Brief of the Case
ITAT Bangalore held In the case of M/s. Ravi Spice Processors P. Ltd vs. ACIT that amendment to Sec. 40(a) (ia) whereby a second proviso was inserted by the Finance Act, 2012, w.e.f. 1-4-2013 which state that if the payee has considered the income in return of income and tax has been paid by the payee, it will be presumed that the payer has discharged his liability. It was held that these provisions are intended to remove hardship with the assessee, so these will be applicable retrospectively w.e.f. 01/04/2005. However to verify whether the payee has accounted and paid the tax liability, matter remanded to AO for verification.
Facts of the Case
The assessee, an exporter of spices and food items had filed its return of income for the relevant assessment year declaring income of Rs.1,25,16,914/-. During the course of assessment proceedings it was noted by the AO that assessee had effected payments for freight on purchases without effecting deduction of tax at source. Assessee had during the relevant previous year paid a sum of Rs.10,23,138/- as freight on purchases. Assessee had also paid a sum of Rs.36,16,957/- to clearing and forwarding agents during the course of its export business.
As per the assessee, agencies like M/s. Kanakadurga Lorry Supply Office, engaged several private vehicles and payments to individual lorry drivers did not fall within the purview of Section 194C. With regard to disallowance of freight forwarding expenses, argument of the assessee was that major part of the payments made to clearing agents were reimbursements. Assessee also took a plea that Hariharan Logistics which was forwarding and clearing agent had already declared the whole of the amounts received from the assessee in its return as a part of its income. However, AO was not impressed by the above arguments. According to him, circular No.715 dt.08.08.1995 applied for both the above payments.
He disallowed freight on purchases of Rs.10,23,138/- paid by the assessee and freight forwarding expenses of Rs.36,16,957/-, paid to the clearing and forwarding agents relying on section 40(a) (ia) .
Contention of the Assessee
The ld counsel of the assessee submitted that bill raised by Kanakadurga Lorry Office clearly indicated the consigner as Shree Gajanan Industries who was the supplier of goods. As per the Ld. AR, assessee had not entered into any contract with Kanakadurga Lorry Office at any point of time. As per the Ld. AR, lorry by which the goods were to be transported was decided by the seller and the assessee had no role in this. Placing reliance on a letter dt.17.04.2004 of Shree Gajanan Industries, Ld. AR submitted that goods were dispatched by them with a direction to the assessee to pay the balance of the lorry rent. Thus according to him the contract was between the transporter and the consigner and not between the assessee and the lorry owner. Assessee had no choice. In any case, as per the Ld. AR, payment to each of the driver engaged by the consigner was less than Rs.20,000/- and therefore Section 194C was not at all attracted.
With regard to payment made to carrying & forwarding agents, the ld counsel of the assessee submitted that concerned clearing and forwarding agents, namely Hariharan Logistics had accounted the whole of the money received by them from the assessee as a part of its income and paid taxes due thereon. Relying on the decision of coordinate bench in the case of DCIT v. Ananda Marakala [ITA No.1584/Bang/2012, dt.13.09.2013], Ld. AR submitted that once the recipient had accounted the income, liability for non-deduction of tax at source on the payer could not be fastened.
Contention of the Revenue
The ld counsel of the revenue strongly supported the orders of lower authorities.
Held by CIT (A)
CIT (A) upheld the order of AO. It was held that supplier of goods was only a facilitator for transportation arrangement. Transport agency had issued received the lorry receipts and the concerned supplier had issued debit notes for the above paid as advance on behalf of the assessee to the concerned transport agency. Just because the payments were effected to the truck driver at the end of unloading there would be no change in the complexion of the transaction.
It was further submitted that assessee was making contradictory submissions. In one place it was telling that the freight charges paid formed a part of the cost of goods. However in a later submission assessee stated that the supplier was identifying the transport agency and was delivering the goods to them. As no evidence was adduced by the assessee to show that the supplier of the goods had agreed to arrange for the transportation of the goods and to deliver the goods at the assessee’s premises. Thus according to him assessee was bound to deduct tax on the amount of freight expenditure.
In so far as non-deduction of tax at source on freight and forwarding expenditure was concerned, CIT (A) noted that what was claimed by the assessee as reimbursements were not actually reimbursements. Forwarding agent was only a single point for providing multiple services to the assessee and it was under a contractual obligation to do so. As per the CIT (A) assessee should have deducted tax on the payments made to Forwarding agents.
Held by ITAT
Non deduction of TDS on payment made for freight charges
In this issue, no doubt the receipt of Kanakadurga Lorry Office stated the consigner as Gajanana Industries who was the supplier. It is clear from the bill dt.17.04.2004 available on record that Kanakadurga Lorry Office was not the owner of the lorry. For application of Section 194C , it is essential that there is a contract between the assessee and the person who is transporting the goods.
It might be true that the assessee paid to the lorry owner the balance of the amount due for the transportation. However, existence of agreement for transportation, whether oral or written, if any, between the assessee and Shree Gajanan Industries, as to how the supplies were to be made, viz., whether it was the responsibility of the seller to find the transporter and transport it to the assessee’s premises, or it was under direction of the latter the former was doing so, was never verified by the lower authorities. We are of the opinion that this issue requires a fresh look by the AO for verifying all aspects of the payment of freight charges.
Non deduction of TDS on payment made for freight forwarding charges
Memorandum explaining the provisions while introducing Finance Bill, 2012 provides the justification of the amendment to section 40(a) (ia) in the following words:- “In order to rationalize the provisions of disallowance on account of non-deduction of tax from the payments made to a resident payee, it is proposed to amend section 40(a) (ia) to provide that where an assessee makes payment of the nature specified in the said section to a resident payee without deduction of tax and is not deemed to be an assessee in default under section 201(1) on account of payment of taxes by the payee, then, for the purpose of allowing deduction of such sum, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee.”
The question is as to whether the amendment made as above is prospective or retrospective w.e.f. 1.4.2005 when the provisions of Sec.40 (a) (ia) were introduced. Keeping in view the purpose behind the proviso inserted by the Finance Act, 2012 in section 40(a) (ia) of the Act, it can be said to be declaratory and curative in nature and therefore, should be given retrospective effect from 1st April, 2005, being the date from which sub-clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004.
In CIT vs. Alom Extrusions Ltd. 319 ITR 306 (SC), the Hon’ble Supreme Court had to deal with the question, whether omission (deletion) of the second proviso to section 43B by the Finance Act, 2003, operated w.e.f. 1st April, 2004, or whether it operated retrospectively w.e.f. 1st April, 1988. It was held that Finance Act, 2003, to the extent indicated above, should be read as retrospective. It would, therefore, operate from 1st April, 1988, when the first proviso was introduced. It is true that the Parliament has explicitly stated that Finance Act, 2003, will operate w.e.f. 1st April, 2004. However, the matter before us involves the principle of construction to be placed on the provisions of Finance Act, 2003.
We are of the view that the reasoning of the Hon’ble Supreme Court in the case of Alom Extrusions Ltd will equally to the amendment to Sec.40(a)(ia) whereby a second proviso was inserted in sub-clause (ia) of clause (a) of Section 40 by the Finance Act, 2012, w.e.f. 1-4-2013. The provisions are intended to remove hardship. It was argued on behalf of the revenue that the existing provisions allow deduction in the year of payment and to that extent there is no hardship. We are of the view that the hardship in such an event would be taxing an Assessee on a higher income in one year and taxing him on lower income in a subsequent year. To the extent the Assessee is made to pay tax on a higher income in one year, there would still be hardship.
In view of the decision of the coordinate bench, assessee can always plead that recipient of the amounts had accounted the income and filed returns and hence the rigors of Section 40(a) (ia) could not be applied to it. However, question whether the recipients of payments had indeed accounted the amounts and returned the income there from in their return of income requires to be verified. We are of the opinion therefore that this issue also requires a fresh look by the AO.
Accordingly appeal of the assessee allowed for statistical purpose.