2017 (3) TMI 262 - AT - Income Tax

Payment of Standby Letter of Credit charges (SBLC) charges - Allowable business expenses or not - Held that - There is a commercial expediency in payment of SLBC charges by the assessee to M/s. Shalini P.Ltd and hence payment is an allowable expenditure. Therefore the deletion of disallowance made by the ld. CIT(A) is sustained. - Decided in favour of assessee TDS u/s 194C and 194J - consultancy and professional charges - disallowance made u/s 40(a)(ia) - mounts which is shown as payable on the date of balance sheet - Held that - The majority ruling in the case of Merilyn Shipping and Transports (2012 (4) TMI 290 - ITAT VISAKHAPATNAM ) was that if all amounts have been paid then no disallowance can be made u/s 40(1)(ia) of the Act if the amounts are found to be payable as on the year end then no disallowance can be made u/s 40(10(ia) of the Act. That in effect the Tribunal analyzing the section 40(a)(ia) of the Act had held that in the case of omission to deduct tax even the genuine and admissible expenses are to be disallowed. But it sought to remove the rigour of law by holding that the disallowance shall be restricted to the money which is yet to be paid. However, we have observed that in the case of Crescent Export Syndicate (2013 (5) TMI 510 - CALCUTTA HIGH COURT) observed that there can be no denial that the provision in question is harsh. But there is no ground which was not intended by the Legislature. The law was deliberately made harsh to secure compliance of the provisions requiring deduction of tax at source. It is not the case of an inadvertent error and accordingly the Hon ble High Court held that the provision of section 40(a)(ia) of the Act are applicable not only to the amounts which is shown as payable on the date of balance sheet but it is applicable to such expenditure which becomes payable at any time during the relevant previous year and was actually paid within the previous year. In the result the question is decided in favour of the revenue and against the assessee. TDS u/s 194I and 194C - failure to deposit within 31st March, 2009 - disallowance u/s 40(a)(ia) - Held that - The appellant has deducted the tax at source on these payments in the month of Feb. 2009 but has deposited the tax after the end of the accounting year.That the provision of section 40(a)(ia) has been amended by Finance Act 2010. As per the amended provision if the TDS amount is deposited before due date of filing of return then no disallowance can be made under section 40(a)(ia). It has been held by Supreme Court in the case of CIT v Alom Extrusions Ltd.(2009 (11) TMI 27 - SUPREME COURT) that the amendment made in the section 43B is not prospective but is explanatory and will accordingly apply retrospectively. Similarly view has been taken in the case CIT v Virgin Creations 2011 (11) TMI 348 - CALCUTTA HIGH COURT . In view of above discussed legal and factual position the further addition of ₹ 9,38,408/- made by applying the provision of section 40(a)(ia) is delete and thus the appellant gets relief of ₹ 9,38,408/- (11.32.925-194517) on this ground. CIT(A) had rightly sustained the disallowance of ₹ 73556/- u/s 194J of the Act and ₹ 120961/- u/s 194C of the Act in the facts and circumstances of the case. - Decided partly in favour of assessee

Summary

Issues Involved:
1. Allowability of Standby Letter of Credit (SBLC) charges as a business expenditure.
2. Disallowance under Section 40(a)(ia) for failure to deduct tax on consultancy and professional fees.
3. Disallowance under Section 40(a)(ia) for failure to deposit tax deducted at source (TDS) within the stipulated time.

Detailed Analysis:

Issue 1: Allowability of SBLC Charges as Business Expenditure
The core issue was whether the payment of ?11,75,82,702 as Standby Letter of Credit (SBLC) charges to M/s. Shalini Properties & Developers Limited was allowable as a business expenditure due to commercial expediency. The CIT(A) allowed the expenditure, stating that the payment was made for obtaining the 'Dunlop' brand name and logo, which significantly increased the income of the appellant company. The CIT(A) noted that the transactions were not colorable devices but were conducted for genuine commercial purposes. The CIT(A) also referenced various judicial precedents, including the Supreme Court's decision in Union of India vs. Azadi Bachao Andolan, to support the claim that the expenditure was incurred for commercial expediency and was thus allowable under Section 37(1) of the Income Tax Act. The tribunal upheld the CIT(A)'s decision, finding no infirmity in the findings and reasoning that the payment was indeed for commercial expediency.

Issue 2: Disallowance under Section 40(a)(ia) for Failure to Deduct Tax on Consultancy and Professional Fees
The Assessing Officer (AO) disallowed ?2,93,404 under Section 40(a)(ia) due to the failure to deduct tax on consultancy and professional fees. The appellant argued that the amount was a reimbursement of out-of-pocket expenses and thus not subject to TDS. The CIT(A) accepted the appellant's argument, relying on the Special Bench decision in Merilyn Shipping & Transports vs. ACIT, which held that Section 40(a)(ia) applies only to amounts payable as of the year-end and not to amounts already paid. The tribunal, however, reversed the CIT(A)'s decision, following the jurisdictional High Court's ruling in CIT vs. Crescent Export Syndicate, which held that Section 40(a)(ia) applies to both amounts payable and paid during the year.

Issue 3: Disallowance under Section 40(a)(ia) for Failure to Deposit TDS within the Stipulated Time
The AO disallowed ?11,32,925 under Section 40(a)(ia) for failure to deposit TDS deducted in February 2009 within the stipulated time (by 31st March 2009). The CIT(A) partially upheld the disallowance, confirming ?1,94,517 but deleting ?9,38,408 based on the retrospective applicability of the amendment to Section 40(a)(ia) by the Finance Act 2010, as interpreted by the Calcutta High Court in CIT vs. Virgin Creations. The tribunal upheld the CIT(A)'s partial disallowance, agreeing that the amendment applied retrospectively and that the TDS deposited before the due date of filing the return could not be disallowed.

Conclusion:
The tribunal upheld the CIT(A)'s decision on the allowability of SBLC charges as a business expenditure due to commercial expediency. However, it reversed the CIT(A)'s decision on the disallowance under Section 40(a)(ia) for failure to deduct tax on consultancy and professional fees, following the jurisdictional High Court's ruling. Lastly, the tribunal upheld the partial disallowance under Section 40(a)(ia) for failure to deposit TDS within the stipulated time, agreeing with the CIT(A) that the amendment to Section 40(a)(ia) applied retrospectively. The appeal was partly allowed in favor of the revenue.