2018 (6) TMI 1695 - AT - Income Tax

Addition u/s 37 r.w 40(a)(ia) - service charges paid to M/s Golden Trust Financial Services (GTFS) hereafter for having acted as its agent - CIT(A) examining assessee s exclusive method of accounting in service tax receivable on output services as against inclusive method of service tax payments in respect of inputs services thereby holding the impugned expenditure to be eligible for deduction - assessee is a company engaged in corporate insurance business - HELD THAT - We posed a specific query as to whether the said operating expenditure included any commission agency services or infrastructure usages or not. There is no such material on record to this effect. It emerges therefore that the assessee has been following its consistent practice wherein agency and infrastructural service are being availed from the payee GTFS as accepted by the AO himself in preceding succeeding assessment years as discussed in above extracted CIT(A) s findings. Taxpayers before us as has already filed all the relevant particulars of the agency and infrastructure utilized on secured as already discussed at length in the CIT(A) s findings under challenge. Coupled with this is the clinching lower appellate authority s conclusion that these two entities are not group concerns at all. The assessee s directors names along with their respective stake holdings as well as payee firm s partners details reproduced hereinabove do not show any group(s) relationship before these. The Revenue s very fair in not involving section 40A(2)(b) of the Act even to prove the contrary. It is therefore a case of the assessee having availed both agency as well as infrastructure network of the payees GTFS carrying out in its corporate insurance agent business. Assessing Officer had invoked only section 37 in doubting genuineness of the impugned payments. Mr. Usman at this stage submits that CIT(A) ought to have applied section 40(a)(ia) disallowance as well since the assessee had not deducted TDS at the prescribed rate as per tabulation chart extracted forming part of CIT(A) s detailed discussion. We fail to agree with the Revenue s instant technical plea. The fact remains that the assessee has filed its payee s computation of income, income tax return as well as the corresponding assessment order sufficiently indicating that the impugned payment had been duly assessed as his case in its hands. Section 40(a)(ia) 2nd proviso inserted in the Act by way of the Finance Act, 2012 with effect from 01.04.2013 prescribe non application of the impugned provision in case the assessee s concerned is not an assessee in default as per section 201(1) 1st proviso. Hon'ble jurisdictional high court s decision in TIRUPATI CONSTURCTION 2016 (8) TMI 1310 - CALCUTTA HIGH COURT has concluded that the said proviso is a curative one having retrospective effect from 01.04.2005. We therefore decline the Revenue s arguments seeking to invoke u/s 40(a)(ia) of the Act. We further hold that hon'ble jurisdictional high court s land mark decision in CIT(A) vs. M/s S.K. Tekriwal 2012 (12) TMI 873 - CALCUTTA HIGH COURT has further concluded that the section 40(a)(ia) does not apply in case of short deduction of TDS than the prescribed rate. CIT DR next reiterates Revenue s two remaining averments that the assessee has followed exclusive method of its inbound receivables as against inclusive method for impugned expenditure whilst claiming service tax component (supra). Learned counsel representing assessee clarifies that this assessee is not registered under the service tax regime. What it has done it is to claim the impugned expenditure after making the actual payment which is duly allowable under the Act. It has further not claimed any benefit arising out of its exclusive method as well. We therefore reject Revenue s instant argument. CIT-DR s lastly contends that the argument that CIT(A) has erred in both law as well as on facts in adopting judicial consistency on the issue of the impugned payments of ₹66.18 crores despite the facts involved in the relevant previous year are altogether different than in preceding and succeeding assessment years. There is no material on record pin-pointing any such distinction on facts summarized in the lower authorities findings extracted in preceding foregoing discussion. We therefore do not find any substance in Revenue s instant last argument as well. - Decided against revenue

Summary

Issues Involved:
1. Disallowance of ?66.18 crores under Section 37 read with Section 40(a)(ia) of the Income Tax Act, 1961.
2. Method of accounting for service tax receivable on output services versus inclusive method for service tax payments on input services.
3. Consistency in judicial decisions regarding the same issue in different assessment years.

Detailed Analysis:

1. Disallowance of ?66.18 Crores:

The Revenue's primary grievance was the disallowance of ?66.18 crores paid as service charges to M/s Golden Trust Financial Services (GTFS). The Assessing Officer (AO) had questioned the genuineness of these payments, suspecting them to be excessive and not justified by the services rendered. The AO argued that GTFS was not the exclusive agent of the assessee and had already received significant operating expenses, making the additional payment unnecessary.

The assessee defended its payments, explaining that GTFS provided extensive agency and infrastructural services, which were crucial for its business operations. The payments were made under a written agreement, revised through an addendum, and included service tax as per applicable rates. The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's explanation, noting that the payments were for genuine business purposes and were supported by the agreement terms.

The CIT(A) further observed that GTFS had declared these payments in its income tax returns, and the transactions were scrutinized and accepted in GTFS's assessment. The CIT(A) concluded that the AO had not provided sufficient evidence to prove that the payments were bogus or that GTFS and the assessee were related entities.

2. Method of Accounting for Service Tax:

The Revenue argued that the assessee had erred in its method of accounting for service tax receivable on output services versus inclusive method for service tax payments on input services. The assessee clarified that it was not registered under the service tax regime and had claimed the expenditure after making actual payments. The CIT(A) found no merit in the Revenue's argument, noting that the assessee had not claimed any undue benefit from its accounting method.

3. Consistency in Judicial Decisions:

The Revenue contended that the CIT(A) had erred in maintaining judicial consistency on the issue of the impugned payments, despite different facts in the relevant assessment year. The CIT(A) noted that the AO had accepted similar payments in preceding and succeeding assessment years under identical circumstances. The CIT(A) emphasized the importance of consistency in judicial decisions, citing various legal precedents, including the Supreme Court's observations in Radhasoami Satsang vs. CIT, where it was held that a fundamental aspect found as a fact in one year should not be changed in subsequent years without compelling reasons.

Conclusion:

The CIT(A) reversed the AO's disallowance, finding that the payments to GTFS were genuine business expenses, supported by agreements and duly declared in GTFS's tax returns. The CIT(A) also rejected the Revenue's arguments regarding the method of accounting for service tax and the need for consistency in judicial decisions. The appeal was dismissed, upholding the CIT(A)'s findings.

Order:
The Revenue's appeal was dismissed, and the CIT(A)'s order was upheld. The payments made to GTFS were deemed genuine business expenses, and the method of accounting for service tax was found to be appropriate. The importance of consistency in judicial decisions was reaffirmed.