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2010 (10) TMI 695 - AT - Income TaxRemission of liability - Addition u/s 41 - Held that assessee s case is that no amount has been transferred to the profit and loss account. It was merely a book entry whereby sundry debtors amounting to Rs. 1, 08, 94, 578/ and corresponding amount payable to Emery USA where adjusted while passing a reversal entry in the books of account - Commissioner of Income Tax (Appeals) s himself agreed that provision of section 41(1) will not apply unless the assessee has been granted an allowance or deduction in respect of liability which has ceased - Thus against the debtors (which were on account of Emery USA) there was corresponding liability towards Emery USA - Consequently mere book entry of setting off sundry debtors with sundry creditors cannot constitute income - Decided in favor of the assessee Regarding disallowance of communication expense - Royalty - DTAA between India and USA - Assessing Officer observed that the nature of service appeared to be that of fee for technical service on which applicable TDS has not been deducted. He held that this squarely falls under the ambit of section 40(a)(i) - assessee submission is that the payment is being made for reimbursement of communication expenses incurred on behalf of the assessee by Emery USA - The subject of reimbursement are for EMCON connectivity data circuit expenses and not for the use of any industrial commercial or scientific equipment provided by SITA. Even the amount charged to the assessee is only a part of the total expenses incurred by the Emery USA on behalf of the various concerns - the payment was made merely for availing communication facility for transmitting data without there being any right conferred upon the assessee for use of any secret process or formula - Decided in favor of the assessee Reduction of income in the revised return - AO observed that assessee was given a number of opportunities to explain the nature of system failure reasons why it was not noticed at the time of audit and how was the system error removed and correct income computed - In reply the assessee submitted that error crept into account while revenue data was transferred from the front end server to the back end accounting system recording the revenue - ld. Counsel of the assessee submitted that company is not in a position to reconcile the detail in this regard and submitted that no purpose will be served if the matter is remitted to the files of the AO to give the assessee an opportunity to submit the details required in this regard - Decided against the assessee Regarding interest u/s 234D - Hon ble Kerala High Court in the case of Kerala Chemicals and Proteins Ltd. in TMI - 76873 - KERALA HIGH COURT had held that retrospective operation to substantial provision of law providing for interest cannot be given. It was further held that admittedly section 234D was introduced by Finance Act 2003 w.e.f. 1.6.2003 - The interest involved would be levied from 1.6.2003 till the date of completion of assessment as held by the Hon ble Kerala High Court - Appeal is allowed by way of remand to AO
Issues Involved:
1. Addition of Rs. 10,894,578/- to the total income under Section 41 of the Income Tax Act, 1961. 2. Disallowance of communication expenses amounting to Rs. 1,721,464/- under Section 40(a)(i) of the Income Tax Act, 1961. 3. Addition of Rs. 13,773,479/- on account of errors in revenue booking due to system failure. 4. Disallowance of managerial remuneration of Rs. 411,561/-. 5. Disallowance of communication expenses amounting to Rs. 1,742,063/- under Section 40(a)(i) of the Income Tax Act, 1961. 6. Deletion of addition of Rs. 30,34,169/- on account of handling fees. 7. Applicability of Section 234D for computation of interest. Issue-wise Detailed Analysis: 1. Addition of Rs. 10,894,578/- to the total income under Section 41 of the Income Tax Act, 1961: The Assessing Officer (AO) added Rs. 10,894,578/- to the total income, treating it as remission of liability under Section 41(1) of the Income Tax Act, 1961. The AO observed that the amount was no longer payable to Emery USA as it was written off by Emery USA. The Commissioner of Income Tax (Appeals) [CIT(A)] initially disagreed, noting that Section 41(1) would not apply unless an allowance or deduction was granted in respect of the liability. However, the CIT(A) referred to the Supreme Court decision in C.I.T. vs. TV Sundaram Iyenger and Sons Ltd., concluding that the amount should be treated as income. The Tribunal found that the amount was merely a book entry and not transferred to the profit and loss account, thus setting aside the orders of the lower authorities and deciding in favor of the assessee. 2. Disallowance of communication expenses amounting to Rs. 1,721,464/- under Section 40(a)(i) of the Income Tax Act, 1961: The AO disallowed communication expenses paid to Emery USA, treating it as fees for technical services and thus liable for TDS under Section 40(a)(i). The CIT(A) held that the payment was for the use of Emery USA's computer system for tracking packages and fell under Section 9(1)(iva). The Tribunal found that the payment was reimbursement of communication expenses and not in the nature of income. It was determined that the payment did not constitute royalty or fees for technical services, and the provisions of Article 26(3) of the Indo-US DTAA (Non-Discrimination Clause) were applicable, thus deciding in favor of the assessee. 3. Addition of Rs. 13,773,479/- on account of errors in revenue booking due to system failure: The AO added Rs. 13,773,479/- to the income, as the assessee could not provide satisfactory details regarding the system failure and reconciliation of the amount. The CIT(A) confirmed the AO's action due to the lack of necessary details. The Tribunal upheld the CIT(A)'s order, as the assessee was unable to reconcile the difference and provide factual details. 4. Disallowance of managerial remuneration of Rs. 411,561/-: The assessee's counsel did not press this ground, and the issue was dismissed as not pressed. 5. Disallowance of communication expenses amounting to Rs. 1,742,063/- under Section 40(a)(i) of the Income Tax Act, 1961: This issue was similar to the one in A.Y. 2002-03. Following the same reasoning, the Tribunal set aside the orders of the lower authorities and decided in favor of the assessee. 6. Deletion of addition of Rs. 30,34,169/- on account of handling fees: The AO disallowed handling fees payable to Emery USA due to non-deduction of TDS. The CIT(A) deleted the addition, following his order for A.Y. 2002-03. The Tribunal noted that the CIT(A)'s order for A.Y. 2002-03 was set aside and remitted to the AO. Consequently, the Tribunal also remitted this issue to the AO for reconsideration. 7. Applicability of Section 234D for computation of interest: The CIT(A) held that Section 234D, being a substantive provision, would not apply to assessment years prior to 1.6.2003. The Tribunal referred to the Special Bench decision in ITO vs. Ekta Promoters and the Kerala High Court decision in Kerala Chemicals and Proteins Ltd., concluding that interest under Section 234D would be applicable from 1.6.2003 onwards. The issue was set aside to the AO for recalculating interest accordingly. Conclusion: The appeals filed by the assessee were partly allowed, and the revenue's appeal was allowed for statistical purposes. The Tribunal provided detailed reasoning for each issue, considering relevant case laws and the provisions of the Income Tax Act and DTAA.
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