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TDS applicable only if the amount is expenditure or income of one of the party

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IN THE ITAT BANGALORE BENCH ‘A’

Income-tax Officer, Ward-16(2), TDS

V/s.

Hotel Parag Ltd.

IT Appeal No. 667 (Bang.) of 2010

[Assessment Year 2007-08]

JULY 20, 2012

ORDER

Jason P. Boaz, Accountant Member 

This appeal by Revenue is directed against the order of the Commissioner of Income Tax (Appeals)-V, Bangalore dated 12.03.2010 for Assessment Year 2007-08.

2. The facts of the case, in brief, are as under :

2.1 The assessee operates its hotel business from a leasehold building premises, together with necessary infrastructure such as plant, machinery equipments, furniture, fixtures etc. at No. 3, Raj Bhavan Road, Bangalore. The monthly lease rentals for the said hotel premises, on and from 1.4.2006 was not finalized between the assessee and the landlords as there were some differences amongst the members of the land lords family. The land lords had demanded lease rent of Rs. 75,00,000 per month for the said premises as against Rs. 50,00,000 per month offered by the assessee. The assessee, in these circumstances where the lease rentals had not been agreed upon in order to close its books of account for the year ended 31.3.2007, made a provision of an amount of Rs. 9,00,00,000 as lease rent i.e. @ 75 lakhs per month for 12 months payable to the land lord and accordingly finalized its accounts. Further, the assessee neither made any payment to the land lords on account of lease rent for the year ended 31.3.2007 nor did the assessee remit any amount by way of TDS towards the lease rent. However, in its computation of total income for the relevant period filed before the income tax authorities, the assessee added back the entire sum of Rs. 9 crores debited to its profit and loss account and offered the same to tax. Subsequently, by lease agreement dt.1.12.2007, the assessee and the land lords agreed upon a monthly rent of Rs. 50 lakhs per month for a period of 24 months from 1.4.2006 onwards. After reaching this agreement with the land lords, the assessee reversed the provision for lease rent to the extent of Rs. 3 Crores in its books of account. The assessee also remitted the TDS, as applicable on the actual lease rent of Rs. 6 Crores per annum, together with interest for delayed remittance to the account of the Income Tax Department on 18.3.2008.

2.2 A survey under section 133A of the Income Tax Act, 1961 (herein after referred to as ‘the Act’) was conducted by the Tax Deduction at Source (TDS) Wing of the Income Tax Department on 13.3.2009 in order to verify TDS whether the assessee was complying with the TDS provisions. Subsequent thereto, the ITO, TDS, Ward 16(2), Bangalore passed an order under section 201(1) and 201(1A) of the Act dt.24.3.2009 raising a total demand of Rs. 99,63,360; comprising Rs. 67,32,000 being the demand raised under section 201(1) of the Act and Rs. 32,31,360 being interest charged under section 201(1A) of the Act.

2.3 Aggrieved by the order of the ITO-TDS, the assessee went in appeal before the CIT(A). The main issues of dispute between the assessee and the Department were as under :

(i)  the Assessing Officer, in his order, determined the TDS to be remitted by the assessee on lease rent of Rs. 9 Crores as against the lease rent of Rs. 6 Crores paid by the assessee.

(ii)  the Assessing Officer, in his order, determined and charged the interest on delayed payment of TDS calculated on lease rent of Rs. 9 Crores per annum as against Rs. 6 Crores per annum paid by the assessee.

The learned CIT(A) after examining the case and hearing the assessee, disposed off the appeal by order dt.12.3.2010 granting the assessee partial relief.

3. Aggrieved by the order of the CIT(A), Revenue is now in appeal before the Tribunal. In the revised grounds of appeal raised, Revenue has contended as under :

“1.  The CIT(A) has erred in holding that the sum liable for TDS under section 194 I was Rs. 6 Crores as against a sum of Rs. 9 crores charged to the profit and loss account for FY 2006-07.

 2.  The CIT(A) has erred in not considering the Annual Reports of FYs 2006-07 and 2007-08 which make it clear that the rent of Rs. 9 crores charged to the profit and loss account was not a provision but actual rent credited.

 3.  The CIT(A) has erred in considering the TDS certificate issued for FY 2007-08 to give credit for TDS dues for FY 2006-07.

 4.  The CIT(A) has erred in not considering the fact that the deductor followed mercantile system of accounting and was a company to which Schedule VI of the Companies Act, 1956 applied.

 5.  The CIT(A) has erred in not considering the fact that the lease rental due was a monthly due and not an annual charge.

 6.  The CIT(A) has erred in not considering the fact that the deduction of TDS and remittance has not been reported in the TDS statements filed for FY 2006-07.

 7.  The CIT(A) has erred in allowing the deductor’s claim that the disallowance made in the computation statement of return of income filed much later would impact the tax to be deducted at source.

 8.  The CIT(A) has erred in allowing the deductor’s claim that the TDS remitted included interest under section 201(1A) thought the certificate is issued for the entire amount.

 9.  For these and other grounds that may be preferred during the course of appeal.”

4.1 The learned Departmental Representative, at the outset, laid out the main contention of Revenue was that the assessee ought to deduct tax on an amount of Rs. 9 Crores and not on Rs. 6 Crores as erroneously held by the learned CIT(A). It was also submitted by the learned Departmental Representative that interest under section 201(1A) for delayed payment should be computed on the basis of lease rent of Rs. 9 Crores and not on Rs. 6 Crores. The learned Departmental Representative further contended that as regards the working out of the period of delay, since the payment of lease rent is a monthly contractual obligation, the same falling due every month, similarly the period of delay should be taken from the end of every month, irrespective of the fact when the assessee has made entries in its books of account in respect of the same or the actual date of payment. Written submissions have also been filed in support of revenue’s contentions.

4.2 Per contra, the learned counsel for the assessee supported the order of the learned CIT(A) and prayed for the same to be upheld.

5. We have heard both parties and have carefully perused and considered the material on record. On this issue, the conclusion of the learned CIT(A) at paras 8.1 and 8.2 of his order reads as follows :

“In this regard it has already been noted above that the appellant in its computation of income for Assessment Year 2007-08 had disallowed the amount of Rs. 9,00,00,000 and added back the same to its total income and also paid tax on the full amount of Rs. 9,00,00,000. The said return of income for Assessment Year 2007-08, containing the above computation, was filed on 3.12.2007. Thus, not only was the disallowance of Rs. 9,00,00,000 made suo moto, the same was also made much before the date of survey i.e. 13.3.2009. Similarly in the subsequent year, on finalization of the amount of rent payable by the appellant at Rs. 6,00,00,000, the appellant deducted TDS on the said amount and paid the said TDS along with interest for belated payment on 18.3.2008. The appellant further claimed the said amount as a deduction in Assessment Year 2008-09 and the return of income for the said assessment year containing such a claim was filed on 3.10.2008. Thus, all the above mentioned actions of the appellant (reversing the entry of Rs. 3,00,00,000), which were carried out on 3.12.2007, 18.3.2008 and 3.10.2008, were all carried out much before 13.3.2009 i.e. the date of survey under section 133A. Therefore, the assertion of the TDS AO that the contention of the appellant regarding the reversal of the entry of Rs. 3,00,00,000 is an only after thought is not correct. 8.2 In view of the above discussion, I am of the view that the balance sum of Rs. 3,00,00,000 did not constitute lease rent payable to the land lord and therefore no TDS under section 194-I of the Income Tax Act, 1961, was deductible on the said sum of Rs. 3,00,00,000. Therefore, the demand of Rs. 67,32,000 raised under section 201(1) and interest of Rs. 16,15,680 imposed under section 201(1A), being without any basis, is DELETED.”

5.1 From the facts of the case as emanate from the record, it appears that the assessee had initially provided for Rs. 9 Crores in its books of account, more out of prudence and in conformity with prevailing accounting standards. The fact that the assessee added back the entire sum of Rs. 9 Crores as its income, without claiming any deduction for the same in the relevant period (viz. Assessment Year 2007-08) goes to establish the bona fides of the assessee. Further, the subsequent event of the assessee and the land lords agreeing to the lease rent being fixed at Rs. 6 Crores per annum as against Rs. 9 Crores per annum also vindicates the stand of the assessee. The learned CIT(A), in his order has also noted that the assessee had not only deducted and remitted TDS on the lease rent of Rs. 6 Crores after the same was agreed to between the assessee and the land lord, but had also remitted the interest under section 201(1A) of the Act on account of delay in remittance of the TDS, as applicable in this case.

5.2 It is a well settled position in law that ‘mere book entries will not determine the correct income or expenditure.’ This principle has been upheld by the Hon’ble Apex Court in the case of M/s. Shoorji Vallabhdas & Co. reported in 46 ITR 144 and also in the case of Godhra Electricity Co. reported in 225 ITR 746. In the instant case, the actual rent to be paid by the assessee is what is to be considered for the purpose of determining the TDS to be made under section 194-I and consequential interest under section 201(1A) of the Act.

5.3 The provisions of TDS were introduced in the statute so that tax is collected by Revenue at source on certain types of income. In other words, it is the income which determines the extent or amount of tax to be deducted at source. Income sought to be taxed by taxing statutes is always the real income. In the instant case, it is clear that the lease rent for the relevant period was fixed at Rs. 6 Crores per annum. The assessee has only claimed Rs. 6 Crores as an expenditure and that too in the period relevant to Assessment Year 2008-09 when the rent payable was agreed upon. The land lord was also entitled to receive only Rs. 6 Crores as lease rent for the period relevant to Assessment Year 2007-08. In this fact situation if one was to contend that TDS ought to be made on Rs. 9 Crores and not on Rs. 6 Crores, such a contention is both absurd and untenable. The difference of Rs. 3 Crores on which Revenue is seeking TDS and also interest thereon is not anybody’s expenditure or income. It is neither an expenditure in the hands of the assessee nor is it income in the hands of the land lord. When this is the position, how can Revenue tax the same.

5.4 Revenue, in written submissions filed before us, states that the Auditors Report for the relevant period i.e. Assessment Year 2007-08 does not contain any qualification as regards the lease rent provided for by the assessee in its books of account and further that in the Annual Report for Assessment Year 2008-09, the lease rent for Assessment Year 2007-08 is mentioned as Rs. 9 Crores in the column provided for previous years figures. It was also stated therein that the date of the stamp paper on which the lease agreement dt.1.12.2007 are of two different dates, namely 23.3.2001 and 29.11.1994. It was also submitted that in the lease agreement dt.1.12.2007 there is no mention that the lease rent originally agreed for Rs. 75 lakhs per month has now been revised down and to Rs. 50 lakhs.

5.5 After due consideration of the submissions made, we are of the view that the Annual Report and the Auditors Report do not in any way alter or controvert the fact that the actual lease rent on which TDS is to be made is Rs. 6 Crores. As regards the lease agreement dated 1.12.2007, we find that it is not factually correct, to state that the lease rent originally agreed upon was Rs. 75 lakhs per month and was subsequently revised down and to Rs. 50 lakhs per month as there is no mention of this therein nor was there on record any prior lease agreement for lease rent of Rs. 75 lakhs per month. The lease agreement dt.1.12.2007 as per recitals thereof indicate that there were differences between the assessee (viz. the tenant) and the land lords with regard to the terms and conditions of the lease since 1.4.2006. The agreement also goes to state that these differences have since been mutually resolved and the terms and conditions of the lease have been agreed upon between the assessee and the land lord. The dates of the stamp paper are not really significant in a tax matter as long as the stamp papers are of a date prior to the date of agreement, which they admittedly are in the instant case.

5.6 As regards the contention of Revenue that the assessee being a company following the Mercantile System of Accounting, the lease rent falls due every month by virtue of a contractual obligation and hence the period of delay should be reckoned from the date on which the rent falls due for each of the months, does not hold much water as the provision of section 194-I very clearly state that the liability to deduct TDS arises only and only when an assessee makes payment of rent or when the assessee debits rent as an expenditure in the books of accounts, whichever is earlier.

5.7 Taking into account the facts and circumstances of the case as discussed above at paras 4.1 to 5.6 of this order, we are of the considered opinion that being in agreement with the findings of the learned CIT(A) in his appellate order in the instant case, we find that there is no cause for interference therein. We, therefore, uphold the order of the learned CIT(A) and consequently the grounds of appeal raised by Revenue are rejected.

6. In the result, Revenue’s appeal is dismissed.


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