M/s. Modtec Industries India Pvt Ltd, Bangalore V. The Assistant Commissioner of Income Tax , Circle-4(1)(2), Bengaluru

ITA 206/BANG/2023

• Counselvise Citation: [2023] 100 COUNSELVISE.COM (IT) 6155 (ITAT-BANGALORE)
• Duration Of Justice: 7 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-10-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: B
• Next Hearing Date: 25-10-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 19-03-2023
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MADHAV DESHMUKH
• Assessee Lawyers: R.S.V.S. PAVAN KUMAR
• Keywords: Business expenditure; Opportunity of being heard; TDS; FORM 26AS
• Section: 37; 250

Judgement Text

ITA No.206/Bang/2023 M/s. Modtec Industries India Pvt. Ltd., Bangalore IN THE INCOME TAX APPELLATE TRIBUNAL “B’’ BENCH: BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No.206/Bang/2023 Assessment Year: 2015-16 M/s. Modtec Industries India Pvt. Ltd. No.2, Sy.No.62/6, 3 rd Cross, Nagamuneswara Layout Parappana Agrahara Electronic City Post Bangalore 560100 PAN NO : AAHCM7854N Vs. ACIT Circle-4(1)(2) Bangalore APPELLANT RESPONDENT Appellant by : Shri R.S.V.S. Pavan Kumar, A.R. Respondent by : Shri Madhav Deshmukh, D.R. Date of Hearing : 26.10.2023 Date of Pronouncement : 26.10.2023 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal by assessee is directed against order of NFAC passed u/s 250 of the Income-tax Act,1961 ['the Act' for short] for the assessment year 2015-16 dated 17.10.2023. The first ground for our consideration is as follows: 1. The order of the learned C1T(A), Income tax Department, National Faceless Appeal Centre (NFAC), Delhi is arbitrary, against the provisions of law, judicial decisions and contrary to the facts of the case and is therefore unsustainable. 2. The ld. A.R. submitted that the ld. CIT(A), NFAC decided the appeal stating that during the course of the appeal various notices were issued for which no reply was filed and dismissed the appeal virtually for non-prosecution. While on the issue of disallowance of ITA No.206/Bang/2023 M/s. Modtec Industries India Pvt. Ltd., Bangalore Page 2 of 10 Statutory liability for prior period of Rs.24,44,382, he has stated that Form 26AS has been furnished. He has not given any reason for dismissing the appeal on the issue of Interest on others of Rs.7,41,768. He submitted that the NFAC has not considered the submissions in the Statement of facts and Grounds of Appeal, though the same were reproduced in the Appellate Order. Further, he did not consider the submissions made before the Assessing officer available on record. 3. The ld. D.R. submitted that the above ground was too general and NFAC has considered the entire facts and circumstances of the case and decided the issue after giving fair opportunity of hearing to the assessee. Hence, this ground is to be dismissed. 4. We have heard the rival submissions and perused the materials available on record. As seen from the order of the NFAC, the NFAC considered the submission made before him. Same was recorded by the NFAC and given findings and it cannot be said that order of the NFAC is arbitrary without giving fair opportunity to the assessee. Hence, this ground of appeal is dismissed. 5. Next ground for our consideration is with regard to ground Nos.2.1 to 2.4, which reads as follows:- 2. Expenditure to meet the Statutory Liability: 2.1. The Learned CIT(A) erred in confirming the disallowance of expenditure to meet the Statutory Liability of Rs. 24,44,382/- made by the Assessing Officer without providing the opportunity of being heard. 2.2. The Learned CIT(A) erred in holding that the Company has not submitted the Form 26AS without appreciating that Company in order to comply with the provisions of Section 40 of the Income Tax Act, 1961 has remitted the TDS amount payable for the expenses against which TDS has not been deducted from its own funds. ITA No.206/Bang/2023 M/s. Modtec Industries India Pvt. Ltd., Bangalore Page 3 of 10 2.3. The Learned CIT(A) ought to have considered the grounds of appeal of the Company that after negotiation with the vendors, the Company was not in a position to recover the TDS remitted from its own funds, hence the same is expense in the P&L. 2 . 4 . T h e l e ar n e d C I T ( A ) er r e d i n c o nf i r m i ng t h e d i s a l l ow a nc e m a de by th e Assessing Officer in respect of Service tax paid under reverse charge mechanism without providing any decision. 6. The ld. A.R. submitted that the assessee had made payments in F.Y. 2013-14 (A.Y. 2014-15), which was virtually the first year of its operations, on which it did not make TDS, Service Tax and VAT on payments made to the Vendors. During the internal audit after the end of the Financial Year it was-brought to the notice of the Company and the Company paid the TDS, Service Tax and VAT along with applicable interests from its funds. It however could not collect the amounts from the Vendors by the end of the F.Y. 2014- 15 (In fact the Company has not been able to collect the amounts from the vendors till date). It therefore claimed the payments of TDS, VAT and Service tax paid in A.Y. 2015-16 as expenditure U/s 37 of the I.T. Act. 6.1 He submitted that i n the Assessment order, the Assessing officer recorded these facts, accepted them but without giving any reason and without considering the judicial decisions of Hon'ble Madras High Court in Commissioner of Income-tax v. Standard Polygraph Machines (P.) Ltd [2002] 124 Taxman 669 (Madras) and the Hon'ble ITAT Delhi in Italian Thai Development Public Co. Ltd. v. Assistant Director of Income-tax, Circle 1(2), New Delhi [2012] 17 taxmann.com 172 (Delhi) disallowed the expenditure. He reproduced the relevant portion of the Assessment Order as below: ITA No.206/Bang/2023 M/s. Modtec Industries India Pvt. Ltd., Bangalore Page 4 of 10 " 1). Statutory Liability for prior period of Rs.24,44,382/- During the course of scrutiny proceedings, the assessee was asked to furnish the details vide the issue of questionnaire. On verification, it is seen that the company has debited Rs.24,44,382/- towards the Statutory liability meeting expenditure for prior period and Rs.7,41,768/- on interest on others in the profit and loss account which is not an allowable expenditure U/s37 of the IT Act, 1961. The same was asked to the assessee's AR as to why the same should not be disallowed. The assessee stated that during the F. Y. 2014-15, the company has incurred the TDS expense of Rs.15,20,305/- and has incurred service tax under reverse charge mechanism of Rs. 9,07,155/- for the expenses against which TDS has not been deducted and service tax remitted under reverse charge mechanism. In order to comply with the provisions of the sec 40 of the IT Act, 1961, the company has paid the TDS amount payable for the expenses against which TDS has not been deducted from its own funds. The assessee could not recover the same from vendors against whom the TDS was deducted, hence the same is expense in P & L A/c, Further the assessee has submitted two case lawas as below: 1). ITAT Delhi Bench C: Italian Thai Development Public Co. Ltd. v. Assistant Director of Income-tax, Circle 1(2), New Delhi 2). High Court of Madras: Commissioner of Income-Tax v. Standard Polygraph Machines (P.) Ltd The above case laws cited by the assessee are easily distinguishable w.r.t to the facts and context of the issues and more over the judgement is not binding in view of the jurisdiction. Accordingly, the prior period expenses amounting to Rs.24,44,382/- is disallowed and brought to tax" 6.2 He submitted that the decisions of the Hon'ble High Court and ITAT cited above are directly on the facts of the issue of the case of the Assessee. ITA No.206/Bang/2023 M/s. Modtec Industries India Pvt. Ltd., Bangalore Page 5 of 10 6.3 He submitted that as submitted earlier the learned CIT(A), NFAC has not considered the facts admitted in the Assessment Order and the decisions cited not considered by the Assessing officer but dismissed the appeal stating that Form 26AS has not been filed by the Assessee. 6.4 He submitted that Form 26AS is not any relevant document for the TDS made by the Assessee. The decision of the learned CIT(A) not considering that the facts of the payments were not disputed by the Assessing officer and that the Assessing Officer has erroneously not considered the decisions of ITAT and High Court, superior judicial forums whose decisions are binding unless there was any contradictory decision of Jurisdictional High Court and dismissing the appeal for the reason that Form 26AS (which is not relevant to the issue) has not be submitted is against the facts, law and the decisions of Hon'ble ITAT and High Court which are binding on the CIT(A). 6.5 He submitted that the decision of the learned CIT(A) dismissing the appeal and upholding the disallowance of Statutory Liability for prior period of Rs.24,44,382 is against the facts, law and binding Judicial decisions and he prayed that the disallowance of Rs.24,44,382 may be deleted. 7. The ld. D.R. submitted that this amount consists of following components:- a) TDS on expenses - Rs.15,20,305/- b) Service Tax under Reverse Charge Mechanism - Rs. 9,07,155/- ITA No.206/Bang/2023 M/s. Modtec Industries India Pvt. Ltd., Bangalore Page 6 of 10 7.1 These amounts cannot be considered as wholly and exclusively incurred for the purpose of business. Hence, it cannot be allowed. He relied on the order of lower authorities. 8. We have heard the rival submissions and perused the materials available on record. As per submission of the ld. A.R., the statutory liability for the prior period includes following: a) TDS for expenses - Rs.15,20,305/- b) Service tax under Reverse Charge Mechanism - Rs. 9,07,155/- c) VAT - Rs. 16,922/- Total: - Rs.24,44,382/- 8.1 The assessee’s contention is that the TDS amount of Rs.15,20,305/- relating to earlier year which was not deducted by the assessee and the same was deducted in the assessment year under consideration to get out of the penal provisions relating to deduction of TDS and incurred for the purpose of business to be allowed. In our opinion, deduction of TDS cannot be considered as incurred wholly and exclusively for the purpose of business. It is the liability on the assessee imposed by the provisions of the Income Tax Act to deduct the TDS when the assessee is making any payment to the third party exceeding the prescribed limit uy/s 192, 192A, 193, 194, 194A, 194B, 194BB, 194C, 194D, 194DA, 194E, 194EE, 194F, 194G, 194H, 194I, 194IA, 194IB, 194IC, 194J, 194K, 194L, 194LA, 194LB, 194BA, 194BB, 194BC, 194LC, 194LD, 194M, 194N, 194O, 194P, 194Q, 194R, 194S, 195, 195A, etc. Further, it has been gone to the credit of the vendors on whose behalf such TDS has been made. If the assessee has deducted excess TDS in any assessment years, the remedy lies with the assessee by claiming the same from the vendor on behalf of whom it has been deducted and such TDS deduction cannot be claimed ITA No.206/Bang/2023 M/s. Modtec Industries India Pvt. Ltd., Bangalore Page 7 of 10 as an expenditure in the hands of assessee. Being so, we find no force in the arguments of ld. A.R. Accordingly, the issue relating to the deduction of TDS is rejected. 9. Next claim of the assessee is with regard to payment of service tax under Reverse Charge Mechanism at Rs.9,07,155/-. 9.1 The ld. A.R. placed reliance on the order of judgement of Gujarat High Court in the case of CIT Vs. Kaypee Mechanical Inia Pvt. Ltd. (2014) 45 taxmann.com 363 (Guj.). 9.2 The contention of the ld. A.R. is that assessee has failed to collect service tax from its parties and this liability was imposed on the assessee for the default of collection of service tax from parties and payment of same to the Service Tax authorities. Thereafter, the same was paid by assessee to the service tax authorities and it has incurred wholly and exclusively for the purpose of business with interest and to be allowed as a deduction. 9.3 In our opinion, whether the assessee has failed to collect the service tax from the parties to whom assessee rendered services, to be verified at the end of A.O. and as well as the liability imposed on the assessee to payment of service tax to Service Tax authorities. Accordingly, we remit this issue to the file of ld. AO to decide it afresh in the light of judgement of Hon’ble Gujarat High Court in the case of Kaypee Mechanical India Pvt. Ltd. cited (supra). 10. Next issue is with regard to payment of VAT at Rs.16,922/-. This issue is also akin to the payment of service tax liability. Accordingly, this issue also is remitted to the file of ld. AO to decide it afresh in the light of our above observations on issue relating to service tax. 11. Next ground for our consideration in ground Nos.3.1 to 3.2 are as follows: 3. Interest on Others 3.1. The Learned CIT(A) erred in confirming the disallowance of Rs. 7,41,768/- by AO without appreciating that the Interest paid on ITA No.206/Bang/2023 M/s. Modtec Industries India Pvt. Ltd., Bangalore Page 8 of 10 delayed payments of Service Tax, TDS and VAT is compensatory in nature and are business expenses. 3.2. The Learned CIT(A) erred in holding that the Interest on Delayed Payment of Statutory Liabilities are penal in nature without verifying the facts of the case. 12. The ld. A.R. submitted that during the Assessment proceedings the Assessee had submitted that Interest on Income Tax of Rs.3,59,121 included under interest on others of Rs.7,41,768 was claimed as an expense due to oversight and voluntarily requested to disallow it in the Assessment Order. Therefore he submitted that the disallowance contested in the Appeal under Interest on Others is Rs. 3,82,647, comprising of the following: a. Interest on late payment of Service Tax — Rs. 1,75,648 b. Interest on late payment of TDS — Rs.1,96,402 c. Interest on late payment of VAT — Rs. 10,597 12.1 He submitted that in the assessment order the Assessing officer accepted the payments but held all the payments as penal in nature and hence not allowable U/s 37. The learned CIT(A) dismissed the appeal and upheld the disallowance stating as below: "5.2. The Assessing officer has made other addition of Rs.7,41,768/- on account of late payment. The Assessing officer has found this as penal in nature. Since, no details are filed before me, hence this ground is also dismissed." 12.2 He submitted that in the case of Velankani Information Systems Ltd. v. Deputy Commissioner of Income-tax, Circle- 7(1)(2), Bangalore [2018] 97 taxmann.com 599 (Bangalore - Trib.) ITAT Bangalore referring to the decision of Hon'ble Gujarat High Court in Commissioner of Income-tax — Ill v. Kaypee Mechanical India (P.) Ltd. [2014] 45 taxmann.com 363 (Gujarat) has held that Interest on late payment of Service Tax is not penal in nature and is ITA No.206/Bang/2023 M/s. Modtec Industries India Pvt. Ltd., Bangalore Page 9 of 10 allowable as deduction U/s37(1). He submitted that interest on late payment of VAT is same as interest on late payment of Service tax and is accordingly allowable as deduction U/s 37 of the I.T. Act. 12.3 He submitted that Interest on late payment of Service Tax of Rs. 1,75,648/- and Interest on late payment of VAT of Rs. 10,597/- are allowable deductions U/s 37 as held by the ITAT Bangalore and Hon'ble Gujarat High Court (supra) and requested that the disallowance of these payments made in the Assessment Order may be deleted. 12.4 He further submitted that ITAT Bangalore has held in the case of Velankani Information Systems Ltd.(supra) that interest on late payment of TDS is penal in nature and is not allowable U/s 37 of the I.T. Act. It is however prayed that under the facts and circumstances of the assessee where the assessee has incurred heavily of the TDS, Service Tax, VAT and interests on their late payment which it has not been able to recover from the vendors. the interest on late payment of TDS may be allowed as deduction. 13. The ld. D.R. relied strongly on the order of lower authorities and opposed the argument of ld. A.R. 14. We have heard the rival submissions and perused the materials available on record. As seen from the records, this impugned interest includes following:- a) Interest on income tax - Rs.3,59,121/- b) Interest on late payment of service tax – Rs.1,75,648/- c) Interest on late payment of TDS - Rs.1,96,402/- d) Interest on late payment of VAT - Rs. 10,597/- Total: - Rs.7,41,768/- ITA No.206/Bang/2023 M/s. Modtec Industries India Pvt. Ltd., Bangalore Page 10 of 10 14.1 Out of the above, interest on income tax at Rs.3,59,121/- and interest on late payment of TDS cannot be allowed as an expenditure incurred wholly and exclusively for the purpose of business as this is expenditure penal in nature. Accordingly, the ground relating to this issue is rejected. 15. Next ground is with regard to interest on late payment of service tax and interest on late payment of VAT. 15.1 This issue is remitted to the file of ld. AO to decide the same in the light of judgement of Hon’ble Gujarat High Court in the case of Kaypee Mechanical India Pvt. Ltd. cited (supra) to verify the circumstances under which assessee is liable to pay this interest. Accordingly, this issue is set aside to the file of ld. AO for fresh consideration. 16. In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 26 th Oct, 2023 Sd/- (Beena Pillai) Judicial Member Sd/- (Chandra Poojari) Accountant Member Bangalore, Dated 26 th Oct, 2023. VG/SPS Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(Judicial) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore.