The Commissioner Of Income Tax-I, Chandigarh v. M/S Bhagwati Steels, Plot

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Income Tax Appeal No.693 of 2009Date of decision : 21-01-2010 The Commissioner of Income tax-I, Chandigarh. VERSUS ....Appellant M/s Bhagwati Steels, Plot No.379, I.A. II,Chandigarh. ...Respondent CORAM:- HON'BLE MR. JUSTICE M.M. KUMAR HON'BLE MR. JUSTICE JITENDRA CHAUHAN Present: Ms. Urvashi Dhugga, Advocate, for the appellant. 1. Whether Reporters of local papers may be allowed to see the judgment? the judgment? 2. To be referred to the Reporter or not? 3. Whether the judgment should be reported in the Digest? M.M. KUMAR, J. The Revenue has approached this court under Section 260(A) of the Income Tax Act, 1961 (for brevity “the Act”) challengingorder dated 30.04.2009 passed by the Income Tax AppellateTribunal, Chandigarh (for brevity “the Tribunal”) in respect ofassessment year 2006-07 while deciding ITA No.63/Chandi/2009.The Revenue has claimed that from the order of the Tribunal twosubstantive questions of law would emerge and are required to beadjudicated by this court which are as under:- i)“Whether on facts and in the circumstances of the case,the Hon’ble ITAT was right in law in deleting thethe Hon’ble ITAT was right in law in deleting the disallowance made u/s 40(a) (ia) of the Income Tax Act inview of the amended provisions of Sec. 194C(3)(i) of theIncome Tax Act.” ii)“Whether on the facts and circumstances of the case thegoods supplied by M/s. TATA STEEL not being inclusiveof freight and therefore the freight charges chargedseparately by M/s. TATA STEEL falls under theprovisions of Section 194C of the Income Tax Act, 1961.”goods supplied by M/s. TATA STEEL not being inclusiveof freight and therefore the freight charges chargedseparately by M/s. TATA STEEL falls under theprovisions of Section 194C of the Income Tax Act, 1961.” Facts of the case in brief are that the assessee –respondent filed its return of income for the assessment year 2006-07 declaring its income of Rs.37,03,513/-. Thereafter assessmentwas completed under Section 143(3) of the Act on 27.11.2008assessing the income at Rs.2,47,41,968/- as various additions weremade by the Assessing Officer (A-1). The assessee – respondentfiled an appeal before the CIT (A) who partly allowed the appeal videits order dated 12.01.2009 (A-2). The assessee – respondent thenfiled another appeal before the Tribunal by pleading the following fourgrounds:- i)“that the Learned CIT(A) wrongly confirmed addition offreight paid to truck drivers amounting to Rs.172,723/- u/s40(a) (Income Tax Act) of the Income Tax Act, 1961.”freight paid to truck drivers amounting to Rs.172,723/- u/s40(a) (Income Tax Act) of the Income Tax Act, 1961.” ii)That the Learned CIT(A) wrongly confirmed disallowanceof interest expenses amounting to Rs.4,72,216/-.of interest expenses amounting to Rs.4,72,216/-. iii)That the Learned CIT(A) wrongly confirmed disallowanceof Rs.2,01,81,428/- u/s 40(a) of the Income Tax Act out ofpurchase of raw material for freight paid by the supplierof raw material.of Rs.2,01,81,428/- u/s 40(a) of the Income Tax Act out ofpurchase of raw material for freight paid by the supplierof raw material. iv)That the Learned CIT(A) wrongly confirmed disallowanceof labour and freight charges amounting to Rs,82937/- onestimate basis.”of labour and freight charges amounting to Rs,82937/- onestimate basis.” ii)That the Learned CIT(A) wrongly confirmed disallowanceof interest expenses amounting to Rs.4,72,216/-.of interest expenses amounting to Rs.4,72,216/-. iii)That the Learned CIT(A) wrongly confirmed disallowanceof Rs.2,01,81,428/- u/s 40(a) of the Income Tax Act out ofpurchase of raw material for freight paid by the supplierof raw material.of Rs.2,01,81,428/- u/s 40(a) of the Income Tax Act out ofpurchase of raw material for freight paid by the supplierof raw material. iv)That the Learned CIT(A) wrongly confirmed disallowanceof labour and freight charges amounting to Rs,82937/- onestimate basis.”of labour and freight charges amounting to Rs,82937/- onestimate basis.” Re: Question No.1. On the first question, the Tribunal recorded acategorical finding of fact that there was no material on record toprove any written or oral agreement between the assessee and therecipients of goods for transportation or carriage thereof. TheTribunal had further observed that there was no material to show thatthe payments of freight had been made in pursuance to a contract oftransportation of goods for a specific period, quantity or price. Theaforesaid fact being an essential feature to test the applicability ofSection 194(C) of the Act as considered by Division Bench of thiscourt in the case of CIT versus United Rice Land Ltd. (2008) 217CTR (P&H) 332. A further finding of fact is that the freight payment isRs.1,72,723/- and none of the individual payment exceededRs.20,000/-. It was also not disputed that the payments were madeon the basis of individual G.Rs. issued by the truck owners for eachtrip separately. Although aggregate of payments of two truck ownersduring the assessment year exceeded Rs.20,000/- which would stillnot lead to deduction of tax at source because there was no contractfor a specific period, price or quantity for carriage of goods. Thefinding of the Tribunal in Para 11 reads thus:- “11. In the instant case, evidently, there is neither anymaterial to suggest that there is any written or oralagreement between the assessee and the impugned partiesfor carriage or transportation of goods and nor it is provedthat the impugned sum has been paid to the parties inpursuance to a contract for specific period, quantity or price,therefore, following the parity of reasoning laid down by theHon’ble Jurisdictional High Court in the case of United RiceLand Ltd. (supra), in the instant case, it has to be held that the assessee was not liable to deduct tax at source undersection 194C of the Act on the payment of freight chargesof Rs.1,72,723/-, as detailed by the Assessing Officer.Though the two parties in question have transported thegoods for the assessee on more than one occasion duringthe financial year, yet it was based on individual G.Rs.which represent individual and separate contracts. There isno single contract for carriage or transportation of goodsreferred to between the assessee and the impugned partieswhich would make the assessee liable for deduction of taxat source u/s 194C of the Act. Reliance placed by theRevenue on the proviso to section 194C(3)(i) also does nothelp since in this case, the assessee does not fall within thescope of sub-section (1) of section 194C following thereasoning laid down by the Hon’ble High Court in the caseof United Rice Land Ltd. (supra). Consequently, thedisallowance of such amount cannot be justified by invokingthe provisions of section 40(a)(ia) of the Act. The order ofthe Commissioner of Income-tax (A) is set aside and theAssessing Officer is directed to delete the impugnedaddition. The assessee succeeds on this Ground.” In view of the above, question no.1 would not arise fordetermination as the factual foundation needed for answering thequestion is entirely against the Revenue. The finding of factsrecorded by the Tribunal, being the last court of fact, cannot be goneinto by this court merely because after re-appreciation of evidenceand other view would be possible. Therefore, we find that there is nosubstance in the first question of law claimed by the Revenue. Re: Question No.2. The other question claimed by the Revenue isthat the Assessing Officer has rightly disallowed Rs.2,01,81,428/- byinvoking the Section 40(a) (ia) of the Act. The Assessing Officer had found that the assessee was making purchases from M/s Tata Iron &Steel Company Ltd. (for brevity “Tata Steel”). The purchase invoiceraised by M/s Tata Steel included freight charges and the assesseedid not deduct any tax at source under Section 194(C) of the Act onthose freight charges. The non-deduction of tax at source underSection 194(C) on such freight charges were disallowed by theAssessing Officer under Section 40(a) (ia) of the Act. The amountwas computed to be Rs.2,01,81,428/-. The CIT(A) affirmed the orderpassed by the Assessing Officer. On further appeal, the Tribunalreferred to the provisions of Section 40(a) (ia) which disallowed theexpenditure if such expenditure attracts deduction of tax at source.Such tax is either not deducted or if deducted it has not beenremitted to the State Exchequer within the time allowed. The amountof Rs.2,01,81,428/- stood paid by the assessee / respondent to M/sTata Steel as freight charges for carriage of its goods on which taxwas not deducted in terms of Section 194(C) of the Act and thereforesuch amount is not deductible while computing the taxable income. When the matter was heard by the Tribunal a copy of thedistribution agreement between the assessee and the M/s Tata Steelwas placed on record. According to the agreement, the assessee –respondent had appointed distributor for marketing of products of M/sTata Steel which envisages purchase of production by the assessee– respondent and sale thereof. The Tribunal has quoted Clauses2.14 of the agreement which show that M/s Tata Steel was to raiseinvoice on the assessee as per the list price to be published by TataSteel. The Tribunal after reading the agreement reached the conclusion that the assessee – respondent had a responsibility ofmarketing the goods of M/s Tata Steel after purchasing the samefrom them. The sample copy of the price list has been placed on thepaper book. The amount of freight was found to be shown separatelyin the invoices but the Assessing Officer considered for payment bythe assessee in respect of which deduction of tax at source underSection 194(C) of the Act was required to be made. However, theTribunal after reading the whole contract in its entirety reached theconclusion that the transaction between the parties was essentiallygoverned by the Distribution Agreement which was transaction ofgoods per se and cannot be segregated for the purposes of paymentof expenses by way of freight. In that regard, the Tribunal has placedreliance on a Division Bench judgment of this court rendered in thecase of CIT (TDS), Chandigarh versus The Assistant Manager(Accounts), FCI, Jagadhri, I.T.A. No.407 of 2008 decided on21.08.2008. In that case also the Food Corporation of India hadmade payments to State agencies on the basis of invoices raised inrespect of the food grain procured by them. The invoices reflectedthe cost of wheat apart from the cost of incidental expenses includingVAT, transportation, interest or storage charges. This court negatedthe stand of the Revenue and held that if expenses incurred by aperson on account of transportation and interest etc. were added tothe cost of the goods then it would not lead to an inference that sucha person had paid separately for services of transportation andinterest etc. as it becomes part of the cost of the product purchase. Therefore such amount charge separately cannot be held liable ofdeduction of tax at source under Section 194(C) of the Act. The viewof the Tribunal is discernible from Para 25 of the order which readsthus:- “25. Putting the aforesaid logic to the instant case, it isevident that the expenses of freight incurred by M/s TataSteel, which have been shown separately in the invoicesraised on the assessee, cannot be construed to infer that theassessee has paid any amount for transportation of goodsseparately than the cost of the goods purchased by it.Ostensibly, in such circumstances, there would not arise anynecessity of deduction of tax at source on the freight amountseparately shown in the Invoices, in terms of section 194C ofthe Act. Therefore, following the parity of reasoning laiddown by the Hon’ble Jurisdictional in the case of FoodCorporation of India (supra) the amount raised by M/s TataSteel in the invoices shown as freight did not create anobligation on the assessee to deduct tax on such amountsas per section 194C of the Act. In our view, if the freightexpenses incurred by M/s Tata Steel are added to the costof goods in the invoice raised, it cannot be inferred that theassessee has paid any amount of freight separately becausethe same is part of the cost of product purchased. Theassessee could not be said to be an assessee in default fornon deduction of tax at source in terms of section 194C ofthe Act on the amount of freight billed separately by M/s TataSteel. As a consequence, it follows that the provisions ofsection 40(a) (ia) of the Act cannot be applied to disallow theamount of such freight amounting to Rs.2,01,81,428/-.Following the aforesaid discussion, we set-aside the order ofthe Commissioner of Income-tax (A) and direct theAssessing Officer to delete the impugned addition. Theassessee accordingly, succeeds on this Ground.” We asked learned counsel for the Revenue as to whetherany appeal has been filed against the judgment rendered by thiscourt in the case of Food Corporation of India (Supra) no satisfactoryanswer has been given by her. Therefore, we feel bound by theaforesaid judgment and accordingly, the issue is covered against theRevenue and in favour of the assessee – respondent. Accordingly,no substantive question of law would arise for determination by thiscourt. As a sequel to the above discussion, this appeal fails andthe same is accordingly dismissed. (M.M. KUMAR) JUDGE 21-01-2010manju (JITENDRA CHAUHAN) JUDGE