Case Law Details
Shri Suresh Khatri Vs ITO (ITAT Lucknow)
Ground Nos. 1 to 3 of the appeal relate to the disallowance of Rs.6,42,437/- for non deduction of tax at source u/s 40(a)(ia) of the Act on payment of ocean freight, made to non-resident shipping companies. The assessee is a proprietary concern and engaged in the business of manufacturing of leather and cotton items. During the year under consideration, the assessee had exported goods and made payment of Rs.6,42,437/- towards shipping expenses in the nature of freight. The Assessing Officer observed that the payments, made by the assessee, come within the purview of section 194C of the I.T. Act and accordingly the assessee was liable to deduct tax at source on these payments. The Assessing Officer disallowed Rs.6,42,437/- on the ground that the assessee failed to deduct TDS on payments made on account of freight as per the provisions of section 40(a)(ia) of the Act. Being aggrieved with the action of Assessing Officer, the assessee carried the matter in appeal before the CIT(A) who has also sustained the disallowance. Now the assessee is in appeal before us.
During the course of hearing, the learned Counsel for the assessee relied on CBDT Circular No. 723 dated 19/09/1995, placed at page 5 of the paper book, and submitted that the disallowance cannot be made in view of this Circular. Circular No. 723 is reproduced below:
Circular: No. 723, dated 19-9-1995
1. Representations have been received regarding the scope of sections 172, 194C and 195 of the Income-tax Act, 1961, in connection with tax deduction at source from payments made to the foreign shipping companies or their agents.
2. Section 172 deals with shipping business of non-residents. Section 172(1) provides the mode of the levy and recovery of tax in the case of any ship, belonging to or chartered by a nonresident, which carries passengers, livestock, mail or goods shipped at a port in India. An analysis of the provisions of section 172 would show that these provisions have to be applied to every journey a ship, belonging to or chartered by a non-resident, undertakes from any port in India. Section 172 is a self-contained code for the levy and recovery of the tax, shipwise, and journeywise, and requires the filing of the return within a maximum time of thirty days from the date of departure of the ship.
3. The provisions of section 172 are to apply, notwithstanding anything contained in other ‘ provisions of the Act. Therefore, in such cases, the provisions of sections 194C and 195 relating to tax deduction at source are not applicable. The recovery of tax is to be regulated, for a voyage undertaken from any port in India by a ship under the provisions of section 172.
4. Section 194C deals with work contracts including carriage of goods and passengers by any mode of transport other than railways. This section applies to payments made by a person referred to in clauses (a) to (j) of sub-section (1) to any “resident” (termed as contractor). It is clear from the section that the area of operation of TDS is confined to payments made to any “resident”. On the other hand, section 172 operates in the area of computation of profits from shipping business of non-residents. Thus, there is no overlapping in the areas of operation of these sections.
5. There would, however, be cases where payments are made to shipping agents of non-resident ship-owners or charterers for carriage of passengers etc., shipped at a port in India. Since, the agent acts on behalf of the non-resident ship-owner or charterer, he steps into the shoes of the principal. Accordingly, provisions of section 172 shall apply and those of sections 194C and 195 will not apply. ‘
From the reading of the above circular, it is clear that the disallowance was not required to be made. Accordingly, we delete the disallowance sustained by the CIT(A).
FULL TEXT OF THE ITAT JUDGEMENT
This is an appeal filed by the assessee against the order of learned CIT(A)-1, Kanpur dated 21/08/2017 pertaining to assessment year 2013-2014. In this appeal the assessee has taken the following grounds:
“1. Because the CIT(A) has erred on facts and in law in upholding the addition of Rs.6,42,437/- made by the AO under the head Shipping Expenses on account of non deduction of TDS, which addition is contrary to facts, bad in law be deleted.
2. Because the CIT(A) has not considered the provisions of section 200 and 201(1A) of the Act and has wrongly treated the assessee to be in default, the addition upheld be deleted.
3. Because the CIT(A) has failed to appreciate that the provisions of section 40(a)(ia) are to be read alongwith Chapter XVIIB of the Act, as referred to therein, wherein a person to whom the payment having been made, have declared the same in its income, then the provisions of section 40(a)(ia) would not be applicable, the order of the CIT(A) be quashed.
4. Because the CIT(A) has erred on fact and in law in upholding the addition of Rs.50,250/- being difference in the account of M/s. Eskay Sales Corporation, which addition is bad in law and be deleted.
5. Because the CIT(A) has erred on facts and in law in upholding the following disallowances, out of expenses, which disallowances made by the Assessing Officer are all contrary to facts bad in law and be deleted :
(i) Rs. 7,575/- out of travelling expenses,
(ii) Rs.12,322/- out of Misc. expenses.
The above disallowances are contrary to facts, bad in law and be deleted.”
2. At the outset, Learned A. R. invited our attention to the fact that the appeal filed by the assessee is delayed by 36 days. He also invited our attention to the application dated 20/01/2018, filed by the assessee, for condonation of delay wherein the reasons for delay in filing the appeal have been explained stating that the assessee tied the folder in which the order was kept, with some other files and it got bundled with other records; and that the appeal could be filed only after it was traced, incurring the inordinate delay of thirty six days. It was prayed that the assessee was prevented by reasonable and sufficient cause in not filing the appeal within the prescribed time and therefore, the delay may be condoned and the appeal may be heard on merits. Learned D. R. had no objection to the condonation of delay. Finding the plausible sufficient cause for delay in filing the appeal, we condoned the delay and directed both the parties to argue the case on merits.
3. Ground Nos. 1 to 3 of the appeal relate to the disallowance of Rs.6,42,437/- for non deduction of tax at source u/s 40(a)(ia) of the Act on payment of ocean freight, made to non-resident shipping companies. The assessee is a proprietary concern and engaged in the business of manufacturing of leather and cotton items. During the year under consideration, the assessee had exported goods and made payment of Rs.6,42,437/- towards shipping expenses in the nature of freight. The Assessing Officer observed that the payments, made by the assessee, come within the purview of section 194C of the I.T. Act and accordingly the assessee was liable to deduct tax at source on these payments. The Assessing Officer disallowed Rs.6,42,437/- on the ground that the assessee failed to deduct TDS on payments made on account of freight as per the provisions of section 40(a)(ia) of the Act. Being aggrieved with the action of Assessing Officer, the assessee carried the matter in appeal before the CIT(A) who has also sustained the disallowance. Now the assessee is in appeal before us.
4. During the course of hearing, the learned Counsel for the assessee relied on CBDT Circular No. 723 dated 19/09/1995, placed at page 5 of the paper book, and submitted that the disallowance cannot be made in view of this Circular. Circular No. 723 is reproduced below:
Circular: No. 723, dated 19-9-1995
1. Representations have been received regarding the scope of sections 172, 194C and 195 of the Income-tax Act, 1961, in connection with tax deduction at source from payments made to the foreign shipping companies or their agents.
2. Section 172 deals with shipping business of non-residents. Section 172(1) provides the mode of the levy and recovery of tax in the case of any ship, belonging to or chartered by a nonresident, which carries passengers, livestock, mail or goods shipped at a port in India. An analysis of the provisions of section 172 would show that these provisions have to be applied to every journey a ship, belonging to or chartered by a non-resident, undertakes from any port in India. Section 172 is a self-contained code for the levy and recovery of the tax, shipwise, and journeywise, and requires the filing of the return within a maximum time of thirty days from the date of departure of the ship.
3. The provisions of section 172 are to apply, notwithstanding anything contained in other ‘ provisions of the Act. Therefore, in such cases, the provisions of sections 194C and 195 relating to tax deduction at source are not applicable. The recovery of tax is to be regulated, for a voyage undertaken from any port in India by a ship under the provisions of section 172.
4. Section 194C deals with work contracts including carriage of goods and passengers by any mode of transport other than railways. This section applies to payments made by a person referred to in clauses (a) to (j) of sub-section (1) to any “resident” (termed as contractor). It is clear from the section that the area of operation of TDS is confined to payments made to any “resident”. On the other hand, section 172 operates in the area of computation of profits from shipping business of non-residents. Thus, there is no overlapping in the areas of operation of these sections.
5. There would, however, be cases where payments are made to shipping agents of non-resident ship-owners or charterers for carriage of passengers etc., shipped at a port in India. Since, the agent acts on behalf of the non-resident ship-owner or charterer, he steps into the shoes of the principal. Accordingly, provisions of section 172 shall apply and those of sections 194C and 195 will not apply. ‘
5. From the reading of the above circular, it is clear that the disallowance was not required to be made. Accordingly, we delete the disallowance sustained by the CIT(A).
6. Ground No. 4 of the appeal relates to the addition of Rs.50,250/- made on account of difference between the opening balance in the account of M/s Eskay Sales Corporation and in the accounts of the assessee. Learned counsel for the assessee submitted before us that this difference is coming from last several years. Copy of account of M/s Eskay Sales Corporation, as appearing in the assessee’s books, are placed at pages 37 to 41 of the paper book. Learned counsel for the assessee submitted that the difference is being carried over from earlier years and it has to be adjusted/reconciled. He also submitted that the difference does not relate to the year under consideration. Keeping in view the above facts, we delete the addition sustained by CIT(A).
7. Ground No. 5 of the appeal relates to the disallowance of expenses on ad hoc basis. The Assessing Officer has disallowed 10% of travelling expenses and misc. expenses on ad hoc basis. Learned counsel for the assessee submitted before us that the Assessing Officer, without pointing out any discrepancy in the books of account, which are tax audited, has simply made ad hoc disallowance by holding that the assessee produced self-made debit vouchers and these expenses are not open to full verification and disallowed 10% of the total expenses under the head travelling expenses and misc. expenses. When the assessee carried the matter in appeal before learned CIT(A), he also upheld the action of the Assessing Officer. Learned A. R. submitted that in a number of cases, decided by this Bench and various High Courts, it has been held that ad hoc disallowance, without pointing out any discrepancy in the books of account, cannot be made.
8. Learned D. R., on the other hand, heavily relied on the orders of the authorities below.
9. We have heard the rival parties and have gone through the material placed on record. We find that Assessing Officer has made the disallowance simply by holding that the assessee produced ledger account of these expenses which are not open to full verification and hence has disallowed 10% out of various expenses. The Assessing Officer has nowhere pointed out any specific discrepancy in the books of account nor he has rejected the same. In our opinion, the Assessing Officer cannot make ad hoc disallowance. Hon’ble Calcutta High Court in the case of Ashok Surana vs. CIT [2016] 384 ITR 267 (Cal) has held as under:
“The assessee was an individual engaged in the business of producing television serials and had offices at Calcutta, Bangalore, Delhi and Mumbai. For the assessment year 2001-02, the assessee had shown to have incurred expenses on account of telephone. The Assessing Officer disallowed 20 per cent. of the expenditure on the ground that the assessee failed to maintain a call book for monitoring calls and that a part of such calls were for personal and non-business use. The assessee also claimed expenses of the Mumbai office, part of which were supported by internal debit vouchers and claimed general expenses and expenses towards tea and tiffin, supported by debit vouchers. The Assessing Officer, disallowed 20 per cent. of expenses on the ground that they were not verifiable. The Commissioner (Appeals) confirmed this. The Tribunal restricted the disallowance. On appeal:
Held, that it was not the case of the Assessing Officer that the assessee was unable to adduce satisfactory evidence that the expenditure was incurred for the purpose of his business. When appropriate evidence was adduced, it was not in the power of the Assessing Officer to arbitrarily disallow any item of expenditure on the ground that the sums were not verifiable. There was no indication as to what step was taken by the Assessing Officer to have those expenses verified. If the Assessing Officer had not taken pains to have the expenses verified, he could not disallow any portion of the expenditure on the ground that it was not verifiable. The expenses were to be allowed.”
In view of the above, ground No. 5, taken by the assessee, is allowed.
10. It is pertinent to mention here that this order is being pronounced after a period of 90 days from the date of conclusion of the hearing. In this regard, we place reliance on the decision of co-ordinate bench of this Tribunal in the case of JSW Ltd in ITA Nos. 6264 & 6103/Mum/2018 dated 14.5.2020, wherein this issue has been addressed in detail allowing time to pronounce the order beyond 90 days from the date of conclusion of hearing by excluding the days for which the lockdown announced by the Government was in force. The relevant observations of the tribunal in the said binding precedent are as under:-
“7. However, before we part with the matter, we must deal with one procedural issue as well. While hearing of these appeals was concluded on 7th January 2020, this order thereon is being pronounced today on 14th day of May, 2020, much after the expiry of 90 days from the date of conclusion of hearing. We are also alive to the fact that rule 34(5) of the Income Tax Appellate Tribunal Rules 1963, which deals with pronouncement of orders, provides as follows:
(5) The pronouncement may be in any of the following manners :—
(a) The Bench may pronounce the order immediately upon the conclusion of the hearing.
(b) In case where the order is not pronounced immediately on the conclusion of the hearing, the Bench shall give a date for pronouncement.
(c) In a case where no date of pronouncement is given by the Bench, every endeavour shall be made by the Bench to pronounce the order within 60 days from the date on which the hearing of the case was concluded but, where it is not practicable so to do on the ground of exceptional and extraordinary circumstances of the case, the Bench shall fix a future day for pronouncement of the order, and such date shall not ordinarily (emphasis supplied by us now) be a day beyond a further period of 30 days and due notice of the day so fixed shall be given on the notice board.
8. Quite clearly, “ordinarily” the order on an appeal should be pronounced by the bench within no more than 90 days from the date of concluding the hearing. It is, however, important to note that the expression “ordinarily” has been used in the said rule itself. This rule was inserted as a result of directions of Hon’ble jurisdictional High Court in the case of Shivsagar Veg Restaurant Vs ACIT [(2009) 317 ITR 433 (Bom)] wherein Their Lordships had, inter alia, directed that “We, therefore, direct the President of the Appellate Tribunal to frame and lay down the guidelines in the similar lines as are laid down by the Apex Court in the case of Anil Rai (supra) and to issue appropriate administrative directions to all the benches of the Tribunal in that behalf. We hope and trust that suitable guidelines shall be framed and issued by the President of the Appellate Tribunal within shortest reasonable time and followed strictly by all the Benches of the Tribunal. In the meanwhile (emphasis, by underlining, supplied by us now), all the revisional and appellate authorities under the Income-tax Act are directed to decide matters heard by them within a period of three months from the date case is closed for judgment”. In the rule so framed, as a result of these directions, the expression “ordinarily” has been inserted in the requirement to pronounce the order within a period of 90 days. The question then arises whether the passing of this order, beyond ninety days, was necessitated by any “extraordinary” circumstances.
9. Let us in this light revert to the prevailing situation in the country. On 24th March, 2020, Hon’ble Prime Minister of India took the bold step of imposing a nationwide lockdown, for 21 days, to prevent the spread of Covid 19 epidemic, and this lockdown was extended from time to time. As a matter of fact, even before this formal nationwide lockdown, the functioning of the Income Tax Appellate Tribunal at Mumbai was severely restricted on account of lockdown by the Maharashtra Government, and on account of strict enforcement of health advisories with a view of checking spread of Covid 19. The epidemic situation in Mumbai being grave, there was not much of a relaxation in subsequent lockdowns also. In any case, there was unprecedented disruption of judicial wok all over the country. As a matter of fact, it has been such an unprecedented situation, causing disruption in the functioning of judicial machinery, that Hon’ble Supreme Court of India, in an unprecedented order in the history of India and vide order dated 6.5.2020 read with order dated 23.3.2020, extended the limitation to exclude not only this lockdown period but also a few more days prior to, and after, the lockdown by observing that “In case the limitation has expired after 15.03.2020 then the period from 15.03.2020 till the date on which the lockdown is lifted in the jurisdictional area where the dispute lies or where the cause of action arises shall be extended for a period of 15 days after the lifting of lockdown”. Hon’ble Bombay High Court, in an order dated 15th April 2020, has, besides extending the validity of all interim orders, has also observed that, “It is also clarified that while calculating time for disposal of matters made time-bound by this Court, the period for which the order dated 26th March 2020 continues to operate shall be added and time shall stand extended accordingly”, and also observed that “arrangement continued by an order dated 26th March 2020 till 30th April 2020 shall continue further till 15th June 2020”. It has been an unprecedented situation not only in India but all over the world. Government of India has, vide notification dated 19th February 2020, taken the stand that, the coronavirus “should be considered a case of natural calamity and FMC (i.e. force majeure clause) maybe invoked, wherever considered appropriate, following the due procedure…”. The term ‘force majeure’ has been defined in Black’s Law Dictionary, as ‘an event or effect that can be neither anticipated nor controlled’ When such is the position, and it is officially so notified by the Government of India and the Covid-19 epidemic has been notified as a disaster under the National Disaster Management Act, 2005, and also in the light of the discussions above, the period during which lockdown was in force can be anything but an “ordinary” period.
10. In the light of the above discussions, we are of the considered view that rather than taking a pedantic view of the rule requiring pronouncement of orders within 90 days, disregarding the important fact that the entire country was in lockdown, we should compute the period of 90 days by excluding at least the period during which the lockdown was in force. We must factor ground realities in mind while interpreting the time limit for the pronouncement of the order. Law is not brooding omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism, and that is how the law is required to interpreted. The interpretation so assigned by us is not only in consonance with the letter and spirit of rule 34(5) but is also a pragmatic approach at a time when a disaster, notified under the Disaster Management Act 2005, is causing unprecedented disruption in the functioning of our justice delivery system. Undoubtedly, in the case of Otters Club Vs DIT [(2017) 392 ITR 244 (Bom)], Hon’ble Bombay High Court did not approve an order being passed by the Tribunal beyond a period of 90 days, but then in the present situation Hon’ble Bombay High Court itself has, vide judgment dated 15th April 2020, held that directed “while calculating the time for disposal of matters made time- bound by this Court, the period for which the order dated 26th March 2020 continues to operate shall be added and time shall stand extended accordingly”. The extraordinary steps taken suo motu by Hon’ble jurisdictional High Court and Hon’ble Supreme Court also indicate that this period of lockdown cannot be treated as an ordinary period during which the normal time limits are to remain in force. In our considered view, even without the words “ordinarily”, in the light of the above analysis of the legal position, the period during which lockout was in force is to excluded for the purpose of time limits set out in rule 34(5) of the Appellate Tribunal Rules, 1963. Viewed thus, the exception, to 90-day time-limit for pronouncement of orders, inherent in rule 34(5)(c), with respect to the pronouncement of orders within ninety days, clearly comes into play in the present case. Of course, there is no, and there cannot be any, bar on the discretion of the benches to refix the matters for clarifications because of considerable time lag between the point of time when the hearing is concluded and the point of time when the order thereon is being finalized, but then, in our considered view, no such exercise was required to be carried out on the facts of this case.
11. To sum up, the appeal of the assessee is allowed, and appeal of the Assessing Officer is dismissed. Order pronounced under rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1962, by placing the details on the notice board.”
11. Respectfully following the aforesaid judicial precedent, we proceed to pronounce this order beyond a period of 90 days from the date of conclusion of hearing.
12. In the result, appeal of the assessee stands allowed.
(Order pronounced in the open court on 26/06/2020)
