2018 (11) TMI 1109 - AT - Income Tax

TDS u/s 195 - usance interest on delayed payment to its holding company - whether payment of usance interest is part of purchase cost as per the DTAA between India and Singapore - Held that - It is undisputed fact that the Hon ble Gujarat High Court in the case of Vijay Ship Breaking Corporation 2003 (3) TMI 91 - GUJARAT HIGH COURT has decided the issue against the assessee as held The usance interest paid by the assessees was not any part of the purchase price of the ships and was interest within the meaning of the definition of the term interest under section 2(28A) of the Income-tax Act, 1961. The assessees who did not deduct tax at source under section 195(1) of the Income-tax Act, 1961, on the usance interest payable outside India and on which tax had not been paid, are not entitled to deduct the amounts of such usance interest in computing their income chargeable under the head Profits and gains of business of profession . The Tribunal was, therefore, wrong in deleting the disallowance under section 40(a)(i) of the Act for failure on the part of the assessees to deduct tax at source, from usance interest paid to the non-residents, under section 195(1) of the Act. The assessees being responsible for paying to the non-residents usance interest which was chargeable under the provisions of the Income-tax Act, 1961, were liable to deduct income-tax thereon under section 195(1) thereof. The Tribunal was, therefore, wrong in holding that the usance interest partook of the character of purchase price and therefore, not liable to deduction at source under section 195(1) of the Act. Usance interest is interest within the meaning of the article concerning taxation of interest in the relevant Double Taxation Avoidance Agreements. The Tribunal was, therefore, wrong in holding that usance interest was not interest as envisaged in the Double Taxation Avoidance Agreements. - Decided in favour of revenue

Issues Involved:
1. Deletion of addition on account of usance interest.
2. Deletion of addition on account of prior period expenditure.
3. Restriction of disallowance of sales promotion expenditure.
4. Deletion of addition on account of investment in excess stock.
5. Deletion of addition on account of profit from unaccounted stock.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Usance Interest:
The Revenue contended that the CIT(A) erred in deleting the addition of ?1,13,15,861/- made by the AO on account of usance interest. The AO had disallowed the usance interest paid to the holding company in Singapore without deducting TDS under Section 195 r.w.s. 40(a)(i) of the Income Tax Act. The assessee argued that the payment was made to an Indian bank and not the holding company, and thus no TDS was required. The CIT(A) agreed with the assessee, citing that the usance interest should be treated as part of the purchase cost and not as interest under Section 40(a)(i). The Revenue appealed, citing the Gujarat High Court's decision in Vijay Ship Breaking Corporation, which was later reversed by the Supreme Court. The Tribunal concluded that the principles laid down by the Gujarat High Court still hold and reversed the CIT(A)'s order, restoring the AO's addition.

2. Deletion of Addition on Account of Prior Period Expenditure:
The AO disallowed ?19,49,620/- as prior period expenditure, arguing that the commission expenses pertained to earlier years. The assessee contended that these commissions were wrongly classified and actually pertained to the current year, supported by confirmations from the parties. The CIT(A) accepted the assessee's explanation and deleted the addition. The Tribunal upheld the CIT(A)'s decision, noting that the AO failed to consider the reversed entries and the confirmations provided by the assessee, except for a minor discrepancy of ?1,870/-, which was added back.

3. Restriction of Disallowance of Sales Promotion Expenditure:
The AO disallowed ?4,80,231/- of sales promotion expenses due to lack of documentary evidence. The assessee provided bills and vouchers during the appeal, which were partially accepted by the CIT(A), reducing the disallowance to ?13,312/-. The Tribunal found that the AO did not exercise his powers to verify the bills and confirmations and upheld the CIT(A)'s restricted disallowance.

4. Deletion of Addition on Account of Investment in Excess Stock:
The AO added ?21,66,127/- for excess stock and ?64,984/- as profit on unaccounted stock. The assessee provided a reconciliation statement accepted by the District Supply Officer, which was also accepted by the CIT(A). The Tribunal noted that the reconciliation was accepted by the competent authority, and therefore, no excess stock existed. Consequently, the addition for unaccounted stock and the related profit was deleted.

5. Deletion of Addition on Account of Profit from Unaccounted Stock:
Since the addition for unaccounted stock was deleted, the CIT(A) also deleted the related profit addition of ?64,984/-. The Tribunal upheld this decision, as the reconciliation provided by the assessee was accepted by the District Supply Officer, negating the existence of unaccounted stock.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on prior period expenditure, sales promotion expenses, and excess stock, while reversing the CIT(A)'s decision on usance interest, restoring the AO's addition. The Revenue's appeal was partly allowed.

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