ACIT, CHENNAI V. M/s. Sri Lakshmi Saraswathi Textiles (Arni) Ltd., CHENNAI

ITA 1000/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 58131 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-03-2012
• Appeal Filed By: Department
• Bench Allotted: C
• Next Hearing Date: 15-03-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 06-06-2011
• Court: TRIBUNAL
• Department Lawyers: E S NAGENDRA PRASAD; DR YOGESH KUMAR
• Assessee Lawyers: S SRIDHAR
• Keywords: Bonafide belief; Permanent establishment; Non-deduction of tax

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER I.T.A. NOS. 999 & 1000/MDS/2011 (ASSESSMENT YEARS : 2006-07 & 2007-08) THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE VI(4), CHENNAI - 600 034 . (APPELLANT) V. M/S SRI LAKSHMI SARASWATHI TEXTILES (ARNI) LTD., NO.16, KRISHNAMMA ROAD, NUNGAMBAKKAM, CHENNAI - 600 034 . PAN : AABCS2312M (RESPONDENT) APPELLANT BY : SHRI E.S. NAGENDRA PRASAD, CIT-DR & DR. YOGESH KUMAR, JCIT RESPONDENT BY : SHRI S. SRIDHAR DATE OF HEARING : 15.03.2012 DATE OF PRONOUNCEMENT : 23.03.2012 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : THESE ARE APPEALS FILED BY THE REVENUE, DIRECTED AGAINST ORDERS DATED 7.2.1011 AND 8.2.2011 OF COMMISSIONER OF INCOME TAX (APPEALS)-V, CHENNAI, FOR THE IMPUGNED ASSESSMENT Y EARS 2006-07 AND 2007-08 RESPECTIVELY. I.T.A. NOS. 999 & 1000/MDS/11 2 2. APPEAL FOR THE ASSESSMENT YEAR 2006-07 IS TAKEN UP FIRST FOR DISPOSAL. GRIEVANCE OF THE REVENUE IS THAT LD. CIT (APPEALS) DELETED A DISALLOWANCE OF ` 30,10,990/- CONSIDERED AS UNPROVED CLAIM FOR INVISIBLE LOSS OF COTTON BY THE A.O. AND A DISALLOW ANCE OF ` 13,28,970/- CLAIMED BY THE ASSESSEE AS REPAIRS AND MAINTENANCE. 3. SHORT FACTS APROPOS ARE THAT ASSESSEE, A MANUFAC TURER OF COTTON YARN, FOR THE IMPUGNED ASSESSMENT YEAR, RETURNED A LOSS OF ` 4,31,90,894/-. THE A.O., AFTER VERIFICATION OF ACC OUNTS, WAS OF THE OPINION THAT SALES OF THE ASSESSEE HAD CONSIDERABLY REDUCED WHEN COMPARED TO ASSESSMENT YEAR 2005-06 AND ASSESSEES CLAIM OF LOSS OF COTTON OF 3% WAS EXCESSIVE. HE RESTRICTED SUCH CLAIM TO 1% THUS EFFECTING A DISALLOWANCE OF ` 30,10,990/-. SIMILARLY, FOR REPAIRS AND MAINTENANCE, EXPENSES AGAINST ` 2,65,79,386/- CLAIMED BY THE ASSESSEE, A DISALLOWANCE OF 5% WAS MADE AGAIN CITIN G FALL IN SALES COMPARED TO PRECEDING YEAR. SUCH DISALLOWANCE CAME TO ` 13,28,970/-. 4. IN ITS APPEAL BEFORE LD. CIT(APPEALS), ARGUMENT OF THE ASSESSEE WAS THAT FOR THE PRECEDING ASSESSMENT YEAR, IT WAS OPERATING ONE MORE SPINNING MILL OWNED BY ONE M/S VISWABHARATHI T EXTILES PVT. LTD. I.T.A. NOS. 999 & 1000/MDS/11 3 ON CONVERSION BASIS AND SINCE THE ARRANGEMENT WITH SAID COMPANY WAS TERMINATED ON 20.1.2005, THE TURNOVER HAD COME DOWN. AS PER THE ASSESSEE, SINCE THE AGREEMENT TO OPERATE THE OT HER UNIT WAS TERMINATED, THE MACHINERY OF THE ASSESSEE WAS EXCES SIVELY USED NECESSITATING FREQUENT REPAIRS. HENCE, AS PER THE ASSESSEE, BOTH THE CLAIMS WERE JUSTIFIED AND DISALLOWANCES WERE NOT WA RRANTED. LD. CIT(APPEALS) WAS APPRECIATIVE OF THIS CONTENTION. ACCORDING TO HIM, ASSESSEE HAD NOT INCURRED ANY UNREASONABLE EXPENSES WITH REGARD TO COTTON CONSUMPTION AND DISALLOWANCE OF REPAIRS AND MAINTENANCE WAS ALSO NOT CALLED FOR. HE DELETED BOTH THE ADDIT IONS. 5. NOW BEFORE US, LEARNED D.R. STRONGLY ASSAILING T HE ORDER OF LD. CIT(APPEALS), SUBMITTED THAT ASSESSEES TURNOVER HA D CONSIDERABLY GONE DOWN IN THE IMPUGNED ASSESSMENT YEAR AND THERE FORE, THE CLAIMS WERE EXCESSIVE AND HENCE REASONABLE DISALLOW ANCES WERE MADE BY THE ASSESSING OFFICER. 6. PER CONTRA, LEARNED A.R. SUPPORTED THE ORDER OF LD. CIT(APPEALS). 7. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. ASSESSMENT ORDER IS SILENT AS TO WHAT WERE THE REAS ONS FOR MAKING I.T.A. NOS. 999 & 1000/MDS/11 4 THE DISALLOWANCES ON THE EXPENSES CLAIMED BY THE AS SESSEE, BUT FOR MENTIONING THAT ASSESSEES TURNOVER HAD REDUCED CON SIDERABLY WHEN COMPARED TO ASSESSMENT YEAR 2005-06. IT IS AN ADMI TTED POSITION THAT ASSESSEE HAD PRODUCED BOOKS AND THESE WERE VER IFIED BY THE A.O. THE FACTUM OF VERIFICATION OF ACCOUNTS HAS BE EN MENTIONED IN PARA 2 OF ASSESSMENT ORDER. WHEN BOOKS WERE PRODUC ED AND NO DEFECTS WERE FOUND, IT IS NOT REASONABLE TO MAKE DI SALLOWANCE OF EXPENSES JUST BECAUSE TURNOVER HAD GONE DOWN. THER E IS NO CASE FOR THE REVENUE THAT ASSESSEE HAD NOT MAINTAINED VO UCHERS FOR ITS EXPENSES. ASSESSEE HAD CLEARLY POINTED OUT THAT ON E OTHER UNIT WHICH IT HAD EARLIER RUN ON AGREEMENT BASIS, WAS NO MORE BEING OPERATED, RESULTING IN EXCESSIVE USE OF ITS OWN MAC HINERY. LD. CIT(APPEALS) PROPERLY APPRECIATED THESE CONTENTIONS AND DELETED THE DISALLOWANCES. NO INTERFERENCE IS WARRANTED. 8. COMING TO ASSESSMENT YEAR 2007-08, FIRST GRIEVAN CE OF THE REVENUE IS THAT THE CIT(APPEALS) DELETED THE DISALL OWANCE MADE BY THE A.O. FOR EFFECTING PAYMENT TO NON-RESIDENTS WIT HOUT DEDUCTING TAX AT SOURCE AS STIPULATED UNDER SECTION 195 OF INCOME -TAX ACT, 1961 (IN SHORT 'THE ACT'). I.T.A. NOS. 999 & 1000/MDS/11 5 9. SHORT FACTS APROPOS ARE THAT ASSESSEE HAD CLAIME D DEDUCTION OF PAYMENT OF ` 22,73,468/- TO AGENTS ABROAD. ASSESSEE RELYING ON BOARD CIRCULAR NO.786 DATED 7.2.2000, SUBMITTED THA T THERE WAS NO QUESTION OF DEDUCTING TAX AT SOURCE SINCE THE PAYME NTS WERE NOT FOR ANY COMMISSION, SALARY, FEES AND TECHNICAL SERVICES . AS PER THE ASSESSEE, THE SUMS PAID TO NON-RESIDENTS WERE NOT C HARGEABLE TO TAX UNDER THE ACT IN INDIA IN THE HANDS OF SUCH NON-RES IDENTS, AND THEREFORE, IT WAS NOT BOUND TO DEDUCT TAX. HOWEVE R, THIS WAS NOT ACCEPTED BY THE ASSESSING OFFICER. ASSESSING OFFIC ER, RELYING ON THE DECISION OF HONBLE APEX COURT IN THE CASE OF M/S T RANSMISSION CORPORATION OF ANDHRA PRADESH LTD. V. CIT (239 ITR 587), WAS OF THE OPINION THAT ASSESSEE OUGHT HAVE DEDUCTED TAX AT SO URCE AS STIPULATED UNDER SECTION 195 OF THE ACT AND HAVING FAILED TO DO SO, ATTRACTED THE RIGOURS OF SECTION 40(A)(I) OF THE AC T. ACCORDINGLY, HE MADE A DISALLOWANCE OF ` 22,73,468/-. 10. IN ITS APPEAL BEFORE LD. CIT(APPEALS), ARGUMENT OF THE ASSESSEE WAS THAT THE COMMISSION PAID WAS TO PARTIES ABROAD, NONE OF WHOM WERE HAVING ANY PERMANENT ESTABLISHMENT IN INDIA. DETAILS WERE SUBMITTED AS UNDER:- I.T.A. NOS. 999 & 1000/MDS/11 6 S.NO. NAME & ADDRESS OF FOREIGN AGENTS TO WHOM COMMISSION PAID COUNTRY OF AGENT COMMISSION PAID 1. HILADOS ORLA TEXTILE TORREBLANCE 48-5*-4* OS 190 SANT CEGAT DEL VALLES BARCELONA, SPAIN SPAIN 291270.00 2. GINO S OLTER CREDIT SUISSE BELL AIR 2 GENEVA, SWITZERLAND SWITZERLAND 416938.00 3. FIP SERVICES SA BISSONE, SWITZERLAND SWITZERLAND 1469569.00 4. NOVEL 122A/, TEJGAON INDUSTRIAL AREA BANGLADESH 11466.00 5. KODIA OVERSEAS CO. LTD. NO.16, MIN SHENG WEST ROAD, P.O. NO.17-332, TAIPEI 10448 TAIWAN TAIWAN 84243.00 TOTAL 2273468.00 LD. CIT(APPEALS) WAS OF THE OPINION THAT IN VIEW OF THE DECISION OF HONBLE APEX COURT IN THE CASE OF GE INDIA TECHNOLO GY CENTRE V. CIT (327 ITR 656), ASSESSEE WAS NOT BOUND TO DEDUCT TAX AT SOURCE AND HENCE, DISALLOWANCE UNDER SECTION 40(A)(I) OF THE A CT WAS NOT CALLED FOR. 11. NOW BEFORE US, LEARNED D.R., ASSAILING THE ORDE R OF LD. CIT(APPEALS), SUBMITTED THAT WHEN THE PAYMENTS WERE EFFECTED TO THE NON-RESIDENTS UNDER SECTION 195 OF THE ACT, ASSESSE E WAS OBLIGED TO DEDUCT TAX AT SOURCE UNLESS AND UNTIL A CERTIFICATE FROM ASSESSING I.T.A. NOS. 999 & 1000/MDS/11 7 OFFICER EITHER FOR NON-DEDUCTION OF TAX AT SOURCE O R FOR DEDUCTION AT A LOWER RATE IS OBTAINED. 12. PER CONTRA, LEARNED A.R. SUPPORTED THE ORDERS O F LD. CIT(APPEALS). 13. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. IN OUR OPINION, THE MATTER IS NO MORE RES INTEGRA . DECISION OF HONBLE APEX COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTR E (SUPRA) IS CLEAR THAT WHEN THE AMOUNT PAID DID NOT HAVE ANY EL EMENT OF INCOME THEREIN, THERE WAS NO QUESTION OF DEDUCTION OF TAX AT SOURCE BY THE PAYER. HERE, THE CONCERNED NON-RESIDENTS WERE HAVI NG NO BUSINESS IN INDIA NOR ANY PERMANENT ESTABLISHMENT IN INDIA, NOR THEIR INCOME WAS TAXABLE IN INDIA. IN CIRCULAR NO.786 DATED 7.2 .2000, CONDITION FOR TAXING COMMISSION PAID TO AGENTS OUTSIDE INDIA HAS BEEN CLEARLY SPELT OUT BY CBDT AND BY VIRTUE OF THIS CIRCULAR ALSO ASS ESSEE WAS NOT OBLIGED TO DEDUCT TAX. IN THE CASE OF ITO V. PRAS AD PRODUCTIONS LTD. (125 ITD 263), IT HAS BEEN HELD BY SPECIAL BENCH O F THIS TRIBUNAL THAT WHEN THE PAYER WAS HAVING A BONAFIDE BELIEF THAT TH E AMOUNT PAID HAD NO ELEMENT OF INCOME THEREIN, THEN THERE WAS NO LIABILITY FASTENED FOR MAKING ANY DEDUCTION UNDER SECTION 195 OF THE A CT. LD. CIT(APPEALS) WAS, THEREFORE, JUSTIFIED IN TAKING TH E VIEW THAT RIGOURS OF I.T.A. NOS. 999 & 1000/MDS/11 8 SECTION 40(A)(I) OF THE ACT WERE NOT ATTRACTED FOR FAILURE TO DEDUCT TAX SOURCE AND THE DISALLOWANCE WAS RIGHTLY DELETED. 14. VIDE ITS GROUND NOS.3, 4 AND 5, GRIEVANCES RAIS ED BY THE REVENUE ARE REGARDING DELETION OF DISALLOWANCE OF A DDITIONAL BONUS OF ` 36,20,892/-, DISALLOWANCE OF INVISIBLE LOSS OF COTT ON ` 37,36,085/- AND DISALLOWANCE OF INTEREST ON SERVICE TAX ` 1,72,859/-. 15. INSOFAR AS ADDITIONAL BONUS WAS CONCERNED, A.O. WAS OF THE OPINION THAT SUCH BONUS PERTAINED TO PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2006-07 AND NOT FOR ASSESSMENT YEAR 2007-08. ACCORDING TO A.O., ASSESSEE HAD NOT MADE ANY PROVIS ION FOR ADDITIONAL BONUS AND SINCE IT HAD NOT MADE ANY PROV ISION, IT COULD NOT CLAIM OF EXPENSES INCURRED WHICH WAS FOR AN EARLIER YEAR. FOR MAKING A DISALLOWANCE OF INVISIBLE LOSS OF COTTON, ASSESSI NG OFFICER FOLLOWED HIS OWN ORDER FOR ASSESSMENT YEAR 2006-07. FOR MAK ING DISALLOWANCE OF SERVICE TAX OF ` 1,72,859/-, ASSESSING OFFICER WAS OF THE OPINION THAT ASSESSEE WAS NOT ABLE TO GIVE ANY DETAILS. 16. IN ITS APPEAL BEFORE LD. CIT(APPEALS), ARGUMENT OF THE ASSESSEE WAS THAT ADDITIONAL BONUS WAS MADE AS PER AGREEMENT DATED 12.10.2006, ENTERED WITH WORKERS UNION UNDER SECTI ON 18(1) OF I.T.A. NOS. 999 & 1000/MDS/11 9 INDUSTRIAL DISPUTES ACT, 1947. AS PER THE ASSESSEE , THIS WAS NOT A NORMAL BONUS, BUT AN ADDITIONAL BONUS WHICH IT WAS FORCED TO PAY AS PER THE AGREEMENT WITH WORKERS UNION AND THERE COU LD HAVE BEEN NO PROVISION SINCE IT WAS NOT PAYABLE TO THE EMPLOYEES UNDER THE PAYMENT OF BONUS ACT. THE BONUS CRYSTALIZED ONLY O N 12.10.2006, AND HENCE, THE CLAIM AROSE FOR ASSESSMENT YEAR 2007 -08. INSOFAR AS CLAIM OF INVISIBLE LOSS OF COTTON WAS CONCERNED, AS SESSEE ARGUED THAT TURNOVER FOR THE IMPUGNED ASSESSMENT YEAR HAD ACTUA LLY INCREASED WHEN COMPARED TO THE PRECEDING ASSESSMENT YEAR. TH EREFORE, DISALLOWANCE MADE BY THE A.O. WAS INCORRECT. INSOF AR AS CLAIM OF INTEREST ON SERVICE TAX WAS CONCERNED, ARGUMENT OF THE ASSESSEE WAS THAT THIS WAS ONLY INTEREST ON DELAYED PAYMENT AND NOT A PENALTY FOR INFRINGEMENT OF ANY LAW. LD. CIT(APPEALS) WAS APPR ECIATIVE OF THESE CONTENTIONS OF THE ASSESSEE AND DELETED ALL THE THR EE DISALLOWANCES. 17. NOW BEFORE US, LEARNED D.R. ASSAILING THE ORDER OF LD. CIT(APPEALS), SUBMITTED THAT THESE EXPENSES WERE RI GHTLY DISALLOWED BY THE ASSESSING OFFICER. 18. PER CONTRA, LEARNED A.R. SUPPORTED THE ORDER OF LD. CIT(APPEALS). I.T.A. NOS. 999 & 1000/MDS/11 10 19. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. INSOFAR AS ADDITIONAL BONUS OF ` 36,20,892/- IS CONCERNED, ADMITTEDLY, THIS WAS NOT A REGULAR BONUS. THIS WAS NOT PAYABLE UNDER THE BONUS ACT AND THEREFORE, ASSESSEE COULD NOT HAVE MADE ANY PROVISION IN THE PRECEDING ASSESSMENT YEAR. THE BONUS WAS PAID TO THE WORKERS AS PER THE AGREEMENT DATED 12.10.2006 ENTERED WITH WORKERS UNION. ASSESSEE, THEREFORE, RIGHTLY MADE THE CLAIM FOR EXP ENSES IN THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2007-08. ASSESSING OFFICER, IN OUR OPINION, WENT OFF TANGENT IN CONCLU DING THAT ASSESSEE OUGHT HAVE MADE THE PROVISION OF THE AMOUNT IN THE PRECEDING YEAR. 20. INSOFAR AS DISALLOWANCE OF INVISIBLE LOSS OF CO TTON TO THE TUNE OF ` 37,36,085/- IS CONCERNED, THE BOOKS WERE NOT REJECT ED NOR WAS ANY DEFECTS FOUND BY THE ASSESSING OFFICER. THE DISALL OWANCE WAS PURELY ON AN ESTIMATE AND BASED ON A SIMILAR ESTIMATED DIS ALLOWANCE FOR THE PRECEDING ASSESSMENT YEAR. SUCH DISALLOWANCE WAS N OT CALLED FOR. 21. INSOFAR AS INTEREST ON SERVICE TAX OF ` 1,72,859/- IS CONCERNED, ADMITTEDLY, THIS WAS INTEREST PAID ON SERVICE TAX A ND SUCH INTEREST WAS FOR DELAYED PAYMENT. IT CANNOT BE CONSIDERED AS SO METHING WHICH WAS NOT INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. IN OUR I.T.A. NOS. 999 & 1000/MDS/11 11 OPINION, LD. CIT(APPEALS) WAS JUSTIFIED IN DELETING THESE DISALLOWANCES. NO INTERFERENCE IS CALLED FOR. 22. IN THE RESULT, APPEALS FILED BY THE REVENUE FOR BOTH THE YEARS ARE DISMISSED. THE ORDER WAS PRONOUNCED IN THE COURT ON 23 RD MARCH, 2012. SD/- SD/- (VIKAS AWASTHY) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 23 RD MARCH, 2012. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A)-V, CHENNAI-34 (4) CIT, CHENNAI-III, CHENNAI (5) D.R. (6) GUARD FILE