Gujarat High Court

The Principal Commissioner Of ... vs Asian Mills Pvt. Ltd on 26 October, 2021

Bench: Hemant M. Prachchhak

    C/TAXAP/244/2021                                      ORDER DATED: 26/10/2021




           IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

                        R/TAX APPEAL NO. 244 of 2021

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           THE PRINCIPAL COMMISSIONER OF INCOME TAX 1
                              Versus
                       ASIAN MILLS PVT. LTD.
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Appearance:
MR MR BHATT, SR.ADV. With Mr.KARAN SANGHANI for M R BHATT & CO.
(5953) for the Appellant(s) No. 1
MR B S SOPARKAR(6851) for the Opponent(s) No. 1
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 CORAM:HONOURABLE MS. JUSTICE SONIA GOKANI
       and
       HONOURABLE MR. JUSTICE HEMANT M.
       PRACHCHHAK

                               Date : 26/10/2021

                           ORAL ORDER

(PER : HONOURABLE MS. JUSTICE SONIA GOKANI)

1.Aggrieved and dissatisfied with the order

passed by the Income Tax Appellate

Tribunal("the Tribunal" for short) dated

02.03.2021, the appellant has preferred this

appeal raising the following substantial

questions of law:

"[A] Whether the Appellate Tribunal has erred in law and on facts in deleting the disallowance of Rs.1,38,350/- made under section 40(a)(ia) of the Act without appreciating that the assessee had not complied with the provision of sub-section (6) and (7) to Section 194C?

[B] Whether the Appellate Tribunal has erred

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in law and on facts in deleting the disallowance of commission expenses of Rs.55,14,372/- without appreciating that the assessee has not been able to demonstrate the nature and scale of services rendered by Smith and Sons Ltd and that the payment of commission is allowable only on the assessee furnishing evidence in support of the services rendered?"

2.The respondent assessee filed return on

30.09.2021 declaring total income of

Rs.8,65,92,110/- crores. It was processed

under section 143(1) of the Income Tax Act

("the Act" for short) and the same was

selected for scrutiny.

3.Notice under section 142(1) of the Act along

with questionnaire was issued on 27.08.2012.

In response,the authorised representative of

the company attended time to time. It was

noticed that the respondent assessee had not

deducted the tax under section 194(C) for the

payments made to various transporters, this

included the freight inward charges and

clearing and forwarding charges.

4.The Assessing Officer rejected the contention

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of the respondent assessee that TDS was not

deducted, as the same was not applicable as

per the provisions of law. According to the

assessee Company TDS was not to be deducted

on payment made to the transporters as per

Clause 6 of section 194(c). Again, the

details of the transporters have been filled-

in at the time of filing of the TDS return,

wherein their PANs have been duly submitted

to the authority. Therefore, the condition

reflected in sub-section(7) also have been

fulfilled. The Assessing Officer held the

assessee in default and made the disallowance

of all the three charges of the total income

of the assessee under section 40(a)(ia).

5.The assessee preferred the appeal before the

CIT(Appeals), which deleted the addition to

the extent of transportation towards freight,

inward charges and clearing charges, but

confirmed the addition of Rs.1,38,350/-

C/TAXAP/244/2021 ORDER DATED: 26/10/2021

towards forwarding charges for payment to

M/s. Trishul Transport Company.

6.The Revenue as well as the assessee both

preferred appeal before the Tribunal. The

Tribunal dismissed the appeal of the Revenue

and allowed the appeal of the assessee. The

appeal of assessee was allowed on the ground

that it had obtained PAN card details from

the transporters, which were furnished with

TDS return. Therefore, the assessee's claim

cannot be denied on account of non-deduction

of TDS on the payment made to the

transporters towards freight inward charges

and clearing charges under sub-section (6) of

section 194(c). The claim also cannot be

denied on the ground that the assessee was

under an obligation after obtaining the PANs

from the transporter to furnish the same in

the prescribed form to the prescribed

authorities.

C/TAXAP/244/2021 ORDER DATED: 26/10/2021

7.This Court has heard Mr. M.R.Bhatt, learned

Senior Advocate appearing with Mr.Karan

Sanghani, learned advocate for the appellant

and Mr. B.S.Soparkar, learned advocate for

the opponent.

8.The issue is covered by the decision of this

Court rendered in the case of Commission of

Income-tax-I vs. Valibhai Khanbhai Mankad,

[2012] 28 taxman.com 119(Gujarat), where the

issue was again with regard to payment to the

contractor and requirement of deduction of

TDS. Relevant paragraphs are reproduced as

under:

"3) We have heard the learned counsel for the Revenue as well as for the assessee. Section 194C of the Act, as is well known, pertains to payments to contractors. Sub-section (1) of section 194C, as it stood at the relevant time, required that any person responsible for paying any sum to any resident, contractor for carrying out any work in pursuance of a contract between the contractor and the specified entities, shall credit specified sum as income tax on income comprised therein. Likewise, sub-section (2) of section 194C required a person responsible for paying any sum to resident-sub-contractor to deduct tax at source under given circumstances. It is not in dispute that ordinarily the

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assessee was required to make such deduction on the payments made to the sub-contractors, unless he was covered under the exclusion clause contained in sub-section (3) of section 194C of the Act. Such provision, as it stood at the relevant time, read as under:-

"Section 194C(3):- No deduction shall be made under sub-section(1) or sub-section (2) from -

(i)the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor or sub-contractor, if such sum does not exceed twenty thousand rupees: Provided that where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds fifty thousand rupees, the person responsible for paying such sums referred to in sub-section (1) or, as the case may be, subsection (2) shall be liable to deduct income- tax under this section:

Provided further that no deduction shall be made under sub-section (2), from the amount of any sum credited or paid or likely to be credited or paid during the previous year to the account of the sub-contractor during the course of business of plying, hiring or leasing goods carriages, on production of a declaration to the person concerned paying or crediting such sum, in the prescribed form and verified in the prescribed manner and within such time as may be prescribed, if such sub-contractor is an individual who has not owned more than two goods carriages at any time during the previous year: Provided also that the person responsible for paying any sum as aforesaid to the sub- contractor referred to in the second proviso shall furnish to the prescribed income-tax authority or the person authorised by it such particulars as may be prescribed in such form and within such time as may be prescribed; or

(ii)any sum credited or paid before the 1st day of June, 1972; or (iii)any sum credited or paid before the 1st day of June, 1973, in pursuance

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of a contract between the contractor and a co- operative society or in pursuance of a contract between such contractor and the sub-contractor in relation to any work (including supply of labour for carrying out any work) undertaken by the contractor for the cooperative society. Explanation-For the purpose of clause(i), "goods carriage" shall have the same meaning as in the Explanation to sub-section (7) of section 44AE."

4) Section 40(a)(ia) of the Act, in turn, provides that certain amounts shall not be deducted in computing the income chargeable to tax under the head 'profits and gains of business or profession', namely, payments made towards interest, commission or brokerage etc., on which tax is deductible at source and such tax has not been deducted or, after deduction, the same has not been paid on or before the due date specified in sub-section (1) of section 139 of the Act. Section 40(a)(ia) of the Act, insofar as it is relevant for our purpose, reads as under:-

"Section 40(a)(ia):- Any interest, commission or brokerage, [rent, royalty,] fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, [has not been paid on or before the due date specified in sub-section (1) of section 139:]"

5) From the above statutory provisions, it can be seen that under section 40(a)(ia) of the Act, payments made towards interest, commission or brokerage etc. would be excluded for deduction in computing the income chargeable under the head 'profits and gains of business or profession', where though tax was required to be deducted at source, is not deducted or where after such deduction, the same has not been paid

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on or before the due date. Thus for application of section 40(a)(ia) of the Act, the foremost requirement would be of tax deduction at source.

6) Section 194C, as already noticed, makes provision where for certain payments, liability of the payee to deduct tax at source arises. Therefore, if there is any breach of such requirement, question of applicability of section 40(a)(ia) would arise. Despite such circumstances existing, sub-section (3) makes exclusion in cases where such liability would not arise. We are concerned with the further proviso to sub-section (3), which provides that no deduction under sub-section (2) shall be made from the amount of any sum credited or paid or likely to be credited or paid to the sub- contractor during the course of business of plying, hiring or leasing goods carriages, on production of a declaration to the person concerned paying or crediting such sum in the prescribed form and verified it in the prescribed manner within the time as may be prescribed, if such sub-contractor is an individual who has not owned more than two goods carriages at any time during the previous year.

7) The exclusion provided in sub-section (3) of section 194C from the liability to deduct tax at source under sub-section (2) would thus be complete the moment the requirements contained therein are satisfied. Such requirements, principally, are that the sub-contractor, recipient of the payment produces a necessary declaration in the prescribed format and further that such sub-contractor does not own more than two goods carriages during the entire previous year. The moment, such requirements are fulfilled, the liability of the assessee to deduct tax on the payments made or to be made to such sub-contractors would cease. In fact he would have no authority to make any such deduction.

8) The later portion of sub-section (3) which follow the further proviso is a requirement

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which would arise at a much later point of time. Such requirement is that the person responsible for paying such sum to the sub-contractor has to furnish such particulars as prescribed. We may notice that under Rule 29D of the Rules, such declaration has to be made by the end of June of the next accounting year in question.

9) In our view, therefore, once the conditions of further proviso of section 194C(3) are satisfied, the liability of the payee to deduct tax at source would cease. The requirement of such payee to furnish details to the income tax authority in the prescribed form within prescribed time would arise later and any infraction in such a requirement would not make the requirement of deduction at source applicable under sub-section (2) of section 194C of the Act. In our view, therefore, the Tribunal was perfectly justified in taking the view in the impugned judgment. It may be that failure to comply such requirement by the payee may result into some other adverse consequences if so provided under the Act. However, fulfillment of such requirement cannot be linked to the declaration of tax at source. Any such failure therefore cannot be visualized by adverse consequences provided under section 40(a)(ia) of the Act. 10) When on the basis of the record it is not disputed that the requirements of further proviso were fulfilled, the assessee was not required to make any deduction at source on the payments made to the subcontractors. If that be our conclusion, application of section 40(a)(ia) would not arise since, as already noticed, section 40(a)(ia) would apply when there is a requirement of deduction of tax at source and such requirement is either not fulfilled or having deducted tax at source is not deposited within prescribed time."

9.Yet another decision of the High Court of

Madras is reported in the case of

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Commissioner of Income Tax, Madurai vs.Sri

Parameshwari Spinning Mills(P.)Ltd.,[2019] 10

taxmann.com 386(Madras), where sub-section 6

of section 194, which grants benefit to the

assessee, is discussed along with sub-

section(7) of section 194. The Court held

that this benefit comes with the condition of

compliance of sub-section (7) of section

194(c). This is a procedure required to be

followed. The Court held that non-filing of

the statement in terms of sub-section(7) of

section 194(C) cannot take away the benefit,

which will accrue to the assessee under sub-

section(6) of section 194. Relevant

paragraphs are reproduced as under:

"6. We find sub-Section 6 of Section 194C is the provision which grants benefit to the assessee. This benefit comes with the condition of compliance of Sub-Section (7) of Section 194C, which is the procedure to be followed. The question would be as to whether if the procedure under Section 194C(7) has not been adhered to by the assessee would it be fatal and thereby disentitle the assessee to the benefit under sub-Section 6 of Section 194C.

7. It is a submission of Mr.A.S.Sriraman,

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learned counsel for the appellant/assessee that Section 31A deals with statement of deduction of tax under sub-Section 3 of Section 200 referring to Section 31(A)(4)(vi). It is submitted that the deductor at the time of preparing statement of tax, deductor shall furnish particulars of amount paid or credited on which tax was not deducted in view of the compliance of provision of sub-Section 6 of Section 194C by the payee. Section 234(E) was relied to state that if the statement is not filed, a fee of Rs.200/-for every day, during which the failure continues, has to be paid by the assessee. Therefore, it is the submission that the nonfiling of a statement in terms of sub-Section 7 of Section 194C cannot take away the benefit which will accrue to the assessee under sub-Section 6 of Section 194.

8. We fail to understand as to what is the apprehension in the mind of the Revenue when the Tribunal has remanded the matter to the Assessing Officer to consider whether the assessee has filed form no. 26(Q) belatedly and to examine as to whether the fee has to be collected. We find that there is no ground to interfere with the order passed by the Tribunal.

9. Ms.V.Pushpa placed reliance on the decision of the Hon'ble Supreme Court in the case of CIT Vs. Valibhai Khanbhai Mankad reported in [(2014) 51 Taxmann.com 385 (SC)] where the Hon'ble Supreme Court has granted leave to file appeal by the revenue against the order passed by the Gujrat High Court in CIT Vs. Valibhai Khanbhai Mankad reported in [(2012) 28 Taxmann.com 119]. In the said decision the High Court of Gujarat held that once conditions of proviso to Section 194(C)(7) are satisfied, liability of payer to deduct taxes at source would cease and consequently, disallowance of payment of sub- contractor under Section 40(a)(ia) could not be made on the ground that the assesee had not furnished form no.15J as required under Rule 29D. We find that the said decision is of no assistance to the case of the Revenue.

C/TAXAP/244/2021 ORDER DATED: 26/10/2021

10. Mr.A.S.Sriraman, learned counsel for the assessee referred to the decision of the ITAT Jaipur in the case of ACIT Vs. Arihant Trading Co. reported in [176 ITD 397 (Jaipur-Tri)]. In the said decision it has been held that Section 194C(6) & (7) are independent of each other and cannot read together to attract disallowance under Section 40(a)(ia) read with Section 194C of the Act"

10. In the instant case also, as detailed

above, the assessee company has not deducted

the TDS of payment made to the transporters

as per sub-section(6) of section 194(c).

However, the details of the transporters have

been filled-in in the TDS return, wherein

their PAN cards also have been duly submitted

to the Income-tax authorities, as this is a

sufficient compliance of sub-section (7) of

section194(c). The Tribunal was absolutely

correct in upholding the version of the

assessee. It also rightly held that after

obtaining the PAN Card from the transporters,

assessee is needed to furnish the same in

the prescribed form to

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the prescribed authority within prescribed

time. section194(C) (7) is reproduced as

under:

"(7) The person responsible for paying or crediting any sum to the person referred to in sub-section (6) shall furnish, to the prescribed income-tax authority or the person authorised by it, such particulars, in such form and within such time as may be prescribed."

11. The Tribunal held that there is no

prescribed authority nominated under the

provisions of law. Thus, in absence of such

prescribed authority, no fault was attributed

to the assessee obviously for not filing the

details before such authority. The details

filed by the respondent assessee along with

Form No.26 naturally could be construed as

sufficient compliance. No fault can be found

with these detailed findings and the settled

position of law.

12. The first question is accordingly

answered.

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13. Taking the second issue, the Tribunal

deleted the disallowance of commission

expenses of Rs.55,14,372/-. The Assessing

Officer has treated Rs.55,14,372/- as non-

genuine commission claimed by the assessee

given to M/s. C.M. Smith and Sons Ltd.

14.       From            the           overall             facts                and

  circumstances,                 the       agreement            which            was

submitted was treated as sufficient document

being prepared after specific query of the

Assessing Officer. According to the Assessing

Officer three entries were pertaining to NTPC

and the fourth one was of Tata Project Ltd.,

which was not found acceptable and those

concerns were the old customers to which the

sales had already been made in the past and,

therefore, there would not have been any

reason for making payment for M/s. C.M. Smith

and Sons Ltd. for effecting sales to those

concerns during the Assessment Year 2011-12.

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It did not find any justification for making

the payment through any commission agent.

15. The CIT(Appeals) deleted the

disallowance. We notice that the commission

agent also was a company and both the

companies fall under the same rate of

taxation. Therefore, no presumption can be

made that the transaction was not genuine,

particularly,when the agent had paid the due

tax on income. The agent had shown its income

Rs.11.50 crores as against the earlier year's

income of Rs.3.75 crores.

16. When challenged by the Revenue before

the Tribunal, it held thus:

"33.3 The provisions for allowing the deduction of the commission expenses are governed under the provisions of section 37 of the Act which requires the fulfillment of the following ingredients:

i. Expenditure should not be covered under the specific sections, i.e., 30 to 36; ii. Expenditure should not be of capital nature;

iii. Expenditure should have been incurred during the previous year;

iv. Expenditure should not be of a personal nature;

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v. Expenditure should have been incurred wholly or exclusively for the purpose of the business or profession.

33.4 All of the five conditions mentioned above are to be satisfied before on can claim any expense as a deduction under this section. The last condition requires for allowing the claim of the expenses that the expenditure should have been incurred wholly or exclusively for the purpose of the business. This is a very vexed question, and a lot of litigation revolves around this issue. In fact, once the assessee has furnished the details for the deduction of commission expenses, the onus is shifted upon the O to reject the contention of the assessee with valid reasoning and not on the basis of surmise and conjecture.

33.5 Indeed 2 of the parties were the old parties of the assessee yet the assessee hired services for the commission agent. Now the question arises commission paid by the assessee can be denied merely on the ground that these were old parties of the assessee. In our considered view, it cannot be a ground for rejecting the claim of the assessee in the given facts and circumstances. It is because the commission agent has shown turnover of Rs.1685378746 in its financial statement for the year ending 31st March 2011 with the net profit at Rs.115016371.00. In other words the commission agent cannot be categorized as a paper company. There can be a possibility for getting a better deal for the assessee from the parties who were the existing clients of the assessee through the involvement of the commission agent. To prove that the commission expenses has not been incurred in the course of the business, the onus is upon the AO which needs to be brought on record but the AO without conducting the necessary enquiries has made the disallowance based on surmise and conjecture. 33.6 Moving further, it was also pointed out by the AO that the discount is normally extended by

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the assessee to its own clients and not to the clients referred by the commission agent. In this connection, we note that the AO has not brought anything on record to substantiate his version. As such the finding of the AO is based on his surmise and conjecture which cannot be considered for disallowing the commission expenses.

33.7 It is also pertinent to note that it is the wisdom of the assessee to hire the services of the commission agent or not. Similarly, the AO cannot direct the assessee not to extend any commission to the agent for the sales made upon his reference to its (the assessee) existing parties. Indeed, the amount of commission paid in connection with the sales made to the existing parties of the assessee can create a doubt in the mind on the genuineness of the transactions but the doubt alone is not sufficient enough for disallowing the expenses. AS such the AO on having doubt on the genuineness of the commission expenses was to conduct deeper enquiry on the payment of such commission expenses but he has not done so. 33.8 In holding so we draw support and guidance from the judgement of the Hon'ble Gujarat High Court in the case of Voltamp Transformers Pvt. Ltd. vs. CIT reported in 129 ITR 105 wherein it was held as under:

" 8. It is well-settled law that so far as the questions of commercial expediency and business need of an organisation are concerned, it is not the viewpoint of a revenue officer which should count but it should be the view point of a ordinary business mend dealing with a situation like the one faced by the particular assessee in question. It is, therefore, from that particular viewpoint that the question has to be approached."

17. We notice that the Assessing Officer

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chose not to exercise its powers under

section 131/133(6) of conducting the

investigation or enquiries. The Tribunal has

rightly observed that on surmises and

conjectures, AO has chosen to make

disallowance. This Court in the case of

Voltamp Transformers Pvt. Ltd. vs. CIT

reported in 129 ITR 105 has left it to the

concerned assessee to decide its commercial

expediency and business needs. Ordinarily, a