Ita/35/2014 Of Commissioner Of Income Tax-Ii v. Kajaria Ceramics Ltd

*IN THE HIGH COURT OF DELHI AT NEW DELHI18-19. 1. ITA No. 35 of 2014 is an appeal by the Revenue against the order dated 12^*^ July 2013 passed by the ITAT in ITA No. 4879/Del/2011 for theassessment year ('AY') 2008-09. ITA No. 533 of 2014 is directed against Signature Not Verified the order dated 7^ February 2014 passed by the ITAT in ITA No.1142/Del/2013 for AY 2009-10. 2. The Respondent Assessee is a company engaged in the business ofmanufacturing and trading of ceramics glazed and unglazed tiles andfinancing. As regards AY 2008-09, the Assessee filed its return of incomefbon 29 September 2008 declaring nil income. The income was assessedunder Section 143 (3) of the Act. The Assessing Officer ('AO') noted thatthe Assessee had taken a premises on rent from group company DuaEngineering Works Pvt. Ltd. (DEWPL) in terms of an agreement executedon 28^^ December 2006, whereby the annual rent was fixed at Rs.48,00,000.The rent agreement also provided that the Assessee would pay an interestfree security deposit of Rs.5.35 crores. 3. The AO was of the view that the interest free deposit was far in excess ofthe normal deposit of security and therefore was an undue favour given toAssessee's sister concern. The AO calculated the excess security deposit atRs.5.11 crores, computed the interest thereon @12% and held the interestexpenses of Rs.61,32,000 inadmissible. 4. It was further noted by the AO that the Assessee had failed to include inits tax audit report the details of payment of Rs. 89,60,273 to Kajaria PlusLtd. ('KPL'). The AO rejected the plea of the Assessee that the payment wasnot for goods and services and therefore not included in para 17 (m) of theTax Audit Report. The AO held that the Assessee was liable to deduct TDSon the aforementioned payment under Section 194C of the Act.Accordingly, the aforementioned sum was disallowed under Section40(a)(ia) of the Act. 5. Aggrieved by the above order of the AO for AY 2008-09, the Assesseefiled an appeal before the Commissioner of Income Tax (Appeals) ('GIT(A)'). The appeal was allowed by the CIT (A) by holding that the making ofthe interest free deposit in favour of the sister concern was its businessdecision and it gained no undue advantage. On the second issue, it was heldthat the elements of income were not embedded in the reimbursement madeto its sister concern and therefore the Assessee was not obliged to deductTDS. The ITAT in appeal by the Revenue upheld the aforementioned orderof the CIT (A). 6. As far as AY 2009-10 is concerned, the Assessee filed its return on 30^^September 2009 declaring the income of Rs.5,69,92,660. While assessingthe said return under Section 143 (3) of the Act, the AO made an addition ofRs.l 1,25,000 being the expenses claimed on account of the foreign travel ofdealers. The AO viewed these expenses to be in the nature ofincentive/commission, which would be liable to TDS under Section 194H ofthe Act. Accordingly, the said amount was disallowed under Section 40(a)(ia) of the Act. The AO also disallowed the interest calculated on the excesssecurity deposit made with DEWPL and accordingly made an addition ofRs. 81 lakhs. 7. In both the appeals one common question is common regarding the excesssecurity deposit purportedly made by the Assessee in respect of renting ofthe premises from DEWPL. The Assessee had taken the premises onmonthly rent of Rs.l9 per sq. ft. whereas the market rent was Rs.60-80 persq. ft. The area was 21000 sq. ft. As per Clause 2 of the rent agreement theparties had agreed that the rent would be Rs.4 lakhs per month, whereas thesecurity deposit would keep on increasing. Viewed in this manner, there wasno undue advantage to DEWPL. 8. Having heard learned counsel for the parties, the Court finds that the viewtaken by the GIT (A), as affirmed by the ITAT, on an interpretation of theclauses of the rent agreement and in coming to the aforementionedconclusion cannot be said to be perverse. It was a possible view to take. Onthis issue, therefore, the Court is not persuaded to hold that any substantialquestion of law arises. 8. Having heard learned counsel for the parties, the Court finds that the viewtaken by the GIT (A), as affirmed by the ITAT, on an interpretation of theclauses of the rent agreement and in coming to the aforementionedconclusion cannot be said to be perverse. It was a possible view to take. Onthis issue, therefore, the Court is not persuaded to hold that any substantialquestion of law arises. 9. As regards reimbursement made to KPL, as pointed out by the ITAT, itdid not appear to have any element of income warranting deduction of tax atsource under Section 194C of the Act. The ITAT also concurred with theview of the CIT (A) that since no element of income was embedded in thereimbursement, the Assessee was not obliged to deduct TDS. The decisionentirely appears to be on factual basis. 10. Relevant to AY 2009-10, the other issue concerns the travellingexpenses paid to dealers. There was no basis for AO to come to theconclusion that this payment was actually in the nature of commission to theagents. It was noticed that the entitlement to foreign travel was notproportionate to the volume of business conducted through a particulardealer/sub-dealer. Anyone who achieved the actual sale target was entitled to visit the foreign destination. In order to characterize the payment ascommission, for the purposes of Section 194H of the Act, it was essentialfirst to establish the relationship of principal and agent, which admittedlywas absent in the case of the Assessee. Consequently, the GIT (A) held thatthe foreign travel expenses of the dealers could not be disallowed underSection 40(a)(ia) of the Act. 11. The Court finds that both the CIT (A) as well as ITAT proceeded onfacts as far as the aforementioned payment is concerned. The Court is unableto find any substantial question of law arising therefrom. 12. Consequently, the appeals are dismissed. S.MURALIDHAR, J AUGUST 24,2015 mg VIBHU BAKHRU, J