2020 (8) TMI 13 - AT - Income Tax

Disallowance on account of contract cancellation - Non deduction of TDS - HELD THAT - Contract cancellation charges are in the nature of payment for failure to oblige contractual terms and conditions resulting in settlement of contracts at a price of lower than pre-determined price and thus the appellant had to make payment as per terms of contract. The cancellation of the contract was in respect of supply of goods in which the appellant deals. It is the appellant who knows his business and he knows when to enter into a contract and when to exit. Ld. CIT(A) justified such cancellation of contracts by the appellant which according to him a part and parcel of the regular export business. Disallowance of such contract cancellation payment holding it speculative in nature by the AO has, therefore, been directed to be deleted. Having regard to the entire aspect of the matter we find no ambiguity in the order passed by the Ld. CIT(A) who took into consideration of the order passed by the First Appellate Authority whereby and whereunder disallowance of cancellation charges for non-deduction of TDS in respect of the immediate preceding order was deleted which according to us is just and proper so as to warrant interference. We, thus, find no merit in the ground of appeal preferred by the Revenue and thus the same is hereby deleted. TDS u/s 195 - Disallowance being export commission paid to non-resident agents - Addition u/s. 40(a)(ia) on the ground of non-deduction of TDS - HELD THAT - When the commission has been paid to foreign parties for rendering services admittedly abroad for soliciting customers for its export business activities, the appellant is not liable for short deduction of tax at source and therefore disallowance made on this score under Section 40(a)(ia) is not permissible. Hence, keeping in mind such judicial precedent we find no infirmity in the order passed by the Ld. CIT(A) in deleting the disallowance made by the Ld. AO under Section 40(a)(ia) of the Act holding that such commission is not fees for technical services under Section 9(1)(vii) of the act and the same being in nature of business income for recipient of income/payee/non-residents is not taxable in India in terms Sec. 9(1)(i) in the absence of business connection in India, so as to warrant interference. See MGM EXPORTS 2018 (5) TMI 1240 - GUJARAT HIGH COURT - Decided in favour of assessee. Disallowance of foreign exchange fluctuation - HELD THAT - It is specific observation made by the Ld. CIT(A) that though the assessee is not a dealer in foreign exchange it had entered into forward contracts with banks for the purpose of hedging the loss due to fluctuation of foreign exchange while implementing the export contracts. Such transaction in foreign exchanges were truly identical to the assessee s regular course of business and hence the loss is not a speculative one under Section 43(5) same is incidental to the assessee s business and hence allowable. No infirmity in the order passed by the Ld. CIT(A) in deleting the addition made by the Ld. AO on the premise that hedging of currency is incidental to appellant s business and thus the same is allowable business expenditure, in the present facts and circumstances of the case so as to warrant interference - Decided in favour of the assessee. Disallowance u/s 14A - assessee made investments which are likely to generate exempt income which will not form part of the gross total income - HELD THAT - In the absence of any material or basis to hold that interest expenditure directly or indirectly was attributable for earning dividend income, the decision of the Ld. CIT-A cannot be said to be incorrect particularly taking into consideration the fact of non-recording of satisfaction as envisaged under sub-section 1 of Sec. 14 of the Act. Hence, we do not find any merit in the issue raised by the Revenue and therefore the same is dismissed. Disallowance of bad debt/forfeiture of advance - HELD THAT - Loss was incurred in the character of trader and during the ordinary course of business. If there is direct and proximate nexus between the business operation and the loss, or it is incidental to it, then the loss is deductible since without the business operation and doing all that is incidental to it, no profit can be earned - the same is business loss and not bad debts as provided in Sec. 36(1)(vii) and hence the loss is not hit by sub-section 2 of section 36 of the Act. Such forfeiture of advance is a business loss having a direct nexus with the operation of the business and is incidental to the business carried too and hence allowable. We, therefore, delete the addition made by the authorities below. This ground of appeal is, thus, allowed. Order being pronounced after ninety (90) days of hearing - COVID-19 pandemic and lockdown - HELD THAT - Taking note of the extraordinary situation in the light of the COVID-19 pandemic and lockdown, the period of lockdown days need to be excluded. See case of DCIT vs. JSW Limited 2020 (5) TMI 359 - ITAT MUMBAI - exclude the period of lockdown while computing the limitation provided under Rule 34(5) of the Income Tax (Appellate Tribunal) Rule 1963

Summary

Issues Involved:
1. Deletion of disallowance made on account of contract cancellation.
2. Disallowance of export commission paid to non-resident agents under Section 40(a)(ia) for non-deduction of TDS.
3. Deletion of disallowance of foreign exchange fluctuation.
4. Deletion of disallowance under Section 14A.
5. Confirmation of disallowance of bad debt/forfeiture of advance.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance Made on Account of Contract Cancellation:
The appellant, a private limited company engaged in trading agricultural products, building construction, and power generation, declared an income of ?23,96,84,200/-. The appellant paid ?2,80,05,500/- as contract cancellation charges to various foreign parties due to non-fulfillment of contractual terms. The Assessing Officer (AO) treated these charges as speculative loss under Section 73(1) and disallowed them. The CIT(A) allowed the appeal, considering the charges as part of regular export business. The Tribunal found no ambiguity in CIT(A)'s order and upheld the deletion of the disallowance, emphasizing that the contract cancellations were integral to the appellant's business operations.

2. Disallowance of Export Commission Paid to Non-Resident Agents under Section 40(a)(ia) for Non-Deduction of TDS:
The AO disallowed ?9,73,33,826/- paid as export commission to non-resident agents under Section 40(a)(ia) due to non-deduction of TDS under Section 194H. The CIT(A) deleted this disallowance, citing that the commission paid to non-residents for services rendered outside India is not taxable in India under Section 9(1)(i) and thus not subject to TDS under Section 195. The Tribunal upheld CIT(A)'s decision, referencing the Gujarat High Court ruling in Pr. Commissioner of Income Tax vs. MGM Exports and other relevant judgments, confirming that the commission payments were not taxable in India and no TDS was required.

3. Deletion of Disallowance of Foreign Exchange Fluctuation:
The AO disallowed ?46,28,828/- claimed as foreign exchange fluctuation, considering it speculative. The CIT(A) deleted the disallowance, relying on the Gujarat High Court judgment in CIT vs. Panchmahal Steel Ltd., which held that forward contracts for hedging against currency fluctuation are incidental to business and not speculative. The Tribunal upheld this view, noting that the transactions were part of regular business operations and allowable as business expenditure.

4. Deletion of Disallowance under Section 14A:
The AO disallowed ?6,02,976/- under Section 14A r.w.r 8D, assuming that the appellant might earn tax-exempt income from investments. The CIT(A) deleted the disallowance, stating that the AO did not record satisfaction about the correctness of the appellant's claim as required under Section 14A(1). The Tribunal upheld CIT(A)'s decision, referencing various judgments, including those from the Gujarat High Court, which emphasized the necessity of recording satisfaction before invoking Rule 8D.

5. Confirmation of Disallowance of Bad Debt/Forfeiture of Advance:
The AO disallowed ?60,07,108/- claimed as bad debt/forfeiture of advance to M/s. Manjeet Cotton Pvt. Ltd., stating it did not meet the conditions under Sections 36(1)(vii) and 36(2)(i). The CIT(A) confirmed the disallowance. The Tribunal, however, allowed the appeal, considering the forfeiture a business loss incidental to the appellant's business, referencing the Bombay High Court judgment in Narandas Mathuradas & Co. vs. CIT, which recognized such losses as deductible if they are directly related to business operations.

Conclusion:
- ITA No. 27/Rjt/2016 (Department’s Appeal) is dismissed.
- ITA No. 360/Rjt/2015 (Department’s Appeal) is dismissed.
- ITA No. 315/Rjt/2016 (Assessee’s Appeal) is allowed.

Note on Pronouncement Delay:
The delay in pronouncement due to the COVID-19 pandemic was justified by referencing the extraordinary circumstances and relevant judicial precedents, including the Supreme Court and Bombay High Court's directions on extending limitation periods during the lockdown. The Tribunal excluded the lockdown period from the 90-day pronouncement rule, ensuring compliance with Rule 34(5) of the Appellate Tribunal Rules, 1963.