2014 (11) TMI 763 - AT - Income Tax

Reopening of assessment u/s 147 - Change of opinion - Held that - Explanation 2(c)(iii) to section 147 of the Act clearly says that income chargeable to tax has escaped assessment where an assessment has been made but excess relief was granted under the Act - In case the reopening is within four years Explanation 1 & 2 of section 147 would come into operation - Therefore, wherever excess relief was granted the assessing officer can rectify the same by reopening the assessment u/s 147 of the Act - Since excess relief was granted without considering the provisions of section 40(a)(ia) of the Act, the AO has rightly reopened the assessment. Amount paid for air and freight to three companies TDS not deducted Disallowance u/s 40(a)(ia) Held that - The agreement entered into between the assessee and Three Star Corporation clearly says that Three Star Corporation has to bear the actual freight from Cochin Airport - it is not the liability of the assessee to meet the expenditure of freight charges - the freight charges are the liability of Three Star Corporation - As per the agreement, Three Star Corporation has to pay the freight charges along with weekly bills to the assessee in dollars - Section 194C provides for deduction of tax by any person responsible for making payment for carrying out any work in pursuance of a contract. When Three Star Corporation is liable to pay the freight charges as per the arrangement / agreement and the assessee was required to pay the amount initially to the respective companies whether the assessee is liable to deduct tax or not Held that - The purchaser has to pay the freight charges in addition to the price agreed upon the contention of the assessee cannot be accepted that the assessee is not expected to deduct tax - Liability to pay the money is different from responsibility to pay the money - Section 194C requires the person responsible for paying the money and it does not requires to deduct tax by the person who is liable to make money - Since the assessee is responsible for making the payment, this Tribunal is of the considered opinion that the assessee is expected to deduct tax u/s 194C of the Act - There is no further disallowance required provided the assessee credited the reimbursement of freight charges under the head income from other sources as claimed by the ld.representative for the assessee - it needs to be verified whether the assessee credited the amount as Income from other sources thus, the matter is remitted back to the AO for verification Decided in favour of assessee.

Summary

Issues:
1. Reopening of assessment u/s 147 of the Act.
2. Disallowance of expenditure on air freight charges under section 40(a)(ia) of the Act.

Analysis:

Issue 1: Reopening of assessment u/s 147 of the Act
The appellant contested the reopening of assessment by the assessing officer under section 147 of the Act, arguing that there was no new information and the officer changed opinion without valid grounds. The respondent, however, justified the reopening based on the failure of the appellant to deduct tax on air freight payments. The Tribunal found that the appellant did not deduct tax on air freight payments to three companies, leading to a potential disallowance under section 40(a)(ia) of the Act. The Tribunal ruled that excess relief was granted to the appellant, justifying the assessment reopening within four years as per the Act. Additionally, the Tribunal differentiated the case from a Delhi High Court judgment, emphasizing the provisions of Explanation 2(c)(iii) to section 147 of the Act. The Tribunal concluded that the assessing officer rightly reopened the assessment due to the excess relief granted without considering the provisions of the Act.

Issue 2: Disallowance of expenditure on air freight charges under section 40(a)(ia) of the Act
The appellant argued that the freight charges were reimbursed by a foreign party, making it a revenue-neutral transaction and not subject to disallowance under section 40(a)(ia) of the Act. The respondent contended that since the appellant debited the payment in the profit & loss account, the assessing officer rightly disallowed the claim. The Tribunal analyzed the agreement between the appellant and the foreign party, concluding that the liability to pay freight charges rested with the foreign party. Despite the appellant debiting the payment, the Tribunal held that the appellant was responsible for making the payment, thus liable to deduct tax under section 194C of the Act. The Tribunal distinguished previous judgments where the responsibility for payment differed. However, the Tribunal remitted the issue back to the assessing officer to verify if the reimbursement of freight charges was credited as income from other sources. If credited as such, no further disallowance was necessary; otherwise, the expenditure had to be disallowed.

In conclusion, the Tribunal allowed the appeal for statistical purposes and remitted the issue back to the assessing officer for further verification, setting aside the orders of the lower authorities.