2024 (7) TMI 225 - HC - Income Tax

TDS u/s 195 - Addition u/s 40(a)(ia) - payments aggregating to the non-residents towards the charges for sampling and analysis of cargo at the destination port as well as for professional and consultancy fees - Scope of Explanation to Section 9(1)(vii) and the retrospective amendment by the Finance Act, 2010 - HELD THAT - Having carefully perused the order of the Tribunal and upon considering the materials on record, we do not find favour with the submission of learned counsel for the Revenue that since the amendment made by the Finance Act, 2010, was retrospective, the payments made by the Respondent Assessee were taxable in the hands of the recipients and consequently, the Respondent Assessee was obliged to deduct tax at source from the payments made . It is not disputed that the decision of the coordinate Bench of the Tribunal in Ajit Ramakant Phatarpekar 2015 (4) TMI 261 - ITAT PANAJI has been accepted by the Department, which held that an Assessee could not be expected to deduct tax at source from payments that became taxable owing to retrospective amendment. The order of this Court in PCIT vs Ajit Phatarpekar 2020 (11) TMI 70 - BOMBAY HIGH COURT is an indicator that the order passed by the Tribunal in the case of Ajit Phatarpekar (supra) has been accepted by the Department. It is significant to note that the Supreme Court in Engineering Analysis Centre of Excellence (P) Ltd. 2021 (3) TMI 138 - SUPREME COURT has dealt with two latin maxims, lex non cogit ad impossibilia, i.e. the law does not demand the impossible and impotentia excusat legem, i.e. when there is a disability that makes it impossible to obey the law, the alleged disobedience of law is excused. It is thus clear that the person mentioned in section 195 of the Income Tax Act cannot be expected to do the impossible, namely, to apply the expanded definition of royalty inserted by explanation 4 to section 9 (1) (vi) of the Income Tax Act, for the assessment years in question, at a time when such explanation was not actually and factually in the statute. Nature of expenditure - expenditure on temple repairs and construction of school revenue or capital expenditure - Before the Tribunal, Assessee submitted that the expenditure incurred was out of business exigencies in order to create and maintain good/cordial relations with the villagers residing around the mining and business activity area of the Assessee, that no capital asset came to be acquired. - HELD THAT - Tribunal in the facts of the present case, according to us, did not commit any error in holding that the quantum of expenses incurred is a wholly irrelevant consideration for the purpose of determining whether the expenses incurred are of capital or revenue in nature. The decision of the CIT (A) as regards the allowance of the expenditure incurred on the purchase of ambulances has been accepted by the Revenue and has not been agitated further. The expenditure incurred on the purchase of ambulances was allowed. However, the expenditure incurred on renovation and construction of temples/schools was disallowed. In the facts of the present case, we are inclined to agree with the Tribunal that it is not open for the Revenue to take a divergent stand with respect to the expenditure incurred on renovation and construction of temples/schools when it has allowed the expenditure on purchase of ambulances only based on the reason that the expenditure on schools/temples was huge. Factually, the Respondent Assessee has incurred expenses on the renovation and construction of schools/temples situated in the villages surrounding the mining area. The expenses were incurred out of business exigencies, the details of which are set out earlier. The Tribunal, therefore, committed no error in holding that the expenditure was the allowable business expenditure of a revenue nature having found no capital asset had been acquired by the Respondent Assessee by incurring the expenditure. Appeal Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition under Section 40(a)(ia) of the Income Tax Act, 1961.
2. Deletion of disallowance of expenditure on renovation of temples.
3. Deletion of disallowance of donation to school for building construction.

Detailed Analysis:

Issue 1: Deletion of Addition under Section 40(a)(ia) of the Income Tax Act, 1961
The Tribunal deleted the addition of Rs. 6,94,32,433/- made on account of disallowance under Section 40(a)(ia). The Respondent Assessee had made payments to non-residents for sampling and analysis of cargo and professional consultancy fees, believing these were not taxable under the IT Act or relevant DTAA. The AO and CIT (A) disagreed, citing Explanation to Section 9(1)(vii) and the retrospective amendment by the Finance Act, 2010. The Tribunal, however, sided with the Assessee, referencing the principle that one cannot be expected to comply with a law that was not in force at the time of the transaction. This view was supported by the Supreme Court’s decision in Engineering Analysis Centre of Excellence (P) Ltd. and the precedent set in Ajit Ramakant Phatarpekar.

Issue 2: Deletion of Disallowance of Expenditure on Renovation of Temples
The AO disallowed Rs. 81,16,257/- for temple renovations, deeming it capital expenditure. The CIT (A) upheld this, citing the large quantum of the expense. The Tribunal overturned this, recognizing the expenditure as necessary for maintaining good relations with villagers around the mining area, thus qualifying as revenue expenditure. The Tribunal found no capital asset was acquired, aligning with the principle that business exigency justifies such expenses.

Issue 3: Deletion of Disallowance of Donation to School for Building Construction
Similarly, the AO disallowed Rs. 20,00,000/- for a school donation, also deemed capital expenditure. The CIT (A) upheld this, again citing the large quantum. The Tribunal found the expenditure necessary for maintaining local goodwill, thus allowable as revenue expenditure. The Tribunal noted that the quantum of expenditure is irrelevant if it serves business purposes and does not create a capital asset.

Conclusion:
The High Court upheld the Tribunal’s findings, emphasizing that the Respondent could not be expected to comply with retrospective tax laws and that expenditures aimed at maintaining good business relations and not resulting in capital assets are allowable as revenue expenses. The appeal was dismissed with no substantial question of law arising.