Sanjay Kumar Pani, Balasore V. ITO, Balasore

ITA 372/CTK/2012

• Counselvise Citation: 37222114 RSA 2012
• Duration Of Justice: 3 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2012
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 25-09-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 05-06-2012
• Court: TRIBUNAL
• Department Lawyers: N K NEB
• Assessee Lawyers: P R MOHANTYB R PANIGARHI ARS

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK ( ) BEFORE . . , , HONBLE SHRI K.K.GUPTA, ACCOUNTANT MEMBER. /AND . . . , S HRI K.S.S.PRASAD RAO, JUDICIAL MEMBER / I.T.A.NO. 372/CTK/2012 / ASSESSMENT YEAR 2007 - 08 MR. SANJAY KUMAR PANI, PROP. M/S.BASANTI AUTO AGENCY, NILIABAG, BALASORE, ODISHA 756 001 PAN: AHCPP 1237 B - - - VERSUS - INCOME - TAX OFFICER, WARD 2, BALASORE. ( /APPELLANT ) ( / RESPONDENT ) / FOR THE APPELLANT : / SHRI P.R.MOHANTY/B.R.PANIGARHI, ARS / FOR THE RESPONDENT: / SHRI N.K.NEB, DR / DATE OF HEARING : 25.09.2012 / DATE OF PRONOUNCEMENT: 28.09.2012 / ORDER . . , , SHRI K.K.GUPTA, ACCOUNTANT MEMBER. THIS APPEAL BY THE ASSESSEE RAISES THE FOLLOWING GROUNDS. L. FOR THAT THE LEARNED COMMISSIONER OF INCOME TA X (APPEALS) SHOULD HAVE DELETED THE DISALLOWANCE OF 12,65,819 U/S 40(A) (IA) OF THE INCOME TAX ACT, 1961 ON THE FACTS AND CIRCUMSTANCES OF THE CASE. THEREFORE THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX ( APPEALS) CONFIRMING THE ADDITIONS IS INCORR ECT, ILLOGICAL, BAD IN LAW & UNSUSTAINABLE IN THE FACTS & CIRCUMSTANCES OF THE CASE. 2. FOR THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IS WHOLLY UNJUSTIFIED IN CONFIRMING THE ADDITION OF 57,378 AS TRANSPORTATION EXPENSES BRUSHING ASIDE ALL THE SUBMISSIONS & MATERIALS PRODUCED BEFORE HIM AND THEREFORE THE ORDER BEING ILLEGAL, BAD IN LAW AND ARBITRARY SHOULD BE INTERFERED WITH IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. DURING THE COURSE OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE DID N OT PRESS GROUND NO.2 AND THEREFORE, THE SAID GROUND IS DISMISSED AS NOT PRESSED. I.T.A.NO. 372/CTK/2012 2 3. AS REGARDS GROUND NO.1, INITIATING HIS ARGUMENTS, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THE BRIEF FACTS OF THE ASSESSEES CASE THAT THE ASSESSEE DERIVES INCOME AS A DEALER OF MAHINDRA LCV, UV, THREE WHEELERS, SPARES AND ACCESSORIES. IT FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2007 - 08 ON 2.11.2007 DECLARING INCOME OF 4,90,880. THE ASSESSING OFFICER, DURING THE COURSE OF ASSESSMENT PROCEEDINGS, DISALLOWED A SUM OF 12,65,819 U/S.40(A)(IA) OF THE I.T.ACT ON FINDING THAT THE ASSESSEE OUGHT TO HAVE DEDUCTED TAX AT SOURCE UNDER THE PROVISIONS OF SECTION 194A BEING INTEREST PAID TO THE PARTY NAMELY, MAHINDRA & MAHINDRA FINANCE SERVICE LTD. THE TOTAL AMOUNT PAID U NDER THE HEAD FINANCIAL EXPENSES WAS 28,82,248 OUT OF WHICH 12,65,819 WAS DISALLOWED U/S.40(A)(IA). 3.1. AGGRIEVED THE ASSESSEE APPEALED BEFORE THE FIRST APPELLATE AUTHORITY, WHO CONFIRMED THE DISALLOWANCE BY OBSERVING IN HIS ORDER AS FOLLOWS : 4.3. I HAVE GONE THROUGH THE P & L A/C OF THE APPELLANT FOR THE YEAR ENDED 31.3.2007 FILED ALONG WITH THE RETURN OF INCOME. AS PER ANNEXURE 10 OF FINANCIAL EXPENSES DEBITED TO THE P & L A/C., INTEREST ON TRADE ADVANCE AMOUNTS TO 12,265,819. AS PER SECTION 194 A DEDUCTION IS TO BE MADE OF TAX AT SOURCE FROM INTEREST OTHER THAN INTEREST ON SECURITIES. AS PER THE ABOVE SECTION, ANY PERSON, NOT BEING AN INDIVIDUAL OR HUF, WHO IS RESPONSIBLE FOR PAYING TO A RESIDENT ANY INCOME BY WAY OF INTEREST, OTHER THAN INTEREST ON SECURITIES, IS REQUIRED TO DEDUCT INCOME - TAX THEREON AT THE RATES IN FORCE AT THE TIME OF CREDIT OF SUCH INCOME TO THE ACCOUNT OF PAYEE OR INTEREST PAYABLE ACCOUNT OR SUSPENSE ACCOUNT OR AT THE TIME OF PAYMENT THEREOF, IN CASH OR BY ISSUE OF A CHEQUE O R DRAFT OR BY ANY OTHER MODE, WHICHEVER IS EARLIER. THE APPELLANT FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING. IN A FULL BENCH CASE, CIT V. SINGARI BAI 13 ITR 71, 74, SIR LQBAL AHMED CJ SCRIBED THE MERCANTILE SYSTEM AS FOLLOWS: UNDER THIS SYSTEM THE NET PROFI T OR LOSS IS CALCULATED AFTER TAKING INTO ACCOUNT ALL THE INCOME AND ALL THE EXPENDITURE RELATING TO THE PERIOD, WHETHER SUCH INCOME HAS BEEN ACTUALLY RECEIVED OR NOT AND WHETHER SUCH EXPENDITURE HAS BEEN ACTUALLY PAID OR NOT. THAT IS TO SAY, THE NET PROFI T COMPUTED UNDER THIS SYSTEM IS THE PROFIT ACTUALLY EARNED, THOUGH NOT NECESSARILY REALIZED IN CASH, OR THE LOSS COMPUTED UNDER THIS SYSTEM IS THE LOSS ACTUALLY SUSTAINED, THOUGH NOT NECESSARILY PAID IN CASH. THE DISTINGUISHING FEATURE OF THIS METHOD OF AC COUNTANCY I.T.A.NO. 372/CTK/2012 3 IS THAT IT BRINGS INTO CREDIT WHAT IS DUE IMMEDIATELY IT BECOMES LEGALLY DUE AND BEFORE IT IS ACTUALLY RECEIVED; AND IT BRINGS INTO DEBIT EXPENDITURE THE AMOUNT FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY DISBURSED. EXAMI NED ON THE TOUCH - STONE OF THE ABOVE LEGAL PRINCIPLE AND THE PROVISION OF SECTI ON 194A, THE DISALLOWANCE OF 12,65,819 MADE BY THE AO U/S.40(A)(IA) OF THE ACT IS CONFIRMED. 4. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE VARIOUS DOCUMENTS BROUG HT ON RECORD WOULD LEAD TO THE FINDING THAT WHETHER A PAYMENT COULD BE CONSTRUED TO HAVE A DIRECT LINK WITH IMMEDIATE NEXUS OF THE TRADING LIABILITY BEING CONNECTED WITH THE DELAYED PAYMENTS OF PURCHASES WHETHER WOULD FALL WITHIN THE CATEGORY OF INTEREST A S DEFINED IN SECTION 2(28A) OF THE I.T.ACT WHILE PAYING INTEREST ON BELATED PAYMENT OF PURCHASE BILLS THE ASSESSEE COULD NOT COMPUTE THE INTEREST FOR THE DELAYED PAYMENTS SUBJECT TO DEDUCTION OF TAX AT SOURCE U /S.194 A AS WAS CONSIDERED BY THE ITAT, HYDER ABAD BENCH IN THE CASE OF SRI VENKATESH PAPER AGENCIES (HYD)(P) LTD., V. DCIT [(2012) 24 TAXMANN.COM 52 (HYD)]. IN ANOTHER DECISION OF ITAT,AHMEDABAD IN THE CASE OF INCOME - TAX OFFICER V. PARAG MAHASUKHLAL SHAH [(2012) 143 TTJ (AHD) 606], SIMILAR PROPOSITI ON WAS CONSIDERED WHEN THE PAYMENT HAVING NO NEXUS WITH THE DEPOSITS, LOANS OR BORROWING IS OUT OF THE DEFINITION OF INTEREST AS PER SECTION 2(28A) WAS HELD DID NOT REQUIRE DEDUCTION OF TAX AT SOURCE U/S.194A. FOR THIS PROPOSITION THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED COPY OF DEALER FUNDING AGREEMENT BETWEEN MAHINDRA & MAHINDRA LTD., AND MAHINDRA & MAHINDRA FINANCE SERVICE LTD., BEING SISTER CONCERN OF MAHINDRA & MAHINDRA LTD., WHEN MAHINDRA & MAHINDRA FINANCE SERVICE LTD., WAS TO CHARGE INTEREST ON THE D AILY PRODUCT BASIS WHEN THE INVOICES RAISED BY MAHINDRA & MAHINDRA LTD. ON THE DEALER (ASSESSEE) , WERE PAID BY MAHINDRA & MAHINDRA FINANCE SERVICE LTD., LEAVING NO ROOM FOR THE ASSESSEE TO COMPUTE INTEREST ON SUCH I.T.A.NO. 372/CTK/2012 4 FINANCE WHEN THE SALES OF THE ASS ESSEE WERE DIRECT SALES TO THE BUYERS ON THE AMOUNT FINANCED BY MAHINDRA & MAHINDRA FINANCE SERVICE LTD TO THE PURCHASERS OF THE VEHICLES FROM THE ASSESSEE. HE HAS SUBMITTED A CHART WHEN THE TRADE ADVANCE IN THE NAME OF THE DEALER HAD BEEN GIVEN TO MAHINDR A & MAHINDRA FINANCE SERVICE LTD AS PER THE AGREEMENT SIGNED BY THE ASSESSE E AND MAHINDRA & MAHINDRA LTD . THIS COMPOSITE TRANSACTIONS THEREFORE WAS FULLY RE COVERED FOR PAYMENT AT THE END OF THE YEAR AS FINANCIAL CHARGES AMOUNTING TO 12,65,819 WHICH FINANCIAL CHARGES ARE BASICALLY THE MANAGEMENT OF FINANCE BETWEEN THE SISTER CONCERNS. THE DEALER HAS NO OPTION TO PAY FOR IT, MAY BE DUE TO ITS INABILITY TO PAY AS PER THE DEALER FUNDING AGREEMENT ON TIME. IT WAS NOT THE CASE OF THE ASSES SING OFFICER TO DEDUCT TAX AT SOURCE ON THE INTEREST PAID EITHER TO MAHINDRA & MAHINDRA LTD., OR TO THE MAHINDRA & MAHINDRA FINANCE SERVICE LTD .THE ASSESSEE COULD NOT IDENTIFY THE AMOUNT OF DEDUCTION AT SOURCE AS IT DID NOT OWE ANY AMOUNT TO MAHINDRA & MA HINDRA FINANCE SERVICE LTD. THE LEARNED COUNSEL FOR THE ASSESSEE THEREFORE ARGUED THAT HAVING APPRECIATED THE TOTAL CLAIM OF FINANCIAL CHARGES PAID AMOUNTING TO MORE THAN 28 LAKHS, IT WAS NOT THE CASE OF THE ASSESSING OFFICER TO DISALLOW A PORTION THEREOF U/S.40(A)(IA) BY INVOKING PROVISIONS OF SECTION 194A. HE PRAYED THAT THIS DISALLOWANCE AS CONFIRMED BY THE LEARNED CIT(A) AS PER FINDINGS NOTED MAY KINDLY BE DIRECTED TO BE DELETED. 5. THE LEARNED DR OPPOSED THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE AND ENTIRELY SUPPORTED THE IMPUGNED ORDERS OF THE AUTHORITIES BELOW. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE IMPUGNED ORDERS OF THE AUTHORITIES BE LOW AND THE MATERIAL AVAILABLE ON RECORD. ON CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE INCLINED TO I.T.A.NO. 372/CTK/2012 5 HOLD THAT THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT PAYMENT IN THE NATURE OF FINANCIAL CHARGES WAS NOT INTEREST PAID EITHER TO MAHINDRA & MAHINDRA LTD., OR MAHINDRA & MAHINDRA FINANCE SERVICE LTD . THE SISTER CONCERNS ARE APPOINTING DEALERS ON THE BASIS OF LOCATIONAL ADVANTAGE ETC., PROMOTED THEIR BUSINESS FOR SALE OF THEIR PRODUCTS IN AS MANY METHODS. THEY THEMSELVES E NTERED INTO FINANCE TRANSACTIONS WHEN TRADE ADVANCE IS MARKED IN THE NAME OF THE ASSESSEE BUT AGAINST THE BILLS RAISED BY THE MANUFACTURER OF VEHICLES. THE ASSESSEE, THEREFORE, WAS NOT TO MANAGE THE FUNDS FOR THE PURPOSE OF PAYING INTEREST ON THE BORROWING S, LOANS OR FOR THAT MATTER EVEN THE INVOICES RAISED BY THE MANUFACTURER WHICH ARE PAID BY THE FINANCER. THE MANAGEMENT OF THE FUNDS BETWEEN THE FINANCER AND MANUFACTURER THEREFORE RESULTED IN AMOUNTS OWED BY THE ASSESSEE, BEING THE DEALER OF THOSE PRODUCT S TO PAY FINANCIAL CHARGES WHICH WERE COMPUTED BY MAHINDRA & MAHINDRA FINANCE SERVICE LTD., ON DAILY BASIS WHEN IT COULD NOT BE SAID THAT THE ASSESSEE WAS TO PAY PROMPTLY THE PROCEEDS OF VEHICLES SOLD BY IT AGAINST THE BILLS RAISED BY THE MANUFACTURER ON T HE SISTER CONCERN MAHINDRA & MAHINDRA FINANCE SERVICE LTD. THE CASE LAWS CITED AT BAR BY THE LEARNED COUNSEL FOR THE ASSESSEE BEING THE DECISION OF ITAT, HYDERABAD IN THE CASE OF SRI VENKATESH PAPER AGENCIES (SUPRA) AND THE DECISION OF ITAT, AHMEDABAD IN T HE CASE OF PARAG MAHASUKHLAL SHAH (SUPRA) SQUARELY FALL APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. THE ASSESSEE COULD HAVE PAID FINANCIAL CHARGES FOR THE PURCHASES MADE BY IT BUT PAID SALE PROCEEDS BELATEDLY WAS RIGHTFULLY CLAIMED AS FINANCIAL CHARGES AND NOT ON ACCOUNT OF INTEREST FOR BELATED PAYMENTS WHICH WAS IN THE DOM AI N OF THE SISTER CONCERN NAMELY MAHINDRA & MAHINDRA FINANCE SERVICE LTD. THE AMOUNT IS NOT OWED BY THE ASSESSEE TO MAHINDRA & MA HINDRA FINANCE SERVICE LTD TO THE EXTENT THAT THE ASSESSEE WAS TO PAY INTEREST TO THEM SUBJECT TO DEDUCTION OF TAX AT I.T.A.NO. 372/CTK/2012 6 SOURCE U/S.194A. IN FACT IT WOULD HAVE BEEN A CASE OF MAHINDRA & MAHINDRA FINANCE SERVICE LTD DEDUCTING TAX AT SOURCE ON THE TRADE ADVANCE GIVEN TO MAHINDRA & MAHINDRA LTD., FOR RAISING THE INVOICES ON THE ASSESSEE DEALER AS PART OF THE AGREEMENT. REFRAINING OURSELVES FROM COMMENTING ON THE BUSINESS EXPEDIENCY BETWEEN THE SISTER CONCERNS, WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSEE COULD NOT HAVE DEDUCTED TAX AT SOURCE U/S.194A ON THE AMOUNT CLAIMED BY MAHINDRA & MAHINDRA FINANCE SERVICE LTD AT THE END OF THE YEAR TOTALLING 12,65,819 WHICH AMOUNT CANNOT BE RELATED TO ANY AMOUNT OWED BY THE ASSESSEE TO EITHER OF THEM. IN VIEW OF THE ABOVE DISCUSSIONS, WE ARE OF THE CONSIDERED VIEW THAT THE DISALLOWANCE OF 12,65,819 MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LEARNED C IT(A) U/S.40(A)(IA) IS NOT JUSTIFIED AND AS SUCH, THE SAID ADDITION OF 12,65,819 IS DIRECTED TO BE DELETED. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. SD/ - SD/ - ( . . . ) , (K.S.S.PRASAD RAO), JU DICIAL MEMBER ( . . ) , , (K.K.GUPTA), ACCOUNTANT MEMBER. ( ) DATE: 28.09.2012 - COPY OF THE ORDER FORWARDED TO: 1 . / THE APPELLANT : MR. SANJAY KUMAR PANI, PROP. M/S.BASANTI AUTO AGENCY, NILIABAG, BALASORE, ODISHA 756 001 2 / THE RESPONDENT: INCOME - TAX OFFICER, WARD 2, BALASORE. 3 . / THE CIT, 4 . ( )/ TH E CIT(A), 5 . / DR, CUTTACK BENCH 6 . GUARD FILE . / TRUE COPY, / BY ORDER, ( ), (H.K.PADHEE), SENIOR.PRIVATE SECRETARY. I.T.A.NO. 372/CTK/2012 7 APPENDIX XVII SEAL TO BE AFFIXED ON THE ORDER SHEET BY THE SR. P.S./P.S. AFTER DICTATION IS GIVEN 1. DATE OF DICTATION 27.09.2012 . 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 27.09.2012 OTHER MEMBER . 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.... 5. DATE ON WHICH THE FAIR ORDE R COMES BACK TO THE SR. P.S./P.S . 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK .. 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER ................ 9. DATE OF DESPATCH OF THE ORDER ..