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Income Tax Appellate Tribunal, “A” BENCH, KOLKATA
Before: Shri P.M. Jagtap & Shri S.S Viswanethra Ravi
IN THE INCOME TAX APPELLATE TRIBUNAL, “A” BENCH, KOLKATA
Before : Shri P.M. Jagtap, Accountant Member and Shri S.S Viswanethra Ravi, Judicial Member
I.T.A No. 413/Kol/2013 A.Y. 2005-06
M/s. Industrial Perforation Vs. I.T.O Ward 5(4), Kolkata India Pvt. Ltd PAN: AAACI 5550J (Appellant) (Respondent)
For the Appellant/assessee : Shri Subash Agarwal, Advocate, AR For the Respondent/department: Shri S.M Das, JCIT, Sr.DR
Date of Hearing: 01-03-2016
Date of Pronouncement: 27-05-2016 ORDER
SHRI S.S VISWANETHRA RAVI, JM
This appeal of the assessee is arising out of the order of CIT(A)-VI, Kolkata in appeal no. 1108/CIT(A)-VI/Cir-5/09-10/Kol dated 24-12-2012 for the assessment year 2005-06 against the order of assessment framed by the AO u/s 147/144 of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).
The assessee has raised the following grounds:- For that the Ld. Commissioner of Income Tax (Appeal)-VI/Kol was erred in law as well as on facts of the case in confirming the addition of Rs. 16,33,578.00 u/s. 40(a)(ia) of the I.T.Act 1961 being the amount of labour charges on which no TDS was deducted on the grounds which are not correct.
For that the Ld. Commissioner of Income Tax (Appeal)-VI/Kol has erred in law as well as on facts of the case in confirming the addition of
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Rs. 4,60,152.00 u/s. 40(a)(ia) of the I.T.Act 1961 being the amount of commission paid to different parties on which no TDS was deducted on the grounds which are not correct.
For that the Ld. Commissioner of Income Tax (Appeal)- VI/Kol has erred in law as well as on facts of the case in confirming the addition of Rs. 1,45,655.00 u/s. 40(a)(ia) of the I.T.Act 1961 being the amount of bill discounting and service charges paid to different parties on which no TDS was deducted on the grounds which are not correct.
For that the Ld. Commissioner of Income Tax (Appeal)-: VI/Kol has erred in law as well as on facts of the case in confirming the addition of Rs. 2,52,000.00 u/s. 40(a)(ia) of the I.T.Act 1961 being the amount of consultancy charges paid to different parties on which no TDS was deducted on the grounds which are not correct.
For that the Ld. Commissioner of Income Tax (Appeal)-VI/Kol is not correct in "directing the Ld. A.O. to charge interest U/s. 234B & 234D after giving effect to the appellate order.
For that the Ld. Commissioner of Income Tax (Appeal)- VI/Kol has erred in law as well as on facts of the case is not allowing sufficient opportunity of being heard resulting non- filing of written submission by the appellant which is not correct.
For that the appellant craves leave to adduce, modify and/or alter the grounds at or before hearing.
The brief facts of the case are that the assessee is a company and derives its income from business as a marketing consultant on commission basis. The assessee filed its return of income declaring its income at Rs.12,50,350/- for assessment year 2005-06. Notices u/s. 143(2) and 142(1) of the Act were issued under scrutiny.
During the scrutiny proceedings, the AO found that an amount totaling to Rs.25,31,857.89 were debited to the profit and loss account on different heads and for
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non production of books of account and details involving said transactions added the said amount to the total income of assessee.
Ground no.1 involving Rs.16,35,578/- paid towards labour charges and AO added such amount on account of non deduction of tax . Basing on the submissions made by the assessee, CIT(A) sought remand report from AO, which is reproduced herein below:- “10. The Assessing Officer vide its letter No. DCIT/CIR-5/KoI/Remand/1012- 13/1022 dated 08.10.2012 submitted as under:-
"Findings in respect of bills for labour charges amounting to Rs.I6,33,578/-. : The AO has made addition of Rs.16,33,578.30 debited as labour charges under the major head manufacturing expenses on account of non deduction of TDS on the said payment u/s.40(a)(ia) of the Income Tax Act, 1961 read with section 194J, 194H and section 2000 of the IT Act, 1961. To examine this issue hearings on different dates were carried out and it has been found that the assessee has paid Rs.16,33,5781- to the various parties as below:-
Paid to M/s. B.P.Projects Pvt. Ltd. Rs.16,03,206/- 2. Paid to M/s. Hardyman Engineering Co. Rs.29,196,30/- 3. Paid to M/s. Barua Engineering Rs.I176/-
The copy of the Remand Report was sent to the appellant vide its written submissions dated 20.11.2012 submitted as follows:-
"Re: Alleged Labour Charges paid Rs.16,33,578.00:
The appellant in its written submission has more fully & clearly submitted that the payment made to M/s. B.P.Projects Pvt. Ltd. as per their bills was for Galvanising Process Charges which comes under the head job charges. The Ld. Assessing Officer has not gone through the exact process of work. M/s. B.P.Projects Pvt. Ltd. has taken the work of Process of Galvanising on job basis and snot on labour basis. The particular job was galvanizing for which M/s. B.P.Projects Pvt. Ltd. charged Rs.21- per K.G. of weight of Cable Tray. This is job charges paid by the appellant besides the Zinc M/s.B.P.Projects Pvt. Ltd. paid wages to their labourers for completing the job as such the said payment by M/s. B.P.Projects Pvt. Ltd. to their labours comes under the head Labour Charges and the payment made by the appellant to M/s.B.P.Projects
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Pvt. Ltd. comes under the head job charges. The Ld. Assessing Officer in his remand report at page-2 line 18 has stated as under :-
It is important to mention that the bills raised by M/s.B. P. Projects Pvt. Ltd. is solely for the purpose of "galvanizing process' charges" therefore there is no doubt that the said company has charged cost of materials for galvanizing other the labour charges. This is also important that galvanizing process charges includes "mainly labour charges" which are substantial in this process. Hence the amount of Rs.16, 03,206.00 paid to Service Provider is in the nature of labour charges. The observation made by the Assessing Officer is not on correct footing as the difference between Job Charges and Labour Charges are not properly dealt with. The appellant more fully and clearly explains the difference between job charges and labour charges as under. a) A job Charge is one which is paid by the person to whom who completes the job of the person on payment and as such the payment made by the appellant to M/s.B.P.Projects Pvt. Ltd. is job charged and not labour charges as observed by the Ld. Assessing officer. b) A Labour Charges is one which is paid by the person to his labours for completing the job taken up by him to complete the job and as such payment made by the person to his labours are labour charges and not job charges. c) Thus the question of applicability of Sec. 194C is not attracted in your appellant's case. d) Besides the above the observation taken up by the Assessing Officer that once the labour charges are paid and debited to the P&L A/c. It is automatically attract Sec. 194C of the I.T Act 1961. This observation of the Assessing Officer is not correct in as much as a mistake can be happened which is corrected if noticed later on. But the nature of payment cannot be changed its colour and as such payment made by the appellant to M/s. B.P.Projects Pvt. Ltd. is for job charges and not for Labour charges and as such provision of sec. 194C is not attracted in appellant case in respect of payment of Rs. 16,03,206.00 to M/s.B.P.Projects Pvt. Ltd. e) Besides the above, the Ld. Assessing Officer did not verify the payments of Rs.29, 176, 50 to M/s. Hardyman Engg. Co. and Rs.1,176.00 to M/s. Barua Engineering by issuing notice u/s.133(6) of the 1. T Act 1961 on request being made and as such the question of submission of substantial evidence in respect of above two parties does not arise. The appellant in its submission has clearly submitted that payment to M/s.Hardyman Engg. Co. of Rs.29, 196.30 is below Rs.50,000.00 in aggregate and Rs.1,176.00 to M/s. Barua Engineering below the limit. The Ld. Assessing Officer without going through the written submission suo unto submitted that no substantial evidence was submitted. This observation of the Ld. Assessing Officer is not correct as the provisions of Sec. 194C of the I.T Act 1961 is not attracted in both the case.
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f) A Xerox copy of submission dated 05.10.2012 submitted the Ld. Assessing Officer is enclosed herewith. g) Thus the disallowance and addition of Rs.16, 33, 578. 30 u/s.40(a)(ia) of the I.T Act 1961 is not correct, justify & proper & requires to be deleted. "
The CIT-A after considering the remand report and reply to such remand report filed by the assessee by way of written submissions dt:20-11-2012, CIT-A held as under:
I have carefully considered the observations of the Assessing Officer in the assessment order, remand report and submissions of the appellant. The appellant has submitted that the particular job was galvanizing for which M/s. B. P. Projects Pvt. Ltd. charged RS.2/- per K.G. of weight of Cable Tray. This is job charges paid by the appellant and the Zinc was supplied by the appellant. M/s. B. P. Projects Pvt. Ltd. had paid wages to their labourers for completing the job. The plea of the appellant is that the said payment by M/s. B. P. Projects Pvt. Ltd. to their labourers comes under the head Labour Charges and the payment made-by the appellant to M/s. B. P. Projects Pvt. Ltd. comes under the head job charges. The appellant had made a payment of RS.16,03,206 to M/s. B. P. Projects Pvt. Ltd. for galvanizing the goods. 15. Therefore, it is held that the appellant has made the payment for carrying out the work of galvanising the material and is held to be a work contract, which attracts the provisions of Sec.194C and by non deduction of TDS the provisions of section 40(a)(ia) are applicable and the payment cannot be allowed. Therefore, the addition of Rs.16,33,578/- is upheld. This ground of appeal is dismissed.
Having aggrieved by order of Ld. CIT(A), the assessee before us prayed to restore the issue on hand to the file of AO and relied on Judgment dt. 26-8- 2015 of Hon’ble High Court of Delhi in the case of CIT-1 Vs. Ansal Land Mark Township(P) Ltd and on order of Tribunal, Kolkata Benches in the case of DCIT Vs. M/s. Five Star Shipping Agency Pvt. Ltd for assessment year 2006-07. The
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Ld. DR submits that the section 194C of the Act is applicable to the issue on hand and relied on the order of AO.
Heard rival submissions and perused the relevant material on record. As relied by the Ld.AR on the case law of the Hon’ble High Court of Delhi supra, while dealing with the case on hand, had an occasion to read down the decision of Agra Bench of Tribunal in ITA 337/Agra/2013 as it was relied on, and held and agreed with the reasoning and conclusion to the insertion of second proviso to section 40(a)(ia) of the Act by the legislature. The relevant portion from paras 11 to 14 are reproduced here in below:
The first proviso to Section 210 (1) of the Act has been inserted to benefit the Assessee. It also states that where a person fails to deduct tax at source on the sum paid to a resident or on the sum credited to the account of a resident such person shall not be deemed to be an assessee in default in respect of such tax if such resident has furnished his return of income under Section 139 of the Act. No doubt, there is a mandatory requirement under Section 201 to deduct tax at source under certain contingencies, but the intention of the legislature is not to treat the Assessee as a person in default subject to the fulfillment of the conditions as stipulated in the first proviso to Section 201(1). The insertion of the second proviso to Section 40(a) (ia) also requires to be viewed in the same manner. This again is a proviso intended to benefit the Assessee. The effect of the legal fiction created thereby is to treat the Assessee as a person not in default of deducting tax at source under certain contingencies.
Relevant to the case in hand, what is common to both the provisos to Section 40 (a) (ia) and Section 210 (1) of the Act is that the as long as the payee/resident (which in this case is ALIP) 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.
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Turning to the decision of the Agra Bench of ITA T in Rajiv Kumar Agarwal v. A CIT (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)(ia1 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 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 in nature even though it may not state so specifically, the insertion of second proviso must be
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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."
The Court is of the view that the above reasoning of the Agra Bench of IT AT as regards the rationale behind the insertion of the second proviso to Section 40(a) (ia) of the Act and its conclusion that the said proviso is declaratory and curative and has retrospective effect from 1st April 2005, merits acceptance.
The Hon’ble High Court supra found that there is a mandatory requirement u/s. 201 to deduct at source, but, however, opined, the assessee cannot be viewed as a person in default in view of the first proviso to section 201(1) of the Act and further that the insertion of second proviso to section 40(a)(ia) of the Act was intended to benefit the assessee and it shall be viewed as in the same manner as that of first proviso to section 201(1) of the Act.
In the present case, the case of the assessee was that the payment made to M/s. B.P.Projects Pvt. Ltd. for galvanising Process Charges. The said M/s. B.P.Projects Pvt. Ltd. executed the work of galvanising on job basis and for that galvanizing M/s. B.P.Projects Pvt. Ltd. charged Rs.21- per K.G. of weight of Cable Tray for which the assessee paid such amount for completing the job. These facts are not disputed by the AO as it can be seen from the remand report and he found that the bills raised by M/s.B. P. Projects Pvt. Ltd is solely for the purpose of galvanizing process charges and the said company has charged cost
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of materials for galvanizing other than labour charges i.e galvanizing process charges includes mainly labour charges. Therefore, the question before us whether the assessee could be treated as defaulter in view of the principle enunciated by the Hon’ble High Court of Delhi supra, we hold that the assessee is not a defaulter in view of the first proviso to section 201(1) r/w second proviso to section 40(a)(ia) of the Act. As opined by the Hon’ble High Court of Delhi supra that the second proviso to Section 40(a)(ia) is declaratory and curative in nature having retrospective effect from 01-04-2005 and the case on hand being for A.Y 2005-06, in our view, the matter shall go back to AO.
An identical issue involving the issue on hand decided by the ‘B ‘Bench of Kolkata Tribunal (supra). The relevant portions from paras 7 to 10 of order are reproduced here in below:-
A plain reading of this Section makes it clear that "any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person" is required to deduct tax at source under section from the amounts so paid or payable. There is no doubt that the assessee in this case has made the payments as transportation charges in the nature of hiring charges for goods carried vehicles. The main contention of the assessee is, however, that the payments have not been made in pursuance of a contract between the assessee and the transporters. Now the question arises before us, whether there is contractual relationship between the assessee and the persons to whom the assessee had made the payments in the nature of hiring charges for goods carried vehicles. In our opinion, a contract need not be in writing; even an oral contract is good enough to invoke the provisions of Section 194 C. As Hon'ble Karnataka High Court has observed in the case of Smt J Rama Vs CIT (236 CTR 105), "Law does not stipulate the existence of a written contract as a condition precedent for ( invoking the provisions of Section 194 C with respect to) payment of TDS". The transporters have received the payments from the assessee towards the transportation charges, therefore, the presumption
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normally be that one would proceed on the basis that there was a contract for hiring of goods carried vehicles. Therefore, if the assessee has made the payment for hiring the goods carried vehicles, the provisions of section 194C are clearly applicable. In our opinion, the Id. CIT(Appeals) was not correct in law that the assessee will be liable to deduct the TDS if the amount of a single contract exceeds Rs.20,000j-. The contract has to be looked into party-wise not on the basis of the individual GR. In our opinion, all the payments made to a truck owner throughout the year are to be aggregated to ascertain the applicability of the TDS provision as all the payments pertain to a contract. Contract need not be in writing. It may infer from the conduct of the parties. It may be oral also. Our aforesaid view is duly supported by the decision of IT AT, 'A' Bench, Kolkata in the case of DCIT -vs.- Kamal Kr. Mukherjee & Co. in ITA No. 199/Kol/2010. We also noted that under section 194C,' sub- section (5) proviso thereto, the aggregate amount of all the payments or credited should exceed only Rs.50,000/-, then the assessee shall be liable to deduct income-tax at source.
In view of our above discussion, the order of the Id. CIT(Appeals) has to be reversed. But before us, the Id. A.R. has taken a submission that the 2nd proviso to section 40(a)(ia) as inserted by Finance Act, 2012 would apply in the case of the assessee. According to him, 2nd proviso is curative in nature intended to supply an obvious omission, take care of an unintended consequence and make the section workable. Section 40(a)(ia) without the second proviso resulted in the unintended consequence of disallowance of legitimate business expenditure even in a case where the payee in receipt of the income had paid tax, and, therefore, he took the plea that the second proviso although inserted w.e.f. 1st April, 2013 but being curative in nature has retrospective effect and accordingly contended that the issue be restored to the file of the Assessing Officer so that the assessee can provide all the details in terms of the second proviso to section 40(a)(ia).
We find force in the said submission of the Id. A.R. We noted that the submissions of the Id. A.R. are duly covered by the decision of this Tribunal (,SMC' Bench) in ITA No. 1905jKolj2014 for the assessment year 2007-08, in which this Tribunal vide order dated 04.03.2015 has held as under:-
"5. I have heard rival contentions and gone through the facts and circumstances of the case. I find from first argument made by Ld. counsel for the assessee that the second proviso to section 40( a)(ia) of the Act
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inserted by the Finance Act, 2012 would apply in the instant case. According to him, the second proviso is curative in nature intended to supply an obvious omission, take care of an unintended consequence and make the section workable. Section 40[a)(ia) without the second proviso resulted in the unintended consequence of disallowance of legitimate business expenditure even in a case where the payee in receipt of the income had paid tax. According to him, it has for long been the legal position that if the payee has paid tax on his income, no recovery of any tax can be made from the person who had failed to deduct the income tax at source from such amount In Grindlays Bank v CIT, (1992) 193 ITR 457 (Cal) decided on September 5, 1989, it was held by the Hon'ble Calcutta High Court as follows at pages 469-470 of the reports:
"A point has been made by the assessee that as a result of this deduction the department is realizing the tax twice on the same income. It does not appear that this point was agitated before the Tribunal. We, however, make it clear that if the amount of tax has already been realised from the employees concerned directly, there cannot be any question of further realisation of tax as the same income cannot be taxed twice. If the tax has been realised once, it cannot be realised once again, but that does not mean that the assessee will not be liable for payment of interest or any other legal consequence for their failure to deduct or to pay tax in accordance with law to the revenue." (emphasis supplied)
That such was the legal position was accepted by the Central Board of Direct Taxes in its Circular No.275/201/95-IT(B) dated January 29, 1997. Reference in this behalf may also be made to the judgment of the Hon'ble Supreme Court in Hindustan Coca Cola Beverage P. Ltd. v CIT, (2007) 293 ITR 226 (SC) where the same view was taken. I find that the aforesaid settled position in law has also been legislatively recognized by insertion of a proviso in sub-section (1) of section 201 of the Act by the Finance Act, 2012. Thus, the settled position in law is that if the deductee / payee has paid the tax, no recovery can be made from the person responsible for paying of income from which he failed to deduct tax at source. In a case where the deductee/payee has paid the tax on such income, the .person responsible for paying the income is no longer required to deduct or deposit any tax at source. In the similar circumstances, I find that the first proviso to section 40(a)(ia) inserted by the Finance Act; 2010, which has been held to be curative and therefore, retrospective in its operation by the Hon'ble Calcutta High Court in ITAT No. 302 of 2011, GA 3200/2011,
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CIT v Virgin Creations decided on November 23, 2011 provides for allowance of the expenditure in any subsequent year in which tax has been deducted and deposited. The intention of the legislature clearly is not to disallow legitimate business expenditure. The allowance of such expenditure is sought to be made subject to deduction and payment of tax at source. However, in a case where the deductee/payee has paid tax and as such the person responsible for paying is no longer required to deduct or pay any tax, legitimate business expenditure would stand disallowed since the situation contemplated by the first proviso viz. deduction and payment of tax in a subsequent year would never come about. Such unintended consequence has been sought to be taken care of by the second proviso inserted in section 40(a)(ia) by the Finance Act, 2012. There can be no doubt that the second proviso was inserted to supply an obvious omission and make the section workable. The insertion of second proviso was explained by Memorandum Explaining The provision in Finance Bill, 2012, reported in 342 ITR (Statutes)234 at 260 & 261, which reads as under:-
"E.RATIONALIZATION OF TAX DEDUCTION AT SOURCE (TDS) AND TAX COLLECTION AT SOURCE (TCS) PROVISIONS I. Deemed date of payment of tax by the resident payee. Under the existing provisions of Chapter XVII -B of the Income-tax Act; a person is required to deduct tax on certain specified payments at the specified rates if the payment exceeds specified threshold. In case of non- deduction of tax in accordance with the provisions of this Chapter, he is deemed to be an assessee in default under section 201(1) in respect of the amount of such non-deduction. However, section 191 of the Act provides that a person shall be deemed to be assessee in default in respect of non/short deduction of tax only in cases where the payee has also failed to pay the tax directly. Therefore, the deductor cannot be treated as assessee in default in respect of non/short deduction of tax if the payee has discharged his tax liability.
The payer is liable to pay interest under section 201 (1A) on the amount of non/short deduction of tax from the date on which such tax was deductible to the date on which the payee has discharged his tax liability directly.
As there is no one-to-one correlation between the tax to be deducted by the payer and the tax paid by the payee, there is lack of clarity as to when
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it can be said that payer has paid the taxes directly. Also, there is no clarity on the issue of the cut-off date, i.e., the date on which it can be said that the payee has discharged his tax liability.
In order to provide clarity regarding discharge of tax liability by the resident payee on payment of any sum received by him without deduction of tax, it proposed to amend section 201 to provide that the payer who fails to deduct the whole or any part of the tax on the payment made to a resident payee shall not be deemed to be an assessee in dealt in respect of such tax if such resident payee- (i) Has furnished his return of income under section 139 ; (ii) Has taken into account such sum for computing income in such return of income; and (iii) Has paid the tax due on the income declared by him in such return of income, and the payer furnishes a certificate to this effect from an accountant in such form as may e prescribed.
The date of payment of taxes by the resident payee shall be deemed to be the date on which return has been furnished by the payer.
It is also proposed to provide that where the payer fails to deduct the whole-or any part of the tax on the payment made to a resident and is not deemed to be an assessee in default under section 201(1) on account of payment of taxes by the such resident, the interest under section 201(1A)(i) shall be payable from the date on which such tax was deductible to the date of furnishing of return of income by such resident payee.
Amendments on similar lines are also proposed to be made in the provisions of section 206C relating to TCS for clarifying the deemed date of discharge of tax liability by the buyer or licensee or lessee.
These amendments will take effect from 1st July, 2012. ll. Disallowance of business expenditure on account of non-deduction of tax on payment to resident payee.
A related issue to the above is the disallowance under section 40(a)(ia) of certain business expenditure like interest, commission, brokerage,
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professional fee, etc. due to non-deduction of tax It has been provided that in case the tax is deducted in subsequent previous year, the expenditure shall be allowed in that subsequent previous year of deduction In order to rationalize the provisions of disallowance on account of non-deduction of tax from the payments made to a resident payee, it is proposed to amend section 40(a)(ia) to provide that where an assessee makes payment of the nature specified in the said section to a resident payee without deduction of tax and is not deemed to be an assessee in default under section 201(1) on account of payment of taxes by the payee, the, for the purpose of allowing deduction of such sum, it shall be deemed that the assessee had deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee. These beneficial provisions are proposed to be applicable only in the case of resident payee. These amendments will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent assessment years." 10. No contrary decision was brought to our knowledge by the ld. D.R. By respectfully following the said decision, we restore this issue to the file of the Assessing officer with the direction that the assessee shall provide all the details to the Assessing Officer with regard to the recipients of the income and taxes paid by them. The Assessing Officer shall carry out necessary verification in respect of the payments and taxes of such income and also filing the return by the recipient. In case, the Assessing Officer finds that the recipient has duly paid the taxes on the income, the addition made by the Assessing Officer shall stand deleted.
The facts in the aforementioned case are that the AO added Rs.1,07,21,525/- for non deduction of TDS by the assessee on transport hire charges and CIT-A deleted the said amount in the absence of any written or oral agreement. The assessee agitated that the resident in terms of 2nd proviso also paid tax on receipt of income and pleaded to restore the issue to the file of AO. The Tribunal observed that the 2nd proviso to Section 40(a)(ia) of the is curative
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and takes care of unintended consequence and restored the file to the AO. We are of the view that the facts therein are similar to the facts of the case on hand. Respectfully following the Judgment of the Hon’ble High Court of Delhi supra and order of Coordinate Bench of Kolkata Tribunal, we remand the case to AO for examination and for verification of the required details of the resident i.e M/s. B.P.Projects Pvt. Ltd and direct the assessee to cooperate in completing the assessment. Ground no-1 raised by the assessee is allowed for statistical purposes.
Ground no.2 involving Rs.4,60,152/- paid towards commission charges/service charges. The AO disallowed the same for not deducting TDS. The ld. CIT(A) confirmed the addition made by the AO. Before us, the ld. AR submits that all the amounts were below Rs.20,000/-, which were examined by the AO under remand proceedings. The AO treated such details of payments produced by the assessee as bogus and found that not a single payment was paid during the relevant financial year. The relevant portion from order of the ld.CIT(A) is reproduced here in below:-
The Assessing Officer in its Remand report dated 07.02.2011 submitted as under:- "From the details of commission payment; submitted by the assessee that the commission of Rs. 1000/- to Rs2300/- has been shown as payable to hundreds of people which is the after-thought of the assessee. It cannot be that (he commission expenses of Rs. l000/- to Rs2300/- had been incurred to hundreds of the 'people and not a single person was paid during the relevant financial year. Hence, it is clear' that the commission expenses claimed is a bogus claim of the assessee and it is requested from the Ld. CIT(A) that this amount of Rs. 4, 60, 152/- should be treated as bogus expenses claimed by the assessee. The same is true for the consultancy charges of Rs.2,52,550/- and; therefore, it should also be treated as bogus expenses claimed by the assessee. "
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The Assessing, Officer in. its Remand report vide letter No. DCIT/CIR-5/Kol/Remand/2012-13/1022 dated 08.1 0.2012 submitted as under:-
"On going through the paper book submitted by the assessee and submissions made during the remand proceedings it has been observed that the assessee has observed that the assessee has paid commission of Rs.4, 60, 152/- to a number of parties for securing orders for twelve companies located at various places. During the course of proceedings explanation was sought in respect of appointment of commission agents. The assessee has submitted that they have appointed persons for each company to follow-up the matter but no substantial evidence in this regard was submitted. All the payments have been made in cash which ranges between Rs.1000/- to Rs 2300/-. The A/R has stated that the said commission was paid during F.Y. 2005-06 & 2006-07. He failed to produce any documentary evidence except vouchers. This is after-thought preparation to provide the colour of genuineness to the transactions. The assessee failed to establish the genuineness. of payment; therefore, the claim of the assessee is not liable for consideration.
I have carefully considered the' observations of the Assessing Officer in the assessment order, and submissions 'of the appellant. The appellant has paid the commission expenses of RS.1000/- to RS.2300/- to hundreds of the people and not to a single person during the relevant financial year. During the course of proceedings explanation 'was sought in respect of appointment of commission agents. The assessee has submitted during the remand proceedings that they have appointed persons for each company to follow-up the matter but no substantial evidence in this regard was submitted while all the payments have been made in cash which ranges between Rs.1000/- to- Rs.2300/-. The A/R stated before the Assessing Officer that the said commission was paid during F.Y. 2005-06 & 2006-07 but failed to produce any documentary evidence except self made non-verifiable vouchers. The Assessing officer stated in the remand report that this is after-thought preparation to provide the colour ot genuineness to the transactions and the said report was sent to the appellant. The appellant failed to establish the genuineness of payment even during appellate proceedings even in the subsequent written
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submissions nothing more was brought on record, The appellant has deliberately structured its transactions in a way so as to avoid the provisions of section 194H r.w.s 40(a)(ia). The arrangement about real transactions takes place in secret and direct evidence about such dlscreet transaction/agreement would be not available to the department in the normal circumstances during assessment proceedings. The result of these structured transactions was designed that in this transaction no TDS were to be deducted by the appellant and the provisions of section 194H r.w.s. 40(a)(ia) do not become applicable. Therefore, in the facts and circumstances it is held that the appellant is not able to Justify the genuineness of the expenditure and evidence of its actual incurring arid disbursing to the concerned persons.
The Hon'ble Delhi High Court in the case of CIT Vs. Modi Industries Ltd reported in (1992)(200 IT 341) has held as follows:-
'the expenditure was not incurred ~holly and exclusively for the purpose of assessee's business. Commission paid was not deductible. "
The Hon'ble Apex Court in the case of Lachminarayan Mondal (86 ITR 439 (SC) has also held as follows:-
"it is still open to the Department/Assessing Officer to consider the relevant facts and, determine for himself whether the commission has been paid to the agents was wholly and, exclusively for purpose of the assessee's business for allowing deduction u/s 37 of the Act. "
The Hon'ble Madhya Pradesh-High Court in the case of Ramdas Ramlal reported in (1983) 149 ITR 256 held as follows:- “The burden to prove the genuineness of the agreement in pursuance of which commission was paid to the agent was on the assessee. "
The Hon'ble ITAT Kolkata Bench 'C' in the case of United Traders Co. v. Tax Recovery Officer, Kolkata-36 in IT Appeal No. 1233 (KOL.) of 2010 dated 12th October 2012 for Assessment year 2006-07 reported in (2012) 139 ITD 475(kol); [2012] 27 taxmnann.corn 293 (Kol.) held that one of the fundamental requirements for allowing deduction in respect of commission payment is that there should be evidence for some services
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having been rendered and the services having been rendered cannot be simply assumed or inferred in the absence of such evidence.
Therefore, the cumulative effect of all the above facts & circumstances and decisions of the Hon'ble appellate Authorities makes clear that the payments allegedly having been made in cash ranging between Rs. 1 000/- to Rs. 2300/- are not genuine. Therefore, the claim of the assessee is not allowed as business expenditure u/s 37 of Income tax Act,1961. The addition made by the Assessing Officer is upheld. It is held that on technical aspect since the alleged payments are shown to be less than the threshold limit of Rs.2,500/- each and the amounts payable to the persons do not attract-the provisions of sec.40(a)(ia) of the I.T.Act 1961. This ground of appeal is dismissed since the entire amount has been disallowed.
Heard rival submissions and perused the relevant material on record. The contention of the Revenue was that the assessee not deducted TDS for the amounts liable to be deducted U/sec 194H of the Act, but, however, the AO found under examination of the details submitted by the under remand proceedings that all the payments were paid to various persons , particularly in cash between Rs. 1000/- to Rs. 2300/- and CIT-A having examined the paper book filed before him by the assessee observed that the assessee has paid commission of Rs.4,60,152/- to a number of parties for securing orders from twelve companies located at various places. Further noted that the assessee failed to produce any kind of evidence in respect of appointment of such commission agents either before AO or CIT-A. Mere stating that the assessee has appointed persons as commission agents for each company to follow-up its affairs in support of which no sufficient evidence, whatsoever, filed in this regard. In our opinion, as per the procedure established the assessee shall produce all the details before the authorities, after due verification of the material available on record which are filed by the assessee without any
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supporting evidence both the authorities below arrived to a conclusion that the said payments made to various persons are self made and non-verifiable. Therefore, we hold that the assessee had clearly failed to prove genuineness of expenditure, consequently, the addition made on this issue stands confirmed. Accordingly ground no-2 raised by the assessee is dismissed.
Ground no.3 relates to disallowance made on account of bill discounting and Invoice charges of Rs.1,45,655/- by the AO by invoking sec 40(a)(ia) of the Act. The CIT(A) pointed out to remand report that the financial institutions charged discounts on the direction of the assessee and as the amount was above Rs.2,500/- and it is the responsibility of the assessee to deduct the TDS and confirmed the addition made by the AO and the observation of which is reproduced herein below:-
“26. The Assessing Officer in the, Remand report vide letter No. DCIT/CIR- 5/Ko1/Remand/2012-13/1022 dated 08:-;10.2012 submitted as follows:-
"Bill discounting and service charges of Rs.1,45,654/- The assessee has incurred expenses totalling to &.1,45,654/- on account of bill discounting and service charges-the details of which are as below:-
D.C. Industrial Plant Services Pvt. Ltd. Rs.70,658/- 2. Alstom System Ltd Rs. 33,010/- 3. AVIS Corporation Rs. 41,986/-.
I have carefully considered the observations of the Assessing, Officer in the assessment order, and submissions of the appellant. The appellant has not been able to produce the parties to prove the genuineness of the transactions before the Assessing Officer. The bill discounting 'and
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service charges have been paid on the direction of the appellant and it was the responsibility of the appellant to default the TDS u/s.194H as
soon as the amount exceeded Rs.2,5001-. The appellant has failed in its duty to deduct TDS and also has failed to produce the persons to whom these payments were made, therefore the expenses on account of bill discounting and serves charges amounting to Rs.1,45,654/- is disallowed. The addition made by the Assessing Officer is upheld and this ground of appeal is dismissed.
Before us, the ld.AR contended that the section 194H on which addition was made is not applicable and the section 194A of the Act is relatively applicable to the facts of the case on hand and reiterated the submissions made before the lower authorities relied on the case law reported in 355 ITR 94. The Ld.DR relied on the order of CIT-A.
Heard both the sides and perused the record. It is noticed that the assessee has got guarantee on some terms from banks and other financial institutions for financial assistance against their bills. The said banks used to credit balance amount under bills after deducting their discount charges. Therefore, as such, the assessee has no role to deduct the tax as such the assessee has not made any payment to the bank. To support of this view, page no- 22 of paper book is a statement of account issued by the Bank of Baroda shows that the assesee’s account was deposited with Rs.8,64,024/- on 17-08-2004 and in page no-23 of paper book goes show that the actual bill amount was Rs.8,88,000/- and the said bank deposited the balance amount after deducting interest, surcharge and commission mentioned therein. The submissions made by the assessee as it was reflecting in the order of CIT-A that the assessee did not pay any amount and the banks and the financial institutions paid amounts after deducting their charges appears to be true.
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In this regard we may refer to the case law relied on by the assessee in the case of CIT vs Cargill Global Trading (P) Ltd reported in 355 ITR 94. The facts are that the AO noticed that the assessee had paid a sum of Rs. 3.97 crores to its associate concern, M/s Kargil Financial Services Asia (P) Ltd. (CFSA), Singapore on account of discounted charges for getting the export sale bills discounted. In appeal the CIT(A) deleted the addition holding that the discount paid by the assessee to CFSA cannot be held to be interest and the provisions of s. 40(a)(i) of the Act would not apply and he allowed the expenditure of Rs. 3.97 crores as claimed by the assessee. The Tribunal observed that discounting charges were not in the nature of interest paid by the assessee and assessee had received net amount of bill of exchange accepted by the purchaser after deducting amount of discount. The Hon’ble High Court supra agreed with the discussion and decision rendered by the Tribunal portion of which is reproduced as under:
"9. The word ‘interest’ is differently defined under Interest-tax Act. As per s. 2(7) of Interest-tax Act, ‘interest’ means interest on loans and advances made in India and includes—(a) commitment charges on unutilized portion of any credit sanctioned for being availed of in India and (b) discount on promissory notes and bill of exchange drawn or made in India. Thus where the legislature was conscious of the fact that even the discount of bill of exchange is to be included within the definition of interest, the same was basically so provided for. However, under the scheme of IT Act, the word ‘interest’ defined under s. 2(28A) does not include the discounting charges on discounting of bill of exchange. Though the Circular No. 65 was rendered in relation to deduction of tax under s. 194A, in respect of payment to a resident, the same will be relevant even for the purpose of considering whether the discount should be treated as interest or not. The CBDT has opined that where the supplier of goods makes over the usance bill/hundi to his bank which discounts the same and credits the net amount to the supplier’s account straightaway without waiting for realization of the bill on due date, the property in the
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usance bill/Hundi passes on to the bank and the eventual collection on due date is a receipt by the bank on its own behalf and not on behalf of the supplier. For such cases of immediate discounting the net payment made by the bank to the supplier is in the nature of a price paid for the bill. Such payment cannot technically be held as including any interest and therefore, no tax need be deducted at source from such payment by the bank. The decision relied by the AO in the case of Vijay Ship Breaking Corpn. (supra) has been reversed by the Hon’ble Supreme Court as reported in the case of Vijay Ship Breaking Corpn. & Ors. vs. CIT (2008) 219 CTR (SC) 639 : (2008) 14 DTR (SC) 74. The Hon’ble Supreme Court held that usance interest payable outside India by an undertaking engaged in the business of ship breaking is exempt from payment of income-tax by virtue of Expln. 2 added to s. 10(15)(iv)(c) with retrospective effect from 1st April, 1962 and hence the assessee was not liable to deduct tax at source under s. 195 of the Act. The discounting charges are not in the nature of interest paid by the assessee. Rather after deducting discount the assessee received net amount of the bill of exchange accepted by the purchaser. CFSA, not having any PE in India, is not liable to tax in respect of such discount earned by it and hence the assessee is not under obligation to deduct tax at source under s. 195 of the Act. Accordingly, the same amount cannot be disallowed by invoking s. 40(a)(i) of the Act." 11. We are in agreement with the aforesaid discussion on the legal aspect. It may be pointed out that the CBDT has issued one Circular No. 65 way back on 2nd Sept., 1971 clarifying the position in respect of income by way of interest under s. 194 r/w s. 197(1) and (2) of the Act as under : "1....Where the supplier of goods makes over the usance bill/hundi to his bank which discounts the same and credits the net amount to the supplier’s account straightaway without waiting for realization of the bill on due date, the property in the usance bill/hundi passes on to the bank and the eventual collection on due date is a receipt by the bank on its own behalf and not on behalf of the supplier. For such cases of immediate discounting the net payment made by the bank to the supplier is in the nature of a price paid for the bill. Such a payment cannot technically be held as including interest and therefore no tax need be deducted at source from such payments by the bank. Further,
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the buyer need not deduct any tax from the payment made by him on due date to the bank in respect of such discounted bill in as much as these payments are to a bank or a banking co-operative society, conforming to the exemption granted by s. 194A(3)(iii)(a) of the IT Act, 1961. 2. On the other hand where there is no immediate discounting and the bank merely acting as agent receives on the expiry of the period the payment for the bill from the buyer on behalf of the supplier and credits it to him accordingly, the bank receives interest on behalf of the supplier and the instructions contained in Board’s above- mentioned circular dt. 7th Nov., 1970, would apply and the buyer will have to deduct the tax from the interest."
A perusal of the above decision show that the AO treated said discounted charges collected by the Singapore based Financial service provider and disallowed the same in terms of Interest under section 2(28A) of the Act. In the present case at page no-23 the discounting charges said to have received by the Bank of Baroda also, though the addition was not on account of interest, in this case also, but, however, incidentally includes interest. Therefore, no tax can be charged on any such payments. It is pertinent to note as discussed above the assessee did not pay any amounts to bank so as to deduct the tax at source. Thus, the section 194H is not applicable to the case on hand and addition made thereon by the AO is not maintainable. Ground no-3 raised by the assessee is allowed.
Ground no. 4 is a disallowance regarding the amount of Rs. 2,52,000/- 20. made for not deducting TDS on account of payments made towards consulting charges. The assessee contended that the addition was made without any basis and the section 194J of the Act does not attract to the facts of the case as all the payments under professional consultancy charges are below Rs. 20,000/-. The
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AO admits the fact that all the payments were below Rs. 20,000/- vide remand report, which is reproduced below:- 31. The Assessing Officer in the Remand report vide letter No. DCIT/CIR.5/KoI/Remand/2012-13/1022 dated 08.10.2012 submitted as follows:-
"On going through the paper book made by the assessee, it has been observed that assessee has made payment to a no, of parties 10wards consultancy charges which is less than Rs.20,000/- in each case. In view of the above payment details section 194J of the IT Act 1961 is not attracted. ..
During the remand proceedings the it was told to the A/R of assessee that the said payments do not appear to be genuine and he was directed to produce the parties and make comments but assessee has neither made any comment in respect of its genuineness nor produced any of the above parties. Therefore, genuineness of the above payments is not proved by the assessee instead of giving him sufficient opportunity. Hence the said payment cannot be held to be genuine and addition made by A. 0. is valid"
The Assessing Officer during the assessment order has observed that due to non attendance after giving adequate opportunities disallowed this amount for non deduction of TDS. The appellant is notable to show that what kind of professional services were taken by it from so many different persons. It ·is held that since the disallowance was made u/s. 40(a)(ia),' ,the appellant has shown the payments to different persons in cash for less than Rs.20,000/- each through the self made vouchers.
Before us, the ld.AR contended that the assessee has produced all the details of bills etc… before the AO. Inspite of which the AO added on the ground that genuineness of the payments made to fifteen parties are not proved by the assessee despite having given sufficient opportunity. Further submits that the AO could have conducted enquiry u/s. 133 of the Act as all such details were available with AO which are placed at page 34 onwards in paper book. The Ld.
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DR contended that the claimed expenses are not genuine and even the big industries in Calcutta does not claim consultancy charges and relied on orders of both the authorities below.
Heard rival submissions and perused the relevant record. It is observed from the remand report that the AO verified the paper book as produced by the assessee containing details of payments made to various parties, which are admittedly less than Rs.20,000/- and the ld. CIT(A) also confirmed the same. The same has been noticed at page 34 of the paper book, wherein it shows that the name of persons, their complete addresses and respective amounts mentioned therein paid to them. The AO further observed that the assessee did not produce any one of such parties before him for confirmation of the genuineness of the transaction. As submitted by the ld.AR above, in our opinion, the AO could have resorted to the proceedings u/s. 133 of the Act to secure the presence of such 15 persons for examination. But the AO failed to do so. That it is open to the AO to consider the relevant factors for determining as to whether the said consultancy charges were paid to the parties mentioned at page 34 of the paper book or not. In the present case, the AO totally failed to consider the same. The AO did not bring anything contrary to the claim of the assessee. Therefore, we hold that in view of the proviso (B) (i) to subsection (1) of Section 194J of the Act the addition does not stand, therefore, it is deleted, accordingly, Ground no-4 is allowed.
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Ground no’s 5 to 7 are consequential and general in nature, needs no adjudication, in view of the above discussion involving ground no’s 1 to 4, therefore, Ground no’s 5 to 7 are dismissed.
In the result, the appeal of the assessee is partly allowed
THIS ORDER IS PRONOUNCED IN OPEN COURT ON 27/05/2016
Sd/- Sd/- P.M. Jagtap, S.S. Viswanethra Ravi, Accountant Member J Judicial Member
Date 27 /05/2016
Talukdar
Copy of the order forwarded to: 1.. The Appellant/assessee: M/s. Industrial Perforation India Pvt. Ltd 327 R.N Guha Road, Dum Dum, Kolkata-28. 2 The Respondent/department: The Income Tax Officer, Ward 5(4), P-7 Chowringhee Square, Kol-69. 3 The CIT, 4. The CIT(A) 5. DR, Kolkata Bench 6. Guard file. True Copy, By order,
Asstt Registrar
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