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2019 (5) TMI 111 - HC - Income TaxDeduction in respect of provision for liquidated damages and retention of money - contingent liability - possibility vs probability - HELD THAT - The controversy has been decided in the case of the Assessee itself by a Co-ordinate Bench of this Court for Assessment Year 1998-1999 on 13.08.2018 in FFE Minerals India (P) Ltd. v. Joint Commissioner of Income Tax, 2018 (9) TMI 357 - MADRAS HIGH COURT in which, it was held that when a provision was made for liquidated damages to be paid by the Assessee to the companies with which it executed certain turnkey projects and delay occurred in execution of such turnkey projects, the liability for liquidated damages made by the Assessee had not crystallized during the previous year in question and, therefore, the same was not allowable towards business expenditure under Section 37 (1) - M/S. ROTORK CONTROLS INDIA (P) LTD. VERSUS COMMISSIONER OF INCOME TAX, CHENNAI 2009 (5) TMI 16 - SUPREME COURT OF INDIA followed. - First Question of Law in favour of the Revenue and against the Assessee. Disallowance u/s 40 (a) (i) - TDS u/s 195 OR 194A - interest paid to its Banker for import of certain goods from a supplier in USA - remittance to the exporter in USA through his Bank in USA - HELD THAT - We are satisfied that the learned Assessing Authority was absolutely not justified in invoking Section 195, ignoring the fact of payment made by the Assessee to its own Bank in India. There was no material on record either produced by the Assessee or brought on record by the Assessing Authority, on the basis of which a direct payment by the Assessee to the non-resident company in US could be inferred and, therefore, the applicability of Section 195 was out of question. Still, the Assessing Authority, without having any material on record, chose to ignore the provision of Section 194A (3), which clearly provides that the provisions of Section 194A shall not apply in case such income is credited or paid to any banking company. Payment of interest in question was made by the Asseseee to its own Banker in India for the grace period or period of delay under the contract and such remittance was made to the exporter in USA through his Bank in USA. This is how in normal course export and import transactions take place and without the intervention of Banks, direct payment for import cannot be made and, therefore, the existence of a Bank in India through which such remittance was made by the Assessee during the year in question and payment of interest made by the Assessee to its Bank in India could not have been ignored by the Assessing Authority. Without there being any material on record in this regard, the learned Assessing Authority could not even have arrived at the figure of interest of ₹ 6,22,577/-. If the provisions of Section 40 (a) (i) have to be invoked, the burden squarely lies on the Assessing Authority to establish in the first instance that the relevant TDS provisions were applicable to the facts of the case, casting a legal obligation upon the Assessee to deduct tax at source. Without such a finding or basis being found, the disallowance u/s 40 (a) (i) could not have been lightly made by the Assessing Authority. In the present case, we find it to be casually invoked by the Assessing Authority as well as the Tribunal - Decided in favour of the Assessee and against the Revenue. Duty of Tribunal - The final fact finding body, particularly while reversing the order of the First Appellate Authority, was expected to deal with the facts of the case and the legal position in detail, before restoring the addition made in the hands of the Assessee in the present case. The findings of facts by the final fact finding body are not only of great relevance and significance for the higher Constitutional Courts, such as High Court under Section 260A of the Act in the present appeal, but, even otherwise also, the mandate of the Act is that the Tribunal should arrive at its own findings of facts based on relevant and cogent material.
Issues Involved:
1. Entitlement to deduction for provision for liquidated damages and retention of money. 2. Disallowance of interest under Section 40(a)(i) of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Entitlement to Deduction for Provision for Liquidated Damages and Retention of Money: The first issue concerns whether the assessee is entitled to a deduction in respect of the provision for liquidated damages and retention of money. The Tribunal had previously ruled against the assessee, determining that the liability for liquidated damages was contingent and had not crystallized during the relevant assessment year. This decision was based on the precedent set by the Hon'ble Supreme Court in Rotork Controls India (P.) Ltd. v. CIT, which established a "triple test" for recognizing a provision. The three tests are: (a) a present obligation as a result of a past event; (b) the probability of an outflow of resources to settle the obligation; and (c) a reliable estimate of the obligation amount. The court noted that the assessee had failed to satisfy all three tests, particularly the probability of an outflow of resources. The Tribunal's decision was aligned with the Supreme Court's judgment, which emphasized that only obligations arising from past events and existing independently of future business conduct qualify as provisions. Consequently, the court upheld the Tribunal's decision, ruling that the assessee was not entitled to the deduction claimed under Section 37(1) of the Act. The first question of law was answered in favor of the Revenue and against the assessee. 2. Disallowance of Interest under Section 40(a)(i): The second issue revolves around the disallowance of interest paid by the assessee to its banker for the import of goods, which the Assessing Authority disallowed under Section 40(a)(i) for non-deduction of tax at source. The CIT (A) had allowed the assessee's appeal, stating that the interest was paid to an Indian bank, and hence, no TDS was required under Section 194A(3). The Tribunal, however, reversed this decision, following its previous rulings that mandated TDS on such payments. The High Court disagreed with the Tribunal and the Assessing Authority, noting that the interest was paid by the assessee to its own bank in India, not directly to a non-resident entity. The court emphasized that there was no material evidence to suggest a direct payment to the US supplier, making the application of Section 195 inappropriate. The court also criticized the Assessing Authority for relying on assumptions without verifying the actual details of the interest payment. The court ruled that the burden of establishing the applicability of TDS provisions lies with the Assessing Authority, which had failed to do so in this case. Therefore, the court concluded that the disallowance under Section 40(a)(i) was unjustified and answered the second question of law in favor of the assessee and against the Revenue. Conclusion: The appeal was allowed in part. The first question of law was answered in favor of the Revenue, denying the deduction for provision for liquidated damages. The second question of law was answered in favor of the assessee, overturning the disallowance of interest under Section 40(a)(i). The court also directed the Registry to inform relevant authorities, including the President of the Income Tax Appellate Tribunals and the concerned Tribunal, emphasizing the need for proper legal basis and factual findings in such cases.
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