Case Law Details

Case Name : Mitsutor Shipping Agency Pvt. Ltd. Vs. DCIT (ITAT Mumbai)
Appeal Number : ITA No. 3103/MUM/2010
Date of Judgement/Order : 08/04/2011
Related Assessment Year : 2007- 08
Mitsutor Shipping Agency Pvt Ltd Vs DCIT (ITAT Mumbai)- The assessee was owner of the premises in which it was carrying on business. The assessee paid maintenance charges to the society of Apartment Owners. According to the AO the assessee ought to have deducted tax at source on the payment of maintenance charges to the society as the payment by the assessee to the society was in the nature of contract and, therefore, the provisions of section 194C was applicable.
Under section 40(a)(ia) of the Act where assessee has an obligation to deduct tax at source before making payment and where such tax is not deducted by an assessee the payment made without deduction of tax at source which is claimed as expenditure while computing total income is liable to be disallowed. According to the AO the payment of maintenance charges to the society by the assessee was in the nature of payment to contractor for carrying out any work attracting the provisions of section 194C of the Act. Since tax was not deducted at source while making payment, the AO invoked the provisions section 40(a)(ia) of the Act and added a sum of Rs. 1,72,455/- to the total income of the assessee.

On appeal by the assessee the CIT(A) confirmed the order of the AO, hence, ground No. 2 by the assessee before the Tribunal.

ITAT held as follows-  The payment of maintenance charges by the owner of the premises to the society can by no stretch of imagination be said to be a payment to contractor for carrying out work on behalf of the owner of the premises. These payments were made to defray common cause. There is no contract for maintenance between the society and the owner of the premises. It is a payment to common fund to be used for the benefit of the owners of the premises. The payment by the member of the society is governed by the principle of mutuality and the society does not derive any income. We are therefore, of the view that the impugned addition cannot be sustained and the same is directed to be deleted. Ground No. 2 is accordingly allowed.

Dis-allowance can not be made u/s 14A by applying rule 8D for the A.Y. prior to the A.Y. 2008-09 when the 8D was inserted.

Mitsutor Shipping Agency Pvt. Ltd. Vs. DCIT
ITAT Mumbai

ITA No. 3103/MUM/2010

(A.Y. 2007- 08)

8th day of April, 2011

ORDER

PER N.V. VASUDEVAN, J.M,

This is an appeal by the assessee against the order dated 15/4/10 of CIT(A)-5, Mumbai relating to the assessment year 2007- 08. Ground No. 1 raised by the assessee reads as follows:

“1.a) On the facts and circumstances of the case the CIT(A) erred in upholding the dis-allowance of Rs. 4,57,895/- made by the AO u/s. 14A.

b) The learned CIT(A) failed to appreciate that Rule 8D read with section 14A can be invoked only if the AO considers that the determination of the expenditure relating to non-taxable income as done by the assessee is not proper and thereafter reject the book results relating to the same and determine the expenditure referable to the earning of non-taxable income as per Rule 8D. No such attempt has been made while framing the assessment.”

2. The assessee is a company engaged in the business of clearing and forwarding services. The assessee earned dividend income of Rs. 35,507/-. The dividend income did not found part of the total income of the assessee. In view of the provisions of section 14A of the Income Tax Act, 1961 (the Act) the AO was of the view that any expenditure incurred in earning income which does not form part of the total income under the Act should be disallowed while computing the total income of an assessee. The plea of the assessee before the AO was that there was no expenditure incurred in earning the dividend income. The assessee explained that it had invested surplus funds in mutual funds and earned dividend income. Further it was also submitted that there was no other direct or indirect expenses that was incurred to earn the dividend income. The AO however applying the provisions of Rule 8D of the IT Rules, 1962 r.w.s. 14A of the Act disallowed a sum of Rs. 4,57,895/- and added the same to the total income of the assessee.

3. On appeal by the assessee the CIT(A) confirmed the order of the AO by following the decision of the Special Bench of ITAT, Mumbai in the case of ITO vs. Daga Capital Management Ltd.(2008) 26 SOT 603 (Mum)(SB), wherein it was held that provisions of Rule 8D which was introduced by the Income Tax (5th Amendment) Rules 2008 w.e.f. 24/3/2008 were retrospective in operation, upheld the order of the AO. Hence, Ground No. 1 by the assessee before the Tribunal.
4. We have heard the rival submissions. The Hon’ble Bombay High Court in INCOME TAX APPEAL NO.626 OF 2010 in the case of Godrej & Boyce Mfg.Co.Ltd. Mumbai. Vs. Dy. Commissioner of Income Tax,Range 10(2), Mumbai & Anr. And W.P. 758/10 Godrej & Boyce Mfg.Co.Ltd. Mumbai. Vs.Dy. Commissioner of Income Tax Range 10(2), Mumbai & Ors. by Judgement dated 12-8-20 10 has dealt with the disallowance that can be made u/s. 14-A of the Act. The Honourable Court also dealt with the decision of the Special Bench of the ITAT in the case of Daga Capital Management Pvt.Ltd. 117 ITD 169 (mum) (SB) and has laid down the following proposition:

i) Dividend income and income from mutual funds falling within the ambit of Section 10(33) of the Income Tax Act 1961, as was applicable for Assessment Year 2002-03 is not includible in computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of Section 1 4A( 1);

ii) The payment by a domestic company under Section 115O(1) of additional income tax on profits declared, distributed or paid is a charge on a component of the profits of the company. The company is chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend does not form part of the total income by virtue of the provisions of Section 10(33). Income from mutual funds stands on the same basis;

iii) The provisions of sub sections (2) and (3) of Section 1 4A of the Income Tax Act 1961 are constitutionally valid;

iv) The provisions of Rule 8D of the Income Tax Rules as inserted by the Income Tax (Fifth Amendment) Rules 2008 are not ultra vires the provisions of Section 1 4A, more particularly sub section (2) and do not offend Article 14 of the Constitution;

v) The provisions of Rule 8D of the Income Tax Rules which have been notified with effect from 24 March 2008 shall apply with effect from Assessment Year 2008- 09;

vi) Even prior to Assessment Year 2008-09, when Rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub section (1) of Section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record;

vii) The proceedings for Assessment Year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income / income from mutual funds which does not form part of the total income as contemplated under Section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case.

5. In view of the aforesaid decision of the Honourable Bombay High Court the issue with regard to dis-allowance under section 14A has to be made in accordance with the principle laid down by the Honourable Bombay High Court. Rule 8D should not be applied and the AO has to adopt a reasonable basis or method consistent with all relevant facts and circumstances and after affording reasonable opportunity to the assessee to place all germane material on the record. We, therefore, remit the issue to the A.O for fresh consideration as stated above.
6. Ground No.2 raised by the assessee reads as follows:

“2.a) On the facts and circumstances of the case the learned CIT(A) erred in confirming the dis-allowance of Rs. 1,72,457/- u/s.40(a)(ia) by treating society maintenance charges as being akin to rent. b) The ld. CIT(A) failed to appreciate that payments towards common expenses are not subject to TDS hence the question of disallowance u/s. 40(a)(ia) does not arise.”

7. The assessee was owner of the premises in which it was carrying on business. The assessee paid maintenance charges to the society of Apartment Owners. According to the AO the assessee ought to have deducted tax at source on the payment of maintenance charges to the society as the payment by the assessee to the society was in the nature of contract and, therefore, the provisions of section 194C was applicable. Under section 40(a)(ia) of the Act where assessee has an obligation to deduct tax at source before making payment and where such tax is not deducted by an assessee the payment made without deduction of tax at source which is claimed as expenditure while computing total income is liable to be disallowed. According to the AO the payment of maintenance charges to the society by the assessee was in the nature of payment to contractor for carrying out any work attracting the provisions of section 194C of the Act. Since tax was not deducted at source while making payment, the AO invoked the provisions section 40(a)(ia) of the Act and added a sum of Rs. 1,72,455/- to the total income of the assessee.

8. On appeal by the assessee the CIT(A) confirmed the order of the AO, hence, ground No.2 by the assessee before the Tribunal.

9. We have considered the rival submissions. The payment of maintenance charges by the owner of the premises to the society can by no stretch of imagination be said to be a payment to contractor for carrying out work on behalf of the owner of the premises. These payments were made to defray common cause. There is no contract for maintenance between the society and the owner of the premises. It is a payment to common fund to be used for the benefit of the owners of the premises. The payment by the member of the society is governed by the principle of mutuality and the society does not derive any income. We are therefore, of the view that the impugned addition cannot be sustained and the same is directed to be deleted. Ground No.2 is accordingly allowed.

10. In the result, the appeal of the assessee is partly allowed.

Order pronounced in the open court on the 8th day of April, 2011.

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2 Comments

  1. DEEPIKA says:

    Our company is owner of the society which is registered.The society’s premises given on lease basis but the maintenance is paid by us (company), can you please help us regarding this

  2. srsubramanian says:

    can this be argued that service tax not applicable when the building is embaded on the earth, and not movable.

    in entral excise there is no duty for captive consuptions i.e the inputs where manufactured with in the factory and used for mfrg final product, where that final product only dutiable. similalry underservice tax can this be aruged that the builder does self service on his own before completion of appartments, handing over pocession of appartments, and then getting it registered the property to buyers name

    there are lot of refund pending in service tax for the service tax paid before prior to july 2010 on construction of appartments. most of the cases where builder paid service not able to get refund because of unjust enrichment. in this cases where the buyers as individual paid service tax thru the builders who have deposited to govt., prior july 2010, the owner/buyer of the appartment not able to get the refund from the service tax dept., even though the refund of service file before the authorites, well in time

    is there any rulling in the refund case above decided by CESTAT, High court,& SC.

    WHAT THE FINANCE MINISTRY, REVNUE DEPT, CBEC IS DECIDED TO THE SETTLE ALL VOLUMINOUS REFUNDS OF SERVICE TAX TO OWNERS OF APPARTMENTS WHO HAVE PAID SERVICE TAC PRIOR TO JULY 2010.

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