Sham Sunder Gupta Vs ITO (ITAT Chandigarh)
Nigeria Inspection, Hong Kong Business Fair &; a “Source of Source” Chase-All Three Additions Deleted u/ss 40(a)(i), 37 &; 68
Summary:
Three Disputes, One Successful Appeal
The Assessee, proprietor of M/s Steelman Industries & engaged in export activities, challenged three additions confirmed by the CIT(A)/NFAC.
The first was a disallowance of ₹45,71,250 u/s 40(a)(i) for inspection & certification charges paid to a foreign national without TDS. The second concerned foreign-travel expenses of ₹1,99,316. The third related to additions aggregating to ₹6 lakh u/s 68 out of unsecured loans received from the Assessee’s son & another lender.
The Chandigarh ITAT examined each issue separately & deleted all three additions.
Nigerian Inspection Was Not Indian Technical Service
One of the Assessee’s regular buyers, M/s G.M.O. & Company Ltd., was situated in Nigeria. Under Nigerian import regulations, goods entering that country were required to be independently inspected & valued before being cleared from the customs port.
Nigeria had appointed various agencies, including Bureau Veritas, to undertake inspection & valuation. The overseas buyer appointed Mr. Collins Chikezie Chikelube, a foreign national associated with the inspection arrangement, to inspect the exported goods.
Although the Nigerian buyer was primarily liable to bear the inspection charges, the Assessee paid ₹45,71,250 as reimbursement in accordance with prevailing commercial practice.
The AO invoked sections 195, 5(2) & 9(1)(vii), alleging that tax ought to have been deducted at source. Since no TDS was made, the expenditure was disallowed u/s 40(a)(i).
Services Performed & Utilized Outside India
The Assessee explained that the services were neither managerial, technical nor consultancy services. They were rendered entirely outside India, for a Nigerian buyer, under Nigerian import laws & were utilized in Nigeria.
The ITAT found no factual finding by the AO that the payment constituted fees for technical services. The foreign national had performed no services in India, while no part of the inspection benefit was utilized in India.
The payment represented the overseas professional’s business income. Since the recipient had no Permanent Establishment in India, the income did not accrue or arise in India.
The Tribunal also noticed that identical disallowances had been made in AYs 2012-13 & 2013-14 but deleted by the CIT(A). In those years, it had been accepted that services were rendered abroad, payments were made abroad, no income accrued in India & the receipts did not qualify as fees for technical services.
Following the same factual position, the ITAT held that there was no obligation to deduct tax u/s 195. Consequently, disallowance of ₹45,71,250 u/s 40(a)(i) was deleted.
Hong Kong Trip Had a Business Passport
The AO also disallowed foreign-travel expenses of ₹1,99,316 because the Assessee allegedly failed to furnish adequate supporting evidence such as a business visa or confirmation from foreign clients.
Before the Tribunal, the Assessee produced the HDFC Bank Mastercard statement showing payment of ₹1,67,344 to MakeMyTrip on 29.05.2013 for booking flights to & from Hong Kong.
The Assessee also furnished an email from a prospective supplier inviting him to attend a Hong Kong business fair scheduled from 28.06.2013 to 01.07.2013. An invitation letter dated 31.05.2013 from the buyer & a quotation or pro forma invoice concerning the proposed sale of goods were also placed on record.
Considering that the Assessee was admittedly engaged in exports, foreign travel for exploring business opportunities could not be ruled out merely because the AO desired additional forms of confirmation. The travel dates, invitation, fair & proposed commercial transaction formed a coherent evidentiary chain.
The ITAT held that the Assessee had sufficiently proved the business purpose of the visit. The disallowance of ₹1,99,316 was accordingly deleted.
Section 68 Cannot Demand a Historical “Source of Source”
The Assessee had received a loan of ₹34 lakh from his son, Shri Rajan Gupta. The AO accepted ₹31 lakh but added ₹3 lakh due to an alleged cash deposit connected with the funds.
However, the cash deposit was not made in the immediate lender’s bank account. It appeared in the account of Shri Raj Kumar, proprietor of M/s Vikas Bricks Works, who had advanced ₹10 lakh to Shri Rajan Gupta. Shri Rajan Gupta thereafter advanced funds to the Assessee.
Thus, the AO went beyond the Assessee’s creditor & examined the source of the creditor’s source.
The Tribunal observed that the statutory amendment requiring such expanded source-of-source examination in respect of loans was introduced only with effect from 01.04.2023. It could not be retrospectively applied to AY 2014-15. The addition of ₹3 lakh was therefore unsustainable.
Accepted ₹37 Lakh, Doubting Only ₹3 Lakh
The second addition concerned ₹3 lakh out of a total loan of ₹40 lakh from Shri Raj Kumar, proprietor of M/s Vikas Bricks Works.
The Assessee furnished the lender’s ITR, computation of income, confirmation & affidavit. The AO had accepted ₹37 lakh from the very same lender but rejected only ₹3 lakh because of a cash deposit in the lender’s bank account.
The Tribunal found that identity, transaction & supporting evidence had been established. Once the substantial loan from the same lender was accepted, the isolated rejection of ₹3 lakh without cogent contrary material could not survive.
The second addition u/s 68 was also deleted.
The Final Verdict
The ITAT allowed the appeal in full, deleting ₹45.71 lakh u/s 40(a)(i), ₹1.99 lakh of foreign-travel expenditure & ₹6 lakh u/s 68.
Inspection conducted in Nigeria does not become Indian technical service because an Indian exporter reimburses the bill; a Hong Kong ticket supported by a trade-fair invitation is not a holiday voucher; & section 68 cannot ask AY 2014-15 questions using a source-of-source amendment effective from 01.04.2023.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT CHANDIGARH
1. Aforesaid appeal by assessee for Assessment Year (AY) 2014-15 arises out of an order of learned Commissioner of Income Tax (Appeals), NFAC [CIT(A)] dated 27.12.2024 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s 143(3) of the Act on 26.12.2016. The grievance of the assessee is confirmation of disallowance for Rs.45,71,250/- u/s 40(a)(i), disallowance of foreign travel expenses for Rs.1,99,316/- and confirmation of unsecured loans for Rs. 6 Lacs. Having heard rival submissions, the appeal is disposed-off as under.
2. Disallowance u/s 40(a)(i)
2.1 The assessee being proprietor of M/s. Steelman Industries, paid amount of Rs.45,71,250/- as inspection and certification charges to foreign citizen Mr. Collins Chikezie Chikelube without deduction of tax at source (TDS) as per provisions u/s 195 r.w.s.5(2) and section 9(1)(vii) of Income Tax Act. The Ld. AO accordingly disallowed the same for want of any TDS on impugned payments.
2.2 During first appeal, the assessee contended that no services were rendered by the payee in India and the source of payment was not in India. One of assessee’s buyer’s M.s G.M.O. & Company Ltd. was located in Nigeria. The buyer imported goods from assessee since past many years. As per import requirements of Federal Govt. of Nigeria, the buyer is required to get the imported goods to be valued and inspected to check compliance with international and local regulations before releasing the same from the customs port of Nigeria. The country of Nigeria appointed various agencies including Bureau Veritas to carry out the inspection and valuation. The buyer of the assessee appointed the said independent professional on behalf of Bureau Veritas Agency for inspection and valuation of imports. The said person was appointed by the buyer and it was the buyer who was liable to pay inspection charges to the said person. The services rendered were actually utilized in Nigeria, the buyer was in Nigeria and all the services rendered by him were as per the requirements of laws of country of Nigeria. As per prevalent market practice, the said charges were paid by the assessee. The said services were not covered within the ambit of fees for technical services. Since the services were not in the nature of managerial services, technical services or consultancy services, no TDS was required thereon. However, Ld. CIT(A) endorsed the findings of Ld. AO against which the assessee is in further appeal before us.
2.3 The undisputed fact that emerges is that the assessee is engaged in export activities. One of the buyers of the assessee is situated in Nigeria. As per extant laws of that country, the exports so made by the assessee are to be inspected and valued by an independent agency. For the said purpose, the services of a foreign national have been taken. As per prevalent trade practice, the charges so paid are reimbursed by the assessee. There is no factual finding by Ld. AO that the said services constitute fees for technical services. The services have been rendered by a foreign national outside India and no part of the services has been utilized in India. In fact, similar disallowance was made by Ld. AO in AYs 2012-13 & 2013-14 which stood deleted in first appeal (Page Nos.115 to 165 of the paper book). In AY 2012-13, Ld. CIT(A) concurred that no income accrued in India for the payee since the services were rendered outside India and the payments were made outside India. The payment was in the nature of business income for the payee who did not have any permanent establishment (PE) in India. The payment would not fall within the ambit of fees for technical services.
2.4 Therefore, the said disallowance as made by Ld. AO was deleted. Similar was the view in AY 2013-14. On these facts, we would hold that no such disallowance could be made for this year. We order so. The corresponding grounds of appeal stand allowed.
3. Disallowance of foreign travel expenses fo Rs.1,99,316/-
3.1 The assessee claimed foreign travel expenses as attributable to business but could not explain the same with supporting proofs as per the books of accounts including business visa and cross-confirmation from the business clients etc. involved in such business work of such foreign travel expenses. The Ld. AO disallowed the same as not attributable to business of the assessee. The Ld. CIT(A) endorsed the view of Ld. AO against which the assessee is in further appeal before us.
3.2 Upon perusal of HDFC Bank Mastercard Credit Card statement (Page No.90 of the paper-book), it could be seen that the amount of Rs.1,67,344/- has been paid to Makemytrip for booking of flight to / from Hongkong on 29.05.2013. The assessee apparently received an email from the proposed supplier to attend business fair in Hongkong which was to be held between 28.06.2013 to 01.07.2013. The assessee received invitation letter dated 31.05.2013 from the buyer to attend the fair. The copy of the quotation / proforma invoice with respect to proposed sale of goods has also been kept on record. It could be seen that the assessee is engaged in export activities and for the said purpose, foreign travel could not, altogether be ruled out. The assessee, in our considered opinion, has sufficiently established that the visit was for business purposes only. This being so, the impugned disallowance stands deleted.
4. Addition of unsecured loans
4.1 The assessee obtained loan of Rs.34 Lacs from his son Shri Rajan Gupta out of which Ld. AO made addition of Rs.3 Lacs. Similarly, loan of Rs.40 Lacs was taken from Shri Vikas Brick Works out of which the amount of Rs.3 Lacs was not accepted by Ld. AO. These loans were added since there was cash deposit in the bank account of respective lenders before advancing the loans to the assessee. The Ld. CIT(A) confirmed the addition against which the assessee is in further appeal before us.
4.2 Upon perusal of relevant documents on record, it could be seen that the assessee has obtained loan of Rs.34 Lacs from Shri Rajan Gupta. The substantial loan stood accepted by Ld. AO except to the extent of cash deposit for Rs.3 Lacs. However, the cash deposit is not in the bank account of the immediate lender rather the said deposit is in the account of Shri Raj Kumar prop. M/s Vikas Bricks Works who has lent amount of Rs.10 Lacs to Shri Rajan Gupta. The said amount has thereafter, been lent to the assessee. The Ld. AO has thus made the impugned addition by enquiring into the ‘source of source’, the statutory amendment of which has been inserted into Sec.68 w.e.f. 01.04.2023 only. Therefore, this addition is clearly unsustainable.
Another addition of Rs.3 Lacs represent loan taken from Shri Raj Kumar prop. M/s Vikas Bricks Works. It could be seen that the assessee has duly filed ITR of the lender, computation of income, confirmation and affidavit of the lender to substantiate these transactions. In fact, substantial loan of Rs.37 Lacs stood accepted from this lender. This being so, the impugned addition could not be sustained. We order so. No other ground has been urged in the appeal.
Conclusion
5. The appeal stand allowed.
Order pronounced on 02nd September, 2026
