Ita/185/2015 Of Commissioner Of Income Tax Faridabad v. Naresh Jindal

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH ITA No.185 of 2015 (O&M)Date of decision: 11.8.2015 The Commissioner of Income Tax, Faridabad .....-Appell Naresh Jindal .... Responde CORAM: HON’ BLE MR. JUSTICK AJAY KUMAR MITTALHON BLE MR. JUSTICK RAMENDRA JAIN 1. Whether Reporters of local papers may be allowed to see the judgment?2. To be referred to the Reporters or not?2. To be referred to the Reporters or not? 3. Whether the judgment should be reported 1n the Digest? Present: Mr. Tajender K.Joshi, Advocate for the appellant-revenue. Ajay Kumar Mittal,J, 1.The delay in refiling the appeal 1s condoned. ).The revenue has preferred this appeal under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated18.5.2012, Annexure A.III passed by the Income Tax Appellate Tribunal, ITA No.185 of 2015(O0&M | Delhi Bench ‘E' New Delhi (in short, “the Tribunal) in ITANo.2462/Del/2011 for the assessment year 2007-08, claiming followingsubstantial questions of law:- “'1) Whether on the facts and in the circumstances of the casethe Hon'ble ITAT was right in law in deleting the addition of|L45,03,927/- made by the AO on account of advance againstorder when the nexus between sending of money as against salewas not established and no service was rendered by the foreignbuyer/receiver of the money and that too without deduction oftax at source as required under section 40(a) of Income Tax Act,196]7 11) Whether on the facts and in the circumstances of the case, theHon'ble ITAT was right in law in deleting the addition of45,00,000/- made by the AO on account of payment of rent madein contravention to provisions of section 40(a)(1a) of IncomeTax Act, 1961?” 3.A few facts relevant for the decision of the controversyinvolved as narrated in the appeal may be noticed. The assessee is anindividual. He was running two proprietorship concerns at the relevanttime namely M/s Jindal Enterprises and M/s Indosun Global. For theassessment year 2007-08, he filed his return on 31.10.2007 declaring totalIncome at nil. After hearing the assessee, the Assessing Officer passedassessment order under Section 143(3) of the Act on 31.12.2009. Hedetermined the taxable Income of the assessee at.=a52,64,659/-. Thefollowing additions/disallowances were made by the Assessing Officer:- 1) Addition on account of advance against order=45,03,927/- 11) Disallowance under section 40(a)(1a<4%++%+++:(111)Addition on account of purchases<32,657/- iv)Addition on account of sampling expensesTy93%+;4:( v) Disallowance on account of conveyance |<.+%+++:(repair and maintenance and staffwelfare expensesrepair and maintenance and staffwelfare expenses viil)Disallowance on account ofL.+%+++:(depreciation on car, insurance,repair and maintenance andtelephone expenses. On appeal by the assessee, the CIIT(A) vide order dated 17.2.2011,Annexure A_II deleted the additions mentioned at SrNo.1 but confirmedthe additions at Sr.Nos.2 to 6. Before the Tribunal, the revenue challengedthe deletion of addition of.Ly45,03,927/- at Sr.No.l whereas the assesseechallenged confirmation of additions by the CIT(A) at Sr.Nos. 2 to 6. TheTribunal vide order dated 18.5.2012, Annexure A.II] dismissed the appealfiled by the revenue and partly allowed the appeal filed by the assessee.Hence the instant appeal by the revenue. _ 4We have heard learned counsel for the appellant.4S.The following two additions made by the Assessing Officerwhich were deleted by CIT(A) or the Tribunal arise for consideration 1nthis appeal:- (a) Addition on account of advance against order: |a45,03,927/-(b) Disallowance under Section 40(a)(1a)L4%++%+++:( 6.|The CIT(A) while deleting the addition of|Lv45,03,927/- hadnoticed in its order dated 17.2.2011, Annexure A.II that the assessee was inthe business of manufacturing and production of home furnishing itemsfor the domestic market and was also carrying the job work for theexporters since 1997. M/s Indosun Global was established by him during 4We have heard learned counsel for the appellant.4S.The following two additions made by the Assessing Officerwhich were deleted by CIT(A) or the Tribunal arise for consideration 1nthis appeal:- (a) Addition on account of advance against order: |a45,03,927/-(b) Disallowance under Section 40(a)(1a)L4%++%+++:( 6.|The CIT(A) while deleting the addition of|Lv45,03,927/- hadnoticed in its order dated 17.2.2011, Annexure A.II that the assessee was inthe business of manufacturing and production of home furnishing itemsfor the domestic market and was also carrying the job work for theexporters since 1997. M/s Indosun Global was established by him during previous year 2005-06 for carrying out the export business of homefurnishing items and had obtained EC Code number for the said purpose.The assessee had become member of ‘Export Promotion Council forHandicrafts’. The assessee had paid the amount of=a45,03,927/- towardsAttorney fees, Bid security amount, EU taxation and Locked FundInsurance. The aforesaid amount was transferred on various dates from theaccount of the assessee through wireless transfer. It was recorded that thetransaction was bonafide and the Assessing Officer was not right inholding it otherwise. The relevant findings are as under:- 4.10. It has also been stated by the Assessing Officer whilemaking the disallowance that no tax at source has beendeducted on these remittances. Therefore, the amount 1sdisallowable as per section 40(a) of the IT Act. Theappellant has submitted that TDS was not deductible fromthese remittances as the amount in question was towards theattorney fees, taxation etc. which is not taxable as per theprovisions of the Act. It has been stated that the securityamount was refundable as per the contract and thus noincome had arisen to the beneficiary. Similarly, in the caseof locked fund insurance the funds were transferred forInsurance policy and thus there was no income to thebeneficiary. In case of EU taxation, the funds weretransferred to EU taxation and again there was no income tothe beneficiary so as to require deduction of tax at source.As regards, the attorney fee, 1t has been stated that the sameis covered under double taxation agreement with Spainnotification NO.GSR 356(E) dated 21.4.1995. The article 7of the agreement reads as under:- “The profits of an enterprise of a contracting Stateshall be taxable only 1n that State unless the enterprisecarried on business in other contracting State through a permanent establishment situated therein.” 4.11 As per the appellant, no TOS was required as thebeneficiary does not have permanent establishment in India.Therefore, 1n view of the above submission of the appellant,the contention of the Assessing Officer that tax should havebeen deducted at source is also held to be not supported byfacts. “The profits of an enterprise of a contracting Stateshall be taxable only 1n that State unless the enterprisecarried on business in other contracting State through a permanent establishment situated therein.” 4.11 As per the appellant, no TOS was required as thebeneficiary does not have permanent establishment in India.Therefore, 1n view of the above submission of the appellant,the contention of the Assessing Officer that tax should havebeen deducted at source is also held to be not supported byfacts. 4.12 Thus, the various reasons given by the AssessingOfficer to disallow the loss incurred by the appellant due tothe sham order do not have any merit. The issue 1s whetherthere was any such transaction in which the appellantsuffered the loss which has been claimed in the return of theincome. The appellant has brought on record sufficientevidence to suggest that such like transaction did take place.It needs to be noted that the amounts 1n question have beenremitted through the banking channels. The appellant hasalso lodged a complaint with the police, filed a case with theHon'ble Punjab and Haryana High Court and has beenfollowing up the issue with the embassy of Spain. Thevarious e-mails exchanged between the appellant and theUnited National Children Fund, the alleged prospectivebuyer indicate that such transaction took place. Theappellant has also placed on record the newspaper cuttingsupporting his case that he was the victim of the fraud. Afterappraising the varied documentary evidence, it 1s held thatthe appellant was victim of fraudulent transaction. Havingheld so now the question is whether the loss arising due tothe fraud as mentioned above 1s a business loss allowable asper the Income Tax Act. It has been contended that the losshas taken place during the course of business and should beallowed as such. 4.13. On careful consideration of the appellant's submission,it is held that the loss has been caused to the appellant due tothe fraud which he fell victim to in the course of his business. The Hon'ble P&H High Court 1n the case of CITvs. Pukhrajywati Bubber 296 ITR 290 on which the appellanhas also relied, while allowing the loss caused due toembezzlement observed as under:- "The liability to tax is on profits or gains of businesscomputed in accordance with sections 30 to 43 of theIncome tax Act, 1961 (for short, “the Act’). Though there 1sno provision for allowing deduction of a trading loss onaccount of embezzlement, section 37 of the Act providesfor any expenditure for the purpose of business and therehas to be nexus between the business operation and theloss. If the loss was directly connected with the businessoperation and incidental to carrying on of the business, thesame has to be allowed as a deduction." Therefore, keeping in view the facts of the case and also theratio of Hon'ble Punjab and Haryana High Court decision inthe case of CIT vs. Pukhraj Wati Bubber (supra) the loss soincurred is held to be an allowable business loss. Theaddition of -45,03,927/- made by the Assessing Officer 1stherefore deleted. This ground of appeal is allowed.” The Tribunal affirmed the said findings. In the absence of anyillegality or perversity demonstrated by learned counsel for therevenue, no legal issue arises for consideration 1n this Court. Jo|Next taking up the issue of <a5,00,000/- disallowed under section 40(a)(1a) of the Act, the Tribunal had set aside theorder of the Assessing Officer and the CIT(A). It was recorded thatthe security deposit was refundable and therefore, 1n view ofcircular, no tax at source was deductible. However, the landlordhad later on adjusted the said amount towards rent and in suchcircumstances, the assessee could not have deducted tax at source and the adjustment of security deposit against rent due was a revenue expenditure. The finding of the Tribunal 1s as follows:- “10. We have duly considered the rival contentions and gonethrough the record carefully. The relevant question in thecircular referred by the learned counsel for the assessee readsas under:- Jo|Next taking up the issue of <a5,00,000/- disallowed under section 40(a)(1a) of the Act, the Tribunal had set aside theorder of the Assessing Officer and the CIT(A). It was recorded thatthe security deposit was refundable and therefore, 1n view ofcircular, no tax at source was deductible. However, the landlordhad later on adjusted the said amount towards rent and in suchcircumstances, the assessee could not have deducted tax at source and the adjustment of security deposit against rent due was a revenue expenditure. The finding of the Tribunal 1s as follows:- “10. We have duly considered the rival contentions and gonethrough the record carefully. The relevant question in thecircular referred by the learned counsel for the assessee readsas under:- Question No.2 Whether tax 1s required to be deducted atsource where a non refundable deposit has been made by thetenant? Ans: In cases where the tenant makes a non refundabledeposit, tax would have to be deducted at source as depositrepresents the consideration for the use of the land or thebuilding etc. and therefore partakes the nature of rent asdefined in section 194-I. If, however, the deposit 1srefundable, no tax would be deductible at source. It is furtherclarified that 1f the deposit carries interest, the tax to bededucted on the amount of interest will govern it. 11. There 1s no dispute that the amount paid by the assesseewas a refundable security. The only dispute raised by theAssessing Officer 1s that the assessee failed to deduct theTDS. Learned first Appellate authority confirmed thedisallowance on the ground that it 1s capital expenditure. Weare of the view that refund was adjusted towards rent inpeculiar facts and circumstances When assessee made thepayment of refundable security, as per circular, he was notsupposed to deduct the tax at source. The security was paid inorder to cover such type of unforeseen circumstances. Thelandlord has forfeited it and adjusted it towards the rent. Thus,it was a revenue expenditure in the hands of the assessee andit did not deserve to be disallowed. We allow this ground ofappeal and delete the disallowance.” S| Again, learned counsel for the revenue was unable to ITA No.185 of 2015(O0&M Show that there was any error or perversity in the approach of theTribunal warranting interference by this Court. Consequently,finding no merit in the appeal, the same is hereby dismissed. (Ajay Kumar Mittal)Judge August 11, 2015 (Ramendra Jain)Judge ‘gs!