Conclusion: Since the director was not a shareholder when bonus was paid to him and also the bonus was not paid out of the earlier years’ accumulated profits, therefore, deduction of bonus paid to director was allowable under 36(1)(ii).
Held: AO during the course of assessment proceedings noticed that assessee-company had made payment of bonus apart from salary to the Executive Chairman and Director of the company, Shri S. It claimed deduction under section 36(1)(ii) for the same. According to the AO, during the year under consideration, 50% of shares of assessee-company were held by Shri S, which was transferred to Mount Kellett Capital Management (Mauritius) Ltd. Therefore, AO disallowed the claim of bonus expenses paid to Shri S by holding that he was Director as well as shareholder of assessee-company and bonus paid to Director/shareholder was not allowable u/s. 36(1)(ii). It was held Shri S was not a shareholder when the bonus/commission was paid to him and once he was not a shareholder and commission/bonus paid for the services rendered, the provisions of Section 36(1)(ii) mandates that the bonus was to be allowed. Admittedly, this bonus was not out of the earlier years’ accumulated profits. Hence deduction under section 36(1)(ii) was allowable.
FULL TEXT OF THE ITAT JUDGEMENT
These two appeals filed by the Revenue as well as the assessee are directed against the order of the Commissioner of Income Tax(Appeals)-4, Mumbai.
Revenue’s appeal in ITA No. 269/Mum/2015:
2. The first issue in this appeal of Revenue is as regards the order of the CIT(A), deleting the disallowance of bonus payment paid by the assessee to Shri Suresh Prabhala. For this, Revenue has raised the following two grounds:
“1. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in deleting the disallowance made by the AO on account of bonus paid by assessee to Shri Suresh Prabhala, holding that the bonus paid was in connection with his employment and not in respect of shares held by Shri Suresh Prabhala and also wrongly distinguishing the decision of Special Bench of ITAT, Mumbai int eh case of Dalal Broacha Stock Broking Ltd”.
2. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in deleting the disallowance made by the AO, on account of bonus paid by the assessee to Mr. Suresh Prabhala, holding that there were no profits available with the assessee company ignoring the fact that assessee company has offered ₹ 11,92,23,908/-as business profit for AY. 2009-10”.
3. Brief facts of the case are that the AO during the course of assessment proceedings noticed that assessee-company has made payment of bonus apart from salary to the Executive Chairman and Director of the company, Shri Suresh Prabhala amounting to ₹6,66,50,000/-. According to the AO, during the year under consideration, 50% of shares of the assessee-company were held by Shri Suresh Prabhala, which was transferred to Mount Kellett Capital Management (Mauritius) Ltd.
According to AO, the Director’s commission/bonus is not allowable expense as per the provisions of Section 36(1)(ii) of the Income Tax Act, 1961 [herein after referred to as ‘Act’]. According to him, assessee was issued show cause notice as to why the commission/bonus paid to Shri Suresh Prabhala be not disallowed. Assessee replied that Mr. Suresh Prabhala has acquired 5,000 equity shares in the assessee-company on 11-08-2008 but subsequently, transferred 4,999 equity shares to Mount Kellett Capital Management (Mauritius) Ltd., and one share to Mount Kellett HK Holdings LLC on 16-09-2008 respectively. Assessee filed copies of Form FC-TRS filed with Reserve Bank of India for transfer of equity shares from Shri Suresh Prabhala to Mount Kellett Capital Management (Mauritius) Ltd., and Mount Kellett HK Holdings LLC. According to assessee, Shri Suresh Prabhala ceased to be shareholder in the assessee-company on 16-09-2008. But the AO disallowed the claim of bonus expenses of ₹ 6,66,50,000/- paid to Shri Suresh Prabhala by holding that he is Director as well as shareholder of the assessee-company and bonus paid to Director/shareholder is not allowable u/s. 36(1)(ii) of the Act. Aggrieved, is preferred an appeal before the CIT(A). The CIT(A) after considering the submissions of assessee and also considering the decision of Special Bench of ITAT in the case of Dalal Broacha Stock Broking (P) Ltd., Vs. Addl. CIT [131 ITD 36], deleted the disallowance by observing in para 188.8.131.52.6 to 184.108.40.206.8 as under:
“220.127.116.11.6 Having carefully and dispassionately considered the rival submissions and in view of the above, the second condition with respect to allowability of deduction under section 36(1)(ii) of the Act is also satisfied. Therefore, it is not a case covered by the decision of the Dalal Broacha Stock Broking Pvt. Ltd., Vs. ACIT (supra). Ld.AR has clearly distinguished facts of the present case from the facts recorded in the case of the said Dalal Broacha Stock Broking Pvt. Ltd., Vs. ACIT (supra) and which may be tabulated as under:
|Sr. No.||Facs in the case of Dalal Broacha||Facts in the case of the Appellant|
|1.||Entire share capital of the company was held by the shareholder employees. All the shareholder employees held
shares through out the year.Also, on the date the
commission was paid to the employees, the employees were shareholders in the company.
|Entire share capital of the Appellant was not held by the shareholder employee i.e., Mr. Prabhala. Initially, even Mr.
Raman Sharma held 50% of the share capital which was ultimately transferred by Mr.
Prabhala and Mr. Raman Sharma to MK Mauritius and Mount
Kellett Holdings LLC, both non-residential employees.At the time of the bonus was paid to Mr. Prabhala, he was not a shareholder of the Appellant.
|2.||All shareholder employees to whom commission was paid were relatives.||Mr. Prabhala was nowhere connected/related to any of the other shareholders.|
|3.||Payment of commission was linked to the profits earned by the Company. The Company
had earned substantial profits in the year in which the commission was paid. Thus, the company had no justifiable reason as to why it had not paid dividend to its shareheloders.
|The year under consideration, AY. 2009-10 was the first year of business. The Appellant had no
distributable profits for the year to enable it to pay dividend. There was no possibility that the Appellant would have distributed dividend in the absence of distributable profits.Further, the bonus amount was determined on the basis of various parameters such as qualifications and experience of employees, industry trends, roles and responsibilities etc.,
18.104.22.168.7 Ld.AR vigorously argued and submitted that the A.O. has erred in disallowing bonus of Rs. 6,66,50,000/- paid by the Appellant to Mr. Prabhala under section 36(1)(ii) of the Act on account of the following reasons:
22.214.171.124.8 In view of the above, the A.O. is directed to reduce the disallowance of payment of bonus to the said Mr. Suresh Prabhala under section 36(1)(ii) of the Act. Therefore Ground of Appeal No. 2 is allowed”.
Aggrieved, now Revenue is in second appeal before the Tribunal.
4. We have heard rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that it is a fact that Shri Suresh Prabhala has acquired 500 equity shares of assessee-company as on 11-08-2008 but subsequently on 16-09-2008, transferred 4,999 equity shares to Mount Kellett Capital Management (Mauritius) Ltd., and one share to Mount Kellett HK Holdings LLC respectively. Assessee during the course of assessment proceedings before the AO and also before the CIT(A) during the appellate proceedings filed the details of transfer of equity shares by Shri Suresh Prabhala to Mount Kellett HK Holdings LLC. Assessee also filed copies of Form FC-TRS as filed with Reserve Bank of India for transfer of equity shares from Shri Suresh Prabhala to these two companies i.e., Mount Kellett Capital Management (Mauritius) Ltd., and Mount Kellett HK Holdings LLC. As on 16-09-2008, Shri Suresh Prabhala ceased to be shareholder of the assessee-company. Assessee-company has paid bonus to Shri Suresh Prabhala along with salary for the month of January, 2009 to 31-03-2009. When this bonus/commission was paid to Shri Suresh Prabhala, he was not shareholder of the assessee-company and assessee’s contentions before us also was that the provisions of Section 36(1)(ii) will not be applicable in the present case in the given facts and circumstances.
4.1. We have gone through the provisions of Companies Act, 1956 cited by Ld. Counsel i.e., Section 371, 372 and 205 which states that the dividend is to be paid only out of profits. We also find that the assessee being the first year of business recruited employees from other organisations based on educational qualifications, past experience of such employees and the relevant details are as under:
|Name of the
date of joining
|Date of joining
|Mr. Prabhala Prabhala||Managing
|MBA, IIM Calcutta, Major in Finance||He is the Managing Director of the Company.
He is responsible for overlooking the overall activities of the company.
|Shiv Nandan Negi||Associate
|MBA, IIM Ahmedabad Delhi Institute of Technology, Delhi University||He focuses on retail, cement education and industrial appliances sectors.|
|MBA, IIM Calcutta, Major in Finance Shriram College of Commerce (SRCC) Delhi University||He focuses on metals and
mining, financial services, power and e-commerce sectors
|Chartered Accountant B. Com (SIES), Mumbai University||He is responsible for identification of investment opportunities across sectors.|
4.2. We find that the assessee has paid bonus in aggregating to Rs. 12.90 Crores to all its employees in the month of January, 2009 and out of the above, the assessee paid a bonus of ₹ 6,66,50,000/- to Shri Suresh Prabhala. We have gone through the provisions of Section 36(1)(ii) of the Act, which is relevant for the year under consideration, which is being reproduced as below:
“Sec.36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28—
(ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission;
4.3. From the plain reading of the provisions of Section 36(1)(ii) of the Act, which provides that a sum paid to an employee as bonus or commission for services rendered by the employees should be allowable as deduction unless such amount or otherwise payable to employee as provided are dividend.
According to us, the section allowed deduction if the expenditure is on account of bonus or commission paid to an employee and for services rendered. Such sum would not even otherwise payable as profit or dividend. Assessee being newly incorporated, had recruited employees from other organisations based on educational qualifications and based on experience of such employees, which we have already narrated above. It is a fact that assessee has agreed to pay bonus only to its employees for the year under consideration to their continued employment and Shri Suresh Prabhala rendered services for the assessee and assessee in lieu of that has paid bonus in the month of January, 2009.
4.4. Here now, we want to refer to the case law of Co-ordinate Bench of ITAT, Pune in the case of Arihantam Infraprojects (P) Ltd., Vs. Jt. Commissioner of Income-tax, [156 ITD 425] (Pune-Trib.),wherein the Tribunal has considered the decision of the Special Bench of Mumbai in the case of Dalal Broacha Stock Broking (P) Ltd., Vs. Addl. CIT(supra), decided the issue vide para 18 to 23 as under:
“18. Under the provisions of section 36(1)(ii) of the Act, it is provided that the bonus or commission paid would be allowed as deduction without any restriction subject to the provisions of section 43B of the Act, wherein it is provided that the said amount would be allowed as deduction in the year of payment. There is another restriction to the said allowability of deduction that in case unreasonably excessive payments are made to relatives or connected persons, the same could be disallowed under the provisions of section 40A(2) of the Act. It may be put on record that the CIT(A) had disallowed the claim of the assessee on the premise that where dividend was to be paid out of the profits of the assessee company, the payment of commission to the directors was hit by the provisions of section 36(1)(ii) of the Act. The CIT(A) has not held the payment made to the directors to be excessive in view of the provisions of section 40A(2) of the Act, which is a safeguard for controlling the payment to relatives or connected persons. Under the amended provisions of section 36(1)(ii) of the Act, there is no restriction on the quantum of payment. However, the spirit of section that where the expenditure has been incurred in connection with carrying on of the business, the same is allowed as deduction, the commercial exigency is to be viewed in the light of the requirement of business and the actual services rendered by the persons concerned. Looking at the nature of sub-contract executed by the assessee which is in specialized field, it cannot be held that the same was carried out without the efforts of concerned directors. In any case, the businessman is the best person to decide its affairs and expenditure cannot be disallowed on any surmises. We find merit in the plea of the learned Authorized Representative for the assessee that in case the concerned entity was a partnership concern, under the provisions of section 40(b) of the Act, 60% of the profits of business could be allowed as remuneration to the partners of the said entity. The assessee has furnished the details of directors’ remuneration and commission paid to the directors and the total of the same does not exceeds 60% of the profits. Merely because the assessee is a private limited company and had agreed to pay the commission to the directors by passing Resolution in this regard before the close of year, the same cannot be brushed aside and the said expenditure was disallowed in the hands of assessee on mere surmises. On the other hand, remuneration paid to the same directors was allowed by the Assessing Officer and not disturbed by the CIT(A), which in turn establishes that the directors were working directors. We find no merit in the observations of CIT(A) in this regard. The assessee out of total profits of Rs.93.48 lakhs available for appropriation, proposed dividend amounting to Rs.1.90 lakhs only and the taxes on distributed profits were Rs.0.30 lakhs. In view thereof, we hold that where the directors had given services and in recognition thereof, there was proposal to pay commission to the said directors, then the same could not be questioned merely on the basis of speculation by the Revenue that the same was to avoid payment of dividend tax. The assessee was entitled to claim of deduction of Rs.1 crore under section 36(1)(ii) of the Act. For the above proposition, we find support from the ratio laid down by the Hon’ble Delhi High Court in Chryscapital Investment Advisors (India) (P.) Ltd. v. Dy. CIT  232 Taxman 20/56 taxmann.com 417, wherein similar issue arose in respect of payment of commission and its allowability as deduction under section 36(1)(ii) of the Act and its denial on the premise that the same was paid to the shareholders in view of dividend with the objective of avoiding taxes. The Hon’ble Delhi High Court held as under:—
“43. The final question that arises for this Court’s determination in the present appeal is the assessee’s claim for deduction under Section 36(1)(ii) of the Act in respect of the bonus paid by it to its two shareholders – Ashish Dhawan and Kunal Shroff. The lower authorities denied such claim, holding that the bonus was paid to the shareholders in lieu of dividend with the objective of avoiding tax. Such inference was drawn from two facts: a) the bonus paid was in proportion of their shareholding in the assessee company, i.e. 2:1; and b) no dividend had been declared by the assessee. However, a perusal of an excerpt from the DRP’s order dated 21.09.2012 quoted by the AO in his order dated 19.10.2012 contradicts both these facts: a) bonus was not paid in the ratio of 2:1 and b) the assessee had declared interim dividend of Rs.5,47,47,000/-. Further, the bonuses paid to the two shareholder directors in the preceding two financial years were in the ratio of 60-65%: 40-35%, even though their shareholding was 1:1. The balance sheet of the assessee placed on record also indicates that the two shareholders also hold directorial positions in the assessee. Therefore, the assessee’s contention that the bonus was paid to the shareholders in their managerial capacity, like in the case of other managers, cannot be questioned merely on the basis of a speculation by the revenue that such payment was to avoid tax. In such circumstances, the deduction under Section 36(1)(ii) in respect of payment of bonus to the two shareholder directors is allowed. The assessee has relied upon a number of judicial pronouncements to support its contention. However, we do not consider it necessary to discuss those decisions for ruling in its favour. Therefore, this question is answered in favour of the assessee.”
19. The learned Authorized Representative for the assessee has placed reliance on series of decisions. The Hon’ble Delhi High Court in AMD Metplast (P.) Ltd’s case (supra) has laid down the ratio that where commission was paid as part and parcel of salary and TDS was deducted and where the director was liable to pay tax on both the salary and component in the commission, no disallowance was warranted under section 36(1)(ii) of the Act on the surmise that the dividend had to be paid to the shareholders in terms of the Companies Act. The Hon’ble High Court further held that dividend is a return on investment and not salary or part thereof. Herein, the consideration in the form of commission which was paid to Ashok Gupta was for services rendered by him as per the terms of appointment as a Managing Director.
20. Similar proposition has been laid down by the Hon’ble Delhi High Court in CIT v. Convertech Equipments (P.) Ltd.  217 Taxman 115 (Mag.)/36 com314 wherein if the commission was found to be paid for services rendered by the director, then the same cannot be said to be distribution of dividend or profits in the guise of commission. Where commission was paid as a form of remuneration for actual services rendered, the dividend was a return on investment and was to be paid to all the shareholders equally. It was thus, held that if the commission was paid for actual services rendered, provisions of section 36(1)(ii) of the Act would not apply.
21. Another aspect to be kept in mind while allowing the claim of the assessee is that where the commission has been paid to the directors and the taxes have been paid by the said directors on its income, then no disallowance is warranted in the hands of the assessee company. The Hon’ble Bombay High Court in Indo Saudi Services (Travel) (P.) Ltd’s. case (supra) have laid down the proposition that where the payee has been paid incentive commission, then there is no tax avoidance and hence, no disallowance under section 40A(2)(b) of the Act. Applying the same simili to the facts of the present case, the assessee company had paid the commission to the directors, who in turn had declared the same in their individual return of income, on which taxes have been paid and applying the simili laid down by the Hon’ble Bombay High Court in such circumstances, no disallowance was warranted in the hands of payer as there was no attempt to avoid tax.
22. The CIT(A) while disallowing the claim of assessee had found support from the ratio laid down by the Mumbai Special Bench of Tribunal in Dalal Broacha Stock Broking (P) Ltd.’s case (supra). The Delhi Bench of Tribunal in K.L. Concast (P) Ltd.’s case (supra) while deciding the issue of commission paid to the managing director and its allowability under section 36(1)(ii) of the Act, observed that where the commission was treated as part and parcel of salary by the assessee company as well as the managing director and tax deduction was made under section 192 of the Act treating the commission as part of salary, then the disallowance of commission paid to managing director was not justified by applying the provisions of section 36(1)(ii) of the Act. Reliance in this regard was placed on the ratio laid down by the jurisdictional High Court in AMD Metplast (P) Ltd.’s case (supra) In view thereof, the reliance placed upon by the Revenue on ratio laid down by the Mumbai Special Bench of Tribunal in Dalal Broacha Stock Broking ((P) Ltd.’s case (supra) was held to be not correct, in view of the decision of Hon’ble High Court, which was binding on all the subordinate Courts and Tribunals working within the jurisdiction of such High Court. The decision of Mumbai Special Bench of Tribunal is not binding, in view of the ratio laid down by the Hon’ble Delhi High Court in series of decisions as referred to by us in the paras hereinabove and consequently, we find no merit in the reliance placed upon by the CIT(A).
23. In the totality of the above said facts and circumstances, we hold that the assessee is entitled to the claim of deduction on account of commission paid to the directors for the services rendered by them at Rs.1 crore. Accordingly, we direct so. The grounds of appeal raised by the assessee are thus, allowed”.
4.5. The assessee, before us has also made distinction between the facts of the assessee with the decision of Dalal Broacha Stock Broking (P) Ltd., Vs. Addl. CIT(supra), which is as under:
|Particulars||Dalal Broacha||Mount Kellet
|1||Shareholders at the time of payment of
|Three shareholders viz:
a. Mr. P. Dalal
b. Mr. N. Dalal
c. Mr. V. Dalal
|Two shareholders viz:
a. Mount Kellet
b. Mount Kellet
|2||Bonus/commission paid to:||All three directors who were the
shareholders viz:a. Mr. P. Dalalb. Mr. N. Dalalc. Mr. V. Dalal
|Employees who wee not shareholders at
time of payment of bonus, viz:a. Mr. Suresh
Bhabhalab. Mr. Shiv Nandan Negic. Mr. Nikhil Banerjeed. Mr. N. Venkitraman
|3.||Whether sufficient profits were available at the time of payment of bonus/ commission:||Yes. Therefore assessee was able to declare dividend||No (Loss of Rs. 13,52,63,768/- as per draft accounts as of January 2009 – Pg No. 28 of FPB) and therefore assessee was not able to declare dividend|
|4.||Relationship of employees/directors inter-se to whom bonus/commission was paid||All directors were relatives||Mr. Suresh Prabhala was not related other directors or connected to other shareholders|
|5.||Period of holding shares||All three shareholders held the entire share
capital throughout the year (i.e. at the time of payment of commission as well)
|Mr. Suresh Prabhala (promoter director)
held shares only for a period of 11.08.08 to 16.09.08 (37 days only) and not at the time of payment of bonus.
|6.||Relevant time of payment of bonus/commission||Commission was paid after the
year end profits were determined
|Bonus was paid during the year i.e. before profits were determined for the year|
|7.||Criteria for payment of bonus/commission||Commission was linked to the profits of the assessee
company.Company earned sizable profits and no justification offered by the
company for non- payment of dividend
|First year of business. No sufficient profits
for declaring dividend at the relevant time when the bonus was actually paid
4.6. In view of the above factual position that Shri Suresh Prabhala was not a shareholder when the bonus/commission was paid to him and once he is not a shareholder and commission/bonus paid for the services rendered, the provisions of Section 36(1)(ii) mandates that the bonus is to be allowed. Admittedly, this bonus is not out of the earlier years’ accumulated profits. Hence, we confirm the order of CIT(A) and this issue of Revenue is dismissed.
5. In the result, the appeal of Revenue is dismissed.
Assessee’s appeal in ITA No. 786/Mum/2015:
6. The next issue in assessee’s appeal is as regards the order of the CIT(A) erred in not adjudicating the issue of granting of credit for tax deducted at source amounting to Rs. 1,31,32,183/-. For this, assessee has raised the following Ground No.1:
“Ground No. 1 – Short credit of taxes deducted at source
a) On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income-tax (Appeals)-4 [CIT(A)] erred in not adjudicating on merits the Appellant’s plea for granting of credit for taxes deducted at source amounting to ₹ 1,31,32,183/-.
b) The Appellant prays that full credit of the taxes deducted at source be allowed”.
7. Briefly stated facts are that during the year under consideration, assessee received total service fee of ₹31,29,01,267/- from its associate enterprises. Out of the same, an amount of Rs. 11,77,87,477/- was received by assessee by post on 31-03-2009, on which tax was deducted at source and bonus for the period in AY. 2010-11 @ 11.33%, including surcharge and education cess. The assessee in its return of income for AY. 2009-10 offered the entire income of Rs. 31,29,01,267/- to income tax, which is undisputed. By virtue of earning of this income in AY. 2009-10 and offering the same as income to tax in AY. 2009-10, the assessee claimed credit for the corresponding amount of TDS amounting to 3,54,51,714/- on the said income in its return of income for the AY. 2009-10.
8. The AO during the course of assessment proceedings has not allowed the credit for TDS amounting to Rs. 1,33,45,316/-, but allowed credit only for an amount of Rs. 2,23,19,530/-. Therefore, short credit for TDS was granted by AO amounting to Rs. 1,31,32,184/-. Aggrieved, assessee preferred an appeal before the CIT(A). CIT(A) also directed the AO to grant correct credit for TDS after due verification, vide para 5.4.2 as under:
“5.4.2. Having regard to the facts and circumstances of the case, the AO is directed to grant correct credit for TDS to the appellant after due verification in accordance with CBDT Instruction No. 01/2012 dated 02.02.2012 and CBDT Instruction No. 04/2012 dated 25.05.2012 read with CBDT Instruction No. 05/2013 dated 08.07.2013 issued vide F.No. 275/03/2013 – IT(B). Ground of Appeal No. 3 is accordingly disposed off”.
Aggrieved, assessee preferred second appeal before the Tribunal.
9. We have heard rival contentions and gone through the facts and circumstances of the case. Before us, Ld. Counsel filed reconciliation with accounts and return of income and also summary of TDS credit, which is as under:
|Particulars||Income Rs.||Tax Amount Rs.|
|57||April 1, 2008 to March 31, 2009||19,51,13,792||2,21,06,398|
|58||April 1, 2009 to June 30, 2009||11,81,58,470||1,33,87,358|
|7||Gross Receipts as per Profit and Loss Account||31,29,01,267|
|1||TDS Credit claimed as per computation of Total Income||3,54,51,714|
|60, 61 (para 2)||Difference – explained in Application u/s. 154||3,70,995||42,042|
10. It was contended by the Ld. Counsel that same summary was given before the AO as well as before the CIT(A). Ld. Counsel stated that this issue is squarely covered in assessee’s favour in the case of CIT Vs. Smt. Pushpa Vijoy [247 CTR 575] (Kerala), wherein the Hon’ble Kerala High Court was held that in view of the provisions of Section 199 of the Act, assessee is entitled to credit of tax based on TDS certificate in the assessment year in which income from which tax is deducted is assessed to tax and declared. The Hon’ble Kerala High Court considered this issue in para 11 and 12 as under:
“11. The question to be considered is whether the assessing officer was justified in refusing to give credit for tax payments based on TDS certificates issued by the Bank for the reason that income is not returned for assessment by the assessees in the assessment year following the year in which tax is recovered and paid by the Banks. We do not think there is any justification for assessees’ claim because Section 199 of the Income Tax Act makes it clear that the assessee is entitled to credit based on TDS certificate only in the assessment year in which income from which tax is deducted is assessed. Therefore, when the statute makes it mandatory that credit of tax based on TDS certificate is available only in the assessment year in which the income from which tax deducted at source is assessed, we do not know how the Tribunal can over-rule the statutory provisions and allow the claim. In our view, going by the practical difficulty to retain TDS certificates for several years until the interest is returned for assessment on cash basis, prudent assessees should return income on which tax is recovered and remitted by the payer in the assessment year following the year in which such income is subject to deduction of tax and remittance by the payer. The assessees who do not do it should follow Section 199 and Rule 37BA, retain the TDS certificates and claim credit in the assessment year in which such income is returned for assessment.
12. The finding of the Tribunal that there is no provision in the Income Tax Act or Rules to defer credit of tax in assessments based on TDS certificates obtained is really incorrect because sub-sections (1) and (3) of Section 199 read with Rule 37BA of the Income Tax Rules specifically authorise the assessee to retain TDS certificates and to produce it and claim credit in the year in which income on which recovery of tax made is returned for assessment. As of now, the Act does not provide that assessees should return the income for assessment in the assessment year following the previous year in which tax is recovered at source and TDS certificate is issued by the payer and if so provided assessment and credit of tax will go together which will avoid botheration for the assessees as well as for the Departmental Officers. In our view, the provisions contained in sub-sections (1) and (3) of Section 199 read with Rule 37BA of the Income Tax Rules serve a purpose because if income is not assessable in the assessment year and at the same time assessees are entitled to credit of tax recovered and remitted in respect of such income, the Department will be compelled to refund the entire tax amount every year and along with it if refund is not made within three months from filing of return, mandatory interest will also payable, as provided under Section 243(1) of the Income Tax Act which will defeat the purpose of TDS provisions in the Act. Therefore, we do not find any justification for the Tribunal to allow credit of tax based on TDS certificates without corresponding assessment of income in the assessment years concerned which is against the statutory provision. We also do not find any merit in the contention of the respondents-assessees that the amount covered by TDS certificates itself should be treated as income of the previous year relevant for the assessment year concerned and the tax amount should be assessed as income by simultaneously giving credit for the full amount of tax remitted by the payer. In these cases, the entire interest credited should be assessed on maturity of the deposit and on payment by the bank, as the assessees are admittedly following cash system of accounting. However, in our view, if Section 145(1) is amended for assessment of income on which TDS is made in the assessment year following the year in which deduction is made irrespective of the system of accounting followed by the assessee, the same will avoid problems for the assessees and the Department.
Based on the findings above, we allow the Departmental appeals by reversing the orders of the Tribunal and that of the first appellate authority and by restoring the assessments denying credit of tax in the assessments for which corresponding income is not assessed. However, since we are allowing the Departmental Appeals, we leave it open to the respondents-assessees to claim credit based on the very same TDS certificates against the interest income assessed in the year in which such income is assessed”.
11. Similarly, the Co-ordinate Bench of the Tribunal in the case of Surendra S. Gupta Vs. Addl. CIT has considered the similar issue and directed to allow the credit. Accordingly, we direct the AO to allow the credit in terms of the decision of the Hon’ble Kerala High Court and after verification of the facts. This issue of assessee’s appeal is set aside for verification only.
12. In the result, the appeal of assessee is allowed subject to verification of facts.
13. To sum-up, the appeal of Revenue is dismissed and the appeal of assessee is allowed.
Order pronounced in the open court on 27th day of November, 2018