2016 (4) TMI 524 - AT - Income Tax

TDS u/s 194C - reimbursement of expenses - Held that - We hold that reimbursement of expenses paid by the assessee to S. Natesa Iyer and company for reimbursement of air freight , insurance charges and postal charges in connection with export consignment shipped from India to Lusaka(Zambia) cannot be disallowed by invoking provisions of Section 40(a)(ia) of the Act as there is no liability on the assessee to deduct tax at source u/s 194C of the Act on these reimbursement of expenses paid by the assessee company. However, payment which was paid to M/s S. Natesa Iyer & Co. vide invoice dated 12-01-2008 for work performed by them for handling custom clearance etc. was subject to deduction of tax at source u/s 194C of the Act but the same was below the threshold exemption limit provided u/s 194C of the Act as per the facts emerging from the records, hence the same stood out of the applicability of provisions of Section 194C of the Act. In our considered view , the order of the CIT(A) is to be set aside and disallowance made by the A.O. and confirmed by the CIT(A) is ordered to be deleted. - Decided in favour of assessee. Addition of notional interest as income from other services - Held that - Assessee which was outstanding to be receivable to the tune of ₹ 9,86,874.18 as on 31-3-2008 and ₹ 12,33,772.00 as on 31-3-2007 as per audited financial statements submitted by the assessee . The assessee s total owned interest free funds being owned capital is ₹ 41,93,799.52 as at 31-03-2008 and ₹ 34,89,597.58 as at 31-03-2007 as per audited financial statements and there is a presumption that assessee has utilized its own interest free funds being owned capital for granting interest free loans to employee and his wife who are also relatives of the assessee. As could be observed that the assessee owned capital invested in the concern of ₹ 34.89 lacs as at 31-03-2007 is much higher than the interest free loan advanced of ₹ 12.34 lacs as at 31- 03-2007 , whereby it could be seen that interest free funds of ₹ 34.89 lacs owned by the assessee are much more than the amount of ₹ 12.34 lacs advanced by the assessee as interest free loans and the presumption as laid down by the judgments of jurisdictional Hon ble High Court of Bombay in the case of CIT v. Reliance Utilities and Power Limited (2009 (1) TMI 4 - BOMBAY HIGH COURT ) and CIT v. HDFC Bank Limited (2014 (8) TMI 119 - BOMBAY HIGH COURT) shall squarely apply that the assessee has deployed its owned funds for grant of interest free loans and hence the additions made by the AO and as confirmed by the CIT(A) with respect of interest as income from other sources is ordered to be deleted - Decided in favour of assessee.

Summary

Issues Involved:

1. Applicability of Section 40(a)(ia) of the Income Tax Act, 1961 concerning non-deduction of tax at source on payments made to C & F agents.
2. Addition of notional interest as income under the head "income from other sources."

Issue-wise Detailed Analysis:

1. Applicability of Section 40(a)(ia) concerning non-deduction of tax at source on payments made to C & F agents:

The assessee's sources of income included house property, business, and other sources. The AO observed that the assessee made a payment of ?71,519 to a C & F agent without deducting tax at source, which should have been done under Section 194C of the Act. Consequently, the AO disallowed the expenditure under Section 40(a)(ia) and added it to the total income.

The assessee contended before the CIT(A) that the provisions of Section 40(a)(ia) apply only to amounts payable at the end of the year and not to amounts already paid. Additionally, the assessee argued that a significant portion of the payment was for reimbursement of expenses (air freight and insurance) and not subject to TDS. The CIT(A) rejected these arguments, distinguishing the cited case laws and confirming the AO's action.

On appeal, the Tribunal noted that ?67,297 out of the total payment was for reimbursement of air freight and insurance charges, which are not subject to TDS as per the Delhi High Court's decision in CIT v. Opera Global Private Limited. The Tribunal held that these reimbursements are excluded from the provisions of Section 194C, as they do not include any element of commission or service charges. Consequently, the disallowance of ?71,519 was deleted, allowing the assessee's appeal on this ground.

2. Addition of notional interest as income:

The AO observed that the assessee had taken loans on which interest was paid and had also given interest-free loans to two parties. The AO added notional interest of ?118,000 as income under "income from other sources," reasoning that a prudent businessman would charge interest on such loans.

The assessee argued before the CIT(A) that the loans were given out of own resources for purchasing land and constructing a residential house, and no interest-bearing funds were diverted. The CIT(A) upheld the AO's decision, directing a proportionate disallowance of interest claimed under Section 36(1)(iii) based on the principle that borrowed funds should be used for business purposes.

On further appeal, the Tribunal found that the assessee had sufficient own funds (capital) to cover the interest-free loans given. Citing the Bombay High Court's decisions in CIT v. Reliance Utilities and Power Limited and CIT v. HDFC Bank Limited, the Tribunal presumed that the interest-free loans were made from the assessee's own funds. Therefore, the addition of notional interest was deleted, allowing the assessee's appeal on this ground.

Conclusion:

The appeal filed by the assessee was allowed, with the Tribunal deleting the disallowance of ?71,519 under Section 40(a)(ia) and the addition of ?118,000 as notional interest income. The Tribunal's decision was pronounced in the open court on 11th April 2016.