perceptions about reasonableness of the respective viewpoints, as such an exercise will de facto amount to sitting in judgment over the views of the High Courts something diametrically opposed to the very basic principles of hierarchical judicial system. We have to, with our highest respect of both the Hon’ble High Courts, adopt an objective criterion for deciding as to which of the Hon’ble High Court should be followed by us. We find guidance from the judgment of Hon’ble Supreme Court in the matter of CIT vs. Vegetable Products Ltd. [(1972) 88 ITR 192 (SC)]. Hon’ble Supreme Court has laid down a principle that "if two reasonable constructions of a taxing provisions are possible, that construction which favours the assessee must be adopted". This principle has been consistently followed by the various authorities as also by the Hon’ble Supreme Court itself. In another Supreme Court judgment, Petron Engg. Construction (P) Ltd. & Anr. vs. CBDT & Ors. (1988) 75 CTR (SC) 20 : (1989) 175 ITR 523 (SC), it has been reiterated that the above principle of law is well established and there is no doubt about that. Hon’ble Supreme Court had, however, some occasions to deviate from this general principle of interpretation of taxing statute which can be construed as exceptions to this general rule. It has been held that the rule of resolving ambiguities in favour of tax-payer does not apply to deductions, exemptions and exceptions which are allowable only when plainly authorised. This exception, laid down in Littman vs. Barron 1952(2) AIR 393 and followed by apex Court in Mangalore Chemicals & Fertilizers Ltd. vs. Dy. Commr. of CT (1992) Suppl. (1) SCC 21 and Novopan India Ltd. vs. CCE & C 1994 (73) ELT 769 (SC), has been summed up in the words of Lord Lohen, "in case of ambiguity, a taxing statute should be construed in favour of a tax-payer does not apply to a provision giving tax-payer relief in certain cases from a section clearly imposing liability". This exception, in the present case, has no application. The rule of resolving ambiguity in favour of the assessee does not also apply where the interpretation in favour of assessee will have to treat the provisions unconstitutional, as held in the matter of State of M.P. vs. Dadabhoy’s New Chirmiry Ponri Hill Colliery Co. Ltd. AIR 1972 (SC) 614. Therefore, what follows is that in the peculiar circumstances of the case and looking to the nature of the provisions with which we are presently concerned, the view expressed by the Hon’ble Delhi High Court in the case of Ansal Landmark (supra), which is in favour of assessee, is required to be followed by us. Revenue does not, therefore, derive any advantage from Hon’ble Kerala High Court’s decision in the case of Thomas George Muthoot (supra).
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The second issue is with respect to the second proviso to Section 40(a)(ia) being held to be retrospective, without corresponding enabling provision in the rules being held to be retrospective. That is a hyper technical argument and too pedantic an approach. The second proviso to Section 40(a)(ia) was held to be retrospective in in the context of finding solution to the problem to the taxpayer, and the matter was set aside to the file of the Assessing Officer with certain directions about factual verifications on the recipient having included the same in the receipts based on which taxable income is computed, and the income having been offered to tax. It is this action of the coordinate bench that was upheld by the Tribunal and the course of action so adopted by the coordinate bench approved by Their Lordships. It is impermissible to pick up one of the aspects of the decision of the judicial authority and read the same in isolation with other aspects. The decision is not on the retrospectivity of the proviso alone, its also on deletion of disallowance in the event of the recipient having taken into account these receipts in the computation of income. The judge made law is as binding on the authorities below as is the legislated statue. The hyper technical stand of the Departmental Representatives, therefore, does not merit our approval.
As regards lack of guidance from Hon’ble jurisdictional High Court, that can not be reason enough to disregard the decisions from non- jurisdictional High Courts. Hon’ble Courts above, being a higher tier of the judicial hierarchy, bind the lower forums not only in the jurisdiction of respective High Courts, but unless, there is anything contrary thereto by the jurisdictional High Courts, other jurisdictions as well. There cannot be any dispute on the fundamental proposition that in the hierarchical judicial system that we have, better wisdom of the Court below has to yield to higher wisdom of the Court above, and therefore we have to humbly bow before the views expressed by Hon’ble Courts above. Such a High Court being a non- jurisdictional High Court does not alter the position as laid down by Hon’ble Bombay High Court in the matter of CIT vs. Godavari Devi Saraf ([1978) 113 ITR 589 (Bom)] and as analysed by a coordinate bench of this Tribunal in the case of ACIT Vs Aurangabad Holiday Resorts Pvt Ltd [(2009) 118 ITD 1 (Pune)].
In view of the above discussions, as also bearing in mind entirety of the case, we deem it fit and proper to remit the matter to the file of the Assessing Officer for limited verification on the aspect as to whether recipient of payment has included the same in his computation of business income offered to tax, and, if found to be so, delete the disallowance in question. With these directions, the matter stands restored to the file of the Assessing Officer.”
We see no reason to take any other view of the matter than the view so taken by the co-ordinate bench. Accordingly, we remit the matter to the file of the Assessing Officer for fresh adjudication in the light of the above observations.
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Ground no.7 is thus allowed for statistical purposes in the terms indicated above.
In the result, the appeal is partly allowed in the terms indicated above. Pronounced in the open Court on today on the 20th day of September, 2017.
Sd/- Sd/-
S S Godara Pramod Kumar (Judicial Member) (Accountant Member) *bt Ahmedabad, the 20th day of September, 2017
Copies to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order