The Principal Commissioner Of Income Tax 1 v. M/S. Arvind Lifestyle Brands Ltd

IN THE HIGH COURT OF GUJARAT AT AHMEDABADR/TAX APPEAL NO. 539 of 2019 ========================================================== THE PRINCIPAL COMMISSIONER OF INCOME TAX 1 VersusM/S. ARVIND LIFESTYLE BRANDS LTD ==========================================================Appearance:MRS MAUNA M BHATT(174) for the Appellant(s) No. 1 for the Opponent(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALAand HONOURABLE MR.JUSTICE A.C. RAO Date : 05/08/2019 ORAL ORDER (PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA) 1.This tax appeal under Section 260A of the Income Tax Act, 1961 [for short 'the Act, 1961'] is at the instance of the Revenue and is directed against the order passed by the Income Tax Appellate Tribunal, Ahmedabad 'D' Bench, Ahmedabad in the ITA No.3461/AHD/2015, dated 27/08/2018 for the A.Y 2011-12. 2.The Revenue has proposed the following substantial question of law for the consideration of this Court:- “Whether the Appellate Tribunal was right in upholding the direction of CIT (A) not to disallow u/s.40(a)(i) of the Act particularly when royalty payments are hit by section 195 of the Act?” 3.It appears that in the case on hand, the CIT(A) while partly allowing the appeal preferred by the assessee held as under so far as the question of law raised by the Revenue in the present tax appeal is concerned. 2.4 I have carefully considered the Assessment Order and appellant's written submission. The appellant has not deducted TDS in respect of provision made for Royalty of Rs.4,59,71,927/- hence Assessing Officer made disallowance u/s 40(a)(i) of the Act of Rs.4,59,71,927/-. The AO has contended that provision of Royalty is nothing but an unascertained liability. It was also observed by Assessing Officer that appellant has not produced any bills in respect of the said expenditure which also proves that the provision of expenditure is liability. The appellant has reversed its provision in succeeding year which also proves that the provision created is in respect of unascertained liability, which is not an allowable expenditure. The Assessing Officer has rejected the ultimate claim of appellant that payment of Rs.3,77,74,260/- was paid before due date of filing return of income hence disallowance u/s 40(a)(i) cannot be made on the ground that provision of Royalty is made for payment to Non-resident person and the same is not credited to Government Account within the time allowed u/s 200(a) of the Act. On the other hand, appellant has argued that provision of Royalty for Rs.4,59,71,927/- is pertaining to the year under consideration in terms of the respective agreements with the non-resident parties in question. It was also argued that Royalty had yet not become payable to them hence the provision was made debiting it to the Profit and Loss Account. The appellant further argued that the Royalty in question became due for payment to the respective non-resident parties in as per agreements entered with them, the appellant had deducted the applicable amount of tax deductible at source and duly paid it to the credit of the Government and made payment of the balance amount to the respective parties. In altemate submission, the appellant further argued that if disallowance made by Assessing Officer is upheld in current year, same may be directed to be allowed in subsequent year as TDS pertaining to such royalty has been paid in subsequent year. The appellant has submitted copy of Challan of payment of TDS in the paper book to prove its contention that TDS have been deducted on such payment.” 2.5 On careful consideration of the entire facts discussed herein above, it is observed that appellant has made provision for royalty payable to various parties as per agreements executed with them. The payment was not due as per agreement executed with such parties hence payments were made by appellant in subsequent year after deducting TDS. The appellant company has followed matching cost principles and made provisions for expenditure pertaining to income booked in current year. It is settled legal accounting practice that assessee company makes lump sum provision of expenditure on the basis of their own estimate in financial year and such provision is immediately reversed on first day of subsequent financial year and actual amount paid is booked as expenditure in subsequent year which means that only excess/short expenditure is booked in subsequent year. This does not mean that expenditure provided in year is contingent or unascertained as same is based upon agreement executed with various parties and are against income booked in current financial year. Considering these facts, argument of Assessing Officer that expenditure is unascertained or contingent cannot be accepted. So far as observation of Assessing Officer that appellant has failed to deduct TDS on above provision, it is observed that provision for expenditure is for identified parties, provisions of section 195 are applicable and appellant is liable to deduct TDS even if liability is not credited to any party account. The Hon'ble Banglore ITAT in the case of IBM India (P) Limited Vs ITO 154 ITD 497 has held as under:- “Section 190, read with sections 4, 40(a)(i), 40(a)(ia) and 201, of the Income-tax Act, 1961 – Deduction of tax at source – General (Suspense account) – Assessment years 2006=07 to 2009-10 – Whether it is clear from statutory provisions of TDS that liability to deduct tax at source exists when amount in question is credited to a 'suspense account' or any other account by whatever name called, which will also include a 'provision' created in books of account – Held, yes – Whether assessee having admitted its default under section 40(a)(i) and section 40(a)(ia) could not in proceedings under section 201(1)/(1A) argue no default under chapter XVII-B – Held, yes – Whether statutory provisions of withholding tax clearly envisage deduction of tax at source de hors charge under section 4(1), hence assessee was liable to deduct tax on provision for expenses created in books of account – Held, yes [Paras 27, 30 & 32] [Partly in favour of revenue].” Thus, addition made by Assessing Officer on the ground of non-deduction of TDS is upheld. However, it is observed that appellant has duly deducted TDS on royalty payment at the time of payment to non-resident hence Assessing Officer is directed to verify the above contention of appellant and allow the expenditure as deduction in subsequent assessment year if same is not claimed by appellant as deduction or not already allowed in any proceedings in subsequent assessment years. This ground of appeal is partly allowed. 4.The aforesaid findings of fact recorded by the CIT(A) ultimately came to be affirmed by the appellate tribunal, held as under:- 10.During the course of the assessment proceedings, it was noticed by the AO that the assessee had paid interest of Rs.4,24,692/- on vehicle loans to Kotak Mahindra Prime Ltd. (A NBFC and subsidiary of Kotak Mahindra Bank Ltd.). It was observed by the AO that assessee has failed to deduct tax at source as per provisions of Section 194A on such interest expenses. The AO accordingly invoked the provisions of Section 40(a)(ia) of the Act and disallowed the expenses. 4.The aforesaid findings of fact recorded by the CIT(A) ultimately came to be affirmed by the appellate tribunal, held as under:- 10.During the course of the assessment proceedings, it was noticed by the AO that the assessee had paid interest of Rs.4,24,692/- on vehicle loans to Kotak Mahindra Prime Ltd. (A NBFC and subsidiary of Kotak Mahindra Bank Ltd.). It was observed by the AO that assessee has failed to deduct tax at source as per provisions of Section 194A on such interest expenses. The AO accordingly invoked the provisions of Section 40(a)(ia) of the Act and disallowed the expenses. 11.In the first appeal, the CIT(A) relied upon the decision of the Hon'ble Delhi High Court in the case of Ansal Lankmark Township (P.) Ltd. Vs. CIT 279 CTR 384 (Delhi) which hold that 2[nd] proviso to Section 40(a)(ia) of the Act is retrospective in nature and applicable to the AY 2011-12 in question. In the light of the aforesaid decision, the CIT(A) held remitted the matter back to the file of the AO to allow the aforesaid expense, if it is found that the recipients have offered the payments made by the assessee as income in their tax return. 12.We find that similar issue was under consideration before the co-ordinate bench in the case of Dipak R. Gondaliya Vs. ITO in ITA No.3313/Ahd/2015 & Another order dated 16.03.2016 cited on behalf of the assessee in the course of hearing. The relevant para dealing with the issue by the co-ordinate bench reads as under: “3. The common grievance in both these appeals relates to the holding that the amendment to Section 40(a)(ia) by the Finance Act, 2012 w.e.f. 01.04.2013 is prospective and by holding so the assessee is aggrieved by the disallowance of interest expenditure.that the amendment to Section 40(a)(ia) by the Finance Act, 2012 w.e.f. 01.04.2013 is prospective and by holding so the assessee is aggrieved by the disallowance of interest expenditure. 4.While scrutinizing the return of income, the A.O. noticed that the assessee has taken loan for purchase of property from Reliance Capital and has also taken Car loan from Kotak Mahindra Ltd. The A.O. further noticed that the assessee has made interest payment to these parties without making any deduction of tax at source. Assessee was asked to explain on the disallowance of interest expenditure should not be made u/s.40(a)(ia) of the Act.assessee has taken loan for purchase of property from Reliance Capital and has also taken Car loan from Kotak Mahindra Ltd. The A.O. further noticed that the assessee has made interest payment to these parties without making any deduction of tax at source. Assessee was asked to explain on the disallowance of interest expenditure should not be made u/s.40(a)(ia) of the Act. 5.Assessee filed a detailed reply claiming that if the payee have offered the income for tax and has paid taxes thereon provisions of Section 40(a)(ia) are not applicable because of the amendment brought in the explanation. However, this claim of the assessee did not find favour with the A.O. who was of the firm belief that the amendment is applicable from A.Y.2013-14 onwards and accordingly made the disallowance of interest.the income for tax and has paid taxes thereon provisions of Section 40(a)(ia) are not applicable because of the amendment brought in the explanation. However, this claim of the assessee did not find favour with the A.O. who was of the firm belief that the amendment is applicable from A.Y.2013-14 onwards and accordingly made the disallowance of interest. 5.Assessee filed a detailed reply claiming that if the payee have offered the income for tax and has paid taxes thereon provisions of Section 40(a)(ia) are not applicable because of the amendment brought in the explanation. However, this claim of the assessee did not find favour with the A.O. who was of the firm belief that the amendment is applicable from A.Y.2013-14 onwards and accordingly made the disallowance of interest.the income for tax and has paid taxes thereon provisions of Section 40(a)(ia) are not applicable because of the amendment brought in the explanation. However, this claim of the assessee did not find favour with the A.O. who was of the firm belief that the amendment is applicable from A.Y.2013-14 onwards and accordingly made the disallowance of interest. 6.Assessee carried the matter before the ld. CIT(A) but without any success. Before us, the ld. counsel for the assessee stated that the issue is no more res integra as the Hon'ble High Court of Delhi has held that applicability of second proviso to Section 40(a)(ia) has retrospective effect. Per contra, the ld. D.R. Drew our attention to the Departmental view of CBDT vide Circular No.10/DV/2013 dated 16.12.2013. It is the say of the ld. D.R. That in the light of the said Circular, the disallowance made by the A.O. and confirmed by the ld. CIT(A) should be upheld.success. Before us, the ld. counsel for the assessee stated that the issue is no more res integra as the Hon'ble High Court of Delhi has held that applicability of second proviso to Section 40(a)(ia) has retrospective effect. Per contra, the ld. D.R. Drew our attention to the Departmental view of CBDT vide Circular No.10/DV/2013 dated 16.12.2013. It is the say of the ld. D.R. That in the light of the said Circular, the disallowance made by the A.O. and confirmed by the ld. CIT(A) should be upheld. 7.We have given a thoughtful consideration to the orders of the authorities below and have carefully considered the rival contentions. authorities below and have carefully considered the rival contentions. At the very outset, we have to say that the reliance on the Circular by the D.R. is misplaced as that Circular refers to the decision of the Tribunal Special Bench, Vishakhapatanam in the case of Merilyn Shipping & Transports Vs. Addl. CIT. The Circular also refers to the decision of the Hon'ble High Court of Gujarat, High Court of Allahabad which all relates to the issue relating to “paid or payable” whereas the issue before us relates to the amendment of second proviso to Section 40(a)(ia) which has been held to have a retrospective effect by the Hon'ble High Court of Delhi in the case of Ansal Landmark Township Pvt. Ltd. 279 CTR 384. 8.However, in the interest of justice and fair play, we restore this issue to the files of the A.O. The assessee is directed to furnish necessary evidences to show that the payee has filed returns and offered the sum received to tax. The A.O. is directed to verify the same and decide the issue in the light of the ratio laid down by the Hon'ble High Court of Delhi (supra).to the files of the A.O. The assessee is directed to furnish necessary evidences to show that the payee has filed returns and offered the sum received to tax. The A.O. is directed to verify the same and decide the issue in the light of the ratio laid down by the Hon'ble High Court of Delhi (supra). 9.In the result, both these appeals by the assessee are treated as allowed for statistical purpose.” for statistical purpose.” 13.A perusal of the order of the CIT(A) shows that its action is squarely in tandem with the observations made by the co-ordinate bench. The CIT(A) has rightly applied the ratio laid down by the Hon'ble Delhi High Court in the facts of the case. Thus, there is no warrant to interfere with the same. 5.In view of the aforesaid findings of fact recorded by the two revenue authorities, we are of the view that we should not interfere with the impugned order passed by the appellate tribunal. 9.In the result, both these appeals by the assessee are treated as allowed for statistical purpose.” for statistical purpose.” 13.A perusal of the order of the CIT(A) shows that its action is squarely in tandem with the observations made by the co-ordinate bench. The CIT(A) has rightly applied the ratio laid down by the Hon'ble Delhi High Court in the facts of the case. Thus, there is no warrant to interfere with the same. 5.In view of the aforesaid findings of fact recorded by the two revenue authorities, we are of the view that we should not interfere with the impugned order passed by the appellate tribunal. 6.In the result, this appeal fails and is hereby dismissed. (J. B. PARDIWALA, J) aruna (A. C. RAO, J)