2014 (8) TMI 1189 - AT - Income Tax

TDS u/s 194C - payment made to a resident for the services rendered - local agent of non-resident company has rendered services to the assessee - HELD THAT - Agent of the foreign shipping company is only a conduit but the destination of the payment is the foreign shipping company and therefore, it is not liable to TDS provisions. Though the AO has observed that the local agent has rendered services to the assessee, his order is silent as to the nature of services rendered by the local agent of the foreign shipping company. The Board s circular No.723 dated 19-91995,in force during the relevant assessment year, clearly provides that payments made to the shipping agent of non-resident ship-owners or charterers for carriage of passengers, etc., from the port in India is not liable for TDS u/s 194C and 195 of the Act. The Board s circulars are binding on the Revenue authorities. Before disallowance u/s 40(a)(ia) of the Act, the AO ought to have examined and brought on record the nature of services rendered by the local agents of the non-resident company which he has failed to do so. Neither has the CIT(A) done this exercise. In view of the same, we deem it fit and proper to remit this issue to the file of the AO to re-consider the same in accordance with law and if it is found that the recipient of payment is only a local agent of the non-resident company and has not rendered any independent services but has received the payment on behalf of the non-resident company for the services rendered by the non-resident company, then no disallowance is required to be made. With these observations, the issue is remitted back to the AO for consideration in the light of our observations above. These grounds are accordingly allowed for statistical purposes. Claim of bad debt - disallowance on the ground that the same has not been written off in the books of account of the assessee - HELD THAT - We find that there is a finding of the AO which is not disputed by the assessee that the bad debts have not been written off in its books of account for the relevant assessment year. In view of the same, the said claim is not allowable and the AO has rightly disallowed the same and brought to tax. As regards the assessee s prayer to give a direction that the same may be considered in the next assessment year, we are not inclined to accept this contention, as a direction can be given only for the issues arising in the assessment of income for the relevant assessment year and not to any earlier or subsequent assessment year. It is for the assessee to make a claim and the AO to consider such a claim, if made, during the assessment proceedings of the relevant assessment year. In view of the same, these grounds of appeal are dismissed. Discrepancy in the valuation of closing stock both with regard to the quantum and the value as on 31-3-2005 - HELD THAT - We find that the CIT(A) has also not verified the contention of the assessee and has merely confirmed the additions made on account of difference in the valuation of closing stock. We find that none of the authorities have, in fact, examined the contentions of the assessee and have not verified the explanation of the assessee with regard to the alleged discrepancies in the valuation of the closing stock. In view of the same, we are inclined to set aside the order of the CIT(A) as well as the order of the AO on this issue and remit the issue to the file of the AO for reconsideration in accordance with law. The AO shall allow the assessee to explain the discrepancies, if any, in the valuation of closing stock by giving a fair opportunity of hearing to the assessee. These grounds are thus allowed for statistical purposes.

Summary

Issues:
1. TDS applicability on freight outward expenses debited to profit and loss account.
2. Disallowance of bad debt claim.
3. Discrepancy in the valuation of closing stock.

Analysis:

Issue 1: TDS Applicability on Freight Outward Expenses
The appeal involved whether tax deduction at source (TDS) was applicable on freight outward expenses debited to the profit and loss account. The Assessing Officer (AO) contended that TDS was required as the payment was made to a resident agent of a foreign shipping company. The AO disallowed the sum under section 40(a)(ia) of the Income-tax Act, 1961. The assessee argued that the local agent acted as a conduit, and the payment was ultimately for the foreign shipping company, not subject to TDS. The ITAT found that the AO did not specify the services rendered by the local agent and noted a circular exempting such payments from TDS. The issue was remitted to the AO for reconsideration based on the nature of services provided by the local agent.

Issue 2: Disallowance of Bad Debt Claim
The AO disallowed the bad debt claim as it was not written off in the books for the relevant assessment year. The ITAT upheld the disallowance, stating that the claim must be made in the relevant assessment year, not in subsequent years. The assessee's request for consideration in the next assessment year was rejected, emphasizing that claims should be made during the relevant assessment proceedings.

Issue 3: Discrepancy in Valuation of Closing Stock
The AO observed a discrepancy in the valuation of closing stock but did not verify the assessee's explanation. The CIT(A) confirmed the additions without examining the contentions of the assessee. The ITAT set aside the orders and remitted the issue to the AO for reconsideration, directing a fair opportunity for the assessee to explain any discrepancies in the valuation of closing stock.

In conclusion, the ITAT partially allowed the appeal, remitting the TDS issue back to the AO for reevaluation, dismissing the bad debt claim, and setting aside the valuation of closing stock for reassessment. The judgment highlighted the importance of proper examination and verification of contentions by tax authorities in determining tax liabilities and allowable deductions.