• Nov
  • 18
  • 2012

Reimbursable expenditure not subject to rigour of section 40a(ia) if not claimed as expense

IN THE ITAT KOLKATA BENCH ‘B’

Mitra Logistic (P.) Ltd.

versus

Income-tax Officer, Ward 9(1), Kolkata

IT APPEAL NOs. 852 AND 944 (KOL.) OF 2011

[ASSESSMENT YEAR 2007-08]

SEPTEMBER 25, 2012

ORDER

Sanjay Arora, Accountant Member 

These are cross-appeals, i.e., by the Assessee and Revenue, arising out of the Order by the CIT (A)-VIII, Kolkata (‘CIT(A)’ for short) dated 4.4.2011, partly allowing the assessee’s appeal contesting its assessment for assessment year (A.Y.) 2007-08 dated 30.12.2009 under section 143(3) of the Income-tax Act, 1961 (‘the Act’ hereinafter).

2.1 At the very outset, the Id. AR, the assessee’s counsel, would submit that the issue arising in the present appeals stands covered by the order by the Tribunal in the assessee’s own case (in ITA Nos. 1216 and 1387/Kol/2011 and ITA Nos. 1217 and 1388/Kol/2011 dated 19.6.2012) for assessment years 2006-07 and 2008-09 respectively, placing a copy of the same on record. These were, as is also the position in the instant case, cross appeals; the first appellate authority having allowed partial relief, so that the disallowances as effected by the Assessing Officer (AO) may be broken-up or considered in two separate components. The assessee-company, a Clearing and Forwarding Agent (CFA) for Hindustan Lever Ltd., Mumbai (HLL), makes payment of various charges, which are in fact only for and on behalf of its principal, i.e., HLL and, accordingly, are fully reimbursable by it. The earning of the assessee is in the form of agency commission, and which in fact stands separately accounted for under the said head, and duly returned as income (being at Rs. 29.05 lakhs for the current year), and on which there is no dispute.

2.2 The first component, he continued, is in respect of ‘transportation charges’. The assessee-company, as a part of its duties and obligations under the Agency Agreement, receives goods consigned to it, which are both stocked and then dispatched to the designated destinations as per the directions of the principal-consignor, and at the latter’s cost. Similarly, the other expenses incurred, viz. security expenses, courier fees, bus hire charges, consultancy fees and accounting charges, are all again toward the various services required to be rendered as a part of the business arrangement, and reimbursable in full. Qua transportation charges, the basis of relief by the ld. CIT(A) has been the furnishing of Form 15-I by the individual transporters to the assessee-company, and of Form 15-J (an annual statement based on Form/s 15-I) by the assessee to the Revenue. As regards other charges, the issue has been restored back by the Tribunal for the other years (i.e., AYs 2006-07 and 2008-09), to examine if the impugned payments are in the nature of reimbursements, with the further direction that where so, no disallowance under section 40(a)(ia) would ensue. The same, it was prayed, be followed.

2.3 The ld. DR would, in response, submit that there is no question of the matter being considered as covered by the order by the Tribunal even though it is in the assessee’s own case. As would be apparent therefrom, the only basis of the acceptance of the assessee’s claim qua transportation charges in that case was the filing of Form 15-J by the assessee, so that no TDS on the said payment was in fact payable. In the instant case, on the other hand, the assessee’s claim for filing Form 15-I or 15-J has been specifically contested and assailed by the AO (refer page 3 of the assessment order). With regard to the other payments also, it stands abundantly clarified that the privity of contract is only between the assessee-company and the payee. As such, even if the assessee draws a separate bill towards the same, and which expenditure is subsequently reimbursed, the same would not absolve the assessee from liability to deduct tax at source.

2.4 In rejoinder, the ld. AR would submit that the filing of Form 15-J by the assessee only formed its alternate ground; its principal case being that the expenditure is not subject to section 40(a)(ia) in view of it being only in the nature of a reimbursement. The issue under reference, it is to be noted, be continued, is not of a liability or demand raised under section 201 and/or 201(1A), but application of section 40(a)(ia). As such, even if section 194C is attracted, so that the assessee was indeed liable to deduct tax at source, no disallowance under section 40(a)(ia) would obtain inasmuch as the assessee has not claimed any expenditure in its respect. If the first appellate authority has chosen not to allow relief to the assessee on this ground, but on a different ground, i.e., furnishing of Form 15-I/15-J, the same cannot be held against the assessee or operate to its prejudice. In fact, this is precisely the basis which found favour with the Tribunal in the assessee’s own case for the other two years. The assessee, he further urged, also places reliance on the decision in case of Merilyn Shipping & Transports v. Addl. CIT [2012] 136 ITD 23 (Vishakhapatnam) (SB), placing a copy of the order of each of the three Members constituting the Special Bench, which decided the same per majority decision, on record. The same being now available and applicable, formed yet another reason for non-application of section 40(a)(ia) in the instant case; the payment, in most part, having been made and not outstanding as at the year-end.

2.5 The Id. DR, on this, relied on the decision in the case of Milk Specialties Ltd. v. CIT [2012] 21 taxman.com 327, placing a copy of the said decision on record. The hon’ble court has clarified that where there is a liability to deduct tax at source under section 194C, which was not deducted and paid, disallowance under section 40(a)(ia) would follow.

3. We have heard the parties, and perused the material on record, as well as the case law cited.

3.1 As regards the assessee’s appeal, i.e., qua the several charges disallowed u/s. 40(a)(ia). The matter, in our view, has to go back to the Assessing Officer in view of the order by the Tribunal in the assessee’s own case for assessment years 2006-07 and 2008-09 (supra). We do observe that the matter stands decided by the Revenue authorities on due examination of the assessee’s records and explanations, with the Assessing Officer also submitting a remand report to the ld. CIT(A), and which stands considered by the latter. In fact, it is indeed surprising that the matter should continue to be disputed and unresolved even up to the second appellate stage, and that too from year to year. This is particularly so as the issue is essentially a simple matter, given that the accounting procedures and methods are well-settled, so that the entries passed in the books of account should ordinarily remove the matter beyond the realm of any doubt. When a payment/s is made, as claimed, for and on behalf of another, the same would only, or at least ordinarily and in the normal course, stand to be debited to the account of the latter, as the same only would reflect the true state of affairs. There would thus be no scope for it being charged to the operating statement of the payer and, thus, being claimed as an expense in the computation of his income, for any confusion to arise, leave alone subsist.

At the same time, so however, it cannot be overlooked that the payments under reference are in pursuance to the same continuing arrangement with the principal, i.e., as for the other years. A uniformity of adjudication by the Tribunal, as well as by the Revenue, would therefore dictate such a course, i.e., as aforestated. The onus, though. we may clarify, would be strictly on the assessee to exhibit that the said expenditure stands incurred only for and on behalf of the principal, who was obliged to reimburse the same in full, and indeed did so, so that there is no claim in respect to the same by the assessee per its return of income. Further, though the Tribunal in ITO v. Dr. Willmar Schwabe India (P.) Ltd. [2005] 3 SOT 71 (Delhi), relied upon by the assessee, clarifies that the reimbursable expenses, separately billed, would not be subject to tax deduction at source, in our view, the Tribunal in the assessee’s own case (supra) has not expressed any such reservation or qualification (refer para 9 & 19 thereof), i.e., qua separate billing, so that the only condition that would obtain and, rather, is to be shown as a matter of fact on the basis of the underlying agreement and records – is that the expenditure was not incurred on own account but only on account of the principal, and therefore not claimed as expenditure, being in effect fully reimbursable. As a corollary, if an expenditure is reimbursable in part – which again would need to be established in terms of the agreement and records, only that portion thereof which is not reimbursable, and thus forms part of assessee’s claim for expenditure per its return of income, would be subject to the rigour of section 40(a)(ia). The premise of this argument, which represents, as apparent by now, the consistent view of the Tribunal, is that even though the assessee may be liable for tax deduction, which has not been deducted, where the same, whatever be the method of accounting or methodology employed, is not claimed as expenditure, there is no question of any disallowance in its respect. We decide accordingly.

3.2 Coming to the Revenue’s appeal; the same concerns only transportation charges, albeit in two sums, i.e., at Rs. 3,07,98,732/- and Rs. 28,63,254/-. As regards the latter, the same is not in the nature of payment to any third party, but only represents the deduction made by the principal on account of short delivery of stock and, therefore, is by way of transportation shortage. There is no question of application of sec. 40(a)(ia), and stands rightly deleted by the ld. CIT(A). We decide accordingly.

3.3 With regard to the former claim (i.e., for Rs. 307.99 lakhs), we are not at all impressed with the basis on which the first appellate authority has allowed relief to the assessee. The findings by the Assessing Officer in this respect are definite and uncontroverted. When the transporters had not issued Form 15-I to the assessee, where is the question of its filing Form 15-J to the Department, of which the former are but an integral part. And, even if filed, would be only a false claim, leading to the charge of perjury. Also, as found by the Assessing Officer, and again to no rebuttal, that Form 15J, i.e., treating it as having been filed, is not with the concerned authority and unaccompanied by Form 15-I, i.e., the declarations for non-deduction of tax at source from the individual transporters, on the basis of which only the assessee can claim to be free from the obligation of deduction of tax at source. That is, de hors F/15I, the filing of F/15J is of no consequence. Further still, the physical verification caused by the Assessing Officer with some of the transporters, i.e., whose addresses were supplied by the assessee-company, nails the untruth of the assessee’s claim in this regard; they being unable to furnish Form 15-I, stated to be issued by them, before the Inspector (ITI). The assessee has not controverted any of these findings.

So however, the assessee’s plea qua the other limb of its argument would hold. The principle of reimbursement, discussed earlier, would definitely apply for this payment as well. At the cost of repetition, we may clarify that even though the privity of contract may be between the assessee (whose obligation it is for the transportation of goods) and the transporter, rather, irrespective of whether the contract is between the assessee and the transporter or the principal and the transporter – the payment in either case being only in pursuance to a contract; the liability under section 194C being on the person responsible for making the payment and not on the one who may finally bear it, so that it (the payment) could be on account of a different person, as the assessee’s principal in the instant case, the disqualification and the consequential disallowance under section 40(a)(ia) would apply only where the claim for expenditure is preferred in its respect by the assessee, i.e., as the person obliged to and in fact making the payment. If, as claimed, the same stands claimed as a reimbursement, and in fact reimbursed, clearly no expenditure has been claimed by the assessee, for thereto be any scope for disallowance under section 40(a)(ia) for the relevant year. The matter, therefore, as in the case of other expenses forming part of the assessee’s appeal, is restored back, on identical terms and scope, to the file of the Assessing Officer, We decide accordingly.

3.4 Finally, we are not inclined to be in agreement with the assessee’s argument qua the non-application of the decision by the Hon’ble Court in the case of Milk Specialities (P.) Ltd. (supra), claiming that it does not give rise to any question of law, much less a substantial question of law (vide para 7 thereof), so that the said decision is not a Judgment under section 260A of the Act. This is for the reason that a holistic reading of the said decision, notwithstanding the aforesaid statement at para 7, would make it clear that it is only a Judgment under section 260A, and not a denial of admission or an in limine dismissal of the assessee’s appeal. The parties were heard at length. The hon’ble court has approved and upheld the findings of the Tribunal. The primary facts are recorded at para 2. Though, no doubt, there is no specific plea with regard to “payable” that by itself would not make the said decision not applicable; the hon’ble court, in ratio, stating that where an expenditure is subject to deduction of tax at source, violation thereof would justify disallowance of the relevant expenditure under section 40(a)(ia) of the Act. We opine accordingly.

4. In the result, the assessee’s appeal is allowed for statistical purposes; while the revenue’s appeal is partly allowed for statistical purposes.


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