Case Law Details
DCIT Vs. M/s. Cox & Kings (I) Ltd. (ITAT Mumbai)
Assessee has a foreign exchange division approved by the RBI and is authorized to buy foreign exchange and travelers cheques from RMCs and others and sell them to persons in need of them. RMCs are also authorized by RBI to buy foreign currency from non residents visiting various places in India. These facts would show that the RMCs are not agents of the assessee but are appointed by RBI. Though, it may be a fact that the assessee buys foreign currency from RMCs depending upon the needs, however, there is no principal agent relationship between the assessee and the RMCs. The RMCs are free to sell foreign currency bought from tourists to assessee, RBI or any other person authorized by the RBI to deal in foreign currency. It is also to be noted that both the RMCs as well as the assessee have shown foreign currency as their stock in trade. The assessee has no relationship with the persons from whom the RMCs purchase foreign currency and the assessee is no way connected to the concerned tourists. Therefore, in our view the transaction between the assessee and the RMCs is on principal to principal basis and there is no principal agent relationship existing between them. Merely because in the financial statement assessee has debited the amount as commission it cannot be treated so without looking at the real nature of the transaction. The AO must bring on record material to establish that there is a principal agent relationship existing between the assessee and the RMCs. No enquiry has been made by the AO with the RMCs to find out the real nature of transactions between them. Further, assessee’s contention that in no other place in India such premium paid has been disallowed requires to be taken note of. It is also relevant to observe, even in respect of premium payment in Goa, except, the impugned assessment year in no other assessment year such dis allowance under section 40(a)(ia) has been made. That being the case, we are inclined to delete the addition made by the AO.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
These cross appeals by the assessee and the Department and the cross objection by the assessee arise out of a common order dated 03.08.2015 of CIT(A)-2 Mumbai for A.Y. 2007-08.
2. Assessee has raised nine grounds. Ground Nos. 1 & 2 are against confirmation of dis allowance of Rs. 4,33,921/- under section 14A of the Act.
The brief facts are that the assessee, a domestic company, is engaged in the business of arranging tours and travels. For the assessment year under dispute the assessee filed its return of income on 01.03.2008 declaring total income of Rs. 36,99,51,002/-. During the assessment proceedings the AO noticed that, though, the assessee has earned exempt income by way of dividend, however, it did not disallow expenses attributable to such exempt income. He found that the assessee has debited interest expenses of Rs. 7,10,78,955/- to the Profit & Loss Account. He, therefore, called upon the assessee to explain why the expenditure attributable to earning of exempt income should not be disallowed under section 14A. In reply it was submitted by the assessee that it has not earned any dividend income during the year from investment and it has not incurred any indirect expenses also. The assessee relying upon the decision of the Hon’ble Jurisdictional High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT 234 CTR 1 contended that provisions of Rule 8D is not applicable to the impugned assessment year. The AO, however, did not find merit in the submissions of the assessee. He observed, the assessee has taken loans and paid interest on them. It has also debited indirect expenses. The AO observed, the investment portfolio yielding dividend income has to be monitored and supervised. Accordingly, he held that expenditure incurred for earning dividend income has to be disallowed under section 14A. After examining the details of expenditure incurred by the assessee, the AO held that out of the total interest expenditure an amount of Rs. 27,38,719/- has to be apportioned to dividend income. He also held that certain indirect expenses out of salary and administrative expenses has to be disallowed which worked out to Rs. 8,99,106/-. Further, he disallowed an amount of Rs. 2,00,000/- out of personnel cost. Thus, the total dis allowance made under section 14A amounted to Rs. 38,37,824/-. The assessee challenged the dis allowance before the CIT(A). Learned CIT(A) after considering the submissions of the assessee in the context of facts and material on record found that except the investment of Rs. 1,44,25,000/- in Tulip Stars Hotels Ltd., the balance investments were made from assessee’s own funds and no borrowed funds were utilized. He, therefore, directed the AO to recompute the dis allowance by considering the interest cost only to the extent of investment made in Tulip Stars Hotels. As far as the balance dis allowance towards salary and administrative cost is concerned, he found that the AO has made the said dis allowance on adhoc basis without giving any specific finding whether the assessee had incurred any such expenditure. Accordingly he directed the AO not to make any dis allowance on adhoc basis. Thus, in sum and substance, learned CIT(A) restricted the dis allowance under section 14A only to the extent of expenditure on investment made in Tulip Star Hotels Ltd.
3. Shri Rajan Vora, the learned counsel appearing for the assessee submitted that during the relevant previous year the assessee has not earned any exempt income, therefore, no dis allowance under section 14A can be made. He submitted, the investments from which assessee has not earned any exempt income should be excluded for the purpose of computing dis allowance under section 14A. In this regard the learned A.R. relied upon the following decisions: –
(i) Cheminvest Ltd. vs. CIT (2015) 387 ITR 33 (Del)
(ii) CIT vs. Lakhani Marketing (2014) 272 ITR 265 (P&H)
(iii) Cox & Kings Ltd. vs. DCIT ITA Nos. 1354 & 7770/Mum/2014 dated 4.11.2015
4. The learned D.R. relied upon the observations of the Assessing Officer.
5. We have considered the rival submissions and perused the material on record. The specific contention of the learned A.R. is, in the relevant previous year the assessee has not earned any exempt income. From the assessment order or even the order of the CIT(A) it is not forthcoming whether this particular factual aspect was at all examined. In case the assessee has not earned any exempt income during the relevant previous year no dis allowance can be made under section 14A of the Act. The aforesaid view has been expressed by the Honorable Delhi High Court in the casd of Cheminvest Ltd. vs. CIT (supra). In fact, following the aforesaid decision different Benches of the Tribunal including Mumbai Benches have held that in absence of any exempt income in a particular assessment year no dis allowance under section 14A can be made. In assessee’s own case for A.Y. 2009-10 and 2010-11 (supra) the Tribunal has taken identical view. In view of the aforesaid, we direct the AO to examine this fact and if upon such examination it is found that in the relevant previous year the assessee has not earned any exempt income, by way of dividend or otherwise, no dis allowance under section 14A can be made. Of course, in the course of hearing the learned A.R. relying upon the decision of the ITAT Delhi Special Bench in the case of ACIT vs. Vireet Investment P. Ltd. ITA No. 502/Del/2012 dated 16.06.2017 had also contended that those investments where the assessee has not earned any income should be excluded for computing dis allowance under section 14A. In any case of the matter, exclusion of investments not yielding exempt income would arise only if the provisions of Section 14A is applicable in the event of assessee earning any exempt income in the relevant previous year. In the absence of such income section 14A itself is inapplicable. Accordingly, ground raised is allowed.
6. In ground Nos. 3 & 4 assessee has challenged dis allowance of Rs. 19,09,775/- under section 40(a)(ia) of the Act for non deduction of tax under section 194H on the payments made to Restricted Money Changers (RMCs).
7. Brief facts are, as discussed earlier the assessee is in the business of tours and travels and in the course of such business it also engages itself in trading in foreign currency. During the assessment proceedings the AO noticing that the assessee was also engaged in the business of trading in foreign exchange called for the details of such transactions. In response, the assessee furnished foreign exchange trading account wherein an amount of Rs. 51,13,680/- was debited towards commission payment. The AO called upon the assessee to furnish details of tax deducted at source on such payments. From the details submitted by the assessee he found that the assessee has not deducted tax at source on an amount of Rs. 19,09,775/-. When called upon to explain the reason for non deduction of tax at source on such amount, it was submitted by the assessee that the payment was not in the nature of commission but premium paid separately to RMCs at Goa for purchase of foreign currency by the assessee from them and which they, in turn have purchased from foreign tourists. It was submitted, RMCs requested for reimbursement at card rate, i.e. the rate at which they paid to the tourists in order to keep track of profits earned by them on stock sold to the assessee. The AO was not convinced with the explanation of the assessee. He opined, though, the assessee has claimed to have entered into such transactions with RMCs on principal to principal basis however the facts indicate a principal and agent relationship as the so called premium is debited under the head commission which is over and above the purchase price. Since, the assessee had not deducted tax at source on such payment, the AO disallowed the amount of Rs. 19,09,775/-under section 40(a)(ia) of the Act. The assessee challenged the dis allowance before the CIT(A).
8. Before the First Appellate Authority the assessee reiterated the stand taken before the AO. The learned CIT(A) after considering the submissions of the assessee sustained the addition by holding that payment made by the assessee is covered under Section 194H. While holding so, he also observed that the assessee has itself originally booked such expenditure as commission.
9. The learned A.R. submitted that the assessee has been authorized by the Reserve Bank of India (RBI) to deal in foreign currency. He submitted, the RBI also appoints/ authorizes certain persons/entities as Restricted Money Changers (RMC) who are authorized to purchase foreign currency from non-residents visiting different places in India including Goa. These RMCs operate from their shops/hotels to encash foreign currency and travelers cheques from foreign tourists. He submitted, the assessee has foreign exchange division approved by the RBI to buy foreign exchange currency and travelers cheque from RMCs. It was submitted that the RMCs are wholesale customers of the assessee’s foreign exchange division and assessee pays premium to the RMCs for bulk purchase of foreign currency and travelers cheques. He submitted, since, the RMCs hold these foreign currency/ travelers cheques as their stock in trade and sell them to the assessee as goods it is a direct sale transaction between two principals and there is no principal agent relationship. He submitted, the assessee has not appointed RMCs as its agents to procure/collect foreign exchange and travelers cheques from tourists. Therefore, provisions of Section 194H are not attracted. Explaining further the reasons for not deducting tax on premium the learned A.R. submitted, the assessee also sells foreign exchange to persons in need of such currencies. Generally, persons in need of foreign currency are brought by various travel agents to the assessee for sale of foreign currency. He submitted, commission is paid to the travel agents who bring customers to the assessee for purchase of foreign currency. He, therefore, submitted both these transactions cannot be equated. Hence, the assessee has deducted tax at source under section 194H of the Act in respect of sales of foreign currencies to different persons who are referred to by various travel agents. As far as purchase of foreign currency in block from RMCs, it is not a case of payment of commission but a premium was paid on the basis of difference between the RBI rate and the purchase price at which the RMCs have purchased the currency from tourists. The learned A.R. submitted, though, the assessee has paid premium at other places also, dis allowance has only been made in Goa, and that too, only in the impugned assessment year. To demonstrate the difference between the premium and commission payment the learned A.R. drew our attention to the details of commission paid and premium paid as placed in the paper book. The learned A.R. drawing our attention to Schedule 6 of the Balance Sheet submitted, the assessee has shown the foreign currency as its stock and the RMCs have also shown it as stock in their books of account. Therefore, it is nothing but a purchase and sale transaction between two principals. Therefore, it will not attract the provisions of Section 194H and consequently section 40(a)(ia).
10. The learned D.R. relied upon the observations of the CIT(A).
11. We have considered rival submissions and perused the material on record. As discussed earlier, the assessee has a foreign exchange division approved by the RBI and is authorized to buy foreign exchange and travelers cheques from RMCs and others and sell them to persons in need of them. RMCs are also authorized by RBI to buy foreign currency from non residents visiting various places in India. These facts would show that the RMCs are not agents of the assessee but are appointed by RBI. Though, it may be a fact that the assessee buys foreign currency from RMCs depending upon the needs, however, there is no principal agent relationship between the assessee and the RMCs. The RMCs are free to sell foreign currency bought from tourists to assessee, RBI or any other person authorized by the RBI to deal in foreign currency. It is also to be noted that both the RMCs as well as the assessee have shown foreign currency as their stock in trade. The assessee has no relationship with the persons from whom the RMCs purchase foreign currency and the assessee is no way connected to the concerned tourists. Therefore, in our view the transaction between the assessee and the RMCs is on principal to principal basis and there is no principal agent relationship existing between them. Merely because in the financial statement assessee has debited the amount as commission it cannot be treated so without looking at the real nature of the transaction. The AO must bring on record material to establish that there is a principal agent relationship existing between the assessee and the RMCs. No enquiry has been made by the AO with the RMCs to find out the real nature of transactions between them. Further, assessee’s contention that in no other place in India such premium paid has been disallowed requires to be taken note of. It is also relevant to observe, even in respect of premium payment in Goa, except, the impugned assessment year in no other assessment year such dis allowance under section 40(a)(ia) has been made. That being the case, we are inclined to delete the addition made by the AO.
12. In ground Nos. 5 to 9 the assessee has challenged the dis allowance made under section 40(a)(ia) of the Act for an amount of Rs. 16,29,488/- on account of short deduction of tax at source.
13. Briefly the facts are, during the assessment proceedings the AO while verifying the deduction claimed by the assessee on account of expenses incurred towards legal and professional fees called for necessary details from the assessee. On examining the details the AO was of the view that the assessee had deducted tax at a rate lower than what is prescribed under section 194J of the Act. Further, in so far as payment made towards advertising expenses to various parties, the AO was of the view that the assessee had deducted tax at a rate lower than what is prescribed under the provisions of the Act. Accordingly, he disallowed an amount of `16,29,488/- under section 40(a)(ia) of the Act. The assessee challenged the dis allowance before the CIT(A).
14. Before the CIT(A) the assessee took a specific plea that the provisions of Section 40(a)(ia) of the Act cannot be attracted towards short deduction of tax and in support of such contention he relied upon decision of the Hon’ble Calcutta High Court in the case of CIT vs. S.K. Tekriwal (2012) 361 ITR 43 and the decision of the ITAT Mumbai Benches in the case of DCIT vs. BLC India P. Ltd. ITA No. 5793/Mum/2010. The learned CIT(A) however, did not accept the contention of the assessee. Relying upon a decision of the Honorable Kerala High Court the learned CIT(A) upheld the dis allowance made by the AO. The learned A.R. reiterating the stand taken before the CIT(A) submitted that the provisions of Section 40(a)(ia) are applicable only in case of non-deduction of tax at source and not for short deduction of tax at source. In support of such contention he relied upon the following decisions: –
(i) CIT vs. S.K. Tekriwal (2014) 361ITR 432
(ii) CIT vs. Kishore Rao, HUF (2016) 387 ITR 196
15. The learned D.R. supported the findings of the CIT(A). He also relied upon the decision of the Honorable Kerala High Court in the case of CIT vs. PVS Memorial Hospital Ltd. (2016) 380 ITR 284.
16. We have considered the rival submissions and perused the material on record. The short issue arising for consideration before us is, whether the provisions of Section 40(a)(ia) of the Act can be invoked to make dis allowance on account of expenditure claimed on which the assessee has deducted tax at source at a rate lower than the prescribed rate. We find, there is no decision of the Honorable Jurisdictional High Court on this issue. However, divergent views have been expressed by different High Courts on this issue. The Honorable Calcutta High Court in the case of S.K. Tekriwal (supra) held that no dis allowance under section 40(a)(ia) can be made for short deduction of tax. Following the said decision the Honorable Karnataka High Court in the case of Kishore Rao, HUF (supra) has expressed similar view. However, it needs to be mentioned, the Honorable Kerala High Court in the case of PVS Memorial Hospital (supra) has taken a contrary view by holding that the provisions of Section 40(a)(ia) gets attracted even to a case of short deduction of tax. We may also note that different Benches of the Tribunal have followed the decision of the Honorable Calcutta High Court and held that no dis allowance under section 40(a)(ia) can be made for short deduction of tax at source. Since, there is no decision of the Honorable Jurisdictional High Court on this issue, we are inclined to follow the decisions of the Honorable Calcutta High Court and the Honorable Karnata High Court as referred to above which are favorable to the assessee and hold that no dis allowance under section 40(a)(ia) can be made in a case where the assessee has deducted tax at source at a lower rate. A plain reading of section 40(a)(ia) would also make it clear that dis allowance under such provision can be made only if there is no deduction of tax at source or the assessee has failed to pay to the government account the TDS amount after deducting the same. In any case of the matter, as brought to our notice by the learned A.R. the payee has offered the amount paid by the assessee as income in the relevant assessment year. Therefore, in terms of the second proviso to section 40(a)(ia) no dis allowance can be made. In view of the aforesaid, we delete the addition made by the AO and affirmed by the CIT(A). Grounds are allowed.
17. In the result, assessee’s appeal is allowed.
ITA No. 5583/Mum/2015
18. This appeal has been preferred by the Department. There is a delay of 5 days in filing the appeal. The learned D.R. submitted before us that the delay of 5 days was due to intervening holidays and due to unavoidable administrative procedures. The learned A.R. has no objection in conconding the delay. Having considered the submissions of the parties we are inclined to condone the delay of 5 days in filing the appeal as such delay is for bonafide reasons. Hence we admit the appeal for deciding on merits.
19. The Department has raised two grounds. Ground No. 1 is against the direction of the CIT(A) for re computation of dis allowance made under section 14A. Since, we have already decided this issue while disposing off ground Nos. 1 & 2 of assessee’s appeal in ITA No. 5440/Mum/2015 in the earlier part of the order, this ground has become infructuous, hence, dismissed.
20. In ground No. 2 the Department has raised the issue of violation of Rule 46A of the I.T. Rules by the CIT(A).
21. Briefly the facts are, during the assessment proceedings the AO having found that the assessee has debited expenditure amounting to Rs. 20,04,37,496/- on account of brokerage payment to various parties for arranging inter corporate deposits (ICDs) called upon the assessee to furnish necessary details. After verifying party-wise details of brokerage payment furnished by the assessee the AO alleged certain discrepancies in such payments and ultimately held that the payments are neither genuine nor for the purpose of assessee’s business. Accordingly, he disallowed an amount of Rs. 1,77,68,298/- out of the total expenditure claimed. The assessee challenged the dis allowance before the CIT(A). The learned CIT(A) after considering the submissions of the assessee deleted the addition made by the AO.
22. The learned D.R. relied upon the ground raised by the Department.
23. The learned A.R. drawing our attention to para 7.4 of the of the order of the CIT(A) submitted that though the assessee had furnished additional evidence before the CIT(A), however, the CIT(A) was fair enough to direct the AO to examine such additional evidence and submit his report. He submitted, only after considering the remand report submitted by the AO the learned CIT(A) has decided the issue. He submitted, identical issue was raised by the Department in assessment year 2008-09 and the Tribunal, having found that adequate opportunity was given to the AO to consider the additional evidence, dismissed the ground raised by the Department.
24. We have considered rival submissions and perused the material on record. The grievance of the Department in this ground is that the learned CIT(A) has deleted the addition relying upon additional evidence produced by the assessee without complying to the provisions of Rule 46A. However, the observations made in para 7.4 of the impugned order of the learned CIT(A) reveals that the AO was given opportunity to examine the additional evidence and offer his comments. It is also evident that the AO after examining the additional evidence has submitted his report, wherein, he had accepted that the payments were made to the parties for services rendered by them to the assessee. Only after considering the remand report the CIT(A) has allowed the deduction claimed by the assessee. Thus, as can be seen, full opportunity was given to the AO to examine the additional evidence. Therefore, the allegation that the CIT(A) has not complied with Rule 46A is without any basis. We may also note that identical ground was raised by the Department in an appeal before the Tribunal in assessee’s own case for A.Y. 2008 and the Tribunal having found that opportunity was given to the AO to examine the evidence dismissed the ground raised by the Department. In view of the aforesaid, the ground raised by the Department being devoid of any merit is hereby dismissed.
25. In the result, the appeal filed by the Department is dismissed.
CO No. 117/Mum/2017
26. The grounds raised in the cross objection are merely in support of the order of the CIT(A). In view of our decision in the cross appeals these grounds have become infructuous, hence dismissed.
27. In the result the cross objection is dismissed.
28. To sum up, assessee’s appeal is allowed and the appeal of the Department and the cross objection of the assessee are dismissed.
Order pronounced in the open court on 6th October, 2017.
