IN THE ITAT CUTTACK BENCH
Bonai Industrial Co. Ltd.
Deputy Commissioner of Income-tax
IT APPEAL NO. 43 (CTK) OF 2012
[ASSESSMENT YEAR 2008-09]
JUNE 25, 2012
K.K. Gupta, Accountant Member
This appeal is by the assessee raised the following grounds of appeal.
“1. That the Assessment is arbitrary, without appreciating the facts of the case, by wrongful application of law and hence bad in Law and illegal.
2. That the Learned A.O. erred in disallowing and the CIT(A) wrongly confirmed the application of section 40(a)(ia) to the case of the appellant in regard to a sum of Rs. 1,14,00,000 being the Wagon Facilitation Charges paid.
3. That the Learned A.O. and the CIT(A) wrongly assumed that the appellant paid rent/hire charges for the use of the wagons of the wagon investors viz. Feegrade & Co. Pvt. Ltd. and Rungta Sons Pvt. Ltd., when no such services were taken for wagon facilitation charges.
4. That the Learned A.O. and the CIT(A) erred while considering the availment of wagon facilities available from Railway to the wagon investors in lieu of wagons purchased by them as hiring of plant & machinery.
5. That the order of the learned A.O. and CIT(A) adding and confirming respectively of Rs. 1,14,00,000 for non-deduction of TDS under section 194-I by invoking the provisions of section 40(a)(ia) having been done on the misinterpretation of the impugned provisions of law, the same may kindly be striked down.
6. That the Learned A.O. and the CIT(A) erred while disallowing and confirming respectively of outstanding entry tax payable Rs. 2,84,040.
7. That the learned A.O. and the CIT(A) wrongly assumed that the outstanding liability towards entry tax of Rs. 2,84,040 is debited to profit & Loss Account but the said liability is created by debiting the party accounts for non-submission of requisite form under entry tax act and crediting the entry tax liability in the form of journal entries.
2. The brief facts as have been brought on record are that the assessee in the business of mining and processing of iron ore by raising iron ore from its mines filed its return for the impugned Assessment Year showing income of Rs. 181.79 Crores. During the scrutiny assessment, the Assessing Officer required the assessee to explain as to why payments made to M/s. Free Grade and Co. Pvt. Ltd., and Rungta Sons (P) Ltd., totaling to Rs. 1.14 Crores have not been subjected to deduction of tax at source u/s. 194-I of the I.T. Act disallowed the same u/s. 40(a)(ia). The Assessing Officer tried to consider the payment as hiring charges for railway rakes as an arrangement to be considered for deduction to tax at source u/s. 194-I. The Assessing Officer also disallowed a sum of Rs. 2,84,040 being the outstanding entry tax payable which entry tax was not claimed as an expenses but was identified as a payment when the same had been raised in the parties bills for want of submission of statutory forms. The same was disallowed u/s.43B by the Assessing Officer.
3. Both the issues were appealed against before the learned CIT(A). The learned CIT(A) negated the claim of the assessee for the allowance u/s. 40(a)(ia) in spite of the assessee bringing on record the case laws on the issue in the case of Vodafone Essar Ltd. v. Dy. CIT (TDS)  45 SOT 82. He held that the assessee had acquired the railway rakes and claimed depreciation, therefore, the payment to the two companies was on account of hiring their space being an arrangement as was in assessee’s own case ought to have been subjected to deduction of tax at source. He held the disallowance as proper. With respect to the entry tax payable, he required the assessee to file the evidence which obviously was not to be furnished being a liability and not income for the disallowance u/s.43B was confirmed.
4. The learned Counsel for the assessee initiating his arguments submitted that the assessee had entered into an agreement with Indian Railways to invest under Wagon Investment Scheme as public private partnership which implies the private party can use a public property provided certain specified investment are made and the public party can also use the private property on certain prescribed facilities. The salient feature of the scheme is as under: (Ref : pages 14 to 20 of Paper Book).
i. It is a Public-Private Partnership for procurement of Wagons to meet with the anticipated incremental freight traffic in coming years.
ii. Customers are required to invest for procurement of wagons in order to get assured supply of a guaranteed number of rakes every month based on number of rakes procured with 10% concession on freight.
iii. In addition, two bonus rakes per month will be supplied without freight concession.
iv. Wagon procured under the scheme will merge and operate in general pool of wagons of Indian Railways.
v. Freight rebate of 10% shall be granted for 10 years and guaranteed supply of wagons at the rate of 6 rakes per month. In addition, a guaranteed supply of two bonus rakes will be made without freight concession. (For customers opting for EOL Scheme 2 further additional bonus rakes will be supplied without freight concession).
vi. No Lease charges shall be payable under WIS.
vii. Ownership of wagons procured under Wagon Investment Scheme (WIS) shall get transferred to Indian Railways after 10th years for BOXN rakes, 15 years for BCN rakes, 9 year for BTPN rakes, 15 years for BRNA rakes, 7 years for BOST rakes and 7 years of BOBRN rakes.
The above scheme clarifies that the wagons purchased and handed over to Railway shall be mixed with the common pool. After completion of 10th year, the assessee shall automatically loose the entitlement, since the said wagons shall be transferred to railways and also the agreement is valid for 10 years. As per clause 5.5 of the scheme, no lease charges shall be payable under Wagon Investment Scheme. It is apparent from the above scheme that there is no lease charge payable against wagons investment in Railways and the assessee is only getting priority in allotment of rakes. Therefore, the investment in wagon Investment Scheme is only to acquire an entitlement and the assessee and other users are paying the usual freight to railways. If the entitlement granted by Railway as per Wagon Investment Scheme is not used, it can be seconded to other users and similarly, the assessee can use the entitlement of the other users. The letter to Railway and clarification by Railway are contained in pages 21 to 27 of the Paper Book. In this process the assessee learned Rs. 1,80,00,000 as wagon facilitation charges and paid Rs. 1,14,00,000, under the same head. Both are appearing in the Profit and Loss account under the head other income and wagon facilitation charges. (Ref: pages 8 and 9 of the Paper Book). The assessee has used the entitlement of the Free Grade and Co. Ltd. and also Rungta Sons (P) Ltd. by making payment of Rs. 42,00,000 and Rs. 72,00,000, respectively. Beside this, usual freight is paid to Railways for transportation. Payment for the use of the entitlement known as ‘Wagon Facilitation Charges’ is purely a business expenditure to acquire the entitlement for allotment of wagon on priority basis. Reference on this issue is made in the case of M.S. Kandappa Mudaliar v. CIT  32 ITR 313 (Mad.), where it was held that payment made for users quota would qualify as business expenditure. (Ref: case decision contained in pages 35 to 38 of the Paper Book). In the context of the above submission, it is clear that investment made in the Wagon Investment Scheme, by way of providing wagons to railway to avail rakes on priority basis is different from payment made to outsiders to use their entitlement known as Wagon Facilitation Charges. The same payment of Wagon Facilitation Charges cannot be treated as hire charges for use of wagons of said outsider parties. The assessee has purchased wagon handed over the same to railway, which is mixed in the common pool, loosing the identity and the assessee derived right to get benefit under the scheme for 10 years and shall not get any compensation for leaving the wagon with the railways forever. The Learned Assessing Officer, while examining the accounting head Freight and total Transportation Expenses (detail reference in page 28 of Paper Book and Schedule XVI of Profit and Loss account, page 9 of the Paper Book), noted the said payment of Wagon Facilitation Charges and asked for explanation about the non-deduction of tax for same payment. He presumed that the payment is in the nature of freight. The freight is defined in the Income Tax Act u/s 40AE(7), which does not include expenses incurred for transportation by railway. Again he linked the same to the depreciation charges on wagon. The Balance Sheet of the assessee is submitted. Reference may be made to page 10, para 3, (accounting policy) of Paper Book, where it is mentioned that the cost of Railway Wagons are being amortized over the period in which wagons are the property of the Company under Wagon Investment Scheme.
5. With respect to the second issue, he submitted that by no stretch of imagination can the amount held as liability in the books of account be disallowed u/s. 43B if it has not been claimed as expenditure. He submitted that rather the amount has been rendered to income in the P & L account insofar as the entry tax portion is borne by the purchaser has not submitted to the assessee the document which would require the assessee to pay the entry tax is on account of income already rendered to tax cannot be disallowed. He prayed that the Assessing Officer be directed to delete the said disallowance.
6. The learned CIT-DR pointed out that the arrangement has been considered by the Assessing Officer and the learned CIT(A) squarely fits into the definition for the purpose of disallowance u/s.40(a)(ia). The assessee cannot say that it was the reimbursement insofar as the learned CIT(A) has rightly held that the assessee could not step into the shoes of the Railways for allowing the assessee 10 years period during which period the amount paid by the assessee was to be liquidated against other use to the Railway wagons were required by the assessee from other parties. The arrangement remains the same and it is akin to hiring out the plant and machinery as defined u/s. 194-I was to be subjected to deduction of tax at source u/s. 194-I was therefore ripe for disallowance u/s. 40(a)(ia). She supported the order of the learned CIT(A) for her part of submissions.
7. With respect to the second issue she proposed that the matter be restored to the file of the Assessing Officer for verification in the light of facts as of now brought on record by the learned Counsel for the assessee.
8. We have heard the rival contentions of the parties and perused the material available on record. Considering the facts and circumstances of the case, we are inclined to hold that the facts of the assessee’s case are squarely applicable as was considered by the ITAT, Mumbai Bench in the case of Vodafone Essar Ltd. (supra). The learned CIT(A) has tried to give a meaning to the definition as given in the Statute u/s. 194-I vis-à-vis the agreement for wagons investment scheme as has been perused in his order. Having reproduced the agreement and the definition of rent, he has not been to correlate the same for the simple reason that rent or arrangement has to be understood from the point of view of ownership. A particular claim of depreciation would remove the intangibility was considered by it but at the same time the ownership could not be disputed in view of the fact that the depreciation cannot be more than the cost of the asset. This clearly crystallized the issue in favour of the assessee for having obtained its own wagon investment, the assessee covered the risk from other parties who were similarly placed and who in turn gladly allowed the assessee to use the rakes when they did not require it. The Assessing Officer therefore misdirected to hold that the arrangement was an arrangement as considered under the provisions of Section 194-I insofar as at no point of time the license to use the wagons could be considered for the peaceful enjoyment of the landlord being the assessee. The parties namely M/s. Free Grade and Co. Pvt. Ltd., and Rungta Sons (P) Ltd., are obviously not Government parties who could be said to be owning the wagons which was the mutual arrangement for the assessee to utilize having its own rakes for its use which were already occupied. The profit went to the railways in any case. This is why the facts of the assessee’s case are squarely applicable to the case laws cited before the learned CIT(A) in the case of Vodafone Essar Ltd. (supra) when it was the case of the Revenue that Government owned machineries available for utilization cannot be at any point of time be considered as owned by the user thereof when the depletion in the license right has been held as claimed for depreciation during the license period. The maximum error that could have been made in claiming these expenses was to ascertain the case of such arrangement which was never the case of the assessee or the Assessing Officer as no arrangement can be made privately for or against the railways. In this view of the mater, we do not find any merit in holding the payments as for an arrangement subject to deduction of tax u/s. 194-I. The disallowance u/s.40(a)(ia) is therefore, directed to be deleted.
9. In respect to the second issue, we are inclined to find favour in the contention of the learned Counsel for the assessee to the extent that the amount which has not been claimed as deduction cannot be disallowed u/s.43B because it pertains to a liability created being a tax, cess or duty already subjected to tax. Therefore, the said disallowance is also directed to be deleted.
10. In the result, the appeal of the assessee is allowed.