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TMI Blog2019 (5) TMI 111X X X X Extracts X X X X X X X X Extracts X X X X ..... ty, without appreciating the facts and the terms of the contract ? 2. Whether on the facts and circumstances of the case, the Tribunal was right in law in confirming the disallowance of interest under Section 40 (a) (i) ignoring the fact that the interest amount is paid by the appellant only to their banker in India and as such no TDS has to be made from interest paid to Indian Bankers under Section 194 A ?" 2. As far as Question No.1 is concerned, the learned counsels at Bar fairly submitted that the controversy has been decided in the case of the Assessee itself by a Co-ordinate Bench of this Court for Assessment Year 1998-1999 on 13.08.2018 in FFE Minerals India (P) Ltd. v. Joint Commissioner of Income Tax, (2018) 98 Taxmann.com 170 (Madras), in which, it was held that when a provision was made for liquidated damages to be paid by the Assessee to the companies with which it executed certain turnkey projects and delay occurred in execution of such turnkey projects, the liability for liquidated damages made by the Assessee had not crystallized during the previous year in question and, therefore, the same was not allowable towards business expenditure under Section 37 (1) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. The Revenue cannot dispute the fact that the assessee in the instant case satisfied test Nos.(a) and (c). 24. To be entitled to a deduction as claimed by the assessee, the assessee has to cumulatively satisfy all the three tests. Therefore, it has to be seen as to whether it is probable that an outflow of resources will be required to settle the obligation. xxxxx 28. As pointed out by the Hon'ble Supreme Court, a past event that leads to a present obligation is called an obligating event and the obligating event is an event that creates an obligation, which results in an outflow of resources. Thus, only those obligations arisen for past event existing independently on the future contract of the enterprise is recognised provision. Admittedly, in the instant case, no such past events have been placed before the Assessing Officer to show that there is every probability that the expenditure will be incurred. At best, the assessee can pitch their case as a case of possibility but, not a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id addition, holding that the amount of interest was paid by the Assessee to its own Banker in India and, in view of the exception under Section 194A (3), when the payment of interest is made by the Assessee to a banking company, no tax was required to be deducted at source and, therefore, the Assessing Authority was not justified in making the addition under Section 40 (a) (i) of the Act, which permits such disallowance to be made in the hands of the Assessee in case the Assessee, being under an obligation to deduct tax at source on payment of interest, does not do so. The relevant findings of CIT (A) are also quoted below for ready reference : ''3. The first ground raised in this appeal relates to the disallowance of interest of Rs. 6,22,577/- u/s.40(a) on the ground that tax has been deducted on payments made to USA suppliers. The assessing officer has stated the assessee has remitted interest of Rs. 6,22,577/- outside India without deduction of tax under chapter XVII B which is liable for disallowance u/s.40(a) (1) and in the absence of proper details and clarification the amount on which tax omitted to be deducted was disallowed u/s.40(a) of the Act. The appellant co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oversy. 9. Ms.Mallika Srinivasan, learned counsel for the appellant/Assessee, has urged before us that payment of interest in question was made by the Assessee to its own Bank, which allows some grace period on the Letter of Credit given to the importer-Assessee and the documents for import of goods are released at the initial stage and imported goods are taken delivery by the Assessee but since the payment made by the Assessee is remitted to the foreign exporter-the company in USA- after some period, for such delay of time period, the Indian Bank recovers some interest from the Assessee and it was this interest that was paid by the Assessee to its Bank, on which the learned Assessing Authority applied the provision of Section 40 (a) (i) of the Act on the premise that the Assessee was liable to deduct tax at source on such payment of interest. She has further contended that the Assessing Authority could not have applied the provision of Section 195 of the Act, which requires such deduction of tax at source in case the payment of interest is directly made to a non-resident. The learned counsel also submitted that since payment of interest was made by the Assessee-company to its own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment of interest made by the Assessee to its Bank in India could not have been ignored by the Assessing Authority. Without there being any material on record in this regard, the learned Assessing Authority could not even have arrived at the figure of interest of Rs. 6,22,577/-. Therefore, without verifying the details of such interest payment made by the Assessee as to whom it was paid, the learned Assessing Authority seems to have applied these provisions just on assumptions and hypothetical facts, for which there was no basis. 13. We are very clear that if the provisions of Section 40 (a) (i) of the Act have to be invoked, the burden squarely lies on the Assessing Authority to establish in the first instance that the relevant TDS provisions were applicable to the facts of the case, casting a legal obligation upon the Assessee to deduct tax at source. Without such a finding or basis being found, the disallowance under Section 40 (a) (i) of the Act could not have been lightly made by the Assessing Authority. In the present case, we find it to be casually invoked by the Assessing Authority as well as the Tribunal. Therefore, we are of the opinion that Section 40 (a) (i) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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