2016 (11) TMI 1251 - AT - Income Tax

Claim of weighted deductions u/s 35(2AB) - disallowance of claim for the reasons that the items manufactured and supplied by the assessee to Indian Railways are in the nature of office machines and apparatus used in Railway stations for office work and for data processing, therefore, these items are clearly falling in Eleventh schedule - Held that - A.O. was erred in disallowing the weighted deduction claimed by the assessee under the provisions of section 35(2AB)(1) of the Act, despite the assessee s R D facility was approved by the competent authority. We further was of the view that the goods manufactured by the assessee are not a mere office machines or apparatus as listed in Eleventh schedule, but they are specially designed electronic equipments meant for use by Indian Railways to monitor smooth movement of trains. The assessee has categorically proved by filing necessary evidences of approval granted by the prescribed authority and also returns filed annually to the prescribed authority to justify the expenditure incurred towards R D expenditure. In our considered view, the competent authority has to decide whether a particular expenditure is eligible for deduction u/s 35(2AB) of the Act or not, but not the assessing officer. In the present case, the A.O. without following the due procedure laid down under the provisions of the Act and rules there under, simply disallowed the expenditure claimed by the assessee. Therefore, we direct the A.O. to allow the weighted deduction claimed by the assessee under the provisions of section 35(2AB)(1) of the Act. TDS u/s 194C - disallowance of direct expenses for non-deduction of tax at source - Held that - We are of the view that no disallowance can be made u/s 40(a)(ia) of the Act, for the amounts which have been already paid during the financial year. However, the facts relating to paid and payable are not emerging from the records, therefore, we set aside the issue to the file of the A.O. and direct the A.O. to examine the issue paid and payable with reference to books of accounts of the assessee and if the expenditure incurred by the assessee is paid within the same financial year, then the A.O. is directed to delete the additions made u/s 40(a)(ia) of the Act. In other words, the A.O. is directed to restrict the disallowances to the extent the amount remaining payable at the end of the financial year. TDS u/s 194H - disallowance of bank guarantee charges under the provisions of section 40(a)(ia) for non deduction of tds - Held that - This issue is covered by the decision of ITAT, Visakhapatnam in assessee s own case for the assessment year 2009-10 and submitted that the coordinate bench of this Tribunal, under similar circumstances deleted the additions made by the A.O. See Kotak Securities Ltd. Vs. DCIT 2012 (2) TMI 77 - ITAT MUMBAI wherein held 'guarantee commission' is not in the nature of 'commission' as it is understood in common business parlance and in the context of the section 194H. This transaction, in our considered view, is not a transaction between principal and agent so as to attract the tax deduction requirements u/s 194H.

Summary

Issues Involved:
1. Rejection of weighted deduction claimed under section 35(2AB) of the Income Tax Act.
2. Disallowance of direct expenses for non-deduction of tax at source under section 194C.
3. Disallowance of bank guarantee charges under section 40(a)(ia) for non-deduction of TDS under section 194H.

Issue-wise Detailed Analysis:

1. Rejection of Weighted Deduction Claimed Under Section 35(2AB):
The assessee, a company engaged in manufacturing electronic systems for Indian Railways, claimed a weighted deduction under section 35(2AB) for R&D expenditure. The Assessing Officer (A.O.) disallowed this claim, arguing that the goods manufactured fell under the Eleventh Schedule, specifically as office machines and apparatus, making the company ineligible for the deduction. The A.O. relied on a letter from the Railway Manager and concluded that the items were primarily for data processing at railway stations.

The assessee contended that the items were specially designed for Indian Railways and not mere office machines. The R&D facility was approved by the Department of Scientific and Industrial Research (DSIR). The A.O. did not follow the due procedure of referring the matter to the competent authority for clarification. The Tribunal found that the items manufactured were specialized electronic equipment for railway operations and not office machines. The Tribunal also noted that once the R&D facility is approved by the competent authority, the A.O. should not question the allowability of the expenditure without referring the matter back to the competent authority. The Tribunal directed the A.O. to allow the weighted deduction claimed by the assessee.

2. Disallowance of Direct Expenses for Non-Deduction of Tax at Source Under Section 194C:
The A.O. disallowed ?3,57,463/- for non-deduction of TDS on direct expenses under section 194C. The assessee argued that the expenses were fully paid within the financial year, referencing the ITAT Special Bench decision in Merilyn Shipping & Transports, which held that no disallowance could be made if amounts were fully paid within the same financial year. The Tribunal agreed with the assessee, stating that no disallowance should be made for amounts paid during the financial year. However, the Tribunal remanded the issue to the A.O. to verify the facts regarding paid and payable amounts and to restrict disallowance to amounts remaining payable at the end of the financial year.

3. Disallowance of Bank Guarantee Charges Under Section 40(a)(ia) for Non-Deduction of TDS Under Section 194H:
The A.O. disallowed bank guarantee charges for non-deduction of TDS under section 194H. The assessee argued that this issue was already decided in its favor by the ITAT, Visakhapatnam, for the assessment year 2009-10, which followed the ITAT Mumbai decision in Kotak Securities Ltd. The Tribunal noted that there is no principal-agent relationship between the bank issuing the guarantee and the assessee, and thus, section 194H does not apply. The Tribunal directed the A.O. to delete the additions made towards bank guarantee charges.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes and dismissed the revenue's appeal, directing the A.O. to allow the weighted deduction under section 35(2AB), verify and restrict disallowance of direct expenses under section 40(a)(ia), and delete the disallowance of bank guarantee charges.