Ita/336/2014 Of Commissioner Of Income Tax-Iii v. M/S. Telco Construction

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 16TH DAY OF FEBRUARY 27027 PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE NATARAJ RANGASW AMY BETWEEN: LT.A. NO.336 OF 2014 1.|COMMISSIONER OF INCOME TAX-III C.R. BUILDINGS, QUEENS ROAD BANGALORE-56000 1. 2.|DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-12(4), BANGALORE. (BY MR. E.I. SANMATHI, ADV.,)— .... APPELLANTS AND" M/S. TELCO CONSTRUCTIONEQUIPMENT CO. LTD.,JUBLIEE BUILDINGNO.45, MUSEUM ROAD|BANGALORE-5600 38PAN: AAACT9O/7/78B (BY MR. A. SHANKAR, SR. COUNSEL FOR|MR. M. LAVA, ADV.,) ~. RESPONDENT THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX|ACT 1961, ARISING OUT OF ORDER DATED 07.03.2014 PASSEDIN ITA NO.478/BANG/2012 FOR THE ASSESSMENT YEAR 2007-08,PRAYING TO: | (1) DECIDE THE FOREGOING QUESTION OF LAW AND/OR-SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BYTHE HON BLE COURT AS DEEMED FIT.(ii) SET ASIDE THE APPELLATE ORDER DATED 07.03.2014|PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, C BENCH,BANGALORE.IN|APPEAL|PROCEEDINGSNO,LIANO.478/BANG/2012 FOR ASSESSMENT YEAR 2007-08. THIS I.T.A. COMING ON FOR’ HEARING, THIS’ DAY, |ALOK ARADHE J.,DELIVERED THE FOLLOWING: | JUDGMENT This appeal under Section 260-A of the Income TaxAct, 1961 (nereinafter referred to as the Act, for snort)Nas been filed Dy the revenue. The subject matter ofthe appeal pertains to the Assessment Year 2007-08.The appeal was admitted by a Bench of this Court videorder dated 27.07.2015 on the following substantialquestions of law:| “I. Whether in tne facts and.circumstances of the case, the Tribunal isjustified in law by holding that theprovisions of Section 194H would applywhen the payments are made to theagents or credited to the agents’ accountswhichever is earlier and not when thepayment is credited to the provisionsaccount even though the Explanation (iv) of Section 194H states that “where anyincome is credited to any account, whethercalled “suspense account’ or by any othername, in the books of accounts of theperson liable to pay such income, suchcrediting shall be deemed to be income totheaccountofthepayeeand|theprovisions of this Section shall applyaccordingly?’ "2. Whether, on the facts and in.the circumstances of the case, the Tribunalis Justified in law by holding that theconsultancychargespaidcannotbetreated as Capital Expenditure since theSame has not resulted in creation of a newasset, despite itself holding that theexpenditureincurredShal|resultIn|enduring benefit, which is the basicessence of the principle of treating any.expenditure as a capital expenditure ?”. 2. Facts leading to filing of this appeal brieflystated are that the assessee is a limited companycarrying on the business of manufacture, purchase and sale of excavators, loaders, cranes, dumpers and spare.parts, etc. The assessee filed its return of income on.27.01.2007 for the Assessment Year 2007-08 declaringan income of Rs.2,82,44,84,066/-. The return was.processed under Section 143(1) of the Act. Thereafter,the case of the assessee was selected for scrutiny. TheAssessing Officer completed the assessment and passedan order dated 30.12.2010 under Section 143(3) of theAct.determiningtnetotalincome.at|Rs.2,98,15,93,114/-. The Assessing Officer, in the order|of assessment, made two additions namely expenditureclaimed by the assessee was disallowed under Section.40(a)(ia) for non-deduction of tax at source for a sum of.Rs.6,46,11,000/- and disallowance of 4/5tn of the)consultancy charges to an extent of Rs.9,24,98,048/-. 3. The assessee thereupon filed an appeal beforethe Commissioner of Income Tax (Appeals), wno Dy an.order dated 19.01.2012, allowed the appeal and deleted 3. The assessee thereupon filed an appeal beforethe Commissioner of Income Tax (Appeals), wno Dy an.order dated 19.01.2012, allowed the appeal and deleted the additions made by the Assessing Officer. The!revenue filed an appeal before the Income Tax AppellateTribunal (hereinafter referred to as ‘the Tribunal’ forshort). The Tribunal, by an order dated 07.03.2014,dismissed the appeal preferred by the revenue. In theaforesaid factual background, the revenue is in appeal|before US. 4. Learned counsel for the revenue, while inviting|the attention of this Court to Explanation (iv) to Section.194H of the Act, submitted that the assessee haddebited an amount of Rs.6,46,11,000/- to profit and loss.account pertaining to provision towards commission and.since the assessee failed to comply withn the provisionsof Section 194H, no_ provision for deduction of tax atsource was made. Therefore, the Assessing Authority,|rightly invoked the provisions of Section 40(a)(ia) of the|Act. It is also submitted that the provisions of Section.194H of tne Act are attracted to the fact situation of tne|case as the conditions of Section 194H are fully satisfied. It is also urged that due to debiting the said|amount to the profit and loss account, the profit hascome down and the amount is claimed as expenditure.Therefore, the payment of tax deducted at source ougNntto have been made. It is further submitted that makingof payment is not necessary but debiting the amount willattract tax deducted at source provisions. 5. It is also urged that the consultancy chargespaid by the assessee to M/s. Mckinsey and Co. was in.respect of study report to relocate its sources and toincrease the profitability of the Company and therefore,the same will result in enduring benefit to the assesseeand as such the same has to be treated as capitalexpenditure. It is also pointed out from the copy of themanagement proposal and study of the same shows thatconsultancy services were engaged for profitability studyof cost reduction initiative for sustained profitabilitywhich was conferring a benefit of enduring nature to the assessee company over a period of time. Therefore, theSame cannot be held as revenue expenditure. It is also.urged that profitability of the assessee has increased|due to said expenditure and the same is not a revenue.expenditure. In support of aforesaid submission,|reliance has been placed on the decisions in|'SHREECHOUDHARY TRANSPORT COMPANY Vs. INCOME|TAX OFFICER’ (2020) 426 ITR O289 (SC), ‘THEDIRECTOR PRASAR BHARATI Vs. COMMISSIONEROF INCOME TAX’ (2018) 403 ITR 0161 (SC) AND'PINGLE INDUSTRIES LTD. Vs. COMMISSIONER OF.INCOME TAX’ (1960) 40 ITR 0067. 6. On the other nand, learned counsel for the|assessee submitted that assessee nas debited a sum ot Rs.14,84,11,000/- as sales commission out of which a)sum of Rs.6,46,11,000/- has been credited to aprovision account wnicn was part of nis commission. It ispointed out that no part of said sum of Rs.6,46,11,000/-. was credited to any of the agents accounts maintainedwith the assessee inasmuch as the amount was payableon matching concept and being in relation to receipts|offered. It is further submitted that the assessee's|nature of business is such which requires expenses.definitely incurred for the purpose of business but due to.peculiar factors of business, provision is made. It isfurther submitted that all corresponding TDS as and|when due nave been paid and TDS Nas been deducted.It is also pointed out that accrual of liabilities is certain.on 31st March while vesting of right to receive by|recipient is subject to certain conditions. It is further|submitted that the tribunal rightly concluded thatprovisions of Section 194H read with Section 40(a)(ia).of the Act are not applicable to the fact situation of thecase. It is also pointed out that similar provisions were.made in the earlier years as well as subsequent years.and the tax was not deducted at source on the'provisions and the department has not made any additions in respect of those provisions during the years|in which return of income were selected for scrutinyassessment. In this connection, reference has been.made to orders of assessment under Section 143(3) ofthe Act for Assessment Years 2005-06, 2006-07, 2008-09 and 2009-10. 7. It is also urged that the assessee has to make aprovision for expenditure to adhere to the matching)concept and the tax can be deducted only if the partyhas been identified and a permanent account number is_obtained from such party. It is impossible for theassessee to deduct TDS on the provisions when partynas not been identified. Tnerefore, no adverse inference|can be drawn as the assessee could not perform tneimpossible. It is further submitted that in light of ist!proviso to Section 40(a)(ia) of the Act which was.inserted witn effect from 01.04.2010, the disallowance|under Section 40(a)(ia) of the Act is not required. It isfurtner submitted that so far as issue with regard to disallowance of consultancy charges is concerned, while|considering the nature of expenditure to the capital orrevenue the test to be applied is also whether there isany new asset being created or whether it is giving any|enduring benefit and the tribunal has recorded a findingin favour of the assessee as the tribunal has found that.no new asset has come into existence and the study was.conducted only for improving the sales and profitability|of the assessee. In support of aforesaid submissions,reliance has been placed on decisions in|BHARATEARTH MOVERS VS. CIT, (2000) 245 ITR 428 (SC),PARASHURAM POTTERY WORKS CO. LTD. VS. ITO,|(1977)106|ITR|7(SC),LIFEINSURANCECORPORATION VS. CIT, (1996) 219 ITR 410 (SC),TAPARIA TOOLS LID. VS. JCIT, 372 ITR 605,STEAM NAVIGATION CO, (1953) (P) LTD. VS. CIT,(1965) 56 ITR 52 and EMPIRE JUTE CoO. VS. CIT,(1980) 124 ITR 1 (SC). 8 _We have considered the submissions made.by learned counsel for the parties and have perused therecord.TheSupreme.CourtInRADHASOAMTSATSANG Vs. COMMISSIONER OF INCOME-TAX’|(1992) 60 TAXMAN 248 (SC)has held that even.though principles of res judicata do not apply to income|tax proceedings, but where a fundamental aspect|permeating through the different Assessment Years has|been found as the fact one way or the other and theparties have allowed the position to be sustained by notchallenging the order, it would not be at all appropriate|to allow the position to be changed in subsequent year.Similar view has been taken by the Supreme Court in.PARASHURAM POTTERY WORKS CO LTD.supra. Inview of aforesaid well settled legal principles, we have.perused the orders of assessment passed under Section.143(3) of the Act for Assessment Years 2005-06, 2006-07, 2008-09 and 2009-10. From perusal of the aforesaidorders of assessment, similar provisions were made in. earlier years as well as subsequent years by theassessee and the TDS was not deducted on the’provisions. However, the Department has not made any.additions with regard to the provisions made during the|years in which returns of income were selected forscrutiny assessment. Therefore, the first substantialquestion of law on the analogy of the principles laid|down by the Supreme Court in the aforesaid decision isanswered against the revenue and in favour of theaSSe@SSAEC oiSo far as second substantial question of lawISconcerned,theCommissionerofIncome.Tax(Appeals) has deleted the addition holding that theexpenditureWaSincurred towardsCOSTreduction initiative for sustained profitability and the provisions ofSection 35D are not applicable to the case as it is notthe case of pre initial activity or setting up of a newcapital asset. The tribunal has affirmed the aforesaidfinding in appeal and has held that consultancy fee paid oiSo far as second substantial question of lawISconcerned,theCommissionerofIncome.Tax(Appeals) has deleted the addition holding that theexpenditureWaSincurred towardsCOSTreduction initiative for sustained profitability and the provisions ofSection 35D are not applicable to the case as it is notthe case of pre initial activity or setting up of a newcapital asset. The tribunal has affirmed the aforesaidfinding in appeal and has held that consultancy fee paid by the assessee is for the purposes of studying and|preparing a strategy to reduce the cost of production bythe assessee. It has further been held that no new asset|has come into existence and the study conducted was.only for improving the sales and profitability of the|assessee and has upheld the order of the Commissionerof Income Tax (Appeals). The Commissioner of Income.Tax (Appeals) has placed reliance on the decision of theSupreme Court onEMPIRE JUTE COsupra. Tne]aforesaid concurrent findings of fact Nave not been|challenged on the ground of perversity. Thus, concurrent|findings of fact which have been recorded on the!aforesaid issue, could not be demonstrated to beperverse. Therefore, no interference is called with theaforesaid concurrent findings of fact in this appeal underSection 260A of the Act. [SEE: SYEDA RAHIMUNNISAVS. MALAN BI BY L.RS. AND ORS. (2016)10 SCC315andPRINCIPAL COMMISSIONER OF INCOMETAX, BANGALORE & ORS. VS. SOFTBRANDS INDIA. P_|LTD., (2018)406ITR|513|.In.VIEWOF aforementioned well settled legal principles, the second.substantial question of law is also answered against the|revenue and in favour of the assessee. In the result, we do not find any merit in this|appeal, the same fails and is hereby dismissed. Sd/-JUDGE Sd/-.JUDGE RV/Ss