DCIT, Bangalore V. M/s Telco Construction Equipment Co. Ltd., Bangalore

ITA 478/BANG/2012

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5358 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 11 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-03-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 25-02-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 02-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ARE GEN ERAL IN
• Assessee Lawyers: PRISCILLA SINGSIT S HRI
• Keywords: Capital asset; Residential status; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH C :BANGALORE BEFORE SMT. P.MADHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P.BOAZ, ACCOUNTANT MEMBER ITA NO.478/BANG/2012 (ASSESSMENT YEAR : 2007-08) DEPUTY COMMISSIONER OF INCOME - TAX, CIRCL E 12(4), B ANGALORE. APPELLANT VS. M/S. TELCO CONSTRUCTION EQUIPMENT CO.LTD. JUBILEE BUILDING, NO.45, MUSEUM ROAD, B ANGALORE. RESPONDENT PAN: AAACT9077B DATE OF HEARING : 25 - 02 - 2014 . DATE OF PRONOUNCEMENT 07 - 03 - 2014. O R D E R PER SMT.P.MADHAVI DEVI, JM: THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE CIT(A)-III, BANGALORE, DATED 19-1-2011 FOR THE ASSESSMENT YEAR 2007-08. 2. THE ASSESSEE HAS RAISED AS MANY AS SEVEN G ROUNDS OF APPEAL. WE FIND THAT GROUND NOS.1, 6,AND 7 ARE GEN ERAL IN APPELLANT BY : M S.PRISCILLA SINGSIT, CIT(DR) . RESPONDENT BY : S HRI S .ANANTHA, CA. ITA NO.478/BANG/2012 PAGE 2 OF 9 NATURE AND GROUNDS NO.2 TO 4 RELATE TO THE DELETION OF ADDITION MADE ON ACCOUNT OF DEALERS COMMISSION OF RS.6,46,11 ,000/- FOR FAILURE TO DEDUCT TDS ON SUCH COMMISSION. GROUND NO .5 RELATES TO THE DELETION OF ADDITION MADE ON ACCOUNT OF CONS ULTANCY CHARGES OF RS.11,56,22,560/- TREATING IT AS CAPITAL EXPENDITURE. ACCORDING TO THE REVENUE, THIS EXPENDITURE IS CAPIT AL IN NATURE AND HAS TO BE ALLOWED U/S 35D OF THE ACT WHILE CIT( A) HAS ALLOWED IT AS REVENUE EXPENDITURE. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE-COMPANY IS INTO THE BUSINESS OF MANUFACTURING, PURCHASE AND SA LE OF EXCAVATORS, LOADERS, CRANES, DUMPERS AND SPARE PART S ETC. FOR THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE FILED IT S RETURN OF INCOME DECLARING INCOME OF RS.282,44,84,066/-. DUR ING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE INCOME-TAX ACT,1961 [HEREINAFTER REFERRED TO AS THE ACT], THE ASSESSE E WAS REQUIRED TO SUBMIT VARIOUS DETAILS. IN RESPONSE TO THE SAME , THE ASSESSEE FILED ALL THE DETAILS. FROM THE DETAILS SUBMITTED BY THE ASSESSEE, THE AO OBSERVED THAT THE ASSESSEE HAS DEBITED A SUM OF RS.14,84,26,424 AS SALES COMMISSION OUT OF WHICH A SUM OF RS.6,46,11,000/- RELATES TO PROVISION MADE TOWARDS COMMISSION. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO HOW THE PRO VISION HAS BEEN MADE AND ON WHAT BASIS IT IS WORKED OUT AND AS TO WHY NO TDS IS MADE FROM THIS AMOUNT. THE ASSESSEE EXPLAIN ED THAT THE PROVISION WAS MADE ON THE BASIS OF SALES MADE DURIN G THE YEAR ITA NO.478/BANG/2012 PAGE 3 OF 9 FROM DIFFERENT SALES OFFICES OF THE COMPANY AND ON THE BASIS OF COMMUNICATION RECEIVED FROM THESE OFFICES REGARDING COMMISSION PAYABLE ON SUCH SALES. AS TO WHY NO TDS WAS MADE F ROM THIS AMOUNT, IT WAS CLARIFIED THAT NO TDS WAS MADE FROM THE PROVISION BUT AS AND WHEN THE COMMISSION PAYMENTS W ERE MADE IN THE SUBSEQUENT YEAR, TDS WAS MADE AND REMITTED T O THE GOVERNMENT ACCOUNT. THE AO CAME TO THE CONCLUSION THAT THE PROVISIONS OF SEC.194H ARE APPLICABLE TO THE FACTS OF THE CASE BEFORE HIM AND SINCE THE ASSESSEE HAS FAILED TO COM PLY WITH THE TDS PROVISIONS, HE HELD THAT THE PROVISIONS OF SEC. 40A(I)(A) OF THE ACT ARE ATTRACTED. HE ACCORDINGLY DISALLOWED A SUM OF RS.6,46,11,000/-. 4. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFO RE THE CIT(A) WHO CONSIDERED THE ASSESSEES CONTENTION AND HELD THAT THE AMOUNT CREDITED BY THE ASSESSEE IS ONLY A PROVI SION AND NOT ACTUAL PAYMENT OF COMMISSION TO THE PARTY AND TILL THE AMOUNTS ARE CREDITED TO THE RESPECTIVE PARTYS ACCOUNT, IT CANNOT BE SAID THAT THE SAME HAVE BECOME FINALLY QUANTIFIED AND HE NCE, THE PROVISIONS OF SEC.194H ARE NOT ATTRACTED. HE ALSO FOLLOWED THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CA SE OF ACIT VS. MOTOR INDUSTRIES CO. (249 ITR 141). HE ACCORDINGLY DELETED THE ADDITION MADE BY THE AO. AGAINST THE DELETION MADE BY THE CIT(A), THE REVENUE IS IN APPEAL BEFORE US. ITA NO.478/BANG/2012 PAGE 4 OF 9 5. MS.PRISCILLA SINGSIT, LEARNED DEPARTMENTAL R EPRESENTATIVE, SUPPORTED THE ORDER OF THE AO AND SUBMITTED THAT U/ S 194-H, WHENEVER A COMMISSION OR BROKERAGE IS CREDITED BY T HE ASSESSEE, THE ASSESSEE IS REQUIRED TO MAKE TDS. IN SUPPORT OF HER CONTENTION, SHE ALSO PLACED RELIANCE UPON THE D ECISION OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. CRESCENT EXPORT SYNDICATE (2013) 33 TAXMANN.COM250 (CAL). SHE FURTHER SUBMITTED THAT RELIANCE BY THE CIT(A) ON THE DECISI ON OF THE HONBLE KARNATAKA HIGH COURT CITED SUPRA IS MISPLAC ED AS, IN FACT, FACTS OF THE SAID CASE ARE DISTINGUISHABLE FROM THE FACTS OF THE CASE BEFORE US. SHE SUBMITTED THAT IN THE SAID CAS E, PAYMENT WAS MADE TO A NON-RESIDENT WHEREAS IN THE CASE BEFO RE US, PAYMENT IS MADE TO A RESIDENT. SHRI S.ANANTHA , LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, REITERATED THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW AND SUBMITTED THAT THE COMMISSION IS PAYABLE TO THE AGENTS UPON THEIR FULFILLING ALL THE CONDITIONS I.E. SALE OF PRODUCTS, COLLECTING AMOUNT FROM CUSTOMERS AND OBTAINING OF FORMS ETC., HE SUBMITTED THAT SINCE ALL THE ABO VE CONDITIONS ARE NOT SATISFIED BY THE END OF THE RELEVANT FINANC IAL YEAR, THE COMMISSION HAD NOT ACCRUED TO THE AGENT BUT SINCE T HE SALES WERE MADE, THE ASSESSEE HAD TO MAKE A PROVISION FOR PAYMENT OF COMMISSION AS AND WHEN ALL THE OBLIGATIONS ARE FULF ILLED. HE SUBMITTED THAT ONLY WHEN THE COMMISSION IS CREDITED TO THE ITA NO.478/BANG/2012 PAGE 5 OF 9 PARTYS ACCOUNT OR WHEN PAYMENT IS MADE WHICHEVER I S EARLIER, IS THE ASSESSEE REQUIRED TO MAKE TDS U/S 194-H OF THE ACT. HE SUBMITTED THAT SINCE THE AGENTS DID NOT HAVE RIGHT TO RECEIVE THE PAYMENT, THE COMMISSION WAS NOT CREDITED TO THEIR A CCOUNT AND IT WAS CREDITED TO THE PROVISION ACCOUNT AND THEREF ORE THERE WAS NO REQUIREMENT OF MAKING TDS U/S 194H AND CONSEQUEN TLY NO DISALLOWANCE U/S 40A(IA) CAN BE MADE. IN SUPPORT O F THIS CONTENTION, HE PLACED RELIANCE UPON THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF MOTOR INDUSTRIES CO. (SUPRA) AND SUBMITTED THAT IN THE SAID CASE, THE HO NBLE HIGH COURT WAS DEALING WITH THE APPLICABILITY OF SEC.195 AND IT HAS BEEN HELD THAT LIABILITY U/S 195 OF THE ACT WOULD B EGIN TO OPERATE ONLY WITH EFFECT FROM THE DATE WHEN THE COLLABORATI ON AGREEMENT WAS CONCLUDED AND NOT EARLIER BECAUSE THE FOREIGN C OLLABORATOR CAN ENFORCE HIS RIGHT TO RECEIVE PAYMENT ONLY ON CO NCLUSION OF THE COLLABORATION AGREEMENT AND THAT THE MERE FACT THAT THE ASSESSEE WAS CREDITING AMOUNT TO THE CREDIT OF THE SUSPENSE ACCOUNT WOULD NOT ALTER THE SITUATION IN ANY WAY. HE SUBMITTED THAT IRRESPECTIVE OF THE RESIDENTIAL STATUS OF THE PARTIES IN THE SAID CASE, THE RATIO DECIDED BY THE HONBLE HIGH COURT I S VERY MUCH APPLICABLE TO THE FACTS OF THE CASE BEFORE US. HE SUBMITTED THAT THE AGENTS WOULD GET VESTED RIGHT TO RECEIVE AMOUNT AND THE LIABILITY OF THE ASSESSEE TO PAY COMMISSION WOULD A RISE ONLY ON FULFILLMENT OF OBLIGATIONS OF THE AGREEMENT AND SIN CE ALL THE OBLIGATIONS WERE NOT FULFILLED, THE AMOUNT WAS CRED ITED TO THE ITA NO.478/BANG/2012 PAGE 6 OF 9 PROVISION ACCOUNT AND THEREFORE THE DECISION OF THE JURISDICTIONAL HIGH COURT IS SQUARELY APPLICABLE TO THE FACTS OF T HE CASE BEFORE US. 6. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDE RED THE RIVAL CONTENTIONS, WE FIND THAT THE AMOUNT CREDITED BY THE ASSESSEE IS TO THE PROVISION ACCOUNT AND NOT TO THE RESPECTIVE AGENTS ACCOUNTS. THEREFORE, IT IS CLEAR THAT THE ASSESSEE HAS NOT MADE ANY PAYMENT TO THE AGENTS. THE PROVISIONS OF SEC.194H WOULD APPLY WHEN THE PAYMENTS ARE MADE TO THE AGENT S OR CREDITED TO THE AGENTS ACCOUNTS, WHICHEVER IS EARL IER, AND NOT WHEN THE PAYMENT IS CREDITED TO THE PROVISION ACCOU NT. AS RIGHTLY POINTED OUT BY THE LEARNED COUNSEL FOR ASSE SSEE, THE AGENTS WOULD GET VESTED RIGHT TO RECEIVE THE COMMIS SION ONLY WHEN THEY FULFILL THE OBLIGATIONS UNDER THE AGREEME NT FOR COMMISSION. WE FIND THAT THE CIT(A) HAS PROPERLY A PPRECIATED THE ISSUE BEFORE DELETING THE ADDITION MADE BY THE AO. IN VIEW OF THE SAME, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE FINDING OF THE CIT(A) ON THIS ISSUE. THIS GROUND O F APPEAL IS ACCORDINGLY REJECTED. 7. COMING TO THE SECOND ISSUE OF DISALLOWANCE OF CO NSULTANCY CHARGES OF RS.11,56,22,560/- AS REVENUE EXPENDITURE , THE LEARNED DR HAS RELIED UPON THE ORDER OF THE AO WHER EIN THE AO HAS HELD THAT THE CONSULTANCY CHARGES PAID BY THE A SSESSEE TO ITA NO.478/BANG/2012 PAGE 7 OF 9 M/S.MCKINSEY & CO., WAS IN RESPECT OF STUDY REPORT TO RELOCATE ITS SOURCES AND TO INCREASE THE PROFITABILITY OF THE CO MPANY. THE AO HELD THAT THE ASSESSEE WAS GETTING ENDURING BENEFIT AND THEREFORE IT IS TO BE TREATED AS CAPITAL EXPENDITUR E AND HE HAS AMORTIZED THE EXPENDITURE FOR A PERIOD OF FIVE YEAR S. ON APPEAL, THE CIT(A) HAS DELETED THE ADDITION HOLDING THAT TH E EXPENDITURE WAS INCURRED TOWARDS COST REDUCTION INITIATIVE FOR SUSTAINED PROFITABILITY. HE HELD THAT THE PROVISIONS OF SEC.3 5D ARE NOT APPLICABLE TO THE SAID CASE AS IT IS NOT A CASE OF PRE-INITIAL ACTIVITY NOR SETTING UP OF A NEW CAPITAL ASSET. AS REGARDS THE NATURE OF EXPENDITURE, HE HELD THAT THE ENTIRE EXERCISE IS DI RECTED TOWARDS COST REDUCTION AND NOT TOWARDS CREATION OF ANY ASSE T AND THAT ANY STRATEGY FOR IMPROVED COSTING OR IMPROVED SALE WOULD ALWAYS YIELD ENDURING BENEFIT BUT THIS CANNOT BE THE ONLY FACTOR TO CAPITALIZE SUCH EXPENDITURE. IN SUPPORT OF HIS CON CLUSION, HE HAS PLACED RELIANCE UPON THE DECISION OF THE HONBLE SU PREME COURT IN THE CASE OF EMPIRE JUTE CO. VS. CIT (124 ITR 1) AND THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CA SE OF MOTOR INDUSTRIES CO. LTD. (9223 ITR 112). AGGRIEVED BY THE RELIEF GIVEN BY THE CIT(A), THE REVENUE IS IN APPEAL BEFORE US. 8. THE LEARNED DR RELIED UPON THE ORDER OF THE AO W HILE THE LEARNED COUNSEL FOR ASSESSEE RELIES UPON THE ORDER OF THE CIT(A) AND HAS ALSO PLACED WRITTEN SUBMISSIONS AND JUDICIA L PRECEDENTS ON RECORD. ITA NO.478/BANG/2012 PAGE 8 OF 9 9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDE RED THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FI ND THAT THE CONSULTANCY FEES PAID BY THE ASSESSEE TO M/S.MCKINS EY & CO., IS TO CAUSE A STUDY AND PREPARE A STRATEGY TO REDUCE T HE COST OF PRODUCTION BY THE ASSESSEE. THUS, IN EFFECT, PROFI TABILITY OF THE ASSESSEE HAS INCREASED. AS RIGHTLY OBSERVED BY THE CIT(A), ANY STRATEGY FOR IMPROVED COSTING OR IMPROVED SALE WOUL D ALWAYS YIELD ENDURING BENEFIT. THOUGH ENDURING BENEFIT IS ONE OF THE CRITERION TO HOLD AN EXPENDITURE TO BE CAPITAL IN N ATURE, IT IS NOT THE ONLY CRITERION TO HOLD IT TO BE SO. WHILE CONS IDERING THE NATURE OF EXPENDITURE TO BE CAPITAL OR REVENUE, THE TEST TO BE APPLIED IS ALSO WHETHER THERE IS ANY NEW ASSET BEIN G CREATED AND WHETHER IT IS GIVING ENDURING BENEFIT. AS RIGHTLY POINTED OUT BY THE CIT(A), NO NEW ASSET HAS COME INTO EXISTENCE AN D THE STUDY IS ONLY FOR IMPROVING THE SALES AND PROFITABILITY O F THE ASSESSEE. THEREFORE, IN OUR OPINION, THE EXPENDITURE IS CLEAR LY REVENUE IN NATURE AND HENCE, THERE IS NO REASON TO INTERFERE W ITH THE ORDER OF THE CIT(A) ON THIS ISSUE ALSO. 10. IN THE RESULT, THE REVENUES APPEAL IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH MARCH, 2014 SD/- SD/- ( JASON P.BO AZ ) ( SMT. P.MADHAVI DEVI ) ACCOUNTANT MEMBER JUDICIAL MEMBER EKSRINIVASULU ITA NO.478/BANG/2012 PAGE 9 OF 9 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY IN COME-TAX APPELLATE TRIBUNAL BANGALORE