The Principal Commissioner Of Income Tax 1 v. Asian Mills Pvt. Ltd

IN THE HIGH COURT OF GUJARAT AT AHMEDABADR/TAX APPEAL NO. 244 of 2021 ========================================================== THE PRINCIPAL COMMISSIONER OF INCOME TAX 1 Versus ASIAN MILLS PVT. LTD. ========================================================== Appearance: MR MR BHATT, SR.ADV. With Mr.KARAN SANGHANI for M R BHATT & CO.(5953) for the Appellant(s) No. 1MR B S SOPARKAR(6851) for the Opponent(s) No. 1 ========================================================== CORAM: HONOURABLE MS. JUSTICE SONIA GOKANIandHONOURABLE MR. JUSTICE HEMANT M. PRACHCHHAK Date : 26/10/2021 ORAL ORDER (PER : HONOURABLE MS. JUSTICE SONIA GOKANI) 1.Aggrieved and dissatisfied with the order passed by the Income Tax Appellate Tribunal(“the Tribunal” for short) dated02.03.2021, the appellant has preferred this appeal raising the following substantialquestions of law: “[A] Whether the Appellate Tribunal has erredin law and on facts in deleting thedisallowance of Rs.1,38,350/- made undersection 40(a)(ia) of the Act withoutappreciating that the assessee had notcomplied with the provision of sub-section (6)and (7) to Section 194C?[B] Whether the Appellate Tribunal has erred in law and on facts in deleting thedisallowance of commission expenses ofRs.55,14,372/- without appreciating that theassessee has not been able to demonstrate thenature and scale of services rendered by Smithand Sons Ltd and that the payment ofcommission is allowable only on the assesseefurnishing evidence in support of the servicesrendered?” 2.The respondent assessee filed return on30.09.2021 declaring total income of Rs.8,65,92,110/- crores. It was processed under section 143(1) of the Income Tax Act (“the Act” for short) and the same wasselected for scrutiny. 3.Notice under section 142(1) of the Act alongwith questionnaire was issued on 27.08.2012.In response,the authorised representative ofthe company attended time to time. It wasnoticed that the respondent assessee had notdeducted the tax under section 194(C) for thepayments made to various transporters, thisincluded the freight inward charges andclearing and forwarding charges. 4.The Assessing Officer rejected the contention of the respondent assessee that TDS was notdeducted, as the same was not applicable asper the provisions of law. According to theassessee Company TDS was not to be deductedon payment made to the transporters as perClause 6 of section 194(c). Again, thedetails of the transporters have been filled-in at the time of filing of the TDS return,wherein their PANs have been duly submittedto the authority. Therefore, the conditionreflected in sub-section(7) also have beenfulfilled. The Assessing Officer held theassessee in default and made the disallowanceof all the three charges of the total incomeof the assessee under section 40(a)(ia). 5.The assessee preferred the appeal before theCIT(Appeals), which deleted the addition tothe extent of transportation towards freight,inward charges and clearing charges, butconfirmed the addition of Rs.1,38,350/- C/TAXAP/244/2021 ORDER DATED: 26/10/2021 towards forwarding charges for payment toM/s. Trishul Transport Company. C/TAXAP/244/2021 ORDER DATED: 26/10/2021 towards forwarding charges for payment toM/s. Trishul Transport Company. 6.The Revenue as well as the assessee bothpreferred appeal before the Tribunal. TheTribunal dismissed the appeal of the Revenueand allowed the appeal of the assessee. Theappeal of assessee was allowed on the groundthat it had obtained PAN card details fromthe transporters, which were furnished withTDS return. Therefore, the assessee’s claimcannot be denied on account of non-deductionof TDS on the payment made to thetransporters towards freight inward chargesand clearing charges under sub-section (6) ofsection 194(c). The claim also cannot bedenied on the ground that the assessee wasunder an obligation after obtaining the PANsfrom the transporter to furnish the same inthe prescribed form to the prescribedauthorities. 7.This Court has heard Mr. M.R.Bhatt, learned Senior Advocate appearing with Mr.KaranSanghani, learned advocate for the appellantand Mr. B.S.Soparkar, learned advocate forthe opponent. 8.The issue is covered by the decision of thisCourt rendered in the case of Commission ofCourt rendered in the case of Commission of Income-tax-I vs. Valibhai Khanbhai Mankad, [2012] 28 taxman.com 119(Gujarat), where theissue was again with regard to payment to thecontractor and requirement of deduction ofTDS. Relevant paragraphs are reproduced as under: “3) We have heard the learned counsel for theRevenue as well as for the assessee. Section194C of the Act, as is well known, pertains topayments to contractors. Sub-section (1) ofsection 194C, as it stood at the relevant time,required that any person responsible for payingany sum to any resident, contractor for carryingout any work in pursuance of a contract betweenthe contractor and the specified entities, shallcredit specified sum as income tax on incomecomprised therein. Likewise, sub-section (2) ofsection 194C required a person responsible forpaying any sum to resident-sub-contractor todeduct tax at source under given circumstances.It is not in dispute that ordinarily the assessee was required to make such deduction onthe payments made to the sub-contractors, unlesshe was covered under the exclusion clausecontained in sub-section (3) of section 194C ofthe Act. Such provision, as it stood at therelevant time, read as under:- “Section 194C(3):- No deduction shall be madeunder sub-section(1) or sub-section (2) from -(i)the amount of any sum credited or paid orlikely to be credited or paid to the account of,or to, the contractor or sub-contractor, if suchsum does not exceed twenty thousand rupees: Provided that where the aggregate of the amountsof such sums credited or paid or likely to becredited or paid during the financial yearexceeds fifty thousand rupees, the personresponsible for paying such sums referred to insub-section (1) or, as the case may be,subsection (2) shall be liable to deduct income-tax under this section: “Section 194C(3):- No deduction shall be madeunder sub-section(1) or sub-section (2) from -(i)the amount of any sum credited or paid orlikely to be credited or paid to the account of,or to, the contractor or sub-contractor, if suchsum does not exceed twenty thousand rupees: Provided that where the aggregate of the amountsof such sums credited or paid or likely to becredited or paid during the financial yearexceeds fifty thousand rupees, the personresponsible for paying such sums referred to insub-section (1) or, as the case may be,subsection (2) shall be liable to deduct income-tax under this section: Provided further that no deduction shall be madeunder sub-section (2), from the amount of anysum credited or paid or likely to be credited orpaid during the previous year to the account ofthe sub-contractor during the course of businessof plying, hiring or leasing goods carriages, onproduction of a declaration to the personconcerned paying or crediting such sum, in theprescribed form and verified in the prescribedmanner and within such time as may beprescribed, if such sub-contractor is anindividual who has not owned more than two goodscarriages at any time during the previous year:Provided also that the person responsible forpaying any sum as aforesaid to the sub-contractor referred to in the second provisoshall furnish to the prescribed income-taxauthority or the person authorised by it suchparticulars as may be prescribed in such formand within such time as may be prescribed; or(ii)any sum credited or paid before the 1st dayof June, 1972; or (iii)any sum credited or paidbefore the 1st day of June, 1973, in pursuance of a contract between the contractor and a co-operative society or in pursuance of a contractbetween such contractor and the sub-contractorin relation to any work (including supply oflabour for carrying out any work) undertaken bythe contractor for the cooperative society.Explanation-For the purpose of clause(i), “goodscarriage” shall have the same meaning as in theExplanation to sub-section (7) of section 44AE.”4) Section 40(a)(ia) of the Act, in turn,provides that certain amounts shall not bededucted in computing the income chargeable totax under the head 'profits and gains ofbusiness or profession', namely, payments madetowards interest, commission or brokerage etc.,on which tax is deductible at source and suchtax has not been deducted or, after deduction,the same has not been paid on or before the duedate specified in sub-section (1) of section 139of the Act. Section 40(a)(ia) of the Act,insofar as it is relevant for our purpose, readsas under:- “Section 40(a)(ia):- Any interest, commission orbrokerage,[rent,royalty,]feesforprofessional services or fees for technicalservices payable to a resident, or amountspayable to a contractor or sub-contractor, beingresident, for carrying out any work (includingsupply of labour for carrying out any work), onwhich tax is deductible at source under ChapterXVII-B and such tax has not been deducted or,after deduction, [has not been paid on or beforethe due date specified in sub-section (1) ofsection 139:]” 5) From the above statutory provisions, it canbe seen that under section 40(a)(ia) of the Act,payments made towards interest, commission orbrokerage etc. would be excluded for deductionin computing the income chargeable under thehead 'profits and gains of business orprofession', where though tax was required to bededucted at source, is not deducted or whereafter such deduction, the same has not been paid on or before the due date. Thus for applicationof section 40(a)(ia) of the Act, the foremostrequirement would be of tax deduction at source.6) Section 194C, as already noticed, makesprovision where for certain payments, liabilityof the payee to deduct tax at source arises.Therefore, if there is any breach of suchrequirement, question of applicability ofsection 40(a)(ia) would arise. Despite suchcircumstances existing, sub-section (3) makesexclusion in cases where such liability wouldnot arise. We are concerned with the furtherproviso to sub-section (3), which provides thatno deduction under sub-section (2) shall be madefrom the amount of any sum credited or paid orlikely to be credited or paid to the sub-contractor during the course of business ofplying, hiring or leasing goods carriages, onproduction of a declaration to the personconcerned paying or crediting such sum in theprescribed form and verified it in theprescribed manner within the time as may beprescribed, if such sub-contractor is anindividual who has not owned more than two goodscarriages at any time during the previous year.7) The exclusion provided in sub-section (3) ofsection 194C from the liability to deduct tax atsource under sub-section (2) would thus becomplete the moment the requirements containedtherein are satisfied. Such requirements,principally, are that the sub-contractor,recipient of the payment produces a necessarydeclaration in the prescribed format and furtherthat such sub-contractor does not own more thantwo goods carriages during the entire previousyear. The moment, such requirements arefulfilled, the liability of the assessee todeduct tax on the payments made or to be made tosuch sub-contractors would cease. In fact hewould have no authority to make any suchdeduction. 8) The later portion of sub-section (3) whichfollow the further proviso is a requirement which would arise at a much later point of time.Such requirement is that the person responsiblefor paying such sum to the sub-contractor has tofurnish such particulars as prescribed. We maynotice that under Rule 29D of the Rules, suchdeclaration has to be made by the end of June ofthe next accounting year in question. 9) In our view, therefore, once the conditionsof further proviso of section 194C(3) aresatisfied, the liability of the payee to deducttax at source would cease. The requirement ofsuch payee to furnish details to the income taxauthority in the prescribed form withinprescribed time would arise later and anyinfraction in such a requirement would not makethe requirement of deduction at sourceapplicable under sub-section (2) of section 194Cof the Act. In our view, therefore, the Tribunalwas perfectly justified in taking the view inthe impugned judgment. It may be that failure tocomply such requirement by the payee may resultinto some other adverse consequences if soprovided under the Act. However, fulfillment ofsuch requirement cannot be linked to thedeclaration of tax at source. Any such failuretherefore cannot be visualized by adverseconsequences provided under section 40(a)(ia) ofthe Act. 10) When on the basis of the record itis not disputed that the requirements of furtherproviso were fulfilled, the assessee was notrequired to make any deduction at source on thepayments made to the subcontractors. If that beour conclusion, application of section 40(a)(ia)would not arise since, as already noticed,section 40(a)(ia) would apply when there is arequirement of deduction of tax at source andsuch requirement is either not fulfilled orhaving deducted tax at source is not depositedwithin prescribed time.” 9.Yet another decision of the High Court ofMadras is reported in the case of 9.Yet another decision of the High Court ofMadras is reported in the case of Commissioner of Income Tax, Madurai vs.SriParameshwari Spinning Mills(P.)Ltd.,[2019] 10taxmann.com 386(Madras), where sub-section 6of section 194, which grants benefit to theassessee, is discussed along with sub-section(7) of section 194. The Court heldthat this benefit comes with the condition ofcompliance of sub-section (7) of section194(c). This is a procedure required to befollowed. The Court held that non-filing ofthe statement in terms of sub-section(7) ofsection 194(C) cannot take away the benefit,which will accrue to the assessee under sub-section(6) of section 194. Relevant paragraphs are reproduced as under: “6. We find sub-Section 6 of Section 194C is theprovision which grants benefit to the assessee.This benefit comes with the condition ofcompliance of Sub-Section (7) of Section 194C,which is the procedure to be followed. Thequestion would be as to whether if the procedureunder Section 194C(7) has not been adhered to bythe assessee would it be fatal and therebydisentitle the assessee to the benefit undersub-Section 6 of Section 194C. 7. It is a submission of Mr.A.S.Sriraman, learned counsel for the appellant/assessee thatSection 31A deals with statement of deduction oftax under sub-Section 3 of Section 200 referringto Section 31(A)(4)(vi). It is submitted thatthe deductor at the time of preparing statementof tax, deductor shall furnish particulars ofamount paid or credited on which tax was notdeducted in view of the compliance of provisionof sub-Section 6 of Section 194C by the payee.Section 234(E) was relied to state that if thestatement is not filed, a fee of Rs.200/-forevery day, during which the failure continues,has to be paid by the assessee. Therefore, it isthe submission that the nonfiling of a statementin terms of sub-Section 7 of Section 194C cannottake away the benefit which will accrue to theassessee under sub-Section 6 of Section 194. 8. We fail to understand as to what is theapprehension in the mind of the Revenue when theTribunal has remanded the matter to theAssessing Officer to consider whether theassessee has filed form no. 26(Q) belatedly andto examine as to whether the fee has to becollected. We find that there is no ground tointerfere with the order passed by the Tribunal.9. Ms.V.Pushpa placed reliance on the decisionof the Hon'ble Supreme Court in the case of CITVs. Valibhai Khanbhai Mankad reported in [(2014)51 Taxmann.com 385 (SC)] where the Hon'bleSupreme Court has granted leave to file appealby the revenue against the order passed by theGujrat High Court in CIT Vs. Valibhai KhanbhaiMankad reported in [(2012) 28 Taxmann.com 119].In the said decision the High Court of Gujaratheld that once conditions of proviso to Section194(C)(7) are satisfied, liability of payer todeduct taxes at source would cease andconsequently, disallowance of payment of sub-contractor under Section 40(a)(ia) could not bemade on the ground that the assesee had notfurnished form no.15J as required under Rule29D. We find that the said decision is of noassistance to the case of the Revenue. 10. Mr.A.S.Sriraman, learned counsel for theassessee referred to the decision of the ITATJaipur in the case of ACIT Vs. Arihant TradingCo. reported in [176 ITD 397 (Jaipur-Tri)]. Inthe said decision it has been held that Section194C(6) & (7) are independent of each other andcannot read together to attract disallowanceunder Section 40(a)(ia) read with Section 194Cof the Act” 10. Mr.A.S.Sriraman, learned counsel for theassessee referred to the decision of the ITATJaipur in the case of ACIT Vs. Arihant TradingCo. reported in [176 ITD 397 (Jaipur-Tri)]. Inthe said decision it has been held that Section194C(6) & (7) are independent of each other andcannot read together to attract disallowanceunder Section 40(a)(ia) read with Section 194Cof the Act” 10.In the instant case also, as detailedabove, the assessee company has not deductedthe TDS of payment made to the transportersas per sub-section(6) of section 194(c).However, the details of the transporters havebeen filled-in in the TDS return, whereintheir PAN cards also have been duly submittedto the Income-tax authorities, as this is asufficient compliance of sub-section (7) ofsection194(c). The Tribunal was absolutely correct in upholding the version of theassessee. It also rightly held that afterobtaining the PAN Card from the transporters,assessee is needed to furnish the same intheprescribedformto the prescribed authority within prescribed time. section194(C) (7) is reproduced as under: “(7) The person responsible for paying orcrediting any sum to the person referred to insub-section (6) shall furnish, to the prescribedincome-tax authority or the person authorisedby it, such particulars, in such form and withinsuch time as may be prescribed.” 11. The Tribunal held that there is no prescribed authority nominated under the provisions of law. Thus, in absence of suchprescribed authority, no fault was attributedto the assessee obviously for not filing thedetails before such authority. The detailsfiled by the respondent assessee along withForm No.26 naturally could be construed assufficient compliance. No fault can be foundwith these detailed findings and the settledposition of law. 12. The first question is accordingly answered. 13.Taking the second issue, the Tribunal deleted the disallowance of commission expenses of Rs.55,14,372/-. The Assessing Officer has treated Rs.55,14,372/- as non- genuine commission claimed by the assesseegiven to M/s. C.M. Smith and Sons Ltd. 14.Fromtheoverallfactsand circumstances, the agreement which was submitted was treated as sufficient document being prepared after specific query of theAssessing Officer. According to the AssessingOfficer three entries were pertaining to NTPCand the fourth one was of Tata Project Ltd.,which was not found acceptable and thoseconcerns were the old customers to which thesales had already been made in the past and,therefore, there would not have been anyreason for making payment for M/s. C.M. Smithand Sons Ltd. for effecting sales to thoseconcerns during the Assessment Year 2011-12. It did not find any justification for making the payment through any commission agent. 15.TheCIT(Appeals)deletedthe disallowance. We notice that the commission agent also was a company and both the companies fall under the same rate of taxation. Therefore, no presumption can be made that the transaction was not genuine, particularly,when the agent had paid the due tax on income. The agent had shown its incomeRs.11.50 crores as against the earlier year’s income of Rs.3.75 crores. 16.When challenged by the Revenue before the Tribunal, it held thus: “33.3The provisions for allowing thededuction of the commission expenses aregoverned under the provisions of section 37 ofthe Act which requires the fulfillment of thefollowing ingredients:i. Expenditure should not be covered under thespecific sections, i.e., 30 to 36;ii.Expenditure should not be of capitalnature; iii. Expenditure should have been incurredduring the previous year;iv.Expenditure should not be of a personalnature; v.Expenditure should have been incurredwholly or exclusively for the purpose of thebusiness or profession. tax on income. The agent had shown its incomeRs.11.50 crores as against the earlier year’s income of Rs.3.75 crores. 16.When challenged by the Revenue before the Tribunal, it held thus: “33.3The provisions for allowing thededuction of the commission expenses aregoverned under the provisions of section 37 ofthe Act which requires the fulfillment of thefollowing ingredients:i. Expenditure should not be covered under thespecific sections, i.e., 30 to 36;ii.Expenditure should not be of capitalnature; iii. Expenditure should have been incurredduring the previous year;iv.Expenditure should not be of a personalnature; v.Expenditure should have been incurredwholly or exclusively for the purpose of thebusiness or profession. 33.4 All of the five conditions mentioned aboveare to be satisfied before on can claim anyexpense as a deduction under this section. Thelast condition requires for allowing the claimof the expenses that the expenditure shouldhave been incurred wholly or exclusively for thepurpose of the business. This is a very vexedquestion, and a lot of litigation revolvesaround this issue. In fact, once the assesseehas furnished the details for the deduction ofcommission expenses, the onus is shifted uponthe O to reject the contention of the assesseewith valid reasoning and not on the basis ofsurmise and conjecture.33.5 Indeed 2 of the parties were the oldparties of the assessee yet the assessee hiredservices for the commission agent. Now thequestion arises commission paid by the assesseecan be denied merely on the ground that thesewere old parties of the assessee. In ourconsidered view, it cannot be a ground forrejecting the claim of the assessee in the givenfacts and circumstances. It is because thecommission agent has shown turnover ofRs.1685378746 in its financial statement for theyear ending 31[st] March 2011 with the net profitat Rs.115016371.00. In other words thecommission agent cannot be categorized as apaper company. There can be a possibility forgetting a better deal for the assessee from theparties who were the existing clients of theassessee through the involvement of thecommission agent. To prove that the commissionexpenses has not been incurred in the course ofthe business, the onus is upon the AO whichneeds to be brought on record but the AO withoutconducting the necessary enquiries has made thedisallowance based on surmise and conjecture. 33.6 Moving further, it was also pointed out bythe AO that the discount is normally extended by the assessee to its own clients and not to theclients referred by the commission agent. Inthis connection, we note that the AO has notbrought anything on record to substantiate hisversion. As such the finding of the AO is basedon his surmise and conjecture which cannot beconsidered for disallowing the commissionexpenses. 33.7 It is also pertinent to note that it is thewisdom of the assessee to hire the services ofthe commission agent or not. Similarly, the AOcannot direct the assessee not to extend anycommission to the agent for the sales made uponhis reference to its (the assessee) existingparties. Indeed, the amount of commission paidin connection with the sales made to theexisting parties of the assessee can create adoubt in the mind on the genuineness of thetransactions but the doubt alone is notsufficient enough for disallowing the expenses.AS such the AO on having doubt on thegenuineness of the commission expenses was toconduct deeper enquiry on the payment of suchcommission expenses but he has not done so.33.8 In holding so we draw support and guidancefrom the judgement of the Hon’ble Gujarat HighCourt in the case of Voltamp Transformers Pvt.Ltd. vs. CIT reported in 129 ITR 105 wherein itwas held as under: “ 8. It is well-settled law that so far as thequestions of commercial expediency and businessneed of an organisation are concerned, it is notthe viewpoint of a revenue officer which shouldcount but it should be the view point of aordinary business mend dealing with a situationlike the one faced by the particular assessee inquestion. It is, therefore, from that particularviewpoint that the question has to beapproached.” 17.We notice that the Assessing Officer chose not to exercise its powers undersection 131/133(6) of conducting theinvestigation or enquiries. The Tribunal has rightly observed that on surmises andconjectures, AO has chosen to makedisallowance. This Court in the case ofVoltamp Transformers Pvt. Ltd. vs. CITreported in 129 ITR 105has left it to theconcerned assessee to decide its commercialexpediency and business needs. Ordinarily, abusiness person would alone decide as to inwhat manner it would seek to hire the serviceof the commission agent. Merely because, thedoubt was created by the Assessing Officeronly on the premises that two of thecompanies were already being served by therespondent assessee and the sales were made in the past, it chose to disallow thecommission, is not a sustainable premise. 18.If there was any question with regard to genuineness of the transaction furtherinquiry or investigation is permissible under the law and in absence thereof, doubtingagreement or financial statement of the agent was impermissible, much less, disallowing thecommission without appreciating businessexpediency. 19.In the result, in absence of anysubstantial question of law arising for ourconsideration, we choose to dismiss theappeal with no costs. (MS. SONIA GOKANI, J. ) SUDHIR (HEMANT M. PRACHCHHAK,J)