F.L.Smidth Minerals P Ltd., CHENNAI V. DCIT, CHENNAI

ITA 1698/CHNY/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6466 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-08-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 16-05-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 23-07-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANN MARY BA
• Assessee Lawyers: G BASKAR
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI ... , , $ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER ./ I.T.A. NO. 1697 & 1698/MDS/2015 / ASSESSMENT YEAR : 2005-06 & 2007-08 M/S. FLSMIDTH MINERALS P LTD., (SINCE MERGED WITH FLSMIDTH PVT. LTD.) FLSMIDTH HOUSE, 34, EGATOOR, KELAMBAKKAM, OLD MAHABALIPURAM ROAD, CHENNAI 600 103. [PAN: AAACF 1122D] VS. DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE II(1), V FLOOR, NEW BLOCK, 121, NUNGAMBAKKAM HIGH ROAD, CHENNAI 34. ( / APPELLANT) ( / RESPONDENT) ./ I.T.A. NO. 1918/MDS/2015 / ASSESSMENT YEAR : 2005-06 ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE II(1), V FLOOR, NEW BLOCK, 121, NUNFAMBAKKAM HIGH ROAD, CHENNAI 34. (/ APPELLANT) VS. M/S. FLSMIDTH MINERALS P LTD., (SINCE MERGED WITH FLSMIDTHPVT. LTD.) FLSMIDTH HOUSE, 34, EGATOOR, KELAMBAKKAM, OLD MAHABALIPURAM ROAD, CHENNAI 600 103. [PAN: AAACF 1122D] ( / RESPONDENT) &' / APPELLANT BY : SHRI G. BASKAR, ADVOCATE *+&' / RESPONDENT BY : MS. ANN MARY BABY, JCIT ' /DATE OF HEARING : 23.05.2017 ' /DATE OF PRONOUNCEMENT : 03.08.2017 2 /O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER: THE ASSESSEE FILED THE ABOVE APPEALS AGAINST THE ORDERS OF THE COMMISSIONER OF INCOME TAX (APPEALS)-6, CHENNAI IN ITA NO. 124/CIT(A)- 6/208-09 AND 153/CIT(A)-6/2010-11 DATED 20.03.2015 FOR ASSESSMENT YEARS 2005-06 AND 2007-08, RESPECTIVELY. THE REVENUE FIL ED THE CROSS APPEAL IN ITA NO. 1918/15 AGAINST THE ORDER OF THE COMMISSIONER O F INCOME TAX (APPEALS) FOR AY 2005-06. 2. IN THE ASSESSMENT MADE FOR ASSESSMENT YEARS 2005 -06 AND 2007-08 RESPECTIVELY, THE AO FOUND THAT THE ASSESSEE HAS IN VESTED SUBSTANTIAL AMOUNTS IN SHARES/MUTUAL FUNDS AND EARNED DIVIDEND OF RS. 1 ,28,16,649/- AND 4,29,59,915/- , RESPECTIVELY , AND CLAIMED THEM AS EXEMPT U/S. 10(34). THE ASSESSEE HAS CONSIDERED ONLY RS. 46,600/- AND 92,00 0/- AS EXPENDITURE ATTRIBUTABLE TO SUCH INVESTMENTS AND EARNING OF DIV IDENDS IN THE RESPECTIVE ASSESSMENT YEARS. THE AO INVOKED THE PROVISIONS OF SECTION 14A R.W.R. 8D AND DETERMINED THE EXPENSES ATTRIBUTABLE FOR EARNIN G SUCH EXEMPT INCOME AT RS. 13,12,883/- AND RS. 69,00,260/-, RESPECTIVELY. FOR THE AY 2005-06, THE AO FOUND THAT THE ASSESSEE HAS DEBITED RS. 7,50,41, 484/- TOWARDS PROVISION FOR WARRANTY. AFTER CONSIDERING THE ASSESSEES REP LY, THE AO HELD THAT THE ASSESSEE COULD NOT SUBSTANTIATE THIS CLAIM WITH ANY CONCRETE SUBMISSIONS 3 EXCEPT TO STATE THAT THE PROVISION OF WARRANTY IS A N ASCERTAINED LIABILITY. RELYING THE DECISION OF MADRAS HIGH COURT IN THE CA SE OF ROTORK CONTROLS INDIA LTD 293 ITR 311, HE HELD THAT CONSIDERING THE NAT URE OF THE LIABILITY, WHICH IS YET TO CRYSTALLISE BUT LOADED WITH UNCERTAINTY OF T HE EVENT TO CAUSE A LIABILITY, THERE IS NO JUSTIFICATION TO ACCEPT THE PLEA OF THE ASSESSEE TO ALLOW THE PROVISIONS FOR WARRANTY WHICH IS ACTUALLY A CONTING ENT LIABILITY. FURTHER, IN THE ASSESSMENT MADE FOR ASSESSMENT YEAR 2007-08, THE AO FOUND THAT THE ASSESSEE HAS DEBITED SUB-CONTRACT EXPENSES AT RS. 8 ,86,329/- AND PROVISION FOR LABOUR CHARGES AT RS. 19,45,739/- , BOTH BY WAY OF PROVISIONS , AND THE ASSESSEE HAS NOT DEDUCTED TDS ON THIS AMOUNT . THE ASSESSING OFFICER INVOKED SECTION 40(A)(IA) AND DISALLOWED THEM. FURT HER, IN THE ASSESSMENT MADE FOR ASSESSMENT YEAR 2007-08, THE AO DISALLOWED RS. 91,68,864/-, THE PAYMENTS MADE TOWARDS SALES COMMISSION TO MEHRTASH TRADING ENTERPRISES (LLC) AND RS. 27,08,506/- TOWARDS ROYALTY PAID TO F FE MINERALS CORPORATE, USA , AS THEY WERE MADE WITHOUT DEDUCTING TAX AT SO URCE U/S. 40(A)(IA). AGGRIEVED, THE ASSESSEE FILED APPEALS BEFORE THE C IT(A). 3. THE CIT(A) FOLLOWING THE JUDGEMENTS OF THE BOMBA Y HIGH COURT IN THE CASE OF GODREJ BOYCE MFG CO LTD VS DCIT (328 ITR 81 ) (BOM) AND THIS TRIBUNAL DECISION IN THE CASE OF ACIT VS CELEBRITY FASHIONS LTD IN ITA NO. 1318 & 1319/MDS/2011 DATED 30.04.2012, HELD THAT EV EN PRIOR TO ASSESSMENT YEAR 2008-09 (PRE RULE 8D ERA) DISALLOWANCE U/S. 14 A(1)IS TO BE MADE ON A 4 RATIONAL BASIS AND DISALLOWANCE OF EXPENSES U/S. 14 A(1) @5% OF THE EXEMPT INCOME EARNED DURING THE YEAR COULD BE A REASONABLE BASIS AND ACCORDINGLY RESTRICTED THE DISALLOWANCE MADE BY THE AO FOR ASSE SSMENT YEARS 2005-06 AND 2007-08 TO RS. 6,40,832/- AND 21,47,996/-, RESP ECTIVELY. WITH REGARD TO THE DISALLOWANCE OF THE PROVISION FOR WARRANTY IN T HE ASSESSMENT MADE FOR AY 2005-06, THE CIT(A) HELD THAT THE ISSUE OF PROVISIO N FOR WARRANTY IS A RECURRING ISSUE, THE HONBLE MADRAS HIGH COURT RELYING ON THE DECISION OF THE APEX COURT (IN THE CASE OF ROTORK CONTROL INDIA LTD VS C IT 314 ITR 62) HAS HELD ISSUE IN FAVOUR OF THE ASSESSEE VIDE TCA NO. 38 OF 2010 DATED 03.06.2013, IN THE ASSESSEES OWN ASSESSMENT YEAR 2003-04. THEREFO RE, RESPECTFULLY FOLLOWING THE ORDERS OF THE HIGH COURT IN THE ASSES SEES OWN CASE, THE CIT(A) DIRECTED THE AO TO ALLOW THE PROVISION FOR WARRANTY IN THE ASSESSMENT YEAR 2005-06. AGGRIEVED AGAINST THIS FINDING, THE REVEN UE FILED THE CROSS APPEAL. WITH REGARD TO THE ISSUES OF SUB-CONTRACT EXPENSES AT RS. 8,86,329/- AND PROVISION FOR LABOUR CHARGES AT RS. 19,45,739/- IN AY 2007-08,AFTER CONSIDERING THE ASSESSEES REPLY ETC, THE CIT(A) HE LD THAT THE ASSESSEES ACTION DOES NOT OBLITERATE FROM THE STATUTORY RESPO NSIBILITY OF DEDUCTING AND REMITTING TDS, IF ANY. THE PROVISIONS FOR SUB-CONT RACT EXPENSES AND PROVISION FOR LABOUR CHARGES ARE FALLING U/S.S 30 TO 38 AND A RE ALSO LIABLE FOR TDS. SINCE, THE ASSESSEE FAILED TO DEDUCT THE TDS ON THE SE PROVISIONS, VIOLATION U/S. 40(A)(IA) HAS BEEN COMMITTED AND CONSEQUENTLY, THE CIT(A) HELD THAT ASSESSEE IS INELIGIBLE TO CLAIM THEM AS DEDUCTION. HOWEVER, THE ACCEPTING THE 5 ALTERNATE CLAIM OF THE ASSESSEE, THE CIT(A) DIRECTE D THE AO TO EXAMINE THIS CLAIM AND ALLOW THE NECESSARY DEDUCTION IN THE FINA NCIAL YEAR(S), WHERE THE ASSESSEE HAS ACTUALLY DEDUCTED AND REMITTED THE TDS INTO GOVERNMENT ACCOUNT, SUBJECT TO VERIFICATION AND ASSESSEES FUR NISHING OF NECESSARY EVIDENCE. AGGRIEVED AGAINST THESE ORDERS, THE ASSES SEE FILED THESE APPEALS. SINCE, THEY ARE INTER-CONNECTED, THEY ARE HEARD TOG ETHER AND DISPOSED BY A COMMON ORDER. 4. WE HEARD THE RIVAL CONTENTIONS, GONE THROUGH REL EVANT ORDERS AND MATERIALS. THE ABOVE ISSUES ARE DISPOSED AS UNDER: 4.1 ON THE DISALLOWANCE OF EXPENSES U/S. 14A R.W.R. 8D: THE AR PLEADED THAT THE LD. CIT(A) ERRED IN CONFIR MING THE DISALLOWANCE TO THE EXTENT OF 5% U/S. 14A(1) RELYIN G ON THE DECISION IN THE MATTER OF CELEBRITY FASHIONS LTD., WHICH IS WHOLLY INAPPLICABLE IN THE CIRCUMSTANCES OF THE PRESENT CASE. PER CONTRA, THE DR RELIED ON THE ORDERS OF THE CIT(A). WE HEARD THE RIVAL CONTENTIONS. WE HO LD THAT EVEN PRIOR TO ASSESSMENT YEAR 2008-09 (PRE RULE 8D ERA), THE NATU RE OF DISALLOWANCES SPECIFIED U/S. 14A(1) HAS TO BE MADE ON A RATIONAL BASIS. THIS TRIBUNAL HELD IN LARGE NUMBER OF ITS DECISIONS THAT THE REASONABLE B ASIS FOR THE DISALLOWANCE U/S. 14A SHOULD BE 2% OF THE EXEMPT INCOME EARNED I N THE YEAR 2007 AND BEFORE. THEREFORE, THE AO IS DIRECTED TO DETERMINE THE EXPENSES ATTRIBUTABLE 6 TO THE EXEMPT INCOME, AT THE RATE 2% OF THE TOTAL E XEMPT INCOME FOR THE ASSESSMENT YEARS 2005-06 & 07-08,RESPECTIVELY. 4.2 DISALLOWANCE OF PROVISION FOR WARRANTY: WITH REGARD TO DISALLOWANCE MADE ON THE PROVISION F OR WARRANTY IN ASSESSMENT YEAR 2005-06, THE DR SUBMITTED THAT THE CIT(A) OUGHT HAVE APPRECIATED THAT AS PER APEX COURTS DECISION RELIE D ON, THE PROVISION TOWARDS WARRANTY ARRIVED AT ON A SCIENTIFIC BASIS IS ONLY A LLOWABLE AND NOT ANY LUMP SUM PROVISION (UNCERTAIN LIABILITY), THE PROVISION MADE BY THE ASSESSE IS NOT SCIENTIFICALLY ARRIVED FIGURE AND IT SHOULD HAVE SA TISFIED THE IMPORTANT ASPECTS OBSERVED BY THE HONBLE SUPREME COURT VIZ, (I) PROVISIONING WHICH RELATES TO PRESENT OBLIGAT ION (II) IT ARISES OUT OF OBLIGATING EVENTS (III) IT INVOLVES OUTFLOW OF RESOURCES AND LASTLY (IV) IT INVOLVES RELIABLE ESTIMATION OF OBLIGATION. THE AR SUBMITTED THAT THE JURISDICTIONAL HIGH COURT IN ITS OWN CASE IN TCA NO. 30 OF 2010 DATED 03.06.2013 SET ASIDE THE ORDER OF THE TRIBUNAL AND ALLOWED THE ASSESSEES APPEAL. WE HAVE CONSIDERED THE RIVA L SUBMISSIONS AND GONE THROUGH THE ORDERS. THE ASSESSEE HAD MADE PROVISIO N FOR WARRANTY AT RS. 7,50,41,484/- IN THE BOOKS OF ACCOUNT AND THE AO R EFUSED TO ALLOW IT FOR THE REASON THAT THIS PROVISION FOR WARRANTY WAS CREDITE D WITHOUT ANY SCIENTIFIC REASONS. THUS, THE CONTENTION OF THE ASSESSEE IS T HAT THE PROVISION IS AN 7 ASCERTAINED LIABILITY, WHEREAS, THE REVENUE OBSERVE D IT AS CONTINGENT LIABILITY. IT IS CLEAR FROM THE ASSESSMENT ORDER THAT THE ASSE SSEE COULD NOT EXPLAIN THE METHODOLOGY AND CALCULATION OF THE PROVISIONS ON TH E BASIS OF THE SATISFACTORY ASPECTS OF APEX COURT IN THE CASE OF ROTORK CONTROL S INDIA LTD. (SUPRA). IN THE CIRCUMSTANCES, WE ARE OF THE OPINION THAT THE M ATTER HAS TO BE RE- EXAMINED AS TO WHETHER THE METHODOLOGY ADOPTED FOR CREATING PROVISION IS IN THE LIGHT OF THE OBSERVATIONS MADE BY THE SUPREME C OURT. THEREFORE, WE SET ASIDE THE ORDER OF THE CIT(A) AND REMIT THIS ISSUE TO THE FILE OF THE AO FOR RE- EXAMINATION AFTER AFFORDING ADEQUATE OPPORTUNITY FO R BEING HEARD TO THE ASSESSEE. THUS, THE REVENUES CROSS APPEAL IS TREA TED AS ALLOWED FOR STATISTICAL PURPOSES. 4.3 ON THE DISALLOWANCES OF PROVISION OF SUB-CONTRA CT EXPENSES AND PROVISION OF LABOUR CHARGES U/S. 40(A)(IA): WE HAVE CONSIDERED THE RIVAL CONTENTIONS. THE ASS ESSEE SUBMITTED THAT THESE AMOUNTS ARE PROVISION FOR THE SUB-CONTRACT WO RKS AND THE LABOUR WORKS COMPLETED, RESPECTIVELY. BUT, THE ASSESSEE IS YET TO RECEIVE THE INVOICES FROM THE SAID SUB-CONTRACTORS/SUB-LABOURS/THEIR CONTRACT ORS AS ON 31.03.2007. IN VIEW OF THAT THE ASSESSEE MADE PROVISIONS FOR THESE EXPENSES AND DEBITED IN THE P&L ACCOUNT. IN THE SUBSEQUENT YEAR I.E., AFTE R 01.04.2007 ,WHEN THE ACTUAL INVOICES WERE RECEIVED, THE PROVISION WAS RE VERSED AND THE AMOUNTS WERE DIRECTLY CREDITED TO THE RESPECTIVE SUB-CONTRA CTORS ACCOUNT/RESPECTIVE 8 PERSONS ACCOUNT AND NECESSARY TDS WAS ALSO DEDUCTED AND REMITTED TO THE GOVERNMENT ACCOUNT. IT IS CLEAR THAT THE ASSESSEE H AD MADE PROVISION FOR SUB- CONTRACT AND PROVISION OF LABOUR/THEIR CONTRACTORS IN THE BOOKS OF ACCOUNTS. AS PER SECTION 40(A)(IA) R.W.S. 194C, IT IS CLEAR T HAT THE TDS HAS TO BE MADE AT THE TIME OF CREDIT OF SUCH SUM TO THE ACCOUNT OF TH E CONTRACTOR OR AT THE TIME OF PAYMENTS THEREOF IN CASH OR BY ISSUE OF CHEQUE O R DRAFT OR BY ANY OTHER MODE, WHICHEVER IS EARLIER. IT IS CLEAR THAT WHEN THE ASSESSE HAS MADE THE PROVISIONS I.E., WHEN IT HAS CREDITED SUCH SUM TO T HE ACCOUNT OF THE SUB- CONTRACTORS/LABOUR/THEIR CONTRACTORS, IT SHOULD HAV E DEDUCTED TDS BUT FAILED TO DO SO. IN VIEW OF THAT, THE FINDINGS RECORDED BY T HE CIT(A) DO NOT REQUIRE ANY INTERFERE ON THESE GROUNDS. FURTHER, WE FIND MERIT IN THE DECISION OF THE CIT (A) IN ALLOWING THE ALTERNATE CLAIM BY DIRECTING TH E AO TO EXAMINE AS TO WHETHER THE IMPUGNED AMOUNTS WERE SUBSEQUENTLY DIRE CTLY CREDITED TO THE RESPECTIVE SUB-CONTRACTORS ACCOUNT/RESPECTIVE PERSO NS ACCOUNT, NECESSARY TDS WAS DEDUCTED AND REMITTED TO THE GOVERNMENT IN THE SUBSEQUENT YEAR AND IF SO TO ALLOW NECESSARY DEDUCTION IN THE FINA NCIAL YEAR(S), WHEREIN THE ASSESSEE HAS ACTUALLY HAS DEDUCTED AND REMITTED THE TDS INTO GOVERNMENT ACCOUNT SUBJECT TO VERIFICATION AND THE ASSESSEE FU RNISHING OF NECESSARY EVIDENCE. 4.4 WITH RESPECT TO THE DISALLOWANCE MADE U/S. U/S. 40(A)(IA): WITH RESPECT TO THE DISALLOWANCES MADE U/S. 40(A)( IA)ON THE COMMISSION PAID TO MEHRTASH TRADING ENTERPRISES (LL C) AND THE ROYALTY PAID 9 TO FFE MINERALS CORPORATE, USA, WITHOUT DEDUCTING T HE TDS, WE FIND THAT, THOUGH THE ASSESSEE HAS RAISED SUBSTANTIVE APPEAL G ROUNDS VIZ NO 4 & 5 BEFORE THE CIT(A), THE CIT(A) HAS NOT ADJUDICATED T HEM. IN VIEW OF THAT THESE ISSUES ARE REMITTED BACK TO THE CIT(A). THE CIT(A) AFTER AFFORDING DUE OPPORTUNITY TO THE ASSESSEE, SHALL PASS A SPEAKI NG ORDER ON THESE ISSUES. 5. IN THE RESULT, THE ASSESSEES APPEALS FOR AY 200 5-06 AND FOR AY 2007-08 ARE PARTLY ALLOWED AND THE REVENUES CROSS APPEAL FOR AY 2005-06 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THURSDAY, THE 03 RD DAY OF AUGUST, 2017 AT CHENNAI. SD/- ( . . . ) (N.R.S. GANESAN) !' /JUDICIAL MEMBER SD/- ( ) (S. JAYARAMAN) ' /ACCOUNTANT MEMBER /CHENNAI, 1 /DATED: 03 RD AUGUST, 2017 JPV '*2343 /COPY TO: 1. &/ APPELLANT 2. *+& /RESPONDENT 3. 5 ( )/CIT(A) 4. 5 /CIT 5. 3* /DR 6. 8 /GF