2009 (12) TMI 677 - AT - Income Tax

Accrual of Income - Business expenditure - Deduction of tax at source - Payment to non-resident - HELD THAT - the mere non-compliance with the provisions of sub-section (2) of section 195 per se does not lead to the conclusion that the liability of the person responsible is fixed under sub-section (1) and in every such case, the consequences of failure to deduct or pay the tax including the rigour of section 40(a)( i) shall follow. At best, compliance with sub-section (2) of section 195 is one of the courses available to avoid payment or crediting the account of non-resident etc. without deduction of tax at source. The view taken by the authorities below that taking recourse to sub-section (2) is the only solution to avoid the payment to non-resident without deduction of tax at source, without considering the non-taxability of the amount in the hands of payee, In our considered opinion, does not merit acceptance. As the reimbursement of expenses is not taxable in the hands of payee, there is no point in compelling the assessee to still go ahead with the deduction of tax at source. Ex consequenti the impugned order on this issue is set aside. This ground is allowed. In this view of the matter there remains no doubt whatsoever that if the assessee has failed to claim deduction in the return filed by it, which is otherwise available to it as per law, the doors of justice cannot be closed to the assessee simply for the reason that no revised return was filed making such a claim for deduction. It is simple and plain that the purpose of making assessment is to collect the rightful tax due from the assessee. Filing of revised return by the assessee may be a valid mode of claiming deduction which was omitted to be claimed in the original return. But it is not that if revised return is not filed or the time limit for the filing of the revised return has expired but the assessment is still pending, that the assessee should be prohibited from making such a claim. Technicalities cannot be allowed to work as speed breakers in the course of dispensation of justice. If an amount is legally deductible, nothing can prevent the Tribunal from accepting such a plea. Unamortized cost of temporary structure - We find that the order of the ld. CIT(A) for assessment year 2002-03 has attained finality by which it was held that the said sum of Rs. 1.04 crores was not allowable as deduction for the reason that 5 per cent of the project was incomplete in that year and the said sum will be allowable in the subsequent years in which the said project is completed. In the impugned order the learned CIT(A) has recorded a categorical finding that the project was still incomplete and accordingly he directed the AO to allow proportionate deduction by considering the part of the project which was completed. We, therefore, do not find any reason to interfere with the impugned order on this score. The grounds raised by the assessee as well as the Revenue, therefore, stand dismissed. Claim for excise duty refund - Whether the income could be said to have accrued to the assessee in the year in question on making application with DGFT - It is noted that material on which excise refund had been claimed, was consumed by the assessee in the project. The excise refund was claimed under rule 6(1)( a ) of the Duty Drawback Rules under the deemed exports. Albeit the material was used by the assessee in the earlier years, but it made a claim in the instant year for the refund of excise duty vide its application dated 28-3-2003 filed with DGFT for refund of terminal excise duty paid on the construction material utilized in the project. Since the amount in question is incentive for deemed exports, the mandate of the judgment in Punjab Bone Mill s 1997 (8) TMI 60 - PUNJAB AND HARYANA HIGH COURT case wilfully apply to the instant case and as a result of that the amount is chargeable to tax only in the instant year on the assessee filing the application for claim. We, therefore, hold that the learned CIT(A) was justified in coming to the conclusion that the said amount of Rs. 12.83 crores is liable to tax in the instant year. We will however like to clarify that if due to the dispute, it finally turns out that some part of this claim is not granted in entirety, then such part will be deductible in the year in which the claim to that extent is finally rejected. This ground is not allowed. regarding claim for deduction of gratuity - paid to the employees who left the employment - we direct the learned CIT(A) to dispose of such ground raised before him at Sr. No. 4 of Form No. 35. In the result, the appeal of the Revenue is dismissed and that of the assessee is partly allowed.

Issues Involved:
1. Disallowance under Section 40(a)(i) of the Income Tax Act.
2. Deduction of unamortized cost of temporary structures.
3. Taxability of excise duty refund claim.
4. Claim for deduction of gratuity paid to employees.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(i) of the Income Tax Act
The first issue pertains to the disallowance of Rs. 2,46,41,750 under Section 40(a)(i) due to non-deduction of tax at source on payments made to a non-resident associate concern. The assessee argued that the amount was a reimbursement of expenses and not chargeable to tax, thus not attracting Section 195(1). The Tribunal held that for Section 195(1) to apply, the payment must be "chargeable under the provisions of this Act." Since the reimbursement of expenses does not constitute income, it is not chargeable to tax, and hence, no tax deduction at source is required. Consequently, the disallowance under Section 40(a)(i) was not justified, and the ground was allowed in favor of the assessee.

2. Deduction of Unamortized Cost of Temporary Structures
The second issue involved the deduction of Rs. 1,04,38,065 related to temporary structures. The assessee claimed this amount as the project was completed in the current year. The Assessing Officer denied the deduction due to the absence of a revised return. The Tribunal noted that the CIT(A) had previously directed that the amount be allowed in the year of project completion. Since the project was still incomplete, the Tribunal upheld the CIT(A)'s direction to allow proportionate deduction based on the extent of project completion. Both the assessee's and the Revenue's grounds on this issue were dismissed.

3. Taxability of Excise Duty Refund Claim
The third issue concerned the taxability of a Rs. 12,83,51,428 excise duty refund claim. The assessee argued that the income had not accrued as the claim was not approved by the DGFT. The Tribunal, relying on the Supreme Court's decision in Punjab Bone Mills, held that income accrues when the claim is filed, irrespective of later disputes. Therefore, the excise duty refund claim was taxable in the year it was filed. The Tribunal clarified that if any part of the claim is later rejected, it would be deductible in the year of rejection. This ground was not allowed.

4. Claim for Deduction of Gratuity Paid to Employees
The fourth issue was the non-adjudication of the assessee's claim for deduction of gratuity paid to employees who left during the year. The Tribunal directed the CIT(A) to adjudicate this ground, as it remained unaddressed in the impugned order.

Conclusion:
The appeal of the Revenue was dismissed, and the appeal of the assessee was partly allowed. The Tribunal provided clear directives on the application of Section 40(a)(i), the conditions for claiming deductions on temporary structures, the taxability of excise duty refunds, and the need for adjudication on the gratuity deduction claim.

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