2008 (3) TMI 500 - AT - Income Tax

Reassessment proceedings u/s 147 - assessment orders are time-barred by limitation - liable to deduct TDS u/s 195 - Commission paid to foreign agents chargeable to tax in India? - Claim of bad debts written off. Reassessment proceedings u/s 147 - assessment orders are time-barred by limitation - notice u/s 148 issued - payment of commission in the past after obtaining necessary approval from the RBI - mere change of opinion - assessment order passed under section 143(3) merged with the block assessment order and therefore, no reassessment proceedings could be initiated - HELD THAT - Assessee has disclosed full evidences for the payments. All the details relating to these payments have been the subject-matter of total and full disclosure before the AO during the proceedings u/s 143(3) of the Act, There was no material coming to the possession of the AO on the basis of which he could say that there was such a failure on the part of the assessee to disclose fully and truly all material facts necessary for making the assessment. It is a clear case of change of opinion and therefore a wrong initiation of the proceedings us 148 of the Act. We agree with the reasons given by the CIT(A) and the conclusions arrived at in respect of the disputed issue. He correctly held that the proceedings u/s 147 was clearly time-barred and illegal. We decline to interfere with his order. Although reference has been made to several case law on both the sides during the course of proceedings, the decision of the Hon ble Supreme Court in the case of Indian Oil Corpn. v. ITO 1986 (5) TMI 1 - SUPREME COURT , which is placed at the assessee s paper book, is more relevant to the facts of this case. Disallowance of commission paid to foreign agents - No services rendered by ABC DSL - HELD THAT - AO failed to appreciate that the extent of services rendered by the foreign agents could be ascertained from the correspondences exchanged between the two parties and also the increase in the volume of business of the assessee. The role of the foreign agents in the matter of fixation of rates of stevedoring work was also not appreciated by the Assessing Officer. The Assessing Officer also ignored the certificate given by Mr. Barry Miller, Vice President of APL Lines Ltd., acknowledging that Mr. A.B.C. Dubash and his other associates, viz. Capt. Surty of ABC DSL, who were marketing and liasoning agents for the assessee negotiated with them in respect of the stevedoring contracts in India since 1993. Similarly, the Assessing Officer ignored the certificate given by the managing director of Marco Shipping Co. (PTE) Ltd., Singapore confirming that Mr. A.B.C. Dubash and his other associates of ABC DSL were negotiating and liasoning with him in Singapore, UK and USA for stevedoring and other services provided by the assessee in India to Watermen Steamship, USA from 1993. We would like to refer decision of the Hon ble Supreme Court in Union of India v. Azadi Bachao Andolan 2003 (10) TMI 5 - SUPREME COURT , wherein it was held that An act which is otherwise valid in law cannot be treated as non est'' merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interest, not only is the principle in Duke of Westminister alive and kicking in England but it also seems to have acquired judicial benediction of the Constitutional Bench in India, notwithstanding the temporary turbulence created in the wake of McDowell . The learned CIT(A) in the light of these principles have correctly appreciated the facts of the case and rejected the stand of the Assessing Officer and has rightly deleted the addition made by the Assessing Officer. We agree with his findings and uphold his order. TDS u/s 195 - Disallowance by invoking the provisions of section 40(a)(i) - Whether the commission paid by the appellant to the foreign agent is chargeable to tax in India in the hands of the recipient has to be examined with reference to the provisions of section 5 and section 9 of the Act - The case of the foreign agent, ABC DSL, is also not covered by any of the clauses of section 9 of the Act. Both the Assessing Officer and the learned CIT(A) contemplated that there was business connection between the appellant and the foreign agent. The appellant company and the foreign company, ABC DSL are two distinct and different entities with two different sets of management. If the provisions of section 9(1)( i ) are analysed carefully, it will transpire that there is no business connection between the two within the meaning of that section. The term business connection has been explained clearly in the case of Blue Star Engg. Co. (Bombay) (P.) Ltd. v. CIT 1968 (12) TMI 3 - BOMBAY HIGH COURT held that in order to constitute a business connection there must be an activity of the non-resident in the taxable territories having an intimate and real relation of a continuous character with the business of the non-resident and contributing to the earning of profits by the non-resident in his business. In the present case, the foreign agent rendered no service in India. Therefore, no income accrued or arose in India. The question of deduction of tax at source under section 195 of the Act thus did not arise. The Assessing Officer oversimplified the issue by saying that in the matter of deduction of tax it would be immaterial as to whether the payment was made outside India or within India. He overlooked the expression any other sum chargeable under the provisions of this Act embedded in the section. Unless the payment made to a non-resident (not being a company) or a foreign company is chargeable to tax under the provisions of the Act, deduction of tax under section 195 is totally ruled out. The matter was clarified by CBDT in some of the instructions issued by them from time to time. AO failed to explain under what circumstances he made the disallowance ignoring the CBDT circulars. All instructions/circulars are issued under section 119 of the Act. These instructions/circulars are binding on the Assessing Officers, as held by the apex Court and different High Courts on different occasions. We are strongly of the view that the learned CIT(A) wrongly interpreted the provisions of section 40(a)(i) and section 195 of the Act. Therefore, we hold that the order of the CIT(A) confirming the addition made by the AO is unjustified and uncalled for. Accordingly the addition is deleted. Claim of bad debts written off - No dispute that the debt arose in the course of the assessee s normal and regular business transactions. These are parts of the advances made against hiring of barges/tugs from Concord Barges, which became irrecoverable because of the winding up of the debtor s business. The amounts were written off to the P L a/c during the relevant previous year and there was no chance of recovery of the disputed amount. In our view, such write off are clearly allowable under section 36(1)(iii) of the Act. We accept the claim of the assessee and delete the disallowance. In the result, the appeal of the assessee is allowed and the revenue s appeals are dismissed.

Summary

Issues Involved:
1. Initiation of proceedings under section 147 of the Income Tax Act.
2. Disallowance of commission payments to foreign agents.
3. Applicability of section 40(a)(i) regarding disallowance for non-deduction of tax at source.
4. Claim of bad debts written off.

Issue-wise Detailed Analysis:

1. Initiation of Proceedings under Section 147 of the Income Tax Act:

The revenue's appeals for the assessment years 1995-96, 1996-97, 1997-98, 1998-99, and 2000-01 involved the initiation of proceedings under section 147 for disallowing foreign commission payments to M/s. ABC Dubash Shipping Ltd. The proceedings were initiated after the expiry of four years from the end of the relevant assessment years. The assessee contended that there was no failure to file returns or disclose all material facts necessary for the assessment. The CIT(A) held that the reopening of assessments was barred by limitation and was a result of a change of opinion, which was confirmed by the Tribunal. The Tribunal agreed that the reassessment proceedings were time-barred and illegal, citing the Supreme Court decision in Indian Oil Corpn. v. ITO, which emphasized the need for new material to justify reopening an assessment beyond four years.

2. Disallowance of Commission Payments to Foreign Agents:

The revenue contended that the commission payments to ABC Dubash Shipping Ltd. were without valid business consideration and were essentially payments made to family members. The CIT(A) found that the payments were genuine, approved by the RBI, and necessary for the assessee's business. The Tribunal upheld the CIT(A)'s findings, noting that the foreign agents provided significant services that benefited the assessee's business. The Tribunal emphasized that the commission payments were reasonable and approved by the RBI, and there was no evidence of siphoning funds by the assessee's family members.

3. Applicability of Section 40(a)(i) Regarding Disallowance for Non-Deduction of Tax at Source:

For the assessment year 1999-2000, the CIT(A) confirmed the disallowance of commission payments under section 40(a)(i) for non-deduction of tax at source. The assessee relied on CBDT Circular No. 786, which clarified that no tax was deductible on payments to foreign agents operating outside India. The Tribunal agreed with the assessee, noting that the commission paid to the foreign agent was not chargeable to tax in India as the services were rendered outside India. The Tribunal cited various judicial precedents, including CIT v. Toshoku Ltd., which held that commission earned for services rendered outside India could not be deemed income accrued in India. Consequently, the Tribunal deleted the disallowance.

4. Claim of Bad Debts Written Off:

The assessee claimed a deduction for bad debts written off amounting to Rs. 12,76,115 for the assessment year 1999-2000. The CIT(A) disallowed the claim, stating that the assessee did not provide evidence of the debt arising from normal business transactions. The Tribunal, however, accepted the assessee's explanation that the debt arose from advances made for hiring barges/tugs, which became irrecoverable. The Tribunal allowed the deduction under section 36(1)(iii), recognizing the write-off as a legitimate business expense.

Conclusion:

The Tribunal dismissed the revenue's appeals and allowed the assessee's appeal, confirming that the reassessment proceedings were time-barred, the commission payments were genuine and necessary for business, no tax was deductible on payments to foreign agents operating outside India, and the bad debts written off were allowable as business expenses.