Boscj Limited, Bangalore V. DCIT, Bangalore

ITA 1583/BANG/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8646 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-03-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 19-01-2016
• Assessment Year: 2012-2013
• Appeal Filed On: 09-12-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RUKMANI ATTRI
• Assessee Lawyers: K P KUMAR SR
• Keywords: Gift; Non-deduction of tax
• Section: 194C; 201(1); 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE A BENCH, BANGALORE BEFORE SMT ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER ITA NO.1583(BNG)/2014 (ASSESSMENT YEAR : 2012-13) M/S BOSCH LIMITED, DEPT. TAX-D, HOSUR ROAD, ADUGODI, BANGALORE -560 085 PAN NO.AAACM9840P APPELLANT VS THE INCOME-TAX OFFICER, WARD-7(3), BANGALORE RESPONDENT ASSESSEE BY : SHRI K.P.KUMAR, SR. COUNSEL REVENUE BY : SMT. RUKMANI ATTRI, JCIT DATE OF HEARING : 19-01-201 6 DATE OF PRONOUNCEMENT : 01-03-2016 O R D E R PER SHRI INTURI RAMA RAO, AM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE CIT(A),LTU, BANGALORE DATED 31-07-2014 FOR THE ASSESSMENT YEAR : 2008-09. 2. THE ASSESSEE RAISED THE FOLLOWING GROUNDS IN ITS APPEAL; 1. THAT THE ORDER OF THE LD.CIT(A), LTU, BANGALORE (CIT- A) FOR SHORT) IS BAD IN LAW TO THE EXTENT CHALLENGE D THEREON. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, WHETHER THE AO JUSTIFY IN MAKING THE ADDITION OF RS.95,48,855/- 2 ITA NO.1583(B)/2014 2. THAT THE LD.CIT(A) ERRED IN UPHOLDING THE ACTION OF THE ITO(TDS) LTU IN TREATING THE ASSESSEE AS IN DEFAULT U/S 201(1). 3.THAT THE LD.CITA) ERRED IN HOLDING THAT THE ASSES SEE HAD LIABILITY TO DEDUCT TAX AT SOURCE FROM THE AMOUNTS CREDITED TO PROVISION ACCOUNT, EVEN IN RESPECT OF THOSE ITEMS W HICH WERE SUBSEQUENTLY WRITTEN BACK, EITHER PARTIALLY OR FULL Y AND FURTHER ERRED IN COMING TO THE FOLLOWING CONCLUSION INPARA- 5 ON PAGE-06 OF IMPUGNED ORDER WHICH IS EXTRACTED BELOW; WHERE THE PROVISIONED AMOUNT AS HIGHER THAN THE INVOICED AMOUNT, THE BALANCE HAS CLEARLY NOT SUFFER ED TAX. SINCE IT HAS BEEN HELD (SUPRA) THAT THE LIABILITY F OR TX DEDUCTION EXISTED O N THE COMPANY AT THE TIME OF MAKING THE P ROVISION THE DEFAULT FOR NON-DEDUCTION OF TAX AT SOURCE IS T O BE LIMITED ONLY TO THE SURPLUS OVER AND ABOVE THE INVOICE AMOU NT. 4. THAT THELD.CIT(A) OUGHT TO HAVE ACCEPTED ASSESSE ES PLEA THAT, THE WORD CREDIT N SECTION 195, 194C, 1 94J ETC. REFERS TO CONSTRUCTIVE CREDIT AND WHEN ASSESSEE DIS ALLOWS VOLUNTARILY CERTAIN ITEMS GETS EFFACED AB INITIO AN D CONSEQUENTLY THE ASSESSEE WOULD NOT HAVE HAD ANY OBLIGATION TO D EDUCT TAX AT SOURCE ON THOSE ITEMS U/S 95, 194C, 194J ETC. 5. WITHOUT PREJUDICE, THAT THE LD. CIT(A) OUGHT TO APPRECIATE THE GENERAL LEGAL PRINCIPLES THAT THE AS SESSEE CANNOT BE SUBJECTED TO DOUBLE DISADVANTAGE FOR A SINGLE FA ILURE AND WHEN ASSESSEE DISALLOWS VOLUNTARILY U/S 40(A)(I) OR 40(A)(IA) AND PAYS TAX ON THE SAME, AGAIN HE CANNOT BE MADE L IABLE TO 3 ITA NO.1583(B)/2014 PAY TAX AGA9IN U/S 201(1) BY TREATING HIM AS ASSESS EE IN DEFAULT. 6. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, THE ASSESSEE PRAYS FOR APPROPRIATE RELIEF. 3. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSES SEE IS A LIMITED COMPANY INCORPORATED UNDER THE PROVISION OF THE COMPANIES A CT. IT IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF INJECTION EQUIP MENTS, AUTO ELECTRIC ITEMS, PORTABLE ELECTRIC POWER TOOLS ETC. THE INCOME-TAX OFFICER (TDS) HEREIN AFTER REFERRED TO AS TDS OFFICER HAD NOTICED FROM THE STA TE OF TOTAL INCOME FILED FOR THE ASSESSMENT YEAR 2012-13 THAT THE ASSESSEE COMPANY M ADE SUO-MOTTU DISALLOWANCES U/S 40(A)(I) AND 40(A)(IA) OF THE IT ACT, 1961 IN RESPECT OF WHICH NO TDS WAS MADE. THE TDS OFFICER VIDE LETTER DATED 30 -07-2013 HAD CALLED UPON THE ASSESSEE COMPANY TO FURNISH THE DETAILS OF PAYMENT MADE AND THE TDS DEDUCTED AND REMITTED TO THE CENTRAL GOVERNMENT ACCOUNT. IN RESPONSE TO THIS, THE ASSESSEE COMPANY VIDE ITS LETTER 24-01-2014 SUBMITT ED THE DETAILS TO THE TDS OFFICER. FROM THE DETAILS FURNISHED, THE TDS OFFIC ER NOTICED THAT IN RESPECT OF EXPENSES AN AMOUNT OF RS.1,96,84,115/- A PROVISION WAS CREATED AND THE SAME WAS DISALLOWED UNDER THE PROVISIONS OF SEC.40(A)(I) (IA) OF THE IT ACT, 1961 IN COMPUTATION OF TOTAL INCOME FILED FOR THE ASSESSMEN T YEAR 2012-13. IT WAS SUBMITTED THAT OUT OF RS.1,96,84,115/- AND FOR AN A MOUNT OF RS.1,79,36,713/-NO 4 ITA NO.1583(B)/2014 INVOICES WERE RECEIVED. THEREFORE, THE SAID AMOUNT WAS REVERSED IN THE BEGINNING OF THE NEXT ACCOUNTING YEAR. IT WAS THE CONTENTIO N OF THE ASSESSEE COMPANY THAT NO TDS IS REQUIRED TO BE MADE. THE CONTENTION OF T HE AASSESEE COMPANY WAS NOT ACCEPTED BY THE TDS OFFICER BY HOLDING THAT THE SYS TEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE COMPANY IS FAULTY AND DOES NOT ENABLE ANY VERIFICATION AND HELD SINCE THE ASSESEE COMPANY IS FOLLOWING MERCANTILE S YSTEM OF ACCOUNTING, THE TDS SHOULD HAVE BEEN DEDUCTED ON THE PROVISIONS MADE AN D ACCORDINGLY, THE TDS OFFICER HELD THAT THE ASSESSEE IS ASSESSEE IN DEFAULT U/S 201(1) OF THE IT ACT AND REMANDED TDS OF RS.17,93,677/- APART FROM INTEREST OF RS.4,24,965/-. 4. BEING AGGRIEVED BY THIS ORDER, AN APPEAL WAS FIL ED BEFORE THE CIT(A), LTU, BANGALORE WHO VIDE IMPUGNED ORDER CONFIRMED AC TION OF THE OF THE AO BY HOLDING THAT THE SUO-MOTTU DISALLOWANCE UNDER THE P ROVISIONS OF SEC.40(A)(IA) OF THE ACT, DOES NOT ABSOLVE THE ASSESSEE COMPANY OF T HE RESPONSIBILITY OF DEDUCTING TAX AT SOURCE. HOWEVER, LEARNED CITA) DIRECTED T HE TDS OFFICER TO EXCLUDE THOSE AMOUNTS IN RESPECT OF WHICH TDS HAS BEEN MADE ON TH E DATES ON WHICH INVOICES HAVE BEEN RAISED. 5. BEING AGGRIEVED, THE ASSESSEE COMPANY IS IN APP EAL BEFORE US. LEARNED COUNSEL FOR THE ASSESSEE COMPANY SUBMITTED AND EXPL AINED DURING THE COURSE OF HEARING THAT THE PROCEDURE ADOPTED IN THE BOOKS OF ACCOUNTS, ACCOUNTING THE 5 ITA NO.1583(B)/2014 EXPENDITURE WHICH ARE OUTSTANDING AS ON 31 ST MARCH OF EVERY FINANCIAL YEAR. IT WAS SUBMITTED THAT THE ASSESSEE COMPANY INCURRED CE RTAIN EXPENDITURE TOWARDS SERVICE SUPPORT CHARGES, PROFESSIONAL CHARGES ETC. WHERE INVOICES HAVE BEEN RAISED BY SERVICE PROVIDER OR VENDOR AND ARE ACKNOW LEDGED BY THE ASSESSEE COMPANY, WERE ACCOUNTED IN THE BOOKS OF ACCOUNTS OR THE PAYMENTS ARE MADE AFTER DULY COMPLAINING THE PROVISIONS OF TDS UNDER CHAPTER XVII-B OF THE IT ACT, 1961. 6. AS REGARDS THE EXPENSES FOR WHICH THE SERVICE P ROVIDER OR VENDOR HAD NOT RAISED ANY INVOICES NOR ACKNOWLEDGEMENT BY THE ASSE SSEE COMPANY MADE A PROVISION FOR SUCH EXPENSES ON A SCIENTIFIC BASIS A ND SUCH PROVISION WAS DEBITED TO ITS P&L ACCOUNT, ON CONFORMITY WITH THE PROVISIONS OF ACCOUNTING STANDARD 29- PERTAINING TO PROVISIONS, CONTINGENT LIABILITIES AN D CONTINGENT ASSETS ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA (CAI) AN D SUCH PROVISION WAS REVERSED IN THE BEGINNING OF THE NEXT ACCOUNTING YEAR. IT WAS FURTHER SUBMITTED THAT IT IS MANDATORY TO PROVIDE SUCH PROVISIONS IN TERMS OF AC COUNTING STANDARD-29 ISSUED BY THE CAI. THE LEARNED COUNSEL FOR THE ASSESSEE C OMPANY MADE THE FOLLOWING SUBMISSIONS; A) THAT NO INCOME HAD ACCRUED TO THE PAYEES AND A MERE PROVISION WAS MADE IN THE BOOKS OF ACCOUNTS AT THE YEAR END. THE VERY FACT THAT THE PROVISION 6 ITA NO.1583(B)/2014 WAS REVERSED IN THE BEGINNING OF THE NEXT ACCOUNTIN G YEAR GOES TO SHOW THAT NO INCOME HAD ACCRUED TO THE PAYEE AND THEREFORE, THER E IS NO LIABILITY TO DEDUCT TDS ON THE BASIS OF MERE PROVISION. B) THE PAYEES AS WELL AS THE EXACT AMOUNT PAYABLE TO THEM ARE NOT IDENTIFIABLE AND THEREFORE, NO LIABILITY TO DEDUCT TAX AT SOURCE. C) THE EXISTENCE/ACCRUAL OF INCOME IN THE HANDS OF PAYEE IS A PRE-CONDITION TO FASTEN THE LIABILITY OF TAX DEDUCTION AT SOURCE IN THE HANDS OF THE PAYER AND THE LAST LIMB OF HIS ARGUMENTS IS THAT THE PROVISIONS O F SEC.195 STIPULATES THAT THE PAYER HAS TO DEDUCT TAX AT SOURCE AT THE EARLIER PO INT OF TIME EITHER AT THE TIME OF CREDITING TO THE PAYEE ACCOUNT OR AT THE TIME OF PA YMENT OF INCOME TO THE PAYEE. THE PHRASE WHICHEVER IS EARLIER WOULD MEAN THAT B OTH THE EVENTS I.E CREDITING THE AMOUNT TO THE ACCOUNT OF PAYEE AND PAYMENT TO T HE ASSESSEE MUST NECESSARILY OCCUR. THEREFORE, WHEN THERE WAS NO PA YMENT MADE THE QUESTION OF DEDUCTING TDS AT THE TIME OF CREDITING DOES NOT ARI SE. LEARNED COUNSEL FOR THE ASSESSEE ALSO PLACED RELIANCE ON THE CBDTS INSTRUC TION NO.1215(F.NO.385/61/78- IT(B) DATED 08-11-1978. 7. ON THE OTHER HAND, LEARNED SR. DR SUBMITTED THA T ON A PLAIN READING OF SEC.195, THE LIABILITY TO DEDUCT TAX AT SOURCE HAD ARISEN THE MOMENT THE AMOUNT 7 ITA NO.1583(B)/2014 IS CREDITED IN THE BOOKS OF ACCOUNTS, IRRESPECTIVE OF FACT WHETHER THE AMOUNT IS PAID OR NOT. HE FURTHER SUBMITTED THAT THE PROVISI ON OF TAXING STATUTES SHOULD BE CONSTRUED STRICTLY THAT THERE IS NO PLACE FOR ANY I NFERENCE AND THEREFORE, HE SUPPORTED THE ORDERS OF LOWER AUTHORITIES. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. 9. THE UNDISPUTED FACTS IN THIS CASE ARE THAT HE P ROVISIONS WERE MADE AT THE END OF THE YEAR AND THE SAME WERE REVERSED IN THE B EGINNING OF THE NEXT ACCOUNTING YEAR. THE SHORT POINT THAT ARISES FOR O UR CONSIDERATION IS WHETHER THE LIABILITY FOR DEDUCTION OF TAX AT SOURCE HAS ARISEN THE MOMENT THE AMOUNT IS CREDITED IN THE BOOKS OF ACCOUNTS. HAVING REGARD I N THE SCHEME OF TAX DEDUCTED AT SOURCE, UNDER CHAPTER-XVII-B OF THE IT ACT, WE A RE OF THE CONSIDERED OPINION THAT THE LIABILITY TO DEDUCT TAX AT SOURCE ARISES O NLY WHEN THERE IS ACCRUAL OF INCOME IN THE HANDS OF THE PAYEE. WE ARE HOLDING S O, KEEPING IN VIEW THE RATIO LAID DOWN BY THE HONBLE APEX COURT IN THE CASE OF M/S GE INDIA TECHNOLOGY CENTRE P. LTD. VS. CIT AND ANOTHER 327 ITR 456 (SC) WHEREIN THE HONBLE SUPREME COURT HELD THAT IF PAYMENT IS NOT ASSESSABL E TO TAX THERE IS NO QUESTION OF TAX AT SOURCE BEING DEDUCTED. THE RELEVANT PORTI ON OF THE JUDGMENT IS REPRODUCED AS UNDER :- IF THE CONTENTION OF THE DEPARTMENT THAT THE MOMEN T THERE IS REMITTANCE THE OBLIGATION TO DEDUCT TAS AR ISES IS TO 8 ITA NO.1583(B)/2014 BE ACCEPTED THEN WE ARE OBLITERATING THE WORDS CHARGEABLE UNDER THE PROVISIONS OF THE ACT IN SEC TION 195(1). THE SAID EXPRESSION IN SECTION 195(1) SHOWS THAT THE REMITTANCE HAS GOT TO BE OF A TRADING RECEIPT, THE WHOLE OR PART OF WHICH IS LIABLE TO TAX IN INDIA. THE PAY ER IS BOUND TO DEDUCT TAS ONLY IF THE TAX IS ASSESSABLE IN INDI A. IF TAX IS NOT SO ASSESSABLE, THERE IS NO QUESTION OF TAS B EING DEDUCTED. ONE MORE ASPECT NEEDS TO BE HIGHLIGHTED. SECTION 195 FALLS IN CHAPTER XVII WHICH DEALS WITH COLLECTION AND RECOVERY. CHAPTER XVII-B DEALS WITH DEDUCTION AT SOURCE BY THE PAYER. ON ANALYSIS OF PR OVISIONS OF CHAPTER XVII ONE FINDS USE OF DIFFERENT EXPRESSI ONS, HOWEVER, THE EXPRESSION SUM CHARGEABLE UNDER THE PROVISIONS OF THE ACT IS USED ONLY IN SECTION 195. FOR EXAMPLE, SECTION 194C CASTS AN OBLIGATION TO DEDUCT TAS IN RESPECT OF ANY SUM PAID TO ANY RESIDENT. SIMILAR LY, SECTIONS 194EE AND 194F, INTER ALIA, PROVIDE FOR DE DUCTION OF TAX IN RESPECT OF ANY AMOUNT REFERRED TO IN T HE SPECIFIED PROVISIONS. IN NONE OF THE PROVISIONS WE FIND THE EXPRESSION SUM CHARGEABLE UNDER THE PROVISIONS OF THE ACT, WHICH AS STATED ABOVE, IS AN EXPRESSION USED ONLY IN SECTION 195(1). THEREFORE THIS COURT IS REQUIRED TO GIVE MEANING AND EFFECT TO THE SAID EXPRESSION. IT FOLLO WS, THEREFORE, THAT THE OBLIGATION TO DEDUCT TAS ARISES ONLY WHEN THERE IS A SUM CHARGEABLE UNDER THE ACT. SECTI ON 195(2) IS NOT MERELY A PROVISION TO PROVIDE INFORMA TION TO 9 ITA NO.1583(B)/2014 THE INCOME TAX OFFICER (TDS). IT IS A PROVISION REQ UIRING TAX TO BE DEDUCTED AT SOURCE TO BE PAID TO THE REVENUE BY THE PAYER WHO MAKES PAYMENT TO A NON-RESIDENT. THEREFOR E, SECTION 195 HAS TO BE READ IN CONFORMITY WITH THE C HARGING PROVISIONS, I.E SECTION 4,5 AND 9. THIS REASONING F LOWS FROM THE WORDS SUM CHARGEABLE UNDER THE PROVISIONS OF THE ACT IN SECTION 195 (1). THE FACT THAT THE REVENUE HAS NOT OBTAINED ANY INFORMATION PER SE CANNOT BE A GROUND TO CONSTRUE SECTION 195 WIDELY SO AS TO REQUIRE DEDUCT ION OF TAS EVEN IN A CASE WHERE AN AMOUNT PAID IS NOT CHARGEABLE TO TAX IN INDIA AT ALL. WE CANNOT READ S ECTION 195, AS SUGGESTED BY THE DEPARTMENT, NAMELY, THAT T HE MOMENT THERE IS REMITTANCE THE OBLIGATION TO DEDUCT TAS ARISES. IF WE WERE TO ACCEPT SUCH A CONTENTION IT W OULD MEAN THAT ON MERE PAYMENT INCOME WOULD BE SAID TO A RISE OR ACCRUE IN INDIA. THEREFORE, AS STATED EARLIER, I F THE CONTENTION OF THE DEPARTMENT WAS ACCEPTED IT WOULD MEAN OBLITERATION OF THE EXPRESSION SUM CHARGEABLE UND ER THE PROVISIONS OF THE ACT FROM SECTION 195(1). WHILE INTERPRETING A SECTION ONE HAS TO GIVE WEIGHTAGE TO EVERY WORD USED IN THAT SECTION. WHILE INTERPRETING THE P ROVISIONS OF THE INCOME TAX ACT ONE CANNOT READ THE CHARGING SECTIONS OF THAT ACT DE HORS THE MACHINERY SECTIONS . THE ACT IS TO BE READ AS AN INTEGRATED CODE. SECTION 19 5 APPEARS IN CHAPTER XVII WHICH DEALS WITH COLLECTION AND RECOVERY. AS HELD IN THE CASE OF CIT VS. ELI LILLY AND CO. 10 ITA NO.1583(B)/2014 (INDIA) (P) LTD. (2009) 312 ITR 225 THE PROVISIONS FOR DEDUCTION OF TAS WHICH ARE IN CHAPTER XVII DEALING WITH COLLECTION OF TAXES AND THE CHARGING PROVISIONS OF THE INCOME TAX ACT FORM ONE SINGLE INTEGRAL, INSEPARABL E CODE AND, THEREFORE, THE PROVISIONS RELATING TO TDS APPL Y ONLY TO THOSE SUMS WHICH ARE CHARGEABLE TO TAX UNDER THE INCOME-TAX ACT. IT IS TRUE THAT THE JUDGMENT IN ELI LILLY (2009) 312 ITR 225 WAS CONFINED TO SECTION 192 OF T HE INCOME TAX ACT. HOWEVER, THERE IS SOME SIMILARITY BETWEEN THE TWO. IF ONE LOOKS AT SECTION 192 ONE FI NDS THAT IT IMPOSES STATUTORY OBLIGATION ON THE PAYER TO DED UCT TAS WHEN HE PAYS ANY INCOME CHARGEABLE UNDER THE HEAD SALARIES. SIMILARLY SECTION 195 IMPOSES A STATUTOR Y OBLIGATION ON ANY PERSON RESPONSIBLE FOR PAYING TO A NON- RESIDENT ANY SUM CHARGEABLE UNDER THE PROVISIONS OF THE ACT. WHICH EXPRESSION, AS STATED ABOVE, DO NOT FIN D PLACE IN OTHER SECTIONS OF CHAPTER XVII. IT IS IN THIS SE NSE THAT WE HOLD THAT THE INCOME TAX ACT CONSTITUTES ONE SINGLE INTEGRAL INSEPARABLE CODE. HENCE, THE PROVISIONS RE LATING TO TDS APPLIES ONLY TO THOSE SUMS WHICH ARE CHARGEABLE TO TAX UNDER THE INCOME TAX ACT. IF THE CONTENTION OF THE DEPARTMENT THAT ANY PERSON MAKING PAYMENT TO A NON- RESIDENT IS NECESSARILY REQUIRED TO DEDUCT TAS THEN THE CONSEQUENCE WOULD BE THAT THE DEPARTMENT WOULD BE ENTITLED TO APPROPRIATE THE MONEYS DEPOSITED BY THE PAYER EVEN IF THE SUM PAID IS NOT CHARGEABLE TO TAX BECAU SE 11 ITA NO.1583(B)/2014 THERE IS NO PROVISION IN THE INCOME-TAX ACT BY WHIC H A PAYER CAN OBTAIN REFUND. SECTION 237 READ WITH SECT ION 199 IMPLIES THAT ONLY THE RECIPIENT OF THE SUM I.E. THE PAYEE COULD SEEK A REFUND. IT MUST THEREFORE FOLLOW, IF T HE DEPARTMENT IS RIGHT, THAT THE LAW REQUIRES TAX TO B E DEDUCTED ON ALL PAYMENTS, THE PAYER, THEREFORE, HAS TO DEDUCT AND PAY TAX, EVEN IF THE SO-CALLED DEDUCTION COMES OUT OF HIS OWN POCKET AND HE HAS NO REMEDY WHATSOEV ER, EVEN WHERE THE SUM PAID BY HIM IS NOT A SUM CHARGEA BLE UNDER THE ACT. THE INTERPRETATION OF THE DEPARTMENT , THEREFORE, NOT ONLY REQUIRES THE WORDS CHARGEABLE UNDER THE PROVISIONS OF THE ACT TO BE OMITTED, IT ALSO L EADS TO AN ABSURD CONSEQUENCE. THE INTERPRETATION PLACED BY TH E DEPARTMENT WOULD RESULT IN A SITUATION WHERE EVEN W HEN THE INCOME HAS NO TERRITORIAL NEXUS WITH INDIA OR I S NOT CHARGEABLE IN INDIA, THE GOVERNMENT WOULD NONETHELE SS COLLECT TAX. IN OUR VIEW, SECTION 195(2) PROVIDES A REMEDY BY WHICH A PERSON MAY SEEK A DETERMINATION OF THE APPROPRIATE PROPORTION OF SUCH SUM SO CHARGEABLE WHERE A PROPORTION OF THE SUM SO CHARGEABLE IS LIABLE TO TAX. THE ENTIRE BASIS OF THE DEPARTMENTS CONTENTION IS BASE D ON ADMINISTRATIVE CONVENIENCE IN SUPPORT OF ITS INTERP RETATION. ACCORDING TO THE DEPARTMENT, HUGE SEEPAGE OF REVENU E CAN TAKE PLACE IF PERSONS MAKING PAYMENTS TO NON- RESIDENTS ARE FREE TO DEDUCT TAS OR NOT TO DEDUCT T AS. IT IS THE CASE OF THE DEPARTMENT THAT SECTION 195(2) , AS 12 ITA NO.1583(B)/2014 INTERPRETED BY THE HIGH COURT WOULD PLUG THE LOOPHO LE AS THE SAID INTERPRETATION REQUIRES THE PAYER TO MAKE A DECLARATION BEFORE THE INCOME TAX OFFICER (TDS) OF PAYMENTS MADE TO NON-RESIDENTS. IN OTHER WORDS, ACCORDING TO THE DEPARTMENT, SECTION 195(2) IS A PR OVISION BY WHICH THE PAYER IS REQUIRED TO INFORM THE DEPART MENT OF THE REMITTANCES HE MAKES TO NON-RESIDENTS BY WHICH THE DEPARTMENT IS ABLE TO KEEP TRACK OF THE REMITTANCES BEING MADE TO NON-RESIDENTS OUTSIDE INDIA. WE FIND NO MER IT IN THESE CONTENTIONS. AS STATED HEREINABOVE, SECTION 1 95(1) USES THE EXPRESSION SUM CHARGEABLE UNDER THE PROV ISIONS OF THE ACT. WE NEED TO GIVE WEIGHTAGE TO THOSE WOR DS. FURTHER, SECTION 195 USES THE WORD PAYER AND NOT THE WORD ASSESSEE. THE PAYER IS NOT AN ASSESSEE. THE PAYER BECOMES AN ASSESSEE-IN-DEFAULT ONLY WHEN HE FAILS T O FULFILL THE STATUTORY OBLIGATION UNDER SECTION 195(1). IF T HE PAYMENT DOES NOT CONTAIN THE ELEMENT OF INCOME THE PAYER CANNOT BE MADE LIABLE. HE CANNOT BE DECLARED TO BE AN ASSESSEE-IN-DEFAULT. THE ABOVE-MENTIONED CONTENTION OF THE DEPARTMENT IS BASED ON AN APPREHENSION WHICH IS ILL FOUNDED. THE PAYER IS ALSO AN ASSESSEE UNDER THE OR DINARY PROVISIONS OF THE INCOME TAX ACT. WHEN THE PAYER RE MITS AN AMOUNT TO A NON-RESIDENT OUT OF INDIA HE CLAIMS DEDUCTION OR ALLOWANCES UNDER THE INCOME TAX ACT FO R THE SAID SUM AS AN EXPENDITURE . UNDER SECTION 40(A) (I), INSERTED, VIDE FINANCE ACT, 1988, WITH EFFECT FROM APRIL 1, 13 ITA NO.1583(B)/2014 1989, PAYMENT IN RESPECT OF ROYALTY, FEES FOR TECHN ICAL SERVICES OR OTHER SUMS CHARGEABLE UNDER THE INCOME TAX ACT WOULD NOT GET THE BENEFIT OF DEDUCTION IF THE A SSESSEE FAILS TO DEDUCT TAS IN RESPECT OF PAYMENTS OUTSIDE INDIA WHICH ARE CHARGEABLE UNDER THE INCOME-TAX ACT. THIS PROVISION ENSURES EFFECTIVE COMPLIANCE WITH SECTION 195 OF THE INCOME TAX ACT RELATING TO TAX DEDUCTION AT SOU RCE IN RESPECT OF PAYMENTS OUTSIDE INDIA IN RESPECT OF ROY ALTIES, FEES OR OTHER SUMS CHARGEABLE UNDER THE INCOME TAX ACT. IN A GIVEN CASE WHERE THE PAYER IS AN ASSESSEE HE W ILL DEFINITELY CLAIM DEDUCTION UNDER THE INCOME-TAX ACT FOR SUCH REMITTANCE AND ON INQUIRY IF THE ASSESSING OFF ICER FINDS THAT THE SUMS REMITTED OUTSIDE INDIA COME WIT HIN THE DEFINITION OF ROYALTY OR FEES FOR TECHNICAL SERVICE OR OTHER SUMS CHARGEABLE UNDER THE INCOME-TAX ACT THEN IT WO ULD BE OPEN TO THE ASSESSING OFFICER TO DISALLOW SUCH C LAIM FOR DEDUCTION. SIMILARLY, VIDE THE FINANCE ACT, 2008, W ITH EFFECT FROM APRIL 1, 2008, SUB-SECTION (6) HAS BEEN INSERTED IN SECTION 195 WHICH REQUIRES THE PAYER TO FURNISH INFORMATION RELATING TO PAYMENT OF ANY SUM IN SUCH FORM AND MANNER AS MAY BE PRESCRIBED BY THE BOARD. THIS PROVISION IS BROUGHT INTO FORCE ONLY FROM APRIL 1, 2008. IT WILL ONLY APPLY FOR THE PERIOD WITH WHICH WE ARE CO NCERNED IN THESE CASES BEFORE US. THEREFORE, IN OUR VIEW, T HERE ARE ADEQUATE SAFEGUARDS IN THE ACT WHICH WOULD PREVENT REVENUE LEAKAGE. APPLICABILITY OF THE JUDGMENT IN T HE CASE 14 ITA NO.1583(B)/2014 OF TRANSMISSION CORPORATION (SUPRA) IN TRANSMISSION CORPORATIONS CASE (1999) 239 ITR 587(SC) A NONRESI DENT HAD ENTERED INTO A COMPOSITE CONTRACT WITH THE RESI DENT PARTY MAKING THE PAYMENTS. THE SAID COMPOSITE CONTR ACT NOT ONLY COMPRISED SUPPLY OF PLANT, MACHINERY AND EQUIPMENT IN INDIA, BUT ALSO COMPRISED THE INSTALLA TION AND COMMISSIONING OF THE SAME IN INDIA. IT WAS ADMITTED THAT THE ERECTION AND COMMISSIONING OF PLANT AND MACHINE RY IN INDIA GAVE RISE TO INCOME TAXABLE IN INDIA. IT WAS, THEREFORE, CLEAR EVEN TO THE PAYER THAT PAYMENTS RE QUIRED TO BE MADE BY HIM TO THE NON-RESIDENT INCLUDED AN ELEMENT OF INCOME WHICH WAS EXIGIBLE TO TAX IN INDI A. THE ONLY ISSUE RAISED IN THAT CASE WAS WHETHER TDS WAS APPLICABLE ONLY TO PURE INCOME PAYMENTS AND NOT TO COMPOSITE PAYMENTS WHICH HAD AN ELEMENT OF INCOME EMBEDDED OR INCORPORATED IN THEM. THE CONTROVERSY B EFORE US IN THIS BATCH OF CASES IS, THEREFORE, QUITE DIFF ERENT. IN TRANSMISSION CORPORATION CASE (1999) 239 ITR 587 (S C) IT WAS HELD THAT TAS WAS LIABLE TO BE DEDUCTED BY THE PAYER ON THE GROSS AMOUNT IF SUCH PAYMENT INCLUDED IN IT AN AMOUNT WHICH WAS EXIGIBLE TO TAX IN INDIA. IT WAS H ELD THAT IF THE PAYER WANTED TO DEDUCT TAS NOT ON THE GROSS AMOUNT BUT ON THE LESSER AMOUNT ON THE FOOTING THAT ONLY A PORTION OF THE PAYMENT MADE REPRESENTED INCOME CHARGEABLE TO TAX IN INDIA THEN IT WAS NECESSARY F OR HIM TO MAKE AN APPLICATION UNDER SECTION 195(2) OF THE ACT TO THE 15 ITA NO.1583(B)/2014 INCOME TAX OFFICER (TDS) AND OBTAIN HIS PERMISSION FOR DEDUCTING TAS AT LESSER AMOUNT. THUS, IT WAS HELD B Y THIS COURT THAT IF THE PAYER HAD A DOUBT AS TO THE AMOUN T TO BE DEDUCTED AS TAS HE COULD APPROACH THE INCOME-TAX OF FICER (TDS) TO COMPUTE THE AMOUNT WHICH WAS LIABLE TO BE DEDUCTED AT SOURCE. IN OUR VIEW , SECTION 195(2) IS BASED ON THE PRINCIPLE OF PROPORTIONALITY. THE SAID SU B SECTION GETS ATTRACTED ONLY IN CASES WHERE THE PAYMENT MADE IS A COMPOSITE PAYMENT IN WHICH A CERTAIN PROPORTION OF PAYMENT HAS AN ELEMENT OF INCOME CHARGEABLE TO TA X IN INDIA. IT IS IN THIS CONTEXT THAT THE SUPREME COURT STATED, IF NO SUCH APPLICATION IS FILED, INCOME TAX ON SUC H SUM IS TO BE DEDUCTED AND IT IS THE STATUTORY OBLIGATION O F THE PERSON RESPONSIBLE FOR PAYING SUCH SUM TO DEDUCT TAX THEREON BEFORE MAKING PAYMENT. HE HAS TO DISCHARGE THE OBLIGATION TO TDS. IF ONE READS THE OBSERVATION OF THE SUPREME COURT, THE WORDS SUCH SUM CLEARLY INDICA TE THAT THE OBSERVATION REFERS TO A CASE OF COMPOSITE PAYME NT WHERE THE PAYER HAS A DOUBT REGARDING THE INCLUSION OF AN AMOUNT IN SUCH PAYMENT WHICH IS EXIGIBLE TO TAX IN INDIA. IN OUR VIEW, THE ABOVE OBSERVATIONS OF THIS COURT I N TRANSMISSION CORPORATION CASE (1999) 239 ITR 587 (S C) WHICH ARE PUT IN ITALICS HAVE BEEN COMPLETELY, WITH RESPECT MISUNDERSTOOD BY THE KARNATAKA HIGH COURT TO MEAN T HAT IT IS NOT OPEN FOR THE PAYER TO CONTEND THAT IF THE AMOUNT PAID BY HIM TO THE NON-RESIDENT IS NOT AT ALL CHA RGEABLE TO 16 ITA NO.1583(B)/2014 TAX IN INDIA., THEN NO TAS IS REQUIRED TO BE DEDUC TED FROM SUCH PAYMENT. THIS INTERPRETATION OF THE HIGH COURT COMPLETELY LOSES SIGHT OF THE PLAIN WORDS OF SECTIO N 195(1) WHICH IN CLEAR TERMS LAY DOWN THAT TAX AT SOURCE IS DEDUCTABLE ONLY FROM SUMS CHARGEABLE UNDER THE PROVISIONS OF THE INCOME TAX ACT, I.E. CHARGEABLE U NDER SECTIONS 4,5 AND 9 OF THE INCOME TAX ACT. 10. NOW TO DETERMINE WHERE THERE WAS INCOME ACCRUE D OR NOT CONSIDERING THE FACT THAT THE PROVISIONS WERE MADE AT THE YEAR END IS REVERSED IN THE BEGINNING OF THE NEXT ACCOUNTING YEAR GOES TO SHOW THAT THERE WAS NO INCOME ACCRUED. MERE ENTRIES IN THE BOOKS OF ACCOUNTS DO ES NOT ESTABLISH THE ACCRUAL OF INCOME IN THE HANDS OF THE PAYEE AS HELD BY THE HON BLE SUPREME COURT IN THE CASE OF CIT VS M/S SHOORJI VALLABHDAS & CO. 46 ITR 144 WHEREIN IT WAS HELD AS FOLLOWS; THAT THE SUBSEQUENT AGREEMENT HAD ALTERED THE RA TE OF COMMISSION IN SUCH A WAY AS TO MAKE THE INCOME WHIC H REALLY ACCRUED TO THE ASSESSEE DIFFERENT FROM WHAT HAD BEEN ENTERED IN THE BOOKS OF ACCOUNT. THIS WAS NOTA CA SE OF A GIFT BY THE ASSESSEE TO THE MANAGED COMPANIES OF A PORTION OF INCOME WHICH HAD ALREADY ACCRUED, BUT AN AGREEME NT TO RECEIVE A LESSOR REMUNERATION THAN WHAT HAD BEEN AG REED UPON. THE ASSESSEE HAD IN FACT RECEIVED ONLY THE L ESSER 17 ITA NO.1583(B)/2014 AMOUNT IN SPITE OF THE ENTRIES IN THE ACCOUNT BOOKS , AND THIS LESSER AMOUNT ALONE WAS TAXABLE. INCOME-TAX IS A LEVY ON INCOME. THOUGH THE INCOME -TAX ACT, TAKES INTO ACCOUNTS TWO POINTS OF TIME AT WHIC H THE LIABILITY TO TAX IS ATTRACTED, VIZ. THE ACCRUAL OF THE INCOME OR ITS RECEIPT, YET THE SUBSTANCE OF THE MATTER IS THE INCOME. IF INCOME DOES NOT RESULT AT ALL, THERE CANNOT BE A TA X, EVEN THOUGH IN BOOK-KEEPING, AN ENTRY IS MADE ABOUT A HYPOTHETICAL INCOME;, WHICH DOES NOT MATERIALIZE. WHERE INCOME HAS, IN FACT, BEEN RECEIVED AND IS SUBSEQUEN TLY, GIVEN UP IN SUCH CIRCUMSTANCES THAT IT REMAINS THE INCOME OF THE RECIPIENT, EVEN THOUGH GIVEN UP, THE TAX MAY BE PAYABLE. WHERE, HOWEVER, THE INCOME CAN BE SAID N OT TO HAVE RESULTED AT ALL, THERE IS OBVIOUSLY NEITHER AC CRUAL NOR RECEIPT OF INCOME, EVEN THOUGH AN ENTRY TO THAT EFF ECT MIGHT, IN CERTAIN CIRCUMSTANCES, HAVE BEEN MADE IN THE BOOKS OF ACCOUNT. THUS, HAVING REGARD TO THE RATIO LAID DOWN BY THE H ONBLE APEX COURT, IT CANNOT BE SAID THAT INCOME HAD ACCRUED IN THE HANDS OF THE PAYEE. WE, THEREFORE, HOLD THAT THERE WAS NO LIABILITY IN THE HANDS OF TH E ASSESSEE COMPANY TO DEDUCT TDS, MERELY ON THE PROVISIONS MADE AT THE YEAR END. HENCE, THE ASSESSEE COMPANY CANNOT BE TREATED AS ASSESSEE IN DEFAULT FOR NOT DEDUCTING TAX AT SOURCE 18 ITA NO.1583(B)/2014 AND THEREFORE, WE ALLOW THE GROUNDS OF APPEAL FILED BY THE ASSESSEE COMPANY IN THIS REGARD. 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE COMPANY IS TREATED AS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 1 ST MARCH, 2016. SD/- SD/- (ASHA VIJAYARAGHAVAN ) ( INTURI RAMARAO) JUDICIAL MEMER ACCOUNTANT MEMBER BANGALORE: D A T E D : 01-03-2016 AM COPY TO : 1 APPELLANT 2 RESPONDENT 3. CIT(A), BANGALORE 4. CIT, BANGALORE 5. DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER AR, ITAT, BLORE.