2013 (2) TMI 480 - AT - Income Tax

Disallowance u/s 40(a)(ia) TDS was not deducted on payment for packing material - Held that - It is for purchase of packing material, which does not attract the provisions of TDS - AO has also mentioned it as payment for packing material. As TDS was not deductible on the packing material - provisions of Section 40(a) (ia) are not attracted. Hence, the addition made of Rs.2,73,360/- u/s 40(a) (ia) on account of packing material is deleted Against the revenue. Interest on loan given to subsidiary Held that - The facts as available on record indicate that the sum of money was given by the assessee-company out of business expediency. Punjab Biotehnology park, a subsidiary of the assessee-company and therefore, the assessee is deeply interested in the working of the said company. Besides, the subsidiary company has been set in pursuance of joint collaboration agreement to which the assessee is a party for the development of Biotechnology Park. The subsidiary company is required to act as a facilitator for development of the biotechnology park in which the assessee is also interested Therefore loan standing in the name of Punjab Biotehnology park is guided by business expediency - The AO is directed not to disallow any interest attributable to the loans given by the assessee- company to the said subsidiary company Against the revenue. Interest free advance without commercial expediency - A sum of Rs. 49,38,930/- has been treated by the assessee-company itself as loan and advance given to Shri A.S. Bhatia, maternal uncle of Managing Director Held that - loans and advances have been treated as unsecured loans given by the assessee without any stipulation regarding their re-payment and interest - Auditors have considered the aforesaid loans as prejudicial to the interest of the assessee-company as no interest is being charged on them Therefore amount standing in the name of Shri A.S. Bhatia is in the nature of loan advanced by the assessee to him without any commercial expediency - The interest attributable to a sum of Rs. 49,38,930/- being the amount of diverted by the assessee-company for the personal benefit of Shri A.S. Bhatia is therefore liable to be disallowed. The AO is directed to re-compute the disallowance accordingly Against the assessee. Payments made towards freight charges - As decided in CIT V Bhagwati Steels, 326 ITR 108 (P&H), where f reight expenses incurred added to cost of goods in invoice raised and No inference that assessee paid any amount of freight separately, assessee is not liable to deduct TDS - Assessee not a defaulter under Section 194C- Income- tax Act,1961 s.s. 40(a) (ia), 194C(3) (i)- In favour of assessee. provisions of Section 40(a) (ia) in respect of sales commission - TDS is to be deducted if the amount exceeds Rs.2500/- as per the provisions of Section 194H - AO was right in disallowing the sales commission of Rs.21,191/- u/s 40(a) (ia) - Appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Deletion of addition on account of disallowance of interest and addition under Section 40(a)(ia) of the Income-tax Act, 1961.
2. Disallowance of interest paid treating the amount as an interest-free advance without commercial expediency.
3. Addition on account of payments made towards freight and sales commission under Section 40(a)(ia).

Detailed Analysis:

Issue 1: Deletion of Addition on Account of Disallowance of Interest and Addition under Section 40(a)(ia)
The Revenue contended that the CIT(A) erred in deleting the addition of Rs.20,21,752/- made on account of disallowance of interest and Rs.2,73,360/- made under Section 40(a)(ia) of the Act. The assessee argued that the addition of Rs.20,21,752/- was covered in their favor by a previous ITAT Chandigarh decision. The Tribunal found that the amount given to Punjab Biotechnology Park was out of business expediency, as the subsidiary was involved in a joint collaboration agreement with the assessee for the development of a biotechnology park. Respectfully following the previous ITAT decision, the Tribunal decided this issue in favor of the assessee.

Regarding the disallowance of Rs.2,73,360/- under Section 40(a)(ia), the CIT(A) had deleted the addition, stating that the payment was for packing material, which does not attract TDS provisions. The Tribunal agreed with the CIT(A)'s findings and dismissed the Revenue's ground of appeal.

Issue 2: Disallowance of Interest Paid Treating the Amount as Interest-Free Advance Without Commercial Expediency
The assessee's appeal included a ground that the CIT(A) erred in upholding the disallowance of interest paid, treating the amount as an interest-free advance to Shri A.S. Bhatia without commercial expediency. The Tribunal referred to its previous decision, where it was established that the amount given to Shri A.S. Bhatia, a maternal uncle of the Managing Director, was treated as an unsecured loan without any stipulation for repayment or interest. The auditors had considered this loan prejudicial to the assessee's interest, and the Tribunal upheld that the funds were diverted for non-business purposes. Respectfully following the previous decision, the Tribunal dismissed the grounds raised by the assessee.

Issue 3: Addition on Account of Payments Made Towards Freight and Sales Commission under Section 40(a)(ia)
The assessee contended that the CIT(A) erred in upholding the addition of Rs.97,293/- on account of payments made towards freight. The Tribunal referred to the jurisdictional High Court's decision in CIT v. Bhagwati Steels, which held that no TDS was required on freight expenses added to the cost of goods in the invoice. Following this decision, the Tribunal decided this issue in favor of the assessee.

Another issue raised was the addition of Rs.21,191/- on account of sales commission under Section 40(a)(ia). The CIT(A) upheld this addition, stating that TDS was required if the payment exceeded Rs.2,500/- as per Section 194H. The Tribunal found no infirmity in the CIT(A)'s findings and upheld the addition.

Conclusion:
- The appeal of the Revenue was dismissed.
- The appeal of the assessee was partly allowed, with the Tribunal deciding in favor of the assessee on the issue of freight payments but upholding the addition on sales commission.