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Attorney(S)
  • MRS MAUNA M BHATT
Judges
  • Hon'ble Ms. Justice Harsha Devani
  • Hon'ble Mr. Justice A. G. Uraizee
Acts
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Citation Codes
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citation codes
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Attorney(S)
  • MRS MAUNA M BHATT
Judges
  • Hon'ble Ms. Justice Harsha Devani
  • Hon'ble Mr. Justice A. G. Uraizee
Acts
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Smart Summary

Structured Summary of the Opinion (Harsha Devani, J.)

Factual and Procedural Background

This appeal under section 260A of the Income Tax Act, 1961 was preferred by the revenue against the order dated 30.03.2015 of the Income Tax Appellate Tribunal, Ahmedabad Bench "B" in ITA No.2125/Ahd/2011. The revenue framed two substantial questions of law challenging the Tribunal's upholding of the Commissioner of Income Tax (Appeals)'s deletions of additions relating to:

  • Deletion of an addition of Rs.8,33,252 made on account of disallowance of interest under section 36(1)(iii) of the Act.
  • Deletion of an addition of Rs.55,94,825 made on account of disallowance under section 40(a)(ia) of the Act.

The assessment year was 2008-09 (previous year 2007-08). The assessee filed its return on 30.10.2008 declaring total income of Rs.80,79,294. On scrutiny, the Assessing Officer (AO) noted interest-free loans/advances totaling Rs.81,14,103 (Rs.70,14,103 to M/s Arti Impex; Rs.6,00,000 to Shri Ashok Sharma; Rs.5,00,000 to Mrs. Rajkumari Sharma). The assessee contended these were mis-classified and should have been shown as debtors, that it had sufficient interest-free funds of Rs.1,99,40,000, and that the interest-bearing term loan was used solely to acquire hypothecated business assets (i.e., the advances were not made out of the term loan).

On the interest issue the AO computed disallowance at Rs.9,73,692 but limited the disallowance to Rs.8,33,252 after allowing interest expenditure; the CIT(A) deleted the addition and the Tribunal upheld the CIT(A). On the C&F / TDS issue the assessee debited Rs.62,85,013 as clearing & forwarding charges but deducted TDS only on Rs.7,45,801; the AO disallowed Rs.55,94,825 under section 40(a)(ia), relying on Associated Cement Co. Ltd.; the CIT(A) deleted the disallowance and the Tribunal upheld the CIT(A). The revenue appealed to this court.

Legal Issues Presented

  1. Whether the Appellate Tribunal erred in upholding the CIT(A)'s deletion of the addition of Rs.8,33,252 representing disallowance of interest under section 36(1)(iii) of the Income Tax Act, 1961?
  2. Whether the Appellate Tribunal erred in upholding the CIT(A)'s deletion of the addition of Rs.55,94,825 made on account of disallowance under section 40(a)(ia) of the Income Tax Act, 1961?

Arguments of the Parties

Appellant's (Revenue) Arguments

  • On the interest disallowance (question 1): The Tribunal upheld the CIT(A)'s decision "basically for the sake of consistency" and relied on the CIT(A)'s decision in the assessee's own earlier assessment year (2007-08). The revenue contended the findings by the CIT(A) and Tribunal were erroneous and require reconsideration.
  • On the TDS / section 40(a)(ia) disallowance (question 2): The AO found that the assessee had entered into a contract for carrying out work (implying applicability of section 194C) and therefore TDS should have been deducted for payments for work; payments without deducting TDS are not allowable under section 40(a)(ia). The revenue pointed out that the assessment order showed no evidence that no TDS was required on reimbursements and that TDS was deducted on bills separately raised.

Respondent's (Assessee) Arguments

  • On the interest disallowance: The assessee submitted that the amounts classified as interest-free loans were in truth trade receivables (debtors) and that it had sufficient interest-free funds (Rs.1,99,40,000) to meet the advances. The term loan on which interest was claimed was used wholly for acquisition of assets hypothecated to the bank and the interest-free advances were not made out of the term loan.
  • On the TDS / section 40(a)(ia) issue: The assessee contended that amounts treated as reimbursement of expenses by the clearing & forwarding (C&F) agent were reimbursements, and the C&F agent acted as a front man/incurred expenses on behalf of the company. The C&F agent raised separate debit notes for reimbursable expenses with supporting bills/receipts and raised a separate invoice for his services (on which TDS was deducted). The assessee argued that reimbursements, shown by separate bills, do not attract TDS provisions and thus are not hit by section 40(a)(ia).

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 / 67 Taxman 346 Relied upon by the Assessing Officer in support of disallowance under section 40(a)(ia) where tax was not deducted at source. The AO placed reliance on this Supreme Court decision when making the addition; however, the CIT(A) and the Tribunal declined to follow the AO's conclusion in the facts of this case where reimbursements were separately billed.
Om Satya Exim (P.) Ltd. v. ITO, ITA No.1335/Ahd/2010 (order dated 13.05.2011) Consideration of CBDT Circular No.715 dated 08.08.1975 and holding that where no composite bill was raised by the commission agent, the circular would not be applicable; relevance to whether reimbursements attract TDS. The CIT(A) placed reliance on this Tribunal decision to conclude that where reimbursement bills are separately raised by the agent, TDS is not required to be deducted and section 40(a)(ia) is not applicable; the Tribunal in the present appeal concurred with that approach.
Earlier Tribunal decision (unnamed in the opinion) Held that when a bill for reimbursement of expenses is separately raised, section 194J (or other TDS provisions) is not applicable to the reimbursement. The CIT(A) relied on that earlier decision (as noted in the Omb Satya Exim discussion) to support the view that separate reimbursement bills do not attract TDS and thus cannot be disallowed under section 40(a)(ia); the Tribunal concurred.

Court's Reasoning and Analysis

The court's analysis proceeds on the basis of concurrent findings of fact recorded by the Commissioner (Appeals) and affirmed by the Tribunal. The court considered each proposed question in turn:

Interest Disallowance (Section 36(1)(iii))

  1. Fact-finding: The term loan on which interest deduction was claimed was wholly used for acquisition of the assets that were hypothecated to the bank.
  2. Evidence: The assessee produced evidence before the AO indicating that it had sufficient interest-free funds (Rs.1,99,40,000) that could account for the advances if treated as advances/debts rather than loans from the term loan.
  3. CIT(A)'s conclusion: Recorded a categorical finding that the AO failed to establish any nexus between the borrowings and the utilization of funds (i.e., interest-bearing funds were not shown to have been diverted for non-business use).
  4. Tribunal concurrence: The Tribunal recorded a concurrent finding of fact agreeing that interest-bearing funds were not diverted for non-business purposes.
  5. Legal consequence: Because the Tribunal's conclusion rests on concurrent findings of fact after appreciation of evidence, and no perversity in those findings was pointed out, the court held that those findings do not give rise to a question of law for interference.

Disallowance under Section 40(a)(ia) — TDS on C&F Payments

  1. Fact-finding: The assessee had deducted TDS on amounts invoiced as service/commission, and separate bills were raised for reimbursements (freight and other out-of-pocket expenses) by the C&F agent; this separation of reimbursement bills was not disputed in the assessment order.
  2. Legal reasoning by CIT(A) and Tribunal: The CIT(A) relied upon the Tribunal decision in Om Satya Exim and an earlier decision to hold that where reimbursement bills are separately raised, such reimbursements do not attract TDS and therefore section 40(a)(ia) does not apply; the Tribunal concurred.
  3. Application: Given the concurrent factual finding that reimbursements were separately billed and that TDS had been deducted where it was applicable on service invoices, the Tribunal concluded there was no legal infirmity in holding that disallowance under section 40(a)(ia) could not be made for such reimbursement bills.
  4. Legal consequence: These concurrent findings of fact and their application to the law meant the matter did not present a substantial question of law warranting interference.

Holding and Implications

Holding: The appeal is dismissed. The court concluded that the Tribunal's impugned order, which upheld the CIT(A)'s deletions in respect of both the interest disallowance and the section 40(a)(ia) disallowance, did not give rise to any substantial question of law.

DISMISSED

Implications:

  • The Tribunal's order dated 30.03.2015 in ITA No.2125/Ahd/2011 (which upheld the CIT(A)'s deletions of the additions) stands affirmed by this court.
  • On the interest claim, concurrent findings of fact established that the term loan interest related to acquisition of hypothecated assets and that interest-bearing funds were not diverted for non-business use; no question of law arose from those factual findings.
  • On the TDS / section 40(a)(ia) issue, concurrent factual findings that reimbursement bills were raised separately and that TDS was deducted where applicable led to the conclusion that reimbursements did not attract TDS and could not be disallowed under section 40(a)(ia).
  • The court did not find any legal infirmity in the impugned order or any substantial question of law as framed by the revenue; accordingly, no interference with the Tribunal's factual conclusions was warranted.

This summary is prepared exclusively from the content of the provided opinion and does not add or infer facts beyond what is stated in that opinion.

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    Pri.Commissioner Of Income-Tax-1 v. Consumer Marketing (India) (P.) Ltd.

    Harsha Devani, J.

    1. In this appeal under section 260A of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), the appellant - revenue has challenged the order dated 30.03.2015 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench "B" in ITA No.2125/Ahd/2011 by proposing the following two questions, stated to be substantial questions of law :

    "[1] Whether the Appellate Tribunal has substantially erred in upholding the decision of the CIT (A) in deleting the addition of Rs.8,33,252/- made on account of disallowance of interest under section 36(1)((iii) of the Act?

    [2] Whether the Appellate Tribunal has substantially erred in upholding the decision of the CIT (A) in deleting the addition of Rs.55,94,825/- made on account of disallowance under section 40(a)(ia) of the Act ?"

    2. The assessment year is 2008-09 and the relevant accounting period is the previous year 2007-08. The assessee filed return of income on 30.10.2008 declaring total income of Rs.80,79,294/-. The case was selected for scrutiny. The Assessing Officer noticed that the assessee had given interest free loans of Rs.81,14,103/- out of which, Rs.70,14,103/- was given to M/s Arti Impex, Rs.6,00,000/- to Shri Ashok Sharma and Rs.5,00,000/- to Mrs. Rajkumari Sharma. The assessee submitted that it had entered into purchase and sale transactions with M/s Arti Impex and since the party was delaying payment and in fact, did not want to pay them, they had transferred such amount to loan account, which was a mis-classification on their part as it should have been taken as "debtor". The assessee further pointed out that in any case, they had sufficient interest free funds to the tune of Rs.1,99,40,000/- to take care of the advances. It was also pointed out that the payment of interest was specifically for term loan obtained for acquisition of assets for the business and had been obtained on hypothecation of that particular asset. The interest free loans (which were, in fact, debts) were not advanced out of the said term loan, which were directly disbursed for the acquisition of the particular business asset.

    3. The Assessing Officer computed interest disallowance at Rs.9,73,692/-, but allowed expenditure on account of interest paid and limited the disallowance to Rs.8,33,252/-. The assessee carried the matter in appeal before the Commissioner of Income Tax (Appeals), who deleted the additions made by the Assessing Officer. The revenue carried the matter before the Tribunal, but did not succeed.

    4. In respect of proposed question No.1, Mrs. Mauna Bhatt, learned senior standing counsel for the appellant submitted that the Tribunal has upheld the order passed by the Commissioner (Appeals) basically for the sake of consistency and that the Tribunal has not relied on its decision in the assessee's case, but has relied on the decision of the Commissioner (Appeals) in assessee's own case for assessment year 2007-08 in respect of which, further appeal was not filed in view of the low tax effect involved. It was submitted that the findings recorded by the Commissioner (Appeals) as well as the Tribunal being erroneous, the matter requires consideration.

    5. A perusal of the order passed by the Commissioner (Appeals) reveals that he has noted that there was a direct nexus between the borrowings and the utilization of funds, and therefore, it could not be said that interest bearing funds were diverted for non-business purpose. He further took note of the fact that similar issue had come up for consideration in the previous year when such disallowance was deleted. Since the facts were identical in the year under consideration, he held that interest free funds were not diverted for non-business use and deleted the addition made by the Assessing Officer. The Tribunal concurred with the findings recorded by the Commissioner (Appeals) and upheld the said order.

    6. From the facts noted hereinabove, it is apparent that the term loan, on which deduction of interest was sought, had entirely been used for the purpose of purchasing the assets which were hypothecated to the bank. The assessee had also produced sufficient evidence before the Assessing Officer to indicate that it had sufficient interest free funds to take care of the advances even if the same were accepted to be the advances. The Commissioner (Appeals) has recorded a categorical finding of fact to the effect that the Assessing Officer has failed to establish any nexus between the borrowings and the utilization of funds. It is in these circumstances, that the Tribunal has recorded a concurrent finding of fact to the effect that it could not be said that interest bearing funds were diverted for non-business purpose.

    7. Having regard to the fact that the conclusion arrived at by the Tribunal is based upon concurrent findings of fact recorded by it after appreciation of the evidence on record, in the absence of any perversity being pointed out in the findings of fact recorded by the Tribunal, the same does not give rise to any question of law.

    8. As regards proposed question No.2, the assessee debited Rs.62,85,013/- as clearing and forwarding charges, but out of this amount, deducted TDS (Tax Deducted at Source) only on an amount of Rs.7,45,801/-. It was the case of the assessee that the C & F agent incurs the expenses on behalf of the company and he is merely acting as a front man of the company; and that these expenses have no nexus with the commission he is supposed to get for his work. Before the Assessing Officer the assessee submitted that the part of the clearing and forwarding expenses, which forms reimbursement of expenses, does not attract the TDS provisions. The nature of such expenses was also pointed out to the Assessing Officer. It was submitted that the C & F agent raises a debit note for the expenses to be reimbursed by the company along with necessary bills/receipts/supporting evidence. He also raises an invoice for the services rendered by him with service tax. It is this invoice which attracts TDS, which has been duly deducted.

    9. The Assessing Officer disallowed an amount of Rs.55,94,825/- on which tax was not deducted at source and added it back to the total amount. While making such addition, the Assessing Officer placed reliance upon the decision of the Supreme Court in the case of Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435/67 Taxman 346. The assessee carried the matter in appeal before the Commissioner (Appeals), who deleted the disallowance. The revenue carried the matter before the Tribunal, but did not succeed.

    10. Mrs. Mauna Bhatt, learned senior standing counsel, submitted that the Tribunal has failed to appreciate that the Assessing Officer had recorded a finding that the assessee had entered into a contract for carrying out work as per the requirement of the assessee. Therefore, for the payment made for carrying out any work, TDS is liable to be deducted as per section 194C of the Act. Under the circumstances, the payment made without deducting TDS is not allowable under section 40(a)(ia) of the Act. Referring to the assessment order, it was pointed out that the same clearly shows that there is no evidence that no TDS was made on reimbursement and the TDS was deducted on bills separately raised. It was, accordingly, urged that the matter requires consideration on the question a proposed or as may be deemed fit by this court.

    11. A perusal of the order passed by the Commissioner (Appeals) reveals that he has taken note of the fact that the assessee did not deduct TDS on reimbursements made to C & F agent on separate bills of reimbursement on account of freight and other payments made on behalf of the assessee. The Commissioner (Appeals) placed reliance upon the decision of the Tribunal in the case of Om Satya Exim (P.) Ltd. v. ITO rendered on 13.05.2011 in ITA No.1335/Ahd/2010 wherein, the Tribunal had considered the circular issued by the C.B.D.T. bearing No.715 dated 08.08.1975 and found that since in the facts of the said case, no composite bill had been raised by the commission agent, the circular would not be applicable. The Tribunal, in that decision, also placed reliance upon an earlier decision in which it was held that when the bill for reimbursement of expenses has been separately raised, section 194J of the Act is not applicable. It was held that TDS is not required to be deducted from such reimbursement of expenses and hence, section 40(a)(ia) of the Act is not applicable with regard to such payments. The Commissioner (Appeals) noted that the jurisdictional Tribunal in case of payment to Customs House Agent held that no TDS is required to be deducted in the case where reimbursement bills were separately raised. The assessee had also made payment to clearing and forwarding agents and separate bills were raised in respect of reimbursement of expenses incurred by the agents on behalf of the assessee. The fact that separate bills were issued for services and for reimbursements is not in dispute as per the assessment order. Since the facts of the assessee's case were identical to the case decided by the Tribunal, the Commissioner (Appeals) followed the same and accordingly, held that disallowance in respect of those claims under section 40(a)(ia) of the Act cannot be made and deleted the additions. The Tribunal, in the impugned order, has concurred with the findings recorded by the Commissioner (Appeals), namely, that no TDS is required to be deducted in case where the reimbursement bills were separately raised.

    12. Thus, from the concurrent findings of fact recorded by the Tribunal, it is apparent that the assessee had deducted the TDS in respect of the payment made to the C & F agent and separate bills had been raised in respect of reimbursement expenses incurred by the agent. Since the reimbursement bills were separately raised, there was no requirement to deduct TDS in respect thereof. Under the circumstances, it cannot be said that there is any legal infirmity in the impugned order passed by the Tribunal in holding that disallowance under section 40(a)(ia) of the Act could not be made in respect of reimbursement bills which were separately raised as no TDS was required to be deducted in respect thereof. Under the circumstances, the impugned order passed by the Tribunal does not give rise to any question of law, much less a substantial question of law, as proposed or otherwise.

    13. In the light of the above discussion, the appeal fails and is, accordingly, dismissed.

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    Pri.Commissioner Of Income-Tax-1 v. Consumer Marketing (India) (P.) Ltd.
    (Sep 21, 2015)