Indo Count Industries Ltd., New Delhi V. DCIT, New Delhi

ITA 123/DEL/2011

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3566 (ITAT-DELHI)
• Duration Of Justice: 5 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-07-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 29-06-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 10-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PRATIMA KAUSHIK
• Assessee Lawyers: O P MODY
• Keywords: Revenue expenditure
• Section: 40(a)(ia); 195

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C DELHI BEFORE SHRI I.P. BANSAL AND SHRI K.G. BANSAL ITA NO. 123(DEL)/2011 ASSESSMENT YEAR: 2005-06 INDO COUNT INDUSTRIES LTD., DEPU TY COMMISSIONER OF 705, PRAGATI TOWER, VS. INC OME-TAX, CIRCLE 11(1), 26, RAJENDRA PLACE, NEW DELHI. NEW DELHI. PAN: AAACI0866P (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI O.P. MODY, ADVOCATE RESPONDENT BY : S MT. PRATIMA KAUSHIK, SR. DR ORDER PER K.G. BANSAL : AM THIS APPEAL OF THE ASSESSEE EMANATES FROM THE CONSOLIDATED ORDER OF THE CIT(APPEALS)-XI, NEW DELHI, IN APPEAL NO. 199 & 200/09-10 DATED 18/10/10. THE CORRESPONDING ASSESSMENT ORDER WAS FRAMED BY THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 11(1), N EW DELHI, ON 20.12.2007, UNDER THE PROVISIONS OF SECTION 143( 3) OF THE INCOME-TAX ACT, 1961, RELATING TO ASSESSMENT YEAR 2005-06. THE ASSESSEE HAS TAKEN UP ITA NO. 123(DEL)/2011 2 THREE SUBSTANTIVE GROUNDS IN THE APPEAL, WHICH READ AS UNDER:- 1. FOR THAT THE LEARNED CIT(A) ERRED IN CONFIRMIN G THE DISALLOWANCE OF RS. 1,52,000/- MADE BY THE LEARNED ASSESSING O FFICER (AO) ON ACCOUNT OF LOSS ON SALE OF RAW MATERIALS. FOR T HAT THE DISALLOWANCE SO CONFIRMED BEING NOT TENABLE IS LIABLE TO BE D ELETED. 2. FOR THAT THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 1,00,329/- MADE BY THE LD. AO ON ACCOUNT OF CLUB FEES. FOR THAT THE DISALLOWANCE SO CONFIRMED BEING NOT TENABLE IS LIABLE TO BE DELETED. 3. FOR THAT THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 2,70,903/-/- MADE BY THE LD. AO U/S 40(A)(IA) OF THE INCOME-TAX ACT, 1961. FOR THAT THE DISALLOWANCE SO CONFIRMED BE ING NOT TENABLE IS LIABLE TO BE DELETED. 2. IN REGARD TO GROUND NO. 1, IT IS MENTIONED IN THE ASSESSMENT ORDER THAT THE ASSESSEE SHOWED LOSS OF RS. 1.52 LAKH ON SALE OF RAW-MATERIAL. IT WAS SUBMITTED THAT 33 MT OF COTTON WAS PURCHASE D FOR RS. 43.57 LAKH AND SOLD FOR RS. 42.05 LAKH. THE COTTON WAS NOT F OUND TO BE USABLE IN THE PROCESS OF MANUFACTURING YARN AND, THEREFORE, IT REMAINED IN THE STOCK FOR A LONG TIME. THE AO DISALLOWED THIS LOSS BY MEN TIONING THAT THE ASSESSEE HAS NOT SUBSTANTIATED ITS CLAIM THAT THE COTTON W AS NOT ACTUALLY USABLE IN THE PROCESS OF MANUFACTURE. THE DISALLOWANCE WAS CONFIRMED BY THE LD. CIT(APPEALS) BY MENTIONING THAT THE ASSESSEE FAI LED TO ESTABLISH THE FACT BEFORE THE AO, THE BURDEN OF WHICH LIED ON HIM. ITA NO. 123(DEL)/2011 3 2.1 BEFORE US, THE LD. COUNSEL SUBMITTED THAT T HE ASSESSEE IS CARRYING ON THE BUSINESS OF MANUFACTURE AND SALE OF YARN. COTTON IS THE RAW- MATERIAL IN THE PROCESS OF MANUFACTURE. 33 MT OF COTTON WAS PURCHASED, WHICH WAS NOT FOUND TO BE USABLE AND, THEREFORE, IT REMAINED IN STOCK FOR SOME TIME. THEREAFTER, IT WAS SOLD RESULTING IN THE LOSS, WHICH HAS BEEN CLAIMED IN THE RETURN OF INCOME. THE DETAILS OF PURCHASE AND SALE WERE FURNISHED TO THE AO ALONG WITH CORRESPONDING PUR CHASE AND SALE VOUCHERS. THESE DETAILS HAVE NOW BEEN PLACED IN THE PAPER BOOK FROM PAGE NOS. 39 TO 49. THE COTTON IS THE RAW-MATERI AL CONSUMED BY THE ASSESSEE AND, THEREFORE, LOSS ARISING ON ACCOUNT OF SALE IS REVENUE EXPENDITURE. THE LOSS IS DULY SUPPORTED BY PURC HASE AND SALE BILLS. THEREFORE, THE LOSS IS DEDUCTIBLE IN COMPUTING THE INCOME. IN REPLY, THE LD. DR RELIED ON THE FINDINGS OF THE LD. CIT(APPE ALS). 2.2 WE HAVE CONSIDERED THE FACTS OF THE CASE AN D SUBMISSIONS MADE BEFORE US. IT IS SEEN THAT THE ASSESSEE FURNIS HED PURCHASE AND SALE DETAILS, DULY SUPPORTED BY BILLS, BEFORE THE A O. COTTON IS THE RAW- MATERIAL USED BY THE ASSESSEE IN MANUFACTURING YARN. NO DISCREPANCY HAS BEEN POINTED OUT IN RESPECT OF PURCHASE OR SALE . THE DISALLOWANCE HAS ITA NO. 123(DEL)/2011 4 BEEN UPHELD ON THE GROUND THAT THE ASSESSEE HAS NOT BEEN ABLE TO PROVE THAT THE COTTON WAS UNUSABLE. EVEN IN ABSENCE OF THAT, THE TRANSACTION IS ON TRADING ACCOUNT AND UNLESS THE CONTENTION OF BOGU S LOSS IS RAISED BY THE REVENUE, THE LOSS WILL BE ON ACCOUNT OF REVENUE TR ANSACTION. SUCH A CONTENTION HAS NOT BEEN RAISED IN THE ASSESSMENT ORDER OR THE IMPUGNED ORDER. IN ABSENCE OF THAT, IT IS HELD THAT THE AS SESSEE IS ENTITLED TO DEDUCT THE LOSS IN COMPUTING THE INCOME. 3. GROUND NO. 2 IS AGAINST DISALLOWANCE OF A SU M OF RS. 1,10,329/-, BEING THE EXPENDITURE INCURRED BY WAY OF CLUB F EES. IN THIS CONNECTION, IT IS MENTIONED IN THE ASSESSMENT ORDER THAT THE AUDITORS HAVE CERTIFIED THE EXPENSES TO BE PERSONAL IN NATURE. PERSONAL EX PENSES CANNOT BE ALLOWED. THIS FINDING HAS BEEN UPHELD BY THE LD. CIT(APP EALS) BY MENTIONING THAT THE DISALLOWANCE IS BASED UPON THE REMARKS MADE IN THE AUDIT REPORT AND, THUS, THE ACTION OF THE AO IS RIGHT IN THIS MATT ER. 3.1 BEFORE US, THE LD. COUNSEL REFERRED TO PAGE NO. 54 OF THE PAPER BOOK, WHICH IS A PART OF THE TAX AUDIT REPORT. COLU MN NO. 17(A) DEALS WITH EXPENDITURE OF PERSONAL NATURE. THIS COLUMN SHOW S NIL EXPENDITURE. FURTHER, HE REFERRED TO PAGE NO. 74 OF THE PAPE R BOOK, WHICH SHOWS ITA NO. 123(DEL)/2011 5 ANNUAL MEMBERSHIP FEES AT RS. 85,100/- AND COST OF SERVICES AND FACILITIES AT RS. 15,229/-. IT IS ARGUED THAT BOTH THE EXPE NSES ARE REVENUE IN NATURE. IN REPLY, THE LD. DR RELIED ON THE ORDER OF T HE LD. CIT(APPEALS). 3.2 WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFORE US. IT IS SEEN THAT THE ISSUE CAME UP B EFORE THE TRIBUNAL IN THE CASE OF THE ASSESSEE IN ITA NO. 124(DEL)/2011 FOR ASS ESSMENT YEAR 2006-07 DATED 18.03.2011, A COPY OF WHICH HAS BEEN PLACE D BEFORE US. IN THIS ORDER, IT IS MENTIONED THAT MAJOR EXPENDITURE H AS BEEN INCURRED ON ANNUAL MEMBERSHIP FEES AND VERY SMALL AMOUNT HAS BEEN INC URRED AS EXPENDITURE ON CLUB. RELYING ON THE DECISION IN THE CASE OF OTIS ELEVATOR CO. (INDIA) LTD. VS. CIT, 195 ITR 682, IT HAS BEEN HELD TH AT THE EXPENDITURE IS REVENUE IN NATURE. THE FACTS FOR THIS YEAR ARE IDENTICAL. THEREFORE, FOLLOWING THIS DECISION, IT IS HELD THAT THE ASS ESSEE IS ENTITLED TO DEDUCT THE EXPENDITURE IN COMPUTING THE TOTAL INCOME. 4. GROUND NO. 3 IS AGAINST DISALLOWANCE OF RS. 2, 70,903/- MADE U/S 40(A)(IA). IN THIS CONNECTION, IT IS MENTIONED IN THE ASSESSMENT ORDER THAT THE ASSESSEE HAS PAID FEES FOR QUALITY TESTIN G AMOUNTING TO RS. 2,59,603/-. THE PAYMENT HAS BEEN MADE IN FOREIGN EXCHANGE. NO TAX HAS BEEN ITA NO. 123(DEL)/2011 6 DEDUCTED AT SOURCE. THEREFORE, THE EXPENDITURE WAS DISALLOWED. THIS FINDING HAS BEEN UPHELD BY THE LD. CIT(APPEALS) BY MENTIONING THAT THE AMENDMENT TO THE PROVISION IS NOT RETROSPECTIVE AND, THEREFORE, THE AMOUNT OF RS. 11,300/- ON WHICH TAX WAS DEDUCTED AND P AID IN THE SUBSEQUENT YEAR IS ALSO NOT ADMISSIBLE IN COMPUTING THE INCO ME. 4.1 BEFORE US, THE LD. COUNSEL REFERRED TO PAGE NO. 102 OF THE PAPER BOOK, WHICH IS THE EXPLANATION OF THE ASSESSEE BEFORE THE AO TO THE EFFECT THAT WHERE A NON-RESIDENT AGENT OPERATES OUTSIDE THE COUNTRY, NO PART OF HIS INCOME ARISES IN INDIA. FURTHER, SINCE THE PAYMENT IS USUALLY REMITTED ABROAD, IT CANNOT BE HELD TO HAVE BEEN R ECEIVED BY OR ON BEHALF OF THE AGENT IN INDIA. SUCH PAYMENTS ARE, THEREFORE , NOT TAXABLE IN INDIA. CONSEQUENTLY, NO TAX IS DEDUCTIBLE AT SOURCE U/S 195 IN SUCH CASES. FURTHER, HE REFERRED TO THE DECISION OF B BEN CH OF THE LUCKNOW TRIBUNAL IN THE CASE OF DEPUTY CIT VS. SANJIV GUP TA, (2011) 135 TTJ (LUCKNOW) 641, PERTAINING TO ASSESSMENT YEAR 2007 -08. IN THE DECISION, IT IS MENTIONED THAT AT THE TIME OF FILING THE R ETURN, CIRCULAR NO. 7 OF 2009 DATED 22.10.2009, WAS NOT IN FORCE BY WHICH TH E CBDT WITHDREW CIRCULAR NO. 23 DATED 23.07.1969 WITH IMMEDIATE EFFECT. THEREFORE, THE EARLIER CIRCULAR APPLIED TO THE CASE OF THE ASS ESSEE. ACCORDING TO THE ITA NO. 123(DEL)/2011 7 CIRCULAR, IF THE SERVICES WERE RENDERED ABROAD A ND PAYMENT WAS ALSO RECEIVED ABROAD, NO INCOME ACCRUED TO THE FOREI GN AGENT IN INDIA AND, THUS, THE PROVISION CONTAINED IN SECTION 195 IS NO T APPLICABLE. THE CASE OF THE ASSESSEE IS THAT IT APPOINTED A PROFESSIONA L TO RENDER SERVICES REGARDING QUALITY TESTING OF THE MATERIAL EXPORT ED BY IT. THEREFORE, SERVICES WERE RENDERED BY HIM OUTSIDE INDIA. T HE PAYMENT WAS ALSO MADE OUTSIDE INDIA. IN VIEW OF THE AFORESAID D ECISION, NO INCOME ACCRUED TO THE FOREIGN AGENT IN INDIA. THUS, THE ASSE SSEE WAS NOT OBLIGED TO DEDUCT TAX AT SOURCE. IN REPLY, THE LD. DR R ELIED ON THE ORDER OF THE LD. CIT(APPEALS). 4.2 WE HAVE CONSIDERED THE FACTS OF THE CASE AN D SUBMISSIONS MADE BEFORE US. THE IMPUGNED ORDER DEALS WITH A SITU ATION WHERE TAX IS DEDUCTIBLE AT SOURCE U/S 195, BUT IT HAS BEEN D EDUCTED AND PAID IN A SUBSEQUENT YEAR. SUCH IS NOT THE CASE MADE OUT B EFORE US. THE CASE OF THE LD. COUNSEL IS THAT ALL SERVICES WERE RENDERED B Y THE CONCERNED PERSON OUTSIDE INDIA AND PAYMENT WAS ALSO MADE OUTSID E INDIA. THEREFORE, TAX WAS NOT DEDUCTIBLE AT SOURCE IN RESPECT OF PAYMEN T MADE TO HIM. THIS PROPOSITION HAS NOT BEEN DISPLACED BY ANY ARGUMENT BY THE LD. DR. IN ABSENCE THEREOF, IT IS HELD THAT THE PROVISION CO NTAINED IN SECTION 195 AND ITA NO. 123(DEL)/2011 8 CONSEQUENTLY SECTION 40(A)(IA) IS NOT APPLICABL E TO THE FACTS OF THIS CASE. ACCORDINGLY, THE DISALLOWANCE IS DELETED. 5. IN THE RESULT, THE APPEAL IS ALLOWED. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT ON 8 JULY, 2011. SD/- SD/- (I.P. BANSAL)) (K.G. BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE OF ORDER: 08 .07.2011. SP SATIA COPY OF THE ORDER FORWARDED TO:- INDO COUNT INDUSTRIES LTD., NEW DELHI. DY. CIT, CIRCLE 11(1), NEW DELHI. CIT CIT(APPEALS) THE DR, ITAT, NEW DELHI. ASSISTANT REGISTRAR.