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TMI Blog2018 (11) TMI 1109X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 - I.T.A. No. 211/Rjt/2007 - - - Dated:- 28-9-2018 - SHRI WASEEM AHMED, ACCOUNTANT MEMBER And SMT MADHUMITA ROY, JUDICIAL MEMBER For The Appellant : Shri Lalit P. Jain, Sr. D.R. For The Respondent : Shri Yogesh Phar, A.R. ORDER PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned appeal has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment proceedings submitted that it was not liable to deduct the TDS on account of the following reasons: i. The payment for the usance period was made to the banker and not to the creditor against the import of the goods. ii. The payment of usance interest is in the nature of penalty therefore, there is no liability of TDS under the provision of the DTAA. iii. The assessee is trying to take permission from CBDT for incurring the expense of such usance interest without deducting the TDS. 4.3 However, the AO disregarded the contention of the assessee by holding that the provisions of TDS is very much attracted on the payment of interest paid to its holding company based in Singapore. The AO in support of his order relied on the judgment of Hon ble Jurisdictional High Court in the case of CIT vs. Vijay Ship Breaking Corporation reported in 261 ITR 113. Thus, the amount of usance interest was disallowed and added to the total income of the assessee. 5. Aggrieved, assessee preferred an appeal to ld CIT(A). The assessee before the ld CIT(A) submitted as under: i. The payment of usance interest was paid to the Indian Bank. As such there was no payment made to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f purchase and therefore not covered by section 40(a)(i). Even reading of DTAA provisions and also non discrimination clause gives inference that the interest payment is not covered by article 11 (Interest income) of DTAA, but it is covered under Article 7 (business profits) under DTAA. 3.3 The Assessing Officer is not right in disallowing an amount of ₹ 11315861/- u/s 40(a)(i) that the TDS was not deducted u/s. 195 is not correct in law. Therefore, is to be deleted. This issue is decided thus in favour of the assessee and appeal on this ground is allowed. The AO is directed to delete this addition of ₹ 11315861/-. 5.3 Being aggrieved by the order of ld. CIT(A) the Revenue is in appeal before us. 6. The ld. DR before us submitted that the Hon ble Gujarat High Court in the case of Vijay Ship Breaking Corporation (Supra) has decided the issue in favour of the Revenue. Therefore, the assessee was liable to deduct the TDS on account of usance interest payment. 6.1 As per the provisions of DTAA between India and Singapore, the assessee was liable to deduct the TDS on the payment of usance interest paid to its holding company. The amount of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gument of the ld.AR for the assessee are based on two counts; firstly the order of Hon ble Gujarat High Court in the case of Vijay Ship Breaking Corporation has been merged with the order of Hon ble Supreme Court as discussed above, secondly the payment of usance interest is part of purchase cost as per the DTAA between India and Singapore. 10.2 It is undisputed fact that the Hon ble Gujarat High Court in the case of Vijay Ship Breaking Corporation(supra) has decided the issue against the assessee by holding as under: 28. For the foregoing reasons, we decide the above questions of law formulated in these appeals as under : ( 1) 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. ( 2) 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by an undertaking engaged in the business of ship-breaking in respect of purchase of a ship from outside India shall be deemed to be the interest payable on a debt incurred in a foreign country in respect of the purchase outside India. On reading that Explanation, it is clear that usance interest is exempt from payment of Income-tax if paid in respect of ship breaking activity. This amendment came into force only after the impugned judgment. It was not there when the impugned judgment was delivered. 12. For the aforestated reasons, question No. 2 as to whether the assessee was bound to deduct TDS under section 195(1) is answered in favour of the assessee and against the Department. The assessee was not bound to deduct tax at source once Explanation 2 to section 10(15)(iv )(c) stood inserted as TDS arises only if the tax is assessable in India. Since tax was not assessable in India, there was no question of TDS being deducted by the assessee. Therefore, question No. 2 is answered in favour of the assessee and against the Department . 10.4 Besides the above, we also note that the Hon ble Supreme Court has given clear cut finding that the issue on hand has not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n cannot be deemed to have merged in the order of the Appellate Commissioner in an appeal taken against the composite order of assessment. Similarly, in The State of Uttar Pradesh v. Mohammed Nooh(2), it was held by this Court that the principle of merger cannot apply in the case of an order of dismissal of a public servant which was made by the departmental Tribunal on the 20th April, 1948 and against which the appeal was dismissed by the Appellate Authority on the 7th May, 1949, and the revisional application was rejected on the 22nd April, 1950. In the circumstances of the present case, it cannot be said that there was a merger of the order of assessment made by the Deputy Commercial Tax Officer dated the 28th November, 1952 with the order of the Deputy Commissioner of Commercial Taxes dated the 21st August, 1954 because the question of exemption on the value of yarn purchased from outside the State of Madras was not the subject-matter of revision before the Deputy Commissioner of Commercial Taxes. The only point that was urged before the Deputy Commissioner was that the sum of ₹ 6,57,971-4-9 collected by the respondent by way of tax should not be included in the taxable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whom the commission was paid. However, the same was disregarded by the AO on the ground that the amount of commission was not matching between the confirmation filed vis- -vis books of accounts of the assessee. Accordingly, the AO treated the amount of commission expenses for ₹ 19,49,620/- as prior period items and added back to the total income of the assessee. 13. Aggrieved, assessee preferred an appeal to learned CIT(A). The assessee before the ld CIT(A) submitted that it has prepared its financial statements on 31st August, 2002 and 31st January, 2003 on provisional basis. While preparing the financial statement on provisional basis entries for ₹ 1,00,000/- to M/s. Agarwal (agent) as on 31st August, 2002 was made in the books of accounts. 13.1 Similarly, the entry of commission on provisional basis for ₹ 9,24,810/- accrued for M/s. Bleach Chem (agent) was accounted. However, these entries were reversed while preparing the financial statement on 31st March, 2003, but the AO has not taken into consideration the entries which have been reversed in the books of accounts. The assessee during the assessment proceedings also explained the entries passed in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade is without proper verification of evidences and explanation. The addition of ₹ 19,49,620/- is therefore deleted. 13.4 Being aggrieved by the order of ld CIT(A) Revenue is in second appeal before us. 14. The ld DR before us submitted that the amount of commission shown by the assessee in the confirmation filed by the M/s. Bleach Chem was not matching therefore the same cannot be relied upon. 15. On the other hand, ld AR before us submitted that it has claimed an expense of ₹ 16,43,754/- only under the head commission to sales agent. Therefore, the observation of the AO that the assessee has claimed commission expenses of ₹ 24,88,787/- is not correct. 15.1 The ld AR further submitted that the AO has not considered the reversed entries which were reflected in the ledger account of commission to sales agents. 15.2 The ld AR in support of his claim drew our attention on schedule 14 to the financial statement which is placed on page 120 of the paper book. 15.3 The ld AR also drew our attention on the debit note issued by M/s. Agarwal exports and M/s. Bleach Chem which are placed on pages 75 to 77 of the Paper Book amounting to ₹ 2,49,000/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing entries cannot be decisive factor when the documents contrary to the accounting entry are available on record. 16.3 The argument of the ld Counsel for the assessee also gets fortified from the financial statement wherein, the assessee has claimed an expense of ₹ 16,43,754/- only. 16.4 However, we note that the assessee has claimed an expense of ₹ 9,24,810/- in the name of M/s. Bleach Chem whereas, the confirmation reveals the amount of ₹ 9,22,940/-. Thus, there is a difference of ₹ 1870/- which in our considered view is liable to be dismissed. Accordingly, we delete the addition made by the AO by ₹ 19,47,750/- and direct the AO to make the addition of ₹ 1870/- only. Thus, the ground of appeal of the Revenue is partly allowed . 17. Next issue raised by the revenue is that the ld CIT(A) erred in reducing the disallowance of sales promotion expenses from ₹ 4,66,919/- to ₹ 13,312/- only. 18. The assessee during the year has claimed sales promotion expenses for ₹ 4,80,231/- but the same was not substantiated on the basis of documentary evidences. Therefore, the AO disallowed the same and added to the total income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the evidence as mentioned above before the date of passing of order on 28.03.2006. Appellant company contends that expenses of ₹ 4,80,231 incurred for sate promotion are genuine business expense. All the relevant vouchers and invoices for sale promotion expenses are submitted on page 12-24 of paper-book-II). Hence, it is submitted that expenses of ₹ 4,80,231 be allowed as business expenses. 18.2 The ld CIT(A) called for the remand report on the details filed by the assessee. The AO vide letter dated 3rd October 2006 has pointed out certain defects in the details of the expenses filed by the assessee during the remand proceedings. Therefore, the AO disbelieved on the details of the bills filed by the assessee during the remand proceedings. However, the ld CIT(A) after considering the submission of the assessee deleted the addition in part by observing as under: 7.4 In view of the above detailed billing evidences and considering the nature of business and the occasion the expenses incurred by the assessee is to be considered for business purposes. 7.5 I have perused the detail accounts. The expenditure which is supported by evidences and in the cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdingly, the AO was of the view that there was excess stock of 134.81 MT. Accordingly, the AO worked out the cost of such stock for ₹ 21,66,127/- (16068/MT 134.81 MT) and added the same as undisclosed investment in the stock. 21.2 The AO further observed that such undisclosed investment in stock must have been sold by the assessee outside the books of account and the profit on the same has not been offered by the assessee to the income tax. Therefore, the AO worked out the GP@3% on such unaccounted closing stock for ₹ 64,984/- only. Thus, the AO treated the profit on such unaccounted stock as undisclosed income of the assessee and added to the total income of the assessee. 22. Aggrieved, assessee preferred an appeal to ld CIT(A). The assessee before the ld CIT(A) filed a reconciliation statement as detailed under: (in MT) Stock as appearing in the Stock register when seized 3800.379 Less: Sales not recorded erroneously in monthly stock register 147.340 Add: Excess Stock due to climatic changes 1,770 Stoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24. Heard the rival contentions of both the parties and perused the materials available on record. At the outset, we find that the assessee has filed a reconciliation statement before the District Supply Officer justifying the difference in the quantity of stock as discussed above. The reply of the assessee was duly admitted/ accepted by the DSO. The order of DSO for this mismatch in the stock is placed on pages 101 to110 of the PB. On perusal of the order of District Supply Officer we note that the reconciliation statement filed by the assessee was duly accepted by the DSO. In the case before us the addition was based on the basis of mismatch observed by the DSO in the quantity of stock as on 1st August 2002. Once, the difference observed by the DSO has been reconciled and relief has been given by the DSO then in our considered view no separate addition on account of difference in the stock can be made. The relevant extract of DSO order reads as under: During inspection from date 30.7.02 to 1.8.02 looking to draw-back in Imported White Kerosene 3800.379 M. Tons valuing ₹ 6.10,64,489/- of M/s. Overseas Trading Shipping Co. Pvt. Ltd., Gandhtdham has been seized out ..... X X X X Extracts X X X X X X X X Extracts X X X X
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