Income Tax Appellate Tribunal - Bangalore
The Assistant Commissioner Of Income ... vs M/S Karle International Pvt Ltd , ... on 6 July, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER
AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER
ITA No.399/Bang/2018
Assessment year : 2014-15
The Assistant Commissioner of Vs. M/s. Karle International Pvt. Ltd.,
Income Tax, No.151, Industrial Suburb,
Circle 4(1)(1), Yeshwantpur,
Bangalore. Bangalore - 560 022.
PAN: AADCK 4886C
APPELLANT RESPONDENT
Appellant by : Ms. Neera Malhotra, CIT(DR-II)(ITAT), Bengaluru.
Respondent by : Smt. Suman Lunkar, CA
Date of hearing : 04.06.2018
Date of Pronouncement : 06.07.2018
ORDER
Per N.V. Vasudevan, Judicial Member
This is an appeal by the revenue against the order dated 30.10.2017 of the CIT(Appeals)-IV, Bangalore relating to assessment year 2014-15.
2. Ground Nos.1 to 3 raised by the revenue reads as follows:-
"1. The Order of the Ld. CIT(A), in so far as it is prejudicial to the interest of the Revenue, is opposed to law and the fact and circumstances of the case.ITA No. 399/Bang/2018 Page 2 of 11
2. On facts of the case, Whether the decision of the Ld CIT(A) is right in allowing the appeal of the assessee easing the provisions of section 40(a)(ia) in favour of the assessee, wherein no where it was held that the assessee is at his liberty whether to deduct the TDS or not, which is against the intent and purpose of the statute.
3. Whether the Ld. CIT(A) is right in allowing the appeal of the assessee, wherein the learned appellate authority himself is stating that the assessee is a chronic defaulter of TDS."
3. The assessee is a company engaged in the business of manufacture of readymade garments. The assessee has its own manufacturing facility. In case of the need, the assessee also outsources the work of manufacturing to others. In respect of work of manufacturing outsourced to others, the assessee paid a sum of Rs.39,60,85,470 to M/s. L.T. Karle & Co. Out of the above payment, on a sum of Rs.29,72,63,800 the Assessee did not deduct tax at source as was required by the provisions of Sec.194C of the Act. The AO therefore added a sum of Rs.29,72,63,800 to the total income of the assessee for non-deduction of tax at source by invoking the provisions of section 40(a)(ia) of the Income- Tax Act, 1961 ["the Act"], which lays down that where tax is deductible on a payment and tax is not so deducted, then the sum in respect of which tax is not deducted at source, if it is claimed as expenditure in computing income from business, the same will not be allowed as a deduction, while computing the income from business. The AO accordingly made the impugned disallowance and addition to the total income u/s. 40(a)(ia) of the Act.
ITA No. 399/Bang/2018 Page 3 of 114. Before the CIT(Appeals), the assessee submitted that the recipient of payment from the assessee has included the amount received from assessee in the return of income filed for AY 2014-15. The Assessee also filed Form 26A which is the certificate of auditor certifying that the payee has included the amount received from the assessee in his return of income filed for the relevant assessment year and paid taxes thereon. The assessee pointed out that the 2nd proviso to section 40(a)(ia) of the Act which was introduced by the Finance Act, 2012 w.e.f. 1.4.2013 provided as follows:-
"Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso."
5. The 2nd proviso to Sec.40(a)(ia) lays down that for non-deduction of tax at source, if the Assessee is not treated as Assessee in default under the first proviso to 201(1) of the Act then no disallowance u/s.40(a)(ia) of the Act should be made. The first proviso to section 201(1) referred to the 2nd proviso to Sec.40(a)(ia) of the Act which was also introduced by the Finance Act, 2012 w.e.f. 1.7.2012 provided as follows:-
"Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident--
(i) has furnished his return of income under section 139;ITA No. 399/Bang/2018 Page 4 of 11
(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 person furnishes a certificate to this effect from an accountant in such form as may be prescribed:"
6. The gist of the first proviso to Sec.201(1) of the Act is that taxes due on the payment on which tax has not been deducted at source should have been paid by the payee by inclusion of such payment as part of his income and the return of income including the payment from the payer as part of payee's income. The further requirement is a certificate of a Chartered Accountant regarding compliance of the above conditions.
7. The assessee further submitted that the second proviso to section 40(a)(ia) was inserted in the Act by Finance Act, 2012 w.e.f. 1.4.2013 whereas the first proviso to section 201(1) was inserted by the Finance Act, 2012 w.e.f. 1.7.2012. The provisions of section 201(1) and section 40(a)(ia) as referred to above only implement the law which has been elucidated by the various High Courts, much earlier. As per these provisions, if ultimately the tax due to the exchequer is received then no disallowance u/s.40(a)(ia) of the Act should be made. These provisions are clarificatory and therefore will apply to all the proceedings pending on the date when they were brought into statute book. The assessee placed reliance on certain judicial pronouncements in respect of the above proposition.
8. The CIT(Appeals) obtained a remand report from the AO on the above contention and certificate filed by the assessee before the CIT(A). In the remand report, the AO did not make any adverse comments, but only ITA No. 399/Bang/2018 Page 5 of 11 took the plea that such a certificate was not filed in the course of assessment proceedings. On a consideration of the remand report of the AO and the submissions of the assessee and the judicial pronouncements relied upon by the assessee, the CIT(Appeals) deleted the addition made u/s. 40(a)(ia) of the Act, observing as follows:-
"iv) The assessee during the course of appeal-proceedings has placed reliance on numerous judicial pronouncements on the subject under consideration. The Assessee has drawn reference to the findings of the Hon'ble Supreme Court in the case of Hindustan Coca Cola Beverages Pvt. Ltd v/s CIT 163 taxman 55 in the context of section 201(1) and 201(1A), wherein it was held that, where deductee (recipient of income) has already declared income / paid taxes on amounts received from deductor, the department could not subject the same to double taxation. The appellant has also placed reliance on numerous other judicial decisions in this regard, including Gujarat Pipavan Port Ltd., vs DCIT TDS Circle Rajkot ( 614, 615, 641 & 642 Rjt 2012);
Rajeev Kumar Agarwal v/s. ACIT (ITA No. 337/Agra/2013); G. Shankar vs ACIT ITA no. 1832/Bang/2013 dated 10/10/2014. Having perused the same, it is quite apparent that the judicial position is in favour of the appellant, in respect of the issue, presently under consideration.
5.6. In background of the above detailed discussion, judicial position on the subject and facts & circumstances of the present case, it is apparent that the incomes in respect of which provision u/s 40a(ia) has been invoked, have been certified (as per CA's certificate in Form 26A) to be reflected / offered as income in the hands of the recipient i.e. M/s L.T. Karle & Co. The disallowance in the hands of the appellant would therefore result in double-taxation. In this view of the matter, the disallowance u/s 40a(ia) cannot be upheld without any evidenciary justification brought on record against the appellant's claim. The Assessee's grounds of appeal are therefore to be allowed."
ITA No. 399/Bang/2018 Page 6 of 119. Aggrieved by the order of CIT(Appeals), the revenue has raised grounds 1 to 3 before the Tribunal. Before us the ld. counsel for the assessee placed reliance upon the decision of the Hon'ble Delhi High Court in the case of CIT v. Ansal Land Mark Township (P) Ltd. (377 ITR 635)(Del) wherein the Hon'ble Delhi High Court held that amendment to the provisions of section 201(1) and section 40(a)(ia) of the Act by Finance Act, 2012 w.e.f. 1.7.2012 and 1.4.2013 by insertion of first proviso and third proviso respectively were applicable right from the beginning when section 40(a)(ia) of the Act was enacted.
10. The ld. DR relied on the order of the AO and remand report of the AO which was filed before the CIT(Appeals).
11. We have given a very careful consideration to the rival submissions. The Hon'ble Delhi High Court in the case of CIT Vs. Ansal Land Mark Township (I) Pvt.Ltd., in ITA No.160/2015 judgment dated 26.8.2015 has taken the view that the insertion of the second proviso to Sec.40(a)(ia) of the Act is retrospective and will apply from 1.4.2005. Similar view has also been taken by the Hon'ble Calcutta High Court in the case of M/s.Tirupati Construction (supra). Therefore the Assessee is entitled to the benefit of 2nd proviso to Sec.40(a)(ia) of the Act. The Assessee has filed certificate as is necessary under the 2nd proviso to Sec.40(a)(ia) of the Act and the AO in the remand report after verification has not drawn any adverse inference against the claim of the Assessee. It is thus clear that the recipient of payment from the Assessee has filed return of income for the relevant previous year within time allowed u/s.139(1) and also included the sum received from the Assessee in their return of income. Since the recipients have included the receipts paid by the assessee in their respective returns of income and also paid taxes on the same, no disallowance u/s.40(a)(ia) of the Act should be made. In our view the ITA No. 399/Bang/2018 Page 7 of 11 CIT(A) was fully justified in allowing the relief to the Assessee. We find no grounds to interfere with the order of the CIT(A). Consequently, ground Nos.1 to 3 raised by the Revenue are dismissed.
12. Ground Nos.4 & 5 raised by the revenue reads as follows:-
"4. On facts of the case, whether the decision of the Ld CIT(A) is right in allowing the appeal of assessee despite the fact that the provisions to section 14A makes it clear that the expenditure has to be worked out as per Rule 8D(2)(ii) & 8D(2)(iii).
5. On facts of the case, whether the decision of the Ld CIT(A) is right in allowing the appeal of assessee as the same contravenes the provisions of section 14A and also the Ld CIT(A) has not followed the instructions laid down in the Board's Circular No. 5/2014 dated 11/02/2014 wherein, the Board's has made it clear that the disallowance u/s. 14A r.w.r 8D has to be made even where the tax payer in a particular year has not earned any exempted income."
13. The assessee had made investment in shares and mutual funds of Rs.2 lakhs. The assessee had also incurred interest expenses debited in the profit & loss account of Rs.73,73,16,995. The AO was of the view that since the assessee had made investment which are likely to yield tax-free income, disallowance of expenses incurred in earning tax-free income have to be disallowed u/s. 14A of the Act r.w. Rule 8D of the Income-tax Rules, 1962 (the Rules). The AO accordingly computed the disallowance u/s. 14A of the Act as follows:-
"3.5 In view of the above discussion, the disallowance u/s. 14A of the Income Tax Act r.w.r. 8D of the Act is worked out as under:ITA No. 399/Bang/2018 Page 8 of 11
Disallowance attracted u/s. 14A r.w.r 8D A Total amount of direct interest/other expenses pertaining to NA tax- exempt investment B Total amount of indirect interest pertaining to tax-exempt 13,73,16,995 investments As at As at Average 31/03/14 31/03/13 C Average amount of tax 2,00,000 2,00,000 2,00,000 exempt investments D Average amount of total assets 251,71,14,117 248,65,22,583 250,18,18,350 E Proportionate indirect 10,977 interest to be disallowed B X C i.e. D 13,73,16,995 x 2,00,000 250,18,18,350 F 0.5% of average amount of tax 2,00,000*0.5% 1,000 exempt investments G Total disallowance attracted A+E+F 11,977 u/s. 14A r.w.r 8D 3.5 An amount of 11,977/- is disallowed u/s. 14A of the Income Tax Act, 1961 r.w.r 8D(2)(ii) of 10,977/- and r.w.r 8D(iii) of 1,000/- respectively.
Addition: 11,977/-"
14. On appeal by the assessee, the CIT(Appeals) deleted the addition made by the AO for the reason that there could be no disallowance of expenses u/s. 14A of the Act when there is no exempt income earned during the relevant previous year.
15. Aggrieved by the order of CIT(Appeals), the revenue is in appeal before the Tribunal.
16. The ld. DR relied on the order of the AO, whereas the ld. counsel for the assessee relied on the order of the CIT(Appeals).
ITA No. 399/Bang/2018 Page 9 of 1117. We have considered the rival submissions. At the time of hearing of this appeal, it was brought to our notice by the ld. counsel for the assessee that the admitted factual position in the present case is that there was no dividend income or other exempt income earned by the assessee during the relevant previous year. The ld. counsel for the assessee drew our attention to the decision of the Bangalore Bench of ITAT in the case of M/s UB Infrastructure Projects Ltd., Vs. DCIT, ITA No. 2098/Bang/2016 (asst.
year 2012-13) order dated 22/12/2017, wherein this Tribunal took the view that there can be no disallowance of expenses u/s 14A of the Act, if there is no exempt income earned during the relevant previous year. The following are the relevant observations of the Tribunal in this regard:-
"3. Having carefully examined the orders of authorities below, we find that undisputedly the assessee has not earned any exempted income. Now it is settled position of law that whenever assessee did not earn any exempt income, no disallowance could be made u/s. 14A of the Act. The Hon'ble Delhi High Court in the case of Cheminvest Ltd. v. CIT, 378 ITR 33 (Del) has categorically held that section 14A envisages that there should be actual receipt of income which was not includible in the total income during the relevant previous year for the purpose of disallowing any expenditure in relation to the said income. Wherever there is no exempt income includible in the total income of the assessee, the provisions of section 14A cannot be invoked. The relevant observations of the judgment of the Hon'ble Delhi High Court are extracted hereunder:-
"15. Turning to the central question that arises for consideration, the court finds that the complete answer is provided by the decision of this court in CIT v. Hololcim India (P) Ltd. (decision dated 5th September 2014, in I.T. A. No. 486 of 2014). In that case, a similar question arose, viz., whether the Income-tax Appellate Tribunal was justified in ITA No. 399/Bang/2018 Page 10 of 11 deleting the disallowance under section 14A of the Act when no dividend income had been earned by the assessee in the relevant assessment year ? The court referred to the decision of this court in Maxopp Investment Ltd. (supra) and to the decision of the Special Bench of the Income-tax Appellate Tribunal in this very case, i.e., Cheminvest Ltd. v. CIT [2009] 317 ITR (AT) 86 (Delhi) [SB]. The court also referred to three decisions of different High Courts which have decided the issue against Revenue. The first was the decision in CIT v. Lakhani Marketing Incl. (decision dated April 2, 2014, of the High Court of Punjab and Haryana in I. T. A. No. 970 of 2008)--since reported in [2015] 4 ITR-OL 246 (P&H)-- which in turn referred to two earlier decisions of the same court in CIT v. Hero Cycles Ltd. [2010] 323 ITR 518 (P&H) and CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204 (P&H). The second was of the Gujarat High Court in CIT v.
Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj) ; [2015] 372 1TR 97 (Guj) and the third of the Allahabad High Court in CIT v. Shivam Motors (P) Ltd. (decision dated 5th May, 2014, in T.A. No. 88 of ITA No.1 1071Bang12016 2014). These three decisions reiterated the position that when an assessee had not earned any taxable income in the relevant assessment year in question "corresponding expenditure could not be worked out for disallowance."
4. This was also examined by the Tribunal in the assessee's own case for assessment year 2010-11 and held that when there is no exempt income, provision of section 14 of the Act cannot be applied.
5. In the light of the aforesaid judgment, the provisions of section 14A cannot be invoked as there is no exempt income in the hands of the assessee. Accordingly, we find no infirmity in the order of the CIT(Appeals) who has rightly deleted the addition."
18. In view of the aforesaid decision of the Tribunal, we are of the view that the disallowance of expenditure u/s 14A of the Act was rightly deleted ITA No. 399/Bang/2018 Page 11 of 11 by the CIT(A). We find no grounds to interfere with the order of the CIT(A).
Consequently, Gr.Nos. 4 & 5 raised by the Revenue are dismissed.
19. The other grounds of appeal are general and academic calling for no specific adjudication.
20. In the result, the appeal by the revenue is dismissed.
Pronounced in the open court on this 06th day of July, 2018.
Sd/- Sd/-
( A.K. GARODIA ) ( N.V. VASUDEVAN)
Accountant Member Judicial Member
Bangalore,
Dated, the 06th July, 2018.
/ Desai Smurthy /
Copy to:
1. Appellant 2. Respondent 3. CIT 4. CIT(A)
5. DR, ITAT, Bangalore. 6. Guard file
By order
Senior Private Secretary
ITAT, Bangalore.