Assessee-company made payments on behalf of its clients as Clearing and Forwarding (C&F)Agent which were reimbursed to the assessee-company. The assessee-company did not make claim of deduction in the P & L A/c. Similar claim of assessee-company has been allowed in earlier and subsequent year, therefore, rule of consistency do apply to the income tax proceedings. There were no justification for the authorities below to take a different view on same set of facts. Even no action have been taken while scrutinizing the issue of TDS against the assessee-company. The assessee-company has not violated the provisions of Section 44B r.w.s. 172 of the I.T. Act as well as 44BBA of the I.T. Act. Since, under the domestic Law as well as under DTAA, the income received by non-resident airline/shipping companies or their Agents, are not taxable in India, therefore, assessee is not liable to deduct TDS. In this view of the matter, we set aside the orders of the authorities below and delete the entire addition.
FULL TEXT OF THE ITAT JUDGMENT
This appeal by assessee has been directed against the Order of the Ld. CIT(A)-18, New Delhi, Dated 28.12.2017, for the A.Y. 2014-2015, on the following grounds:
1. “That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making disallowance of 120,86,24,827/- on account of non deduction of TDS u/s 40(a)(i), more so when such amount was not claimed as deduction and it was reimbursement on actual basis.
2. That in any case and any view of the matter, action of CIT(A) in confirming the action of Ld. AO in making disallowance of Rs. 120,86,24,827/- on account of non deduction of TDS u/s 40(a)(i), is bad in law and against the facts and circumstances of the case.
3. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making disallowance of 8,17,807/- u/s 40A(3) of Income Tax Act, 1961.
4. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not reversing the action of Ld. AO in charging interest u/s 234A, 234B, 234C and 234D of the Income ta4 Act, 1961.”
2. We have heard the Learned Representatives of both the parties and perused the material on record.
3. Ground Nos. 1 and 2 have been raised for disallowance on account of non-deduction of TDS on air freight.
3.1. During the year, the assessee-company was engaged in the business of total logistic solutions providers, general cargo agents, charter party contractors, shipping agents, packing agents, salvors, wreck removers, wreck raisers, auctioneers, baggage transporters, forwarding and clearing agents, wholesale warehousemen, booking agents of goods, articles or things on behalf of customers from one place to another place in any part of the world.
3.2. During the assessment proceedings, the basic financial statements along with computation of income and Tax Auditor report were filed. On perusal of the records, it was noticed that Assessee-Company had made certain payments to non-resident parties with respect to airfreight in tune of Rs. 120,86,24,827/-. The assessee-company was asked to file details with regard to such airfreight payments, which were filed.
3.3. The A.O. on perusal of the same noted that under column 21(b) inadmissibility of certain payments had been reported. Column 21(b) of tax audit report talks about amounts inadmissible under section 40(a) and further, sub-column (b)(i) talks about amounts inadmissible as payments to non-resident referred to in sub-clause (i). When some amounts are reported as inadmissible in tax audit report, such amounts are to be added back to profits and gains from business and profession. On perusal of the computation of income, A.O. found that the amounts inadmissible as per tax audit report had not been added back. The details of transactions/payments made to non-residents which have been shown as inadmissible on account of non-deduction of TDS have been reproduced by the A.O. from pages 3 to 46 of the assessment order. The A.O, therefore, noted that these details clearly indicate that freight charges., in tun of Rs. 120,86,24,827/- have been made to various non-resident agents and parties of vivid nationalities. The Assessee-Company has failed to deduct any TDS with regard to such airfreight charges and the same contentions has duly been raised by the Auditor in tax audit report. The explanation of assessee was called for as to why the above amounts should not be disallowed in the absence of TDS being deducted. The A.O. noted in the show cause notice to explain whether provisions of Section 44BBA is applicable in the case of assessee and that assessee failed to provide tax residence certificate of all concerned parties and that Article 8 of DTAA with concerned State/Country governs the air transport and freight related things for most of the DTAA’s. The assessee explained Section 44BBA of I.T. Act is not applicable to the assessee because it is a resident company. Valid tax residence certificates of all the Companies are enclosed. Article 8 of DTAA with the concerned State/Country governs the air transport and freight related things for most of DTAA’s. The A.O. however noted that tax audit is prepared by an Independent Auditor which gives fair and true picture of the accounts of the assessee, in which, Auditor has mentioned that the payments made to non-residents are inadmissible, therefore, these should have been added back by the assessee-company.
4. The assessee-company further submitted before A.O. that it has reimbursed air-freight to non-residents on behalf of Indian resident customers without deducting TDS. Section 40(a)(i) of the I.T. Act is not applicable because the assessee-company has never claimed the airfreight as expenses in th Profit & Loss Account. Such type of payments are also exempt in consonance with India’s DTAA. Section 194C is also not applicable because the payments are made to foreign non-resident agents. As per provisions of the respective tax treaties, it has been clearly provided that international traffic are taxable only in the State, in which, respective enterprises are fiscally domicile. The assessee-company has no obligation to deduct tax at source whether under section 194C or under section 195 for the payments made to non-residents towards airfreight. It was submitted that all the payments are towards freight to companies registered outside India and no tax is required to be deducted on payments to them since the payments to non-residents are covered by provisions of Double Taxation Avoidance Agreement (“DTAA”) with those Countries. Further, more payments to non-residents on account of airfreight are not taxable in India. It is an admitted position that airfreight is paid to the agents on the actual basis and that bills and airfreight documents have been directly issued by foreign airlines. The agents while accepting the payments for airfreight components have been acted merely as agents of the respective airlines and have not received the airfreight payments in their own right. In copy of airway bills, name of these agents is mentioned as “Issuing Carrier’s” Agent. Further, Agent’s code is given as Agent’s IATA Code. There is, thus, enough material to demonstrate that persons having received money for the airfreight, have received the same in their capacity as “Issuing Carrier’s Agent i.e., Agent of Airline concerned. The airfreight payment is thus made to foreign airlines, though through the agents, therefore, the payments cannot be said to have been made to resident company. Accordingly, provisions of section 194C do not apply. The assessee-company relied upon the decisions of the Hon’ble Supreme Court in the case of G.E. India Technology Centre (P) Ltd., vs. CIT (2010) 327 ITR 456 (SC) in which it was held that “any person paying any sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the Act.” The assessee-company also relied upon other decisions of Hon’ble jurisdictional Delhi High Court in the case of CIT vs. Estel Communications (P) Ltd., (2008) 217 CTR 102 (Del.) and decision of Karnataka High Court in the case of Jindal Thermal Power Co. Ltd., 182 Taxman 252 in which it was held that “there was no obligation to deduct tax at source since there was no tax liability of non-resident in India. The assessee bound to deduct TDS only if the freight payments to non-resident is assessable in India.” If the freight payment is not so assessable, there is no question of deducting tax at source. Sections 194C and 195 are not applicable to the case in case of freight payment to non-resident. The assessee-company also filed revised tax audit report. The A.O, however, did not accept the contention of assessee-company. The assessee-company is basically a logistic and Cargos handling entity. M/s. Samsung India Ltd., is a major client for the assessee company along with others and 80% of the total business comes from M/s. Samsung India Ltd., for the assessee-company. The assessee-company handles shipment or cargos arriving at Air Ports and dispatches such shipment to various locations as per client’s requirements. The assessee-company in its accounting recognition taking revenue excluding freight charges in its P & L A/c, whereas as per the assessee-company, the client’s including M/s. Samsung India Ltd., are deducting TDS on the gross amount. M/s. Samsung India Ltd., and other clients are treating it as reimbursement of expenses under section 194C and deduct TDS accordingly. Whereas the assessee-company is not deducting or withholding tax on the payment made to non-resident agents. The A.O. noted that it has not been established that payments made to non-residents were in the nature of airfreight with any supporting documents. The assessee-company has failed to establish the fact that whether payments made to foreign agents are related to airfreight or it is mere reimbursement of expenses. The assessee-company failed to provide details. Therefore, in the opinion of the A.O. the assessee-company is required to deduct TDS on the amount of payments made to various non-resident agents/parties for freight. Therefore, A.O. disallowed the amount in question because assessee-company failed to deduct TDS on the same.
5. The assessee-company challenged the addition before Ld. CIT(A). The written submissions of the assessee-company is reproduced in the appellate order in which the assessee-company reiterated the facts stated before the A.O. It was also explained that though the payments have been made to non-resident agents of the foreign airlines, but such freights have not been paid by the assessee-company as its expenses but have been paid primarily for and on behalf of M/s. Samsung India Ltd., for which, the assessee-company, does work of logistic solutions. In fact, the assessee-company, is reimbursed on actual basis the amount of all expenses including freight by M/s. Samsung India Ltd., and there is no profit element involved in such reimbursement. This fact is evident from the details filed in the paper book and supported by sample copies of the bills raised on the assessee-company and the bills raised by the assessee-company in turn on M/s. Samsung India Ltd., which would show that amount actually paid as freight has been reimbursed to the assessee-company by M/s. Samsung India Ltd. The assessee-company did not make any claim of the deduction of the expenses, therefore, no disallowance could be made. The A.O. has not made out any case, if assessee-company made any claim of deduction of such expenses. The assessee-company relied upon order of ITAT, Mumbai Bench in the case of ITO vs. Universal Traffic Co. (2014) 42 CCH 55 (Mumbai-Tribu.) in which the Tribunal relied upon the decision of the Hon’ble jurisdictional Delhi High Court in the case of CIT vs. Cargo Linkers (2008) 218 CTR 695 in which the Hon’ble High Court held that “Assessee being a Clearing and Forwarding Agent, is an, intermediary who booked Cargo for and on behalf of importers and exporters and facilitated the contract for carrying goods, therefore, not liable to withhold tax under section 194C from payments made towards airfreight on behalf of its customers, decided the issue in favour of the assessee.” The Tribunal agreed with above proposition. It was noted that the Privity of Contract is between the clients and not with the assessee. There was no contact between the assessee and the authorities, rather the assessee has acted as a mere facilitator/agent between the parties and the authorities. It is well understood that TDS is deductible under section 194C on the payments made to the contractors/sub-contractors. Thus, the basic premise for deducting tax is on the contracting parties. In the absence of any contractual relationship between the assessee and the airlines/shipping lines/authorities, assessee agent is not liable to withhold tax or deduct tax under section 194C of the I.T. Act. The Apex Court in the case of M/s. Hindustan Coca Cola Beverages Pvt. Ltd., vs. CIT (2007) 293 ITR 226 (SC) held that “where the deductee concern have already paid tax on the payments made by the assessee-payer, then the department, could not deduct tax from the deductor of this same income by treating the later to be an assessee-in- default.” In the present case, the payees have offered th corresponding income in the returns, therefore, alleged TDS liability raised upon the assessee was not enforceable. Since the contract was between the exporter and the shipping lines and the assessee merely acted as an Agent, therefore, it is not liabl to deduct tax in terms of Section 194C of the I.T. Act. It was further submitted that freight charges paid to the non-resident agents, in any case, are not chargeable to tax in India in view of Article-8 of respective DTAA. It was further submitted that such payments have been made in earlier and in subsequent years also and the nature of business of assessee-company remains the same. A.O. has not made any disallowance under section 143(3) or under section 143(1) of the I.T. Act.
6. The Ld. CIT(A), however, did not accept the contention of the assessee-company and noted that copies of the sample invoices have been furnished. M/s. Samsung India Ltd., makes payment to the assessee-company after deducting TDS, which needs to be routed through P & L A/c. The assessee- company made payment to foreign vendors corresponding to th invoices raised in its name by such vendors, therefore, such expenses also needed to be routed through the P & L A/c. The Ld. CIT(A), thus, did not accept the contention of assessee-company that since the assessee-company did not make any claim of deduction of these expenditure, therefore, no disallowance should be made. This plea of the assessee-company was rejected. The Ld. CIT(A) as regards the submission of the assessee-company that such expenses are only reimbursement of the expenses, there is no need to deduct TDS and that the payment made to non-resident parties is not chargeable to tax in India, asked the A.O. to file the remand report.
6.1. The A.O. filed the remand report which is noted in the appellate order, in which, the A.O. highlighted that Top-10 Agents Accounts for 96% of the payments made by assessee-company is considered. Out of Top- 10 Agents, most of the payments have been made to KGL group companies. The payments made to group companies have not been disclosed in the tax audit report or in audited books of account which creates doubts. The payments have been made by assessee-company to foreign agents and not to foreign airline companies. Article-8 of DTAA is valid only for payments made to airline companies. Since the assessee-company made payments to foreign agents, therefore, Article-8 of DTAA is not applicable. The A.O. also reported that Article-8 of DTAA signed by India with foreign Countries does not give a blanket relief from TDS on freight paid to foreign airline companies. Details of same is noted in the remand report in which the Place of Effective Management (“POEM”) was needed to be settled while deciding on the taxability of the profits/income generated. Further for claiming relief under DTAA, Tax Residence Certificate is mandatorily required. The assessee-company filed few TRCs of foreign airlines companies, in which, discrepancies have been noted by the A.O. But some were found in order. The A.O. also reported that total receipts as per 26AS are of Rs. 165.38 crores but the turnover as per Profit & Loss Account is Rs.35.06 crores. The difference is not reconciled. The assessee-company is required to deduct TDS on such payments.
7. The assessee-company filed rejoinder in which the assessee-company explained the same facts as were explained earlier. It was submitted that the payments have been made to the agents of the airlines, therefore, it should be treated as payments made to airlines. The assessee-company did not claim deduction of the expenditure as the same have been reimbursed by the Principal. For the payments made by M/s. Samsung India Ltd., , they have deducted TDS on the entire amount that is why, the entire figure is coming up in 26AS but the entire amount so received is not income of the assessee-company because substantial portion was on account of reimbursement of the freight and other expenses. Therefore, there is no question of showing the entire amount in the P & L A/c. The assessee-company relied upon several decisions in support of the contention that assessee-company was not required to deduct TDS.
8. The Ld. CIT(A), however, rejected the contention of the assessee-company and noted that Article-8 of respective DTAA is applicable for making payments to foreign airlines and not to other parties including foreign agents. A.O. has pointed out in consistencies in TRCs filed by the assessee-company. The theory of reimbursement of the expenses was also not accepted. This ground of appeal of assessee-company was accordingly dismissed.
9. The Learned Counsel for the Assessee reiterated the submissions made before the authorities below. PB 660 to 669 are the break-up of the amounts paid to the agents and reimbursed to the assessee-company by the parties. Whatever amounts that are paid by the assessee-company, are exactly reimbursed to the assessee-company. The assessee-company merely acted on behalf of M/s. Samsung India Ltd., and Others. PB-627 is gist of the amounts paid by the assessee-company with reference to amounts in USD and date of invoice bill in th name of the assessee-company with reference to the paper book. PB-4 to 21 is the consolidated P & L A/c and balance-sheet of the assessee-company, in which, no amount has been shown as income and no expenditure have been claimed by assessee-company, of the impugned amounts paid. Note- 15 is income from operation and Note- 17 is direct operation expenses details. Assessee-Company did not debit the impugned amounts in the P & L A/c and did not make any claim of the expenditure. PB-1048 is the details of assessments made from A.Ys. 2008-2009 to 2015-2016. In earlier A.Ys. 2008-2009 to 2011-2012, A.O. accepted this similar claim of assessee-company while accepting the return under section 143(1) of the I.T. Act. In A.Y. 2012-2013, A.O. allowed the claim of assessee-company under section 154 of the I.T. Act of the same nature. In A.Ys. 2013-2014 and 2015-2016, the A.O. allowed similar claim of assessee-company in scrutiny assessments under section 143(3). Copies of the assessment orders under section 143(3) for these years are filed in PB Nos. 1013 and 1016. PB-1025 to 1030 are the similar replies filed before A.O. on merit for A.Y. 2015-2016, on which, identical claim of assessee- company has been allowed. PB- 1031 to 1047 are the details of TDS enquiry conducted by the Revenue Department on the same issue and after calling the complete details and information under section 133(6) of the I.T. Act as well, the Department did not take any adverse view against the assessee-company and similar claim of assessee-company has not been disturbed. PB-1066 to 1095 are the intimation under section 143(1) of I.T. Act issued by the Department for several preceding assessment years under section 143(1), in which, similar claim of assessee-company has been allowed. Learned Counsel for the Assessee submitted that rule of consistency do apply to th income tax proceedings. Therefore, on the same set of facts, when Income Tax Department accepted similar claim of the assessee-company for preceding as well as subsequent assessment years, then, for assessment year under appeal, the similar claim of assessee-company should not be disallowed on account of non-deduction of TDS without bringing any new material on record. In support of this contention, he has relied upon the decisions of the Hon’ble Supreme Court in the case of CIT vs. Excel Industries Ltd., (2013) 358 ITR 295 (SC) and Radhasoami Satsung Saomi Bagh vs. CIT (1992) 193 ITR 321 (SC). Since no expenses have been claimed by the assessee-company in its P & L A/c and in the computation of income, so no disallowance should be made because it was a case of reimbursement by the Principal to the Assessee-Company. Learned Counsel for the Assessee further submitted that th amounts in question were paid to non-resident agents on behalf of non-resident airlines/shipping companies. These amounts are not chargeable to tax in India under the domestic Law. Payments made to shipping company shall have to be considered in the light of specific provisions of Law contained under section 44B r.w.s. 172 of the I.T. Act because the shipping is liable to pay tax. Circular 723 dated 19.09.1995 clarified the above position that in such circumstances, Sections 194C and 195 shall not apply. Copy of the same is filed at PB-1349. Learned Counsel for the Assessee further submitted that for airlines, Section 44BBA is applicable. Since no amount of freight is received in India and assessee-company remitted the amount of the freight outside India. So, this Section will not apply to the assessee-company. Section-7 of the I.T. Act will not apply in this case because income deemed to be received is not applicable to assessee-company, since payment was made to non-resident, therefore, Article-8 of DTAA will apply and no disallowance could be made. Copies of the same are filed at PB-526 to 555. The benefit is allowable to the assessee-company because DTAA of the concerned States specify that the profit from operation of ship or aircraft or interest thereon is taxable only in that State i.e., the non-resident companies. Learned Counsel for the Assessee referred to various case Laws in support of the above proposition that assessee-company is not responsible for deduction of the TDS on the amounts in question. Copies of the same are filed in the paper book, which we shall refer to in the Order. Learned Counsel for the Assessee, therefore, submitted that authorities below were not justified in making the addition against the assessee-company. He has also filed written submissions.
10. On the other hand, Ld. D.R. relied upon the orders of the authorities below and submitted that Explanation-2 is inserted to Section 195(1) w.e.f. 01.04.1962 which is retrospective in nature. Assessee-Company filed revised audit report without any cause. The client raises invoice for the work assigned to the assessee-company and deducts tax under section 1 94C for these services and the assessee claims the entire TDS in its return. The Ld. CIT(A), reproduced the remand report furnished by the A.O. in the appellate order in which the A.O. has highlighted the reasons for making the addition against the assessee-company. In the reply of assessee-company filed at PB-1032, the assessee-company claimed reimbursement of expenses, but, M/s. Samsung India Ltd., treats it as contract and deducts TDS. It is not a case of no profit, therefore, TDS is required to be deducted. The assessee-company is an Agent of M/s. Samsung India Ltd., who gets profit share from foreign counterparts and there is no reimbursement of expenses between the two parties. It is a service being rendered by the assessee-company, so TDS is liable to be deducted. The rule of res judicata does not apply. Since new facts have been pleaded, so the case may be decided on merits. The Ld. D.R. also filed two written submissions in which the same submissions have been reiterated, in which, Ld. D.R. also explained that audit report was given by an Independent Auditor who opined that such amounts shall have to be disallowed. The assessee-company shall have to route the payments and expenditure through P & L A/c. He has submitted that the issue shall have to be decided according to principles of Law and not in accordance with the Accounting Practice and relied upon the decision of the Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd., reported in (1997) 227 ITR 172 (SC). The assessment order passed by the A.O. under section 143(3) is cryptic in nature and notice issued under section 133(6) would not help the assessee-company. It is not clear whether sample invoice, airway bills were provided before A.O. The bills referred to by the Learned Counsel for the Assessee, at the most, establish that assessee-company is rendering services to its clients and is getting payment for the said services. The break-up of the bills into different components does not change the character of the payment. He has relied upon the order of the ITAT, Ahmedabad Bench in the case of Mayurbyhai Mangaldas Patel, Mehsana vs. ITO, Ward-2, Mehsana in ITA.No.3451/Ahd./2014, Dated 30.11.2017 on the proposition that “error cannot be perpetuated n the name of reverence to binding judicial precedents”.
11. We have considered the rival submissions and gon through material on record. It is not in dispute that during the year, assessee-company was engaged in the business of inter alia, Clearing and Forwarding Agent. During the year, assessee-company has had major work for and on behalf of M/s. Samsung India Ltd. In this regard, assessee-company has made payment to foreign shipping/airline companies through their Agents aggregating to Rs. 120.86 crores. According to A.O, assessee-company should have withheld tax at source on these payments under section 195 of the I.T. Act, 1961. Since, the assessee-company has failed to deduct TDS, therefore, A.O. disallowed the same under section 40(a)(i) of the I.T. Act, 1961. The assessee-company, however, submitted that for invoking Section 40(a)(i) of the I.T. Act, the A.O. should establish that assessee-company has made a claim of deduction of expenses under sections 30 to 38 of I.T. Act, on which, assessee-company has failed to deduct tax at source. It is not in dispute that assessee-company has not made claim of expenses in its P & L A/c. In the instant case, though the payments have been released to foreign shipping/airlines through their non-resident Agents towards freight, but these payments have not been made by the assessee-company on account of its expenses, but, have been made for and on behalf of its clients/customers namely M/s. Samsung India Ltd., and other Companies, for whom, assessee-company does the work of logistics solutions. In fact, the assessee-company is reimbursed on actual basis, the amount of all expenses including freight by M/s. Samsung India Ltd., and others and there is no profit element involved in such reimbursement. The assessee-company explained and proved that payments have been made to non-resident Agents of foreign airline/shipping companies. Freight is paid by the assessee-company on behalf of M/s. Samsung India Ltd., and others. There is no Privity of Contract between the assessee-company and the non-resident Agents of foreign airlines/shipping companies. Assessee-Company worked as a Facilitator/Agent between the parties. PB-660 to 669 is copy of the chart giving details of payments remitted to non-resident Agents by the assessee-company along with the details of payments reimbursed by the client to the assessee-company, of the exact amount in question. PB-627 to 659 is the chart of complete details of invoice bill raised on assessee-company and bills raised by assessee upon M/s. Samsung India Ltd., amounts in US Dollar, date of invoice, bill in the name of assessee-company with reference to documents filed in the paper book. The same are supported by copy of the sample bills raised upon assessee-company and bills raised by assessee in turn, upon M/s. Samsung India Ltd., which would establish that amounts actually paid as freight, has been reimbursed to the assessee-company. PB-4 to 21 is the copy of the P & L A/c which would not show any claim for such expenses made by assessee-company. It would established that assessee-company is a Clearing and Forwarding Agent and is not a person responsible for deduction of TDS. PB-1048 is a chart showing in earlier and subsequent assessment years, similar payments have been accepted by A.O. without deducting of tax at source under section 143(3)/ 143(1) of the I.T. Act, 1961. In A.Ys. 2008-2009 to 2011-2012, A.O. accepted the claim of assessee-company under section 143(1) of the I.T. Act, 1961. In A.Y. 2012-2013 A.O. accepted the similar claim of assessee-company under section 154 of the I.T. Act and in the remaining years, A.O. accepted the similar claim of assessee-company in scrutiny assessments under section 143(3) of the I.T. Act. Copies of the assessment orders under section 143(3) for A.Ys. 2013-2014 and 2015-2016 along with submissions of the assessee-company on merit are filed in the paper book at pages 1013 to 1030. PB-1066 to 1095 are the orders under section 143(1) for several assessment years, in which, A.O. accepted similar claim of assessee-company. PB- 1031 to 1047 are the copy of the notice under section 133(6) from ITO, TDS, Ward-(International Taxation), Dated 17.02.20 10 along with submissions of the assessee-company and details, in which, the assessee-company similarly explained that assessee-company handled Cargo imported by Indian manufacturer, for which, freight is paid and assessee-company is not liable to deduct TDS. No action have been taken by the Department against the assessee-company for non-deduction of TDS. Since in earlier years and in subsequent years, no disallowances have been made by the authorities below on the same set of facts, therefore, the Revenue Authorities should follow the rule of consistency and should not have disallowed the amount in question. The opinion of the Auditor is not conclusive because the issue shall have to be considered and decided as per Law. Further, the assessee-company has filed the revised audit report to clarify the above position.
12. The Hon’ble Supreme Court in the case of CIT vs. Mahalaxmi Sugar Mills Co. Ltd., (1986) 160 ITR 920 (SC) held that “duty caste on A. 0. to apply relevant provisions of Law for the purpose of determining the true figure of assessee’s taxable income”. The Hon’ble Supreme Court in the case of Radhasoami Satsang Saomi Bagh vs. CIT (1992) 193 ITR 321 (SC) held that “revenue authorities should follow rule of consistency.” The Hon’ble Supreme Court in the case of CIT vs. Excel Industries Ltd., (2013) 358 ITR 295 held in para-31 as under:
“31. It appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the tax payers’ money in pursuing litigation for the sake of it.”
13. ITAT, Mumbai Bench, in the case of ITO vs. Rajeswari Shipping and Logistic (2016) 49 ITR 120 (Tribu.) (Mum.) held as under:
“Assessee having made payments on behalf of its clients, there was no liability to deduct tax at source on Assessee. No disallowance u/s.40(a)(ia) could be made for alleged failure of Assessee to deduct tax at source on payment made on behalf of importers/clients.”
14. ITAT, Kolkata Bench in the case of Mitra Logistic (P.) Ltd., vs. ITO (2012) 139 ITD 420 held as under:
“If business expenditure is claimed as reimbursement, and n fact reimbursed, then no disallowance could be made u/s. 40(a)(ia)”
15. The Hon’ble Delhi High Court in the case of CIT vs. – Cargo Linkers (2009) 179 Taxman 151 held as under:
“Clearing and forwarding agent is not person responsible for deduction of tax at source under section 1 94C; further, both CIT(A) and Tribunal, had concurrently found that there was reasonable cause not to deduct tax at source; no substantial question of law arises.”
16. The Hon’ble jurisdictional Delhi High Court in the case of CIT vs. Hardarshan Singh (2013) 350 ITR 427 (Delhi) held as under:
“In the case of CIT v. Cargo Linkers: (2009) 179 Taxman 151 (Del) the Tribunal had also noted and found as a matter of fact that the assessee was nothing but an intermediary between the exporters and the airlines as it booked cargo for and on behalf ofthe exporters and mainly facilitated the contract for carrying goods. The principal contract was between the exporter and the airline. It had also been found as a matter offact that the contract was actually between the exporter and the airline and the assessee was only an intermediary and, therefore, it was not the ‘person responsible’for deduction of tax at source u/s 1 94C”.
17. The ITAT, Delhi Bench in the case of Hah Logistics, New Delhi vs. DCIT, Circle-26(1), New Delhi, in ITA.No.1864/Del./2011 Dated 04.11.2011 following the decision of Hon’ble jurisdictional Delhi High Court in the case of CIT vs. Cargo Linkers (supra), it was, held as under:
“Therefore, from the various details filed by the assessee and nature of assessee’s business of clearing and forwarding agents, we find that the assessee is nothing but an intermediary between the exporters and the shipping lines. The assessee facilitates the contract for carrying goods for and on behalf of its client i.e., exporters or importers, or importers, and the principle contract for carrying goods is between the exporter/importer and the shipping lines. Therefore, deleted the disallowance made under section 40(a)(ia) of the I. T. Act”.
18. ITAT, Mumbai Bench in the case of ITO vs. Universal Traffic Co. (2014) 42 CCH 55 (Mum-Tribu.) held as under:
“A custom house agent (CHA) is not liable to deduct TDS under section 194C, on payment made towards freight charges, detention charges and de-stuffing charges, etc., paid to foreign lines or to their agents or shipping lines for transportation of cargo, since CHA only act as an intermediary and the privity of contract is not between assessee and foreign lines/shipping lines to whom such charges were paid.”
19. The assessee-company further submitted that, in this case, it is not in dispute that it is a case of reimbursement only and, therefore, assessee-company is not liable to deduct In support of this contention, Learned Counsel for the Assessee relied upon the decision of ITAT, Mumbai Bench in the case of DCIT vs. Rank Shipping Agency (P) Ltd., ITA.No.5946/ Mum/2008, Dated 21.11.2012 and Order of ITAT, Delhi Bench in the case of DCIT vs. Jay Kay Freighters Pvt. Ltd., ITA.No.3407/Del./2011 Dated 08.08.2012.
19.1. In the instant case, since the amount paid to the non-resident agents was on behalf of non-resident shipping company or non-resident airline company, therefore, these amounts are not chargeable to tax in India under the domestic Law and the assessee-company was not liable to deduct TDS on these payments. It is well settled law that no TDS is required to be deducted by the payer, if the income of non-resident payee is not liable to tax in India. We, rely upon the decision of the Hon’ble Supreme Court in the case of G.E. India Technology Centre (P) Ltd., vs. CIT (2010) 327 ITR 456 (SC).
19.2. Learned Counsel for the Assessee, referred to provisions of Section 44B r.w.s. 172 of the I.T. Act because these provisions deal with the shipping business of the non-residents and in such cases, provisions of Section 194C and 195 relating to tax deduction at source are not applicable. The assessment of income of shipping company is to be done as per provisions of Section 44B r.w.s. 172 of the I.T. Act. These are specific provisions which deals with taxability of income of non-resident shipping companies in India. According to these provisions, the taxes on the income assessed in this section shall be paid by the Master of the Ship. Further, the CBDT Circular No.723 dated 19.09.1995 clarified the position of Law that provisions of Section 172 are to be applied where the payment is made to a non-resident carrying-out shipping business and as such, Sections 194C and 195 will not be applicable. The Circular is reproduced as under:
“Circular No. 723, dated 19-9-1995. SECTION 172 SHIPPING BUSINESS OF NON-RESIDENTS
913. Tax deduction at source from payment made to foreign shipping companies
1. Representations have been received regarding the scope of sections 172, 1 94C and 195 of the Income-tax Act, 1961, in connection with tax deduction at source from payments made to the foreign shipping companies or their agents.
2. Section 172 deals with shipping business of non- Section 172(1) provides the mode of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non-resident, which carries passengers, livestock, mail or goods shipped at a port in India. An analysis of the provisions of section 172 would show that these provisions have to be applied to every journey a ship, belonging to or chartered by a non-resident, undertakes from any port in India. Section 172 is a self-contained code for the levy and recovery of the tax, ship-wise, and journey wise, and requires the filing of the return within a maximum time of thirty days from the date of departure of the ship.
3. The provisions of section 172 are to apply, notwithstanding anything contained in other provisions of the Act. Therefore, in such cases, the provisions of sections 1 94C and 195 relating to tax deduction at source are not applicable. The recovery of tax is to be regulated, for a voyage undertaken from any port in India by a ship under the provisions of section 172.
4. Section 1 94C deals with work contracts including carriage of goods and passengers by any mode of transport other than railways. This section applies to payments made by a person referred to in clauses (a) to (j) of sub-section (1) to any “resident” (termed as contractor). It is clear from the section that the area of operation of TDS is confined to payments made to any “resident”. On the other hand, section 172 operates in the area of computation of profits from shipping business of non-residents. Thus, there is no overlapping in the areas of operation of these sections.
5. There would, however, be cases where payments are made to shipping agents of non-resident ship-owners or charterers for carriage of passengers etc., shipped at a port in India. Since, the agent acts on behalf of the non-resident ship-owner or charterer, he steps into the shoes of the principal. Accordingly, provisions of section 172 shall apply and those of sections 1 94C and 195 will not apply.”
19.3. Learned Counsel for the Assessee also referred to the provisions of Section 44BBA of the I.T. Act with regard to payments made to Airline companies. Section 44BBA is reproduced as under:
Special provision for computing profits and gains of the business of operation of aircraft in the case of non-residents 44BBA. (1) Notwithstanding anything to the contrary, contained in sections 28 to 43A, in the case, of an assessee, being a non-resident, engaged in the business of operation of aircraft, a sum equal to five per cent. of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession“.
(2) The amounts referred to in sub-section (1) shall be the following, namely: –
(a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, live-stock, mail or goods from any place in India; and
(b) the amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, live-stock, mail or goods from any place outside India.”
On perusal of the same, it shows that amount of freight incom received by the foreign airline company for carrying of goods from any place outside India is not taxable in India and mor e so, when no amount of freight is received or deemed to be received in India by or on behalf of the said airline company. Learned Counsel for the Assessee explained that substantial foreign airline companies lifted the goods outside India and all the payments are remitted outside India to foreign agents, non-resident agents of non-resident airlines. The ITAT, Delhi Bench, in the case of Welspring Universal vs. JCIT, Range-27, New Delhi (2015) 56 taxmann.com 174 (Delhi-Trib.) held as under:
“Where commission paid by assessee to non-resident agent for procuring export orders was not chargeable to tax in hands of said agent, assessee was not liable to deduct tax at source.”
19.4. Thus, the impugned payments made by the assessee-company to such airline companies or its different agents ar not liable to be taxed in India even under the domestic Law and therefore, assessee-company was not liable to deduct tax in India. Further, it may be noted that such non-resident entities have not rendered any services in India. They do not have any P.E. in India and they do not have any business connection in India. No such case is also made out by the A.O.
19.5. Assessee-Company also pleaded that freight charges paid to non-resident shipping/airline companies directly or through their agents is exempt under Article-8 of DTAA, copies of various relevant DTAAs are filed at pages 526 to 555 of the paper book, which clearly provides that profits from operation of ships or aircraft, including interest on funds connected with that operation, derived by a resident of one of the Contracting States shall be taxable only in that State. Therefore, the impugned payments are not taxable to tax in India, therefore, there is no liability to deduct TDS under section 195 of the I.T. Act.
20. The A.O. observed that Article-8 of DTAA is valid only for payments made to airline companies since payments have made to their Agents, therefore, DTAA will not apply. It may be noted here that it is well known fact that agents of shipping airline companies are merely collection agents and coordinating agency. They receive payment on behalf of airline/shipping companies only. These facts would also be evident from the bills/invoices raised by these agents showing that these have been raised by them on the basis of Master Airway Bill of corresponding Airline/Shipping companies, copies of which, are filed in the paper book at pages 627 to 659 and others. The ITAT, Kolkata Bench in the case of Taj Leather Works vs. ACIT, Circle-32, Kolkata (2012) 23 taxmann.com 58 (Kol.) held as under:
“Where assessee-exporter made payments to Indian agents offoreign airlines on account of airfreight, assessee did not have any TDS obligations either under section 1 94C or under section 195.”
21. Under these circumstances, the payments made to the agents shall be undoubtedly of the nature of payment made to airline/shipping company and these would be covered under Article-8 of respective DTAAs. Since in none of the cases, these non-resident agents have P.E. in India and A.O. has also not pointed out their existence of P.E. of any agent in India, therefore, there is no question of deduction of tax on thes payments. We, rely upon the decision of ITAT, Mumbai Bench in the case of Gujarat Reclaim & Rubber Products Ltd., vs. ACIT- 10(2), (2013) 35 taxmann.com 587 (Mumbai-Trib.) in which it was held as under:
“Where non-resident agent did not have PE in India, Commission paid by assessee to non-resident agent for rendering services in foreign countries cannot be disallowed under section 40(a)(i).
22. Since the amount in question is not taxable in India, therefore, A.O. was not justified in asking for filing of th certificates in case of non-resident agents.
23. Considering the facts of the case/material evidence and above discussion, it is clear that assessee-company made payments on behalf of its clients as Clearing and Forwarding Agent which were reimbursed to the assessee-company. The assessee-company did not make claim of deduction in the P & L A/c. Similar claim of assessee-company has been allowed in earlier and subsequent year, therefore, rule of consistency do apply to the income tax proceedings. There were no justification for the authorities below to take a different view on same set of facts. Even no action have been taken while scrutinizing the issue of TDS against the assessee-company. The assessee-company has not violated the provisions of Section 44B r.w.s. 172 of the I.T. Act as well as 44BBA of the I.T. Act. Since, under the domestic Law as well as under DTAA, the income received by non-resident airline/shipping companies or their Agents, are not taxable in India, therefore, assessee is not liable to deduct TDS. In this view of the matter, we set aside the orders of the authorities below and delete the entire addition. In the result, ground Nos. 1 and 2 of the appeal of the assessee are allowed.
24. On ground No.3, assessee-company challenged the order of the Ld. CIT(A) in confirming the disallowance of Rs.8, 17,807/- under section 40A(3) of the I.T. Act, 1961.
25. The A.O. noted from the tax audit report that the assessee-company has incurred expenditure covered under section 40A(3) of the I.T. Act because the payments have been made in excess of Rs.20,000/- by cash. The details of same are noted in the assessment order for a sum of Rs.8, 17,807/-. The A.O. accordingly disallowed the same.
25.1. The assessee-company challenged the addition before the Ld. CIT(A) and it was submitted that payments have been made to various airlines. The assessee-company pleaded that these are reputed airlines and have PAN and genuine payments have been made, therefore, no disallowance could be made under section 40A(3) of the I.T. Act. The Ld. CIT(A), however, did not accept the contention of assessee-company and noted that Rule 6DD have been amended in 2008. The Rule in its present form does not include any such circumstances like business exigency or exceptional circumstances, under which, such cash payments can be made as a business xpenditure under section 40A(3) of the I.T. Act, 1961. The addition was confirmed and Ground No.3 of appeal of assessee-company was dismissed.
26. Learned Counsel for the Assessee submitted that since the genuineness of the payments have not been doubted by the authorities below, therefore, for business expediency, such amount should not be disallowed. He has relied upon the order of ITAT, Delhi Bench in the case of ACIT, Central Circle-2, Faridabad vs. M/s. Marigold Merchandise (P) Ltd., New Delhi, in ITA.No.5170/Del./2014 for the A.Y. 2006-2007, in which the Tribunal vide Order dated 11.09.2017 dismissed the Departmental Appeal. The relevant portion of the order of the Delhi Tribunal in paras-6 to 8 is reproduced as under:
“6. We have heard both the parties and perused the records available on record especially the impugned order. With regard to disallowance u/s. 40A(3) of the Income Tax Act is concerned, we find that assessee has purchased the land at Village Nangli Umarpur Distt. Gurgaon for a sum of Rs. 3.69 Cr. from the seller parties namely Sh. Pohap Singh, Sh. Chet Singh, Sh. Chandra, Sh. Kishan, Smt. Vidhya, Smt. Jagwati, Smt. Veerwati and Smt. Lali. The purchase of agriculture land is evidenced through sale deed and the payment is also evidenced by way of the sale deed executed before the Sub Registrar. There is no dispute on the fact that the identity of e payee is proved, the genuineness of the transaction is proved and the source payment is also established in as much as such amount is found to be withd rawn from the HDFC bank account of the appellant company. The AO’s case is that the provisions of sec. 40A(3) are of mandatory nature whereas the assessee-relying on the decision of the Hon’ble Jurisdictional Rajasthan High Court in the case of Harshee a Chordia vs. CIT supra has contended that when identity of the payee, genuineness of the transaction and source of payment is established then provision of section 40A(3) cannot be applied. The Hon’ble Rajasthan High Court while interpreting the provisions of Sec. 40A(3) in the case of Harshila Chordia vs, ITO supra has clearly held that when the genuineness of the transaction/payment is not disputed and the identity of the payee / received is established then such case will fall under the exceptional circumstances covered under-rule 6DD of IT Rules. The decision of the Hon’ble Jurisdictional ITAT in the case of the M/s Ace India Abodes Ltd. vs. ACIT CC-2, Jaipur in ITA no. 79/JP/201 10rder dated 12.2.2011 and in the case of the M/s Shree Salaaar Overseas Pvt. Ltd.: vs. DCIT, Circ1 e-2 in ITA no. 56/JP/2 10, order dated 21.2.2011 also supported the assessee’s contention. The decision of the Jurisdictional High Court and the Jurisdictional ITAT are also of binding nature. Therefore respectfully following the ratios of judgment of the Jurisdictional High Court as well as ITAT decisions, Ld. CIT(A) has rightly held that the assessee’s case is found to be covered under the exceptional circumstances under rule 6DD of IT Rules. Accordingly, the addition made by the AO amounting to Rs. 60 lacs was rightly deleted by the Ld. CIT(A). Also we find no force in the arguments advanced by the Ld. DR, in view of the decision of the ITAT, ‘B’ Bench, Kolkata vide Order dated 18.11.2015 passed in ITA No. 1448/Kol/201 1 AY 2008-09 in the case of Sri Manoranjan Raha vs. ITO wherein the Tribunal has held as under:-
4.3 We have heard the rival submissions and perused the materials available on record. We find that the payments made by cash in violation of Section 40A(3) of the Act have been duly acknowledged by the recipient Sh. Amit Dutta who had deposed before the Ld. AO and confirmed the fact of receipt of monies in cash. Hence the genuinity of payments made by the assessee stands clearly established beyond doubt. Even for the amounts enhanced by Ld. CIT(A) in the sum of Rs. 54,01,473/-, the genuineness of the payments and the necessity to incur the said expenditure for the purpose of business of the assesseee was never disputed by the Ld. CIT(A). We hold that since the genuinity of the payments made to the parties is not doubted by the revenue, the provisions of section 40A(3) could not be made applicable to the facts of the instant case. It will be pertinent to go into the intention behind introduction of provisions of section 40A(3) of the Act at this juncture. We find that the said provision was inserted by Finance Act 1968 with the object of curbing expenditure in cash and to counter tax evasion. The CBDT Circular No. 6P dated 6.7.1968 reiterates this view that “this provision is designed to counter evasion of a tax through claims for expenditure shown to have been incurred in cash with a view to frustrating proper investigation by the department as to the identity of the payee and reasonableness of the payment.”
4.4. In this regard, it is pertinent to get into the following decisions on the impugned subject:-
Attar Singh Gurmukh Singh vs. ITO reported in (1991) 191 ITR 667 (SC)
“Section 40A(3) of the Income-tax Act, 1961, which provides that expenditure in excess of Rs.2,500 (Rs.10,000/- after the 1987 amendment) would be allowed to be deducted only if made by a crossed cheque or crossed bank draft (except in specified cases) is not arbitrary and does not amount to a restriction on the fundamental right to carry on business. If read together with Rule 6DD of the Income-tax Rules, 1962, it will be clear that the provisions are not intended to restrict business activities. There is no restriction on the assessee in his trading activities. Section 40A(3) only empowers the Assessing Officer to disallow the deduction claimed as expenditure in respect of which payment is not made by crossed cheque or crossed bank draft. The payment by crossed cheque or crossed bank draft is insisted upon to enable the assessing authority to ascertain whether the payment was genuine or whether it was out of income from undisclosed sources. The terms of section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the Assessing officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of section 40A(3) and rule 6DD that they are intended to regulate business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions.”
CIT vs CPL Tannery reported in (2009) 318ITR 179 (Cal)
The second contention of the assessee that owing to business expediency, obligation and exigency, the assessee had to make cash payment for purchase of goods so essential for carrying on of his business, was also not disputed by the AO. The genuinity of transactions, rate of gross profit or the fact that the bonafide of the assessee that payments are made to producers of hides and skin are also neither doubted nor disputed by the AO, On the basis of these facts it is not justified on the part of the AO to disallow 20% of the payments made u/s 40A(3) in the process of assessment.
We, therefore, delete the addition of Rs. 17,90,571/- and ground no.1 is decided in favour of the assessee.
CIT vs Crescent Export Syndicate in ITA No. 202 of 2008 dated 30.7.2008 – Jurisdictional High Court decision
“It also appears that the purchases have been held to be genuine by the learned CIT(Appeal) but the learned CIT(Appeal) has invoked Section 40A(3) for payment exceeding Rs.20,000/- since it is not made by crossed cheque or bank draft but by hearer cheques and has computed the payments falling under provisions to Section 40A(3) for Rs.78,45,580/- and disallowed @20% thereon Rs.15,69,116/-. It is also made clear that without the payment being made by beater cheque these goods could not have been procured and it would have hampered the supply of goods within the stipulated time. Therefore, the genuineness of the purchase has been accepted by the ld. CIT(Appeal) which has also not been disputed by the department as it appears from the order so passed by the learned Tribunal. It further appears from the assessment order that neither the Assessing Officer nor the CIT(Appeal) has disbelieved the genuineness of the transaction. There was no dispute that the purchases were genuine.”
Anupam Tete Services vs ITO in (2014) 43 Taxmann.com 199 (Guj)
“Section 40A( 3) of the Income-tax Act, 1961, read with rule 6DD of the Income-tax Rules, 1962 – Business disallowance – Cash payment exceeding prescribed limits (Rule 6DD(j)-Assessment year 2006- 07 – Assessee was working as an agent of Tata Tele Services Limited for distributing mobile cards and recharge vouchers – Principal company Tata insisted that cheque payment from assessee’s co-operative bank would not do, since realization took longer time and such payments should be made only in cash in their bank account -If assessee would not make cash payment and make cheque payments alone, it would have received recharge vouchers delayed by 4/5 days which would severely affect its business operation – Assessee, therefore, made cash payment – Whether in view of above, no disallowance under section 40A (3) was to be made in respect of payment made to principal- Held, yes [ Paras 21 to 23] [in favour of the assesse]”
Sri Laxmi Satvanaravana Oil Mill vs CIT reported in (2014) 49 taxmann.com 363 (Andhrapradesh High Court)
“Section 40A(3) of the Income-tax Act, 1961, read with Rule 6DD of the Income-tax Rules, 1962 – Business disallowance – Cash payment exceeding prescribed limit (Rule 6DD) – Assessee made certain payment of purchase of ground nut in cash exceeding prescribed limit – Assessee submitted that her made payment in cash because seller insisted on that and also gave incentives and discounts – Further, seller also issued certificate in support of this – Whether since assessee had placed proof of payment of consideration for its transaction to seller, and later admitted payment and there was no doubt about genuineness of payment, no disallowance could be made under section 40A(3) – Held, yes [ Para 23] [In favour of the assessee]”
CIT vs Smt. Shelly Passi reported in (2013) 350 ITR 227 (P&H)
In this case the court upheld the view of the tribunal in not applying section 40A( 3) of the Act to the cash payments when ultimately, such amounts were deposited in the bank by the payee.
4.5 It is pertinent to note that the primary object of enacting section 40A(3) was two fold, firstly, putting a check on trading transactions with a mind to evade the liability to tax on income earned out of such transaction and, secondly, to inculcate the banking habits amongst the business community. Apparently, this provision was directly related to curb the evasion of tax and inculcating the banking habits. Therefore, the consequence, which were to befall on account of non- observation of section 40A(3) must have nexus to the failure of such object. Therefore, the genuineness of the transactions it being free from vice of any device of evasion of tax is relevant consideration.
4.6. The Hon’ble Apex Court in the case of CIT vs Swastik Roadways reported in (2004) 3 SCC 640 had held that the consequences of non-compliance of Madhya Pradesh Sales Tax Act , which were intended to check the evasion and avoidance of sales tax were significantly harsh. The court while upholding the constitutional validity negated the existence of a mens rea as a condition necessary for levy of penalty for non-compliance with such technical provisions required held that “in the consequence to follow there must be nexus between the consequence that befall for non-compliance with such provisions intended for preventing the tax evasion with the object of provision before the consequence can be inflicted upon the defaulter.” The Supreme Court has opined that the existence of nexus between the tax evasion by the owner of the goods and the failure of C & F agent to furnish information required by the Commissioner is implicit in section 57(2) and the assessing authority concerned has to necessarily record a finding to this effect before levying penalty u/s. 57(2).
Though in the instant case, the issue involved is not with regard to the levy of penalty, but the requirement of law to be followed by the assessee was of as technical nature as was in the case of Swastik Roadways (3 SCC 640) and the consequence to fall for failure to observe such norms in the present case are much higher than which were prescribed under the Madhya Pradesh Sales Tax Act. Apparently, it is a relevant consideration for the assessing authority under the Income Tax Act that before invoking the provisions of section 40A(3) in the light of Rule 6DD as clarified by the Circular of the CBDT that whether the failure on the part of the assessee in adhering to requirement of provisions of section 40A(3) has any such nexus which defeats the object of provision so as to invite such a consequence. We hold that the purpose of section 40A(3) is only preventive and to check evasion of tax and flow of unaccounted money or to check transactions which are not genuine and may be put as camouflage to evade tax by showing fictitious or false transaction. Admittedly, this is not the case in the facts of the assessee herein. The payments made in cash to Shri. Amit Dutta had been duly acknowledged by him in an independent deposition given by him before the Learned AO which was admittedly taken behind the back of the assessee. It is also pertinent to note that the Hon’ble Rajasthan High Court in the case of Smt.Harshila Chordia vs ITO reported in (2008) 298 ITR 349 (Raj) had held that the exceptions contained in Rule 6DD of Income Tax Rules are not exhaustive and that the said rule must be interpreted liberally.
4.7. The assessee has also given the income tax assessment particulars of Amit Dutta before the Learned AO. Moreover, the Learned AO himself had taken deposition from Sri Amit Dutta u/s 131 of the Act wherein he had confirmed the receipt of monies in cash as well as by cheque / DD from the assessee. Hence the acknowledgement of the payments made by the assessee by the payee is proved beyond doubt. The assessee had also stated that the payee had duly included these payments as his receipts in his returns.
4.8. We are unable to buy the argument of the Learned AR that the assessee had made payment to his agent Mr.Arnit Dutta for purchase of sim cards and others and hence would fall under the exception provided in Rule 6DD(k) of the IT Rules. For the sake of convenience, Rule 6DD(k) is reproduced herein below:-
“Rule 6DD(k) of the IT Rules 1962 6DD. No disallowance under sub-section (3) of section 40A shall be made and no payment shall be deemed to the profits and gains of business or profession under sub-section (3A) of section 40A where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees in the cases and circumstances specified hereunder, namely:-
*** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** ***
(k) where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person;”
The said rule says that if the payment is made by a person to his agent who is required to make payment in cash for goods and services on behalf of such person: Admittedly, Shri.Arnit Dutta is only the agent of Hutchison Essar Ltd and not the assessee as could be seen very clearly from the Associate Distributor Agreement entered into by the assessee which is on records before us and before the lower authorities. Hence the payment made by the assessee to Shri.Arnit Dutta would not fall under the exception clause of Rule 6DD(k).
4.9. We find that one of the grounds raised by the assessee is violation of principles of natural justice on the part of the Learned CIT(A) to enhance the assessment without giving enhancement notice to the assessee. But from the order of the Learned CITA, it is specifically mentioned that the assessee was given due opportunity and show cause notice for enhancement of assessment by Rs. 54,01,473/- for making further additions on account of section 40A(3) of the Act. We find that the assessee had not come on any affidavit before us refuting this finding. Hence the enhancement made by the Learned AO cannot be faulted with on violation of principles of natural justice.
4.10. In view of the aforesaid facts and circumstances and respectfully following the judicial precedents relied upon hereinabove, we have no hesitation in deleting the addition made in the sum of Rs. 60,50,8901- and 54,01,473/- u/s 40A(3) of the Act. Accordingly, the grounds raised by the assesee in this regard are allowed.
5. In the result, the appeal of the assessee is allowed.”
7. After perusing the aforesaid decision of the ITAT, Kolkata, we are of the considered view that the issue in dispute is also squarely covered by the aforesaid decision, because the facts and circumstances of the present case are exactly similar and identical to the aforesaid case law. Therefore, respectfully following the aforesaid decision dated 18.11.2015 of the ITAT, ‘B’Bench, Kolkata passed in ITA No. 1 448/Kol/201 1 AY 2008-09 in the case of Sri Manoranjan Raha vs. ITO, the order of the Ld. CIT(A) is upheld and grounds raised by the Revenue stand rejected.
7.1. We further find that assessee has filed a copy of Application under Rule 27 of Appellate Tribunal Rules, 1963 dated 21.6.2017, but at the time of hearing, he has not pressed the same, hence, the same is dismissed as such.
8. In the result, the appeal of the Revenue is dismissed.”
27. On the other hand, Ld. D.R. relied upon the orders of the authorities below and submitted that Tax Auditor has mentioned in the audit report that this amount shall have to be He has submitted that non-genuine payments ar disallowable under section 37 of the I.T. Act. After amendment in Rule-6DDJ in 2008, Rule 6 DDJ will not apply, therefore, disallowance is justified.
28. We have considered the rival submissions. Even though there is an amendment in Rule 6DD of I.T. Rules as is noted by the Ld. CIT(A), but in Section 40A(3) of the I.T. Act, 1961 itself, an exception is provided on account of nature and extent of banking facilities available, consideration of business expediency and other relevant factors. It is not in dispute that assessee-company was engaged in the business of Clearing and Forwarding Agent and acted on behalf of other companies. The amounts in question have been tabulated in the assessment These payments are made to airline companies. The nature of business of assessee-company and the agency carried on by the assessee-company on behalf of others, clearly shows that for business expediency in the line of business of assessee-company, some times cash payments are made to complete th work on behalf of Principal. The assessee-company, under such compelling reasons, shall have to make payments in cash on account of urgent need. The authorities below have not doubted the identity of the payee and the genuineness of the transaction in the matter. The source of payment is also not been doubted by the authorities below, therefore, the decision of ITAT, Delhi Bench in the case of ACIT, Central Circle-2, Faridabad vs. M/s. Marigold Merchandise (P) Ltd., (supra), is squarely applicable to the facts of the case. We, accordingly, set aside the orders of the authorities below and delete the addition. Ground No.3 of appeal of assessee-company is allowed.
29. On Ground No.4, the assessee-company challenged the charging of interest under sections 234A, 234B, 234C and 234D of the I.T. Act. No arguments have been advanced on the same. Since, charging of interest is of consequential in nature, therefore, ground No.4 of appeal of assessee-company is rejected.
30. In the result, appeal of Assessee is allowed partly.
Order pronounced in the open Court.