THE issues before the Bench are - Whether in case of short deduction of tax at source, the provisions of section 40(a)(ia) would not be applicable at all; Whether if there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payment falling under various TDS provisions, the assessee can only be declared as an assessee in default u/s 201 of the Act and no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act; Whether the foreign currency exchange loss incurred in the course of advancing loan
to the subsidiary company for the object of acquiring a company in South Africa is to be treated as revenue loss or capital loss; Whether the loss suffered by the assessee company in the forward contract has to be allowed as business expenditure – Whether even if the claim of loss was not made in the return of income, the CIT(A) ought to have admitted the claim as an additional ground and examined the issue on merit; Whether the expenditure incurred towards entrance fee / subscription fee can be termed as business expenditure and the cost of service could be allowed if the commercial expediency in incurring the expenditure is proved - Whether the irrecoverable part of the amount advanced by the assessee in the course of its business activity is to be treated as business loss and hence allowable as deduction and Whether employees’ contribution to provident fund is allowable expenditure if the same was paid before the due date of filing the return of income. And the verdict partly goes in favour of the assessee.
to the subsidiary company for the object of acquiring a company in South Africa is to be treated as revenue loss or capital loss; Whether the loss suffered by the assessee company in the forward contract has to be allowed as business expenditure – Whether even if the claim of loss was not made in the return of income, the CIT(A) ought to have admitted the claim as an additional ground and examined the issue on merit; Whether the expenditure incurred towards entrance fee / subscription fee can be termed as business expenditure and the cost of service could be allowed if the commercial expediency in incurring the expenditure is proved - Whether the irrecoverable part of the amount advanced by the assessee in the course of its business activity is to be treated as business loss and hence allowable as deduction and Whether employees’ contribution to provident fund is allowable expenditure if the same was paid before the due date of filing the return of income. And the verdict partly goes in favour of the assessee.
Facts of the case
Disallowance u/s 40(a)(ia) of the Act - Assessee deducted tax at source but in some cases there was short deduction. The assessee submitted that in the case of Achuthan Pillai & Co tax was deducted at 16.90%. However, tax should have been deducted at 18.53%. According to the assessee, the surcharge was not considered while deducting tax. In many cases like that surcharge was not considered for the purpose of deduction of tax. The assessee deducted tax applicable to sub contractors instead of the rate applicable to contractors. The assessee further submitted that in some cases, the deductees have filed certificates for deducting the tax at a lesser rate. Therefore, according to the assessee, it is not a case of non deduction of tax, but it is a case of short deduction. The assessee further submitted that short deduction occurred due to the fact that the surcharge was not included for computation.
Referring to section 40(a)(ia) of the Act, the assessee submitted that first the tax is deductible at source under Chapter XVIIB of the Act and if not deducted or after such deduction it was not paid before the due date, then the provisions of section 40(a)(ia) would come into operation. According to the assessee, in case of short deduction, the provisions of section 40(a)(ia) would not be applicable at all. Referring to provisions of section 201(1A) of the Act, the assessee pointed out that the legislature intended to levy penalty in case the person responsible to make payment does not deduct whole or any part of the tax or after deducting fails to pay the tax as required under the Act and shall also pay interest. Therefore, the legislature intended to levy penalty even in case there was a short deduction which is obvious from the language employed in section 201(1A) of the Act. A similar language is not found in section 40(a)(ia) of the Act. In section 40(a)(ia) of the Act, the legislature does not intend to include the words “whole or any part of tax under Chapter XVII-B”. The very fact that “any part of the tax” is omitted to be included in section 40(a)(ia) of the Act, the assessee submitted that merely because there was a short deduction of tax, the provisions of section 40(a)(ia) of the Act would not be applicable.
On the contrary, Revenue submitted that section 40(a)(ia) of the Act requires the assessee to deduct tax at the rate prescribed under Chapter XVII-B of the Act. If the tax was not deducted or after deduction it was not paid before the due date for filing of return u/s 139(1), then the whole of the amount shall be disallowed. Referring to the words “tax is deductible at source under Chapter XVII-B and such tax has not been deducted or after deduction has not been paid on or before the due date specified in sub section (1) of section 139”, the Revenue that “such tax” refers to the tax prescribed under Chapter XVII-B for deduction of tax. Therefore, it is obligatory on the part of the assessee to deduct tax under Chapter XVII-B of the Act at the rate prescribed and if for any reason such tax was not deducted as prescribed, then the assessee would face disallowance u/s 40(a)(ia) of the Act in respect of the entire such amount. The DR submitted that the AO has not disallowed the entire payment. According to the DR, the AO restricted himself only in respect of the proportionate amount which was not deducted. Therefore, according to the DR, the provisions of section 40(a)(ia) is applicable even in case of short deduction or lesser deduction of tax.
Disallowance due to foreign exchange fluctuation loss - Assessee submitted that in order to enhance the efficiency of its business and profitability, the assessee company gave a loan of 314 million Rands to its wholly owned subsidiary company, i.e. Apollo (Mauritius) Holdings Pvt Ltd between March, 2006 and June, 2006 to help the Apollo (Mauritius) Holdings Pvt Ltd to acquire Dunlop Tyres International (Pvt) Ltd, South Africa. Apollo (Mauritius) Holdings Pvt Ltd gave a loan to Apollo (South Africa) Holding Pvt Ltd, another wholly owned subsidiary of the assessee company for acquisition of Dunlop Tyres. In the month of January, 2006 a resolution was passed by the Board of Directors of the assessee company. The assessee further pointed out that as per the terms of the loan it has to be paid in South African currency and the loan period shall be for ten years and the repayment shall be made in semi annual instalments starting from fourth year. According to the assessee, the loan given by the assessee to its 100% subsidiary of Mauritius company exposed to risk of increasing rupee liability due to exchange rate fluctuation. Therefore, the assessee entered into foreign exchange forward contract with Citi Bank N.A. in the month of January, 2006 in order to avoid increase in its liability for payment to be made to Mauritius subsidiary company by way of loan in foreign currency. According to the assessee the purpose for which the forward contract was taken did not materialize till March, 2006. Therefore, the forward contract has to be settled on due date, i.e. 14th March, 2006. Because of this, the assessee has suffered aggregate loss of Rs 5,09,01,000.
Assessee pointed out that the loss was incurred in the course of advancing loan to the subsidiary company. Therefore, it is allowable u/s 37(1) of the Act. According to the assessee, the expenditure incurred by the assessee is incidental to the business, therefore, it is to be allowed. According to the assessee, the very purpose of entering into the forward contract is to safeguard the assessee against the enhancement of liability in advancing foreign currency loan due to exchange rate fluctuation. The loan was advanced to Mauritius subsidiary for commercial expediency. The assessee company acquired the benefit by way of expanding its distribution network in South Africa. According to the assessee the assessee has not acquired any capital asset by advancing loan to Mauritius subsidiary company. The benefit, if any, acquired by the assessee is only in the revenue field. Therefore, according to the assessee, the entire loss due to foreign exchange fluctuation has to be allowed as revenue expenditure. The assessee further submitted that acquisition of equity capital of Dunlop Tyres International (proprietory) Ltd by South Africa subsidiary company did not enlarge the profit making apparatus of the assessee company. The advantage of distribution network acquired by the assessee is in the revenue field. Therefore, the loss suffered by the assessee company in the forward contract has to be allowed as business expenditure.
The DR submitted that admittedly the forward contract was entered into in respect of a loan advanced to Mauritius subsidiary company with an intention to acquire Dunlop Tyres International (proprietory) Ltd. Referring to the assessment order, the DR pointed out that in the director’s report it is clearly stated that as a part of expansion programme, the company wanted to acquire Dunlop Tyres International (proprietory) Ltd at South Africa. For acquiring this company, the assessee incorporated a wholly owned company in Mauritius by the name and style “Apollo Mauritius Holding Pvt Ltd”. The subsidiary company in Mauritius established another company in South Africa, viz. Apollo (South Africa) Holding Pvt Ltd for acquiring 100% controlling power in Dunlop Tyres International (proprietory) Ltd in South Africa. For acquiring Dunlop Tyres International (proprietory) Ltd the assessee has given the loan in foreign currency. Any expenditure incurred by the assessee for acquisition of capital asset is not an allowable expenditure. Therefore, according to the DR, the loss said to be incurred by the assessee in entering into forward contract with Citi Bank cannot be allowed as business loss. Therefore, according to the DR, the CIT(A) has rightly confirmed the order of the CIT(A) on the ground that the loss said to be suffered by the assessee is a capital loss which cannot be allowed;
Loss on account of raw material being destroyed in fire - There was a fire accident at the godown in Maharashtra State Warehousing Corporation at Kalampoli. The assessee had lost shipment worth Rs.17,72,40,718. The complaint was made by the assessee before the Store Superintendent of the Warehousing Corporation for a total amount of Rs.18,26,47,613 which included cost of raw material and incidental charges. The Maharashtra State Warehousing Corporation in turn lodged a complaint before the Directorate of Insurance, Maharashtra Government. Since there was a delay in settlement, the assessee filed a civil suit against Maharashtra State Warehousing Corporation before the Civil Judge at Pune for recovery of Rs. 22,41,41,390 which includes the principal amount of Rs. 18,26,47,613 and Rs.4,17,93,777 being the interest. The suit is pending for disposal. Meanwhile, Maharashtra State Warehousing Corporation paid the assessee a sum of Rs.4,24,96,060. For the year ended 31-03-2006, the loss suffered by the assessee on account of fire accident was debited in the accounts. However, it was not claimed in the return of income, for the AY 2006-07. In the course of assessment proceedings by a letter dated 11-11- 2008 the assessee claimed this amount of Rs.18,26,47,613 as deduction u/s 28 of the Act. However, the AO disallowed the claim of the assessee on the ground that it was not claimed in the return of income by following the judgement of the Apex Court in the case of Goetze (India) Ltd vs CIT (2006-TIOL-198-SC-IT). CIT(A) confirmed the order of the AO on the ground that the assessing authority has no power to entertain any new claim otherwise than by way of revised return.
Referring to the judgement of the Apex Court in the case of Goetze (India) Ltd, the assessee submitted that the Supreme Court itself clarified that the power of the appellate authority to entertain the additional claim cannot be impinged in any way. Therefore, the CIT(A) ought to have considered the issue as an additional ground and adjudicated the same on merit;
On the contrary, the DR submitted that the AO cannot entertain any new claim otherwise than by way of a revised return. Admittedly, the assessee has not made any claim with regard to the loss suffered in the fire in the original return; no revised return was also filed. Therefore, the AO cannot travel beyond the deduction claimed in the return. Hence, the CIT(A) has rightly confirmed the order of the AO;
Club expenditure - AO disallowed the payment of Rs.50,09,299 towards club expenditure incurred by the assessee on the ground that the expenditure were in the nature of personal expenditure. Assessee submitted that the assessee company has paid fringe benefit tax on the expenditure incurred towards club expenditure. Therefore, there is no question of any disallowance. According to the assessee, for the AY 1988-89 a similar issue arose before this Tribunal. This Tribunal by an order dated 29-07- 1992 in ITA No.301/Coch/1991 allowed a similar expenditure. For the AYs 1996-97 and 1997-98 this Tribunal by following its earlier order for the AY 1998-99 allowed similar expenditure in ITA No.43/Coch/2001. Therefore, according to the assessee, there is no question of any disallowance. CIT(A) allowed the appeal of the assessee.
Bad debt written off - CIT(A) allowed the claim of the assessee u/s 37(1) of the Act in respect of the bad debt written off and claimed by the assesse in the computation of income. According to the DR, the provisions of section 37(1) cannot be taken aid unless it is established that the provisions of sections 30 to 36 are not applicable. According to the DR, the provisions of section 36(2) of the Act were not complied with, therefore, it cannot be allowed as bad debt;
On the contrary, the assessee submitted that the assessee company entered into an agreement with M/s S Kumar Tyre Manufacturing Co for acting as its conversion agent for manufacture of automobile tyres and tubes. The raw material for manufacture of tyres and tubes would be supplied by the assessee to its conversion agent. Advance amounts were also paid by the company to the conversion agent over a period of time which will be adjusted against the bill raised by the conversion agent. According to assessee the advance amount was given to the commission agent for smooth running of its manufacturing activity so that uninterrupted supplies of its product could be maintained. Subsequently, the business relationship with S Kumar Tyre Manufacturing Co was terminated and the advances paid to the said company could not be recovered in spite of best efforts of the assessee. Therefore, the Board of Directors of the company decided to write it off as irrecoverable balance. Hence, this loss incurred by the assessee company in the course of its business activity is a business loss, as such, it has to be allowed while computing the total income as revenue loss;
Payment towards employees’ contribution to provident fund - The AO also disallowed employees’ contribution to provident fund since the payment was not made by the due date. However, the CIT(A) allowed the claim of the assessee on the ground that the same was paid before the due date of filing the return of income.
On further appeal by the assessee as well as the Revenue, the ITAT held that,
++ Disallowance u/s 40(a)(ia) of the Act - section 40(a)(ia) enables the AO to disallow any payment towards interest, commission or brokerage, fee for professional service, fees for technical service etc. on which tax is deductible at source under Chapter XVIIB and if such tax has not been deducted or after deduction has not been paid;
++ Section 201(1A) enables the AO to levy interest in case the tax was not deducted either wholly or partly or after deduction it was not paid as required under the Act. In fact, the provisions of section 201(1A) was amended by Finance Act, 2001 with retrospective effect from 01-04-1962;
++ as rightly pointed out by the assessee in section 201(1A) the legislature intended to levy interest even in case of short deduction of tax. In other words, if any part of the tax which required to be deducted was found to be not deducted then interest u/s 201(1A) can be levied in respect of that part of the amount which was not deducted. Whereas the language of section 40(a)(ia) does not say that even for short deduction disallowance has to be made proportionately. Therefore, the legislature has clearly envisaged in section 201(1A) for levy of interest on the amount on which tax was not deducted whereas the legislature has omitted to do so in section 40(a)(ia) of the Act. In other words, the provisions of section 40(a)(ia) does not enable the AO to disallow any proportionate amount for short deduction or lesser deduction;
++ the Andhra Pradesh High Court in the case of P.V. Rajagopal, while considering the provisions of section 201 which stood for the AYs 1989-90 to 1993-94, found that there is nothing in the section to treat the employer as the defaulter where there is a shortfall in the deduction of tax at source. After considering the provisions of section 201(1A) before amendment by Finance Act, 2001, the Andhra Pradesh High Court found that “as required under this Act” does not refer to mean to deduct tax in accordance with computation under the Act. In fact, the Parliament amended the section 201(1A) after this judgment of Andhra Pradesh High Court by incorporating the words “the whole or any part of tax” by Finance Act, 2001. The Division Bench of the Mumbai Bench of this Tribunal in the case of Chandabhoy and Jassobhoy had an occasion to consider an identical issue. The Mumbai Bench found that short deduction of TDS, if any, could have been considered as liability under the Income-tax Act as due from the assessee. Therefore, the disallowance of the entire expenditure, whose genuineness was not doubted by the AO is not justified;
++ in view of the above, this Tribunal is of the considered opinion that section 40(a)(ia) does not envisage a situation where there was short deduction / lesser deduction as in case of section 201(1A) of the Act. There is an obvious omission to include short deduction / lesser deduction in section 40(a)(ia) of the Act. Therefore, this Tribunal is of the considered opinion that in case of short / lesser deduction of tax, the entire expenditure whose genuineness was not doubted by the AO, cannot be disallowed. Accordingly, the orders of lower authorities are set side and the entire disallowance is deleted;
++ Disallowance due to foreign exchange fluctuation loss - The question arises for consideration is – whether loss suffered by the assessee in settling the forward contract before the due date is a capital loss or a revenue loss? It is well settled principle of law that the expenditure incurred by the assessee in the process of earning of profit is a revenue expenditure. However, if any expenditure was incurred in the process of establishing a capital asset either by expanding the existing unit or by expanding the profit making apparatus it has to be treated as capital expenditure;
++ in the above background, it has to be seen whether acquisition of tyre manufacturing company along with the distribution network at South Africa would expand the business and profit making apparatus of the assessee or not? The assessee, instead of acquiring the company directly, established a company in Mauritius as 100% subsidiary company and the said subsidiary company has established another company in South Africa. The motive and intention behind the establishment and creation of two intermediary companies is for the purpose of acquiring Dunlop Tyres International (proprietory) Ltd. The loan in foreign exchange was granted to achieve the above object of acquiring the company in South Africa. This Tribunal is of the considered opinion that by acquisition of a company in South Africa, the manufacturing base and distribution network, in other words, the capital base of the company, expands considerably and the profit making apparatus also expanded. Though the company was acquired through a subsidiary company this Tribunal of the considered opinion that it is only an arrangement made by the assessee to acquire Dunlop Tyres International (proprietory) Ltd. In effect, the assessee is holding and controlling the subsidiary company as well as Dunlop Tyres International (proprietory) Ltd. This Tribunal is of the considered opinion that the entire arrangements made by the assessee by establishing two intermediary subsidiary companies would come to light once the corporate veil is lifted. Therefore, the loss suffered was in the process of acquisition of Dunlop Tyres International (proprietory) Ltd in South Africa. In other words, the loss was suffered in the process of acquisition of a capital asset which expands the manufacturing facility as well as the profit making apparatus of the company. Therefore, this Tribunal is of the considered opinion that the loss suffered by the assessee by settling the forward contract in the process of acquisition of Dunlop Tyres International (proprietory) Ltd is a capital loss which cannot be allowed as a revenue loss or as an item of expenditure. This is not an expenditure incurred in the course of earning of profit. Therefore, this Tribunal do not find any infirmity in the order of the lower authority. Accordingly the order of CIT(A) on this issue is confirmed;
++ loss on account of raw material being destroyed in fire - Though the AO refers that it is a premature claim, he refused to entertain the same on the ground that it was not made through a revised return in view of the judgment of the Apex Court in the case of Goetze (India) Ltd. In view of the judgment of the Apex Court it is obvious that the power of the Income-tax Appellate Tribunal to entertain an additional claim will not impinge. Therefore, even if the claim of loss was not made in the return of income, the CIT(A) ought to have admitted the claim as an additional ground and examined the issue on merit. This Tribunal also has to entertain the same as additional ground since the claim was made in the course of assessment proceedings in view of the judgment of the Apex Court in the case of CIT vs Shelly Products. In view of the above, the CIT(A) is not justified in rejecting the claim of the assessee. However, since the AO has not considered the matter on merit, this Tribunal is of the considered opinion that the matter has to be adjudicated by the AO at the first instance. Accordingly, the orders of lower authorities are set aside and the issue of loss of Rs.18,26,47,613 on account of fire is remitted back to the file of the AO. The AO shall consider the issue on merit and thereafter decide the same in accordance with law after giving reasonable opportunity of hearing to the assessee;
++ Club expenditure - for the AY 2005-06 in the assessee’s own case in ITA No.729/Coch/2008 order dated 08-02-2013, this Tribunal remitted the matter back to the file of the AO for reconsideration. This Tribunal specifically observed that expenditure incurred towards entrance fee / subscription fee can be termed as business expenditure and the cost of service could be allowed if the commercial expediency in incurring the expenditure is proved. Since the matter was remitted back to the file of the AO for 2005-06 on identical set of facts, this Tribunal is of the considered opinion that the CIT(A) was not justified in deleting the disallowance made by the AO. Accordingly we set aside the order of the lower authority and restore the issue back to the file of the AO. The AO shall decide the issue afresh in the light of observation of this Tribunal for the AY 2005-06 in accordance with law after giving reasonable opportunity of hearing to the assessee;
++ Bad debt written off - It is not in dispute that the advance was made to S Kumar Tyre Manufacturing Co in the course of business activity of the assessee for manufacturing tyres and tubes. When the assessee advanced the amount in the course of its business activity for the purpose of manufacturing tyre and tubes, the irrecoverable part of the advance has to be treated as business loss. Therefore, any business loss has to be allowed while computing the taxable income. This Tribunal is of the considered opinion that though the claim of the assessee cannot be allowed u/s 37(1) as a business expenditure it has to be deducted as a business loss while computing the taxable income. In view of the above, the order of the CIT(A) on this issue is confirmed;
++ Payment towards employees’ contribution to provident fund - The CIT(A) allowed the claim of the assessee after finding that the payments were made before filing of return of income. Second Proviso to section 43B was deleted and all sub clauses under section 43B were brought under the First Proviso to section 43B. Therefore, the payments covered by section 43B needs to be allowed if the same was paid before the due date for filing the return of income. In this case, it is not in dispute that the contribution to provident fund was paid before the due date for filing the return of income. Therefore, this Tribunal is of the considered opinion that the CIT(A) has rightly deleted the disallowance.
Disallowance u/s 40(a)(ia) of the Act - Assessee deducted tax at source but in some cases there was short deduction. The assessee submitted that in the case of Achuthan Pillai & Co tax was deducted at 16.90%. However, tax should have been deducted at 18.53%. According to the assessee, the surcharge was not considered while deducting tax. In many cases like that surcharge was not considered for the purpose of deduction of tax. The assessee deducted tax applicable to sub contractors instead of the rate applicable to contractors. The assessee further submitted that in some cases, the deductees have filed certificates for deducting the tax at a lesser rate. Therefore, according to the assessee, it is not a case of non deduction of tax, but it is a case of short deduction. The assessee further submitted that short deduction occurred due to the fact that the surcharge was not included for computation.
Referring to section 40(a)(ia) of the Act, the assessee submitted that first the tax is deductible at source under Chapter XVIIB of the Act and if not deducted or after such deduction it was not paid before the due date, then the provisions of section 40(a)(ia) would come into operation. According to the assessee, in case of short deduction, the provisions of section 40(a)(ia) would not be applicable at all. Referring to provisions of section 201(1A) of the Act, the assessee pointed out that the legislature intended to levy penalty in case the person responsible to make payment does not deduct whole or any part of the tax or after deducting fails to pay the tax as required under the Act and shall also pay interest. Therefore, the legislature intended to levy penalty even in case there was a short deduction which is obvious from the language employed in section 201(1A) of the Act. A similar language is not found in section 40(a)(ia) of the Act. In section 40(a)(ia) of the Act, the legislature does not intend to include the words “whole or any part of tax under Chapter XVII-B”. The very fact that “any part of the tax” is omitted to be included in section 40(a)(ia) of the Act, the assessee submitted that merely because there was a short deduction of tax, the provisions of section 40(a)(ia) of the Act would not be applicable.
On the contrary, Revenue submitted that section 40(a)(ia) of the Act requires the assessee to deduct tax at the rate prescribed under Chapter XVII-B of the Act. If the tax was not deducted or after deduction it was not paid before the due date for filing of return u/s 139(1), then the whole of the amount shall be disallowed. Referring to the words “tax is deductible at source under Chapter XVII-B and such tax has not been deducted or after deduction has not been paid on or before the due date specified in sub section (1) of section 139”, the Revenue that “such tax” refers to the tax prescribed under Chapter XVII-B for deduction of tax. Therefore, it is obligatory on the part of the assessee to deduct tax under Chapter XVII-B of the Act at the rate prescribed and if for any reason such tax was not deducted as prescribed, then the assessee would face disallowance u/s 40(a)(ia) of the Act in respect of the entire such amount. The DR submitted that the AO has not disallowed the entire payment. According to the DR, the AO restricted himself only in respect of the proportionate amount which was not deducted. Therefore, according to the DR, the provisions of section 40(a)(ia) is applicable even in case of short deduction or lesser deduction of tax.
Disallowance due to foreign exchange fluctuation loss - Assessee submitted that in order to enhance the efficiency of its business and profitability, the assessee company gave a loan of 314 million Rands to its wholly owned subsidiary company, i.e. Apollo (Mauritius) Holdings Pvt Ltd between March, 2006 and June, 2006 to help the Apollo (Mauritius) Holdings Pvt Ltd to acquire Dunlop Tyres International (Pvt) Ltd, South Africa. Apollo (Mauritius) Holdings Pvt Ltd gave a loan to Apollo (South Africa) Holding Pvt Ltd, another wholly owned subsidiary of the assessee company for acquisition of Dunlop Tyres. In the month of January, 2006 a resolution was passed by the Board of Directors of the assessee company. The assessee further pointed out that as per the terms of the loan it has to be paid in South African currency and the loan period shall be for ten years and the repayment shall be made in semi annual instalments starting from fourth year. According to the assessee, the loan given by the assessee to its 100% subsidiary of Mauritius company exposed to risk of increasing rupee liability due to exchange rate fluctuation. Therefore, the assessee entered into foreign exchange forward contract with Citi Bank N.A. in the month of January, 2006 in order to avoid increase in its liability for payment to be made to Mauritius subsidiary company by way of loan in foreign currency. According to the assessee the purpose for which the forward contract was taken did not materialize till March, 2006. Therefore, the forward contract has to be settled on due date, i.e. 14th March, 2006. Because of this, the assessee has suffered aggregate loss of Rs 5,09,01,000.
Assessee pointed out that the loss was incurred in the course of advancing loan to the subsidiary company. Therefore, it is allowable u/s 37(1) of the Act. According to the assessee, the expenditure incurred by the assessee is incidental to the business, therefore, it is to be allowed. According to the assessee, the very purpose of entering into the forward contract is to safeguard the assessee against the enhancement of liability in advancing foreign currency loan due to exchange rate fluctuation. The loan was advanced to Mauritius subsidiary for commercial expediency. The assessee company acquired the benefit by way of expanding its distribution network in South Africa. According to the assessee the assessee has not acquired any capital asset by advancing loan to Mauritius subsidiary company. The benefit, if any, acquired by the assessee is only in the revenue field. Therefore, according to the assessee, the entire loss due to foreign exchange fluctuation has to be allowed as revenue expenditure. The assessee further submitted that acquisition of equity capital of Dunlop Tyres International (proprietory) Ltd by South Africa subsidiary company did not enlarge the profit making apparatus of the assessee company. The advantage of distribution network acquired by the assessee is in the revenue field. Therefore, the loss suffered by the assessee company in the forward contract has to be allowed as business expenditure.
The DR submitted that admittedly the forward contract was entered into in respect of a loan advanced to Mauritius subsidiary company with an intention to acquire Dunlop Tyres International (proprietory) Ltd. Referring to the assessment order, the DR pointed out that in the director’s report it is clearly stated that as a part of expansion programme, the company wanted to acquire Dunlop Tyres International (proprietory) Ltd at South Africa. For acquiring this company, the assessee incorporated a wholly owned company in Mauritius by the name and style “Apollo Mauritius Holding Pvt Ltd”. The subsidiary company in Mauritius established another company in South Africa, viz. Apollo (South Africa) Holding Pvt Ltd for acquiring 100% controlling power in Dunlop Tyres International (proprietory) Ltd in South Africa. For acquiring Dunlop Tyres International (proprietory) Ltd the assessee has given the loan in foreign currency. Any expenditure incurred by the assessee for acquisition of capital asset is not an allowable expenditure. Therefore, according to the DR, the loss said to be incurred by the assessee in entering into forward contract with Citi Bank cannot be allowed as business loss. Therefore, according to the DR, the CIT(A) has rightly confirmed the order of the CIT(A) on the ground that the loss said to be suffered by the assessee is a capital loss which cannot be allowed;
Loss on account of raw material being destroyed in fire - There was a fire accident at the godown in Maharashtra State Warehousing Corporation at Kalampoli. The assessee had lost shipment worth Rs.17,72,40,718. The complaint was made by the assessee before the Store Superintendent of the Warehousing Corporation for a total amount of Rs.18,26,47,613 which included cost of raw material and incidental charges. The Maharashtra State Warehousing Corporation in turn lodged a complaint before the Directorate of Insurance, Maharashtra Government. Since there was a delay in settlement, the assessee filed a civil suit against Maharashtra State Warehousing Corporation before the Civil Judge at Pune for recovery of Rs. 22,41,41,390 which includes the principal amount of Rs. 18,26,47,613 and Rs.4,17,93,777 being the interest. The suit is pending for disposal. Meanwhile, Maharashtra State Warehousing Corporation paid the assessee a sum of Rs.4,24,96,060. For the year ended 31-03-2006, the loss suffered by the assessee on account of fire accident was debited in the accounts. However, it was not claimed in the return of income, for the AY 2006-07. In the course of assessment proceedings by a letter dated 11-11- 2008 the assessee claimed this amount of Rs.18,26,47,613 as deduction u/s 28 of the Act. However, the AO disallowed the claim of the assessee on the ground that it was not claimed in the return of income by following the judgement of the Apex Court in the case of Goetze (India) Ltd vs CIT (2006-TIOL-198-SC-IT). CIT(A) confirmed the order of the AO on the ground that the assessing authority has no power to entertain any new claim otherwise than by way of revised return.
Referring to the judgement of the Apex Court in the case of Goetze (India) Ltd, the assessee submitted that the Supreme Court itself clarified that the power of the appellate authority to entertain the additional claim cannot be impinged in any way. Therefore, the CIT(A) ought to have considered the issue as an additional ground and adjudicated the same on merit;
On the contrary, the DR submitted that the AO cannot entertain any new claim otherwise than by way of a revised return. Admittedly, the assessee has not made any claim with regard to the loss suffered in the fire in the original return; no revised return was also filed. Therefore, the AO cannot travel beyond the deduction claimed in the return. Hence, the CIT(A) has rightly confirmed the order of the AO;
Club expenditure - AO disallowed the payment of Rs.50,09,299 towards club expenditure incurred by the assessee on the ground that the expenditure were in the nature of personal expenditure. Assessee submitted that the assessee company has paid fringe benefit tax on the expenditure incurred towards club expenditure. Therefore, there is no question of any disallowance. According to the assessee, for the AY 1988-89 a similar issue arose before this Tribunal. This Tribunal by an order dated 29-07- 1992 in ITA No.301/Coch/1991 allowed a similar expenditure. For the AYs 1996-97 and 1997-98 this Tribunal by following its earlier order for the AY 1998-99 allowed similar expenditure in ITA No.43/Coch/2001. Therefore, according to the assessee, there is no question of any disallowance. CIT(A) allowed the appeal of the assessee.
Bad debt written off - CIT(A) allowed the claim of the assessee u/s 37(1) of the Act in respect of the bad debt written off and claimed by the assesse in the computation of income. According to the DR, the provisions of section 37(1) cannot be taken aid unless it is established that the provisions of sections 30 to 36 are not applicable. According to the DR, the provisions of section 36(2) of the Act were not complied with, therefore, it cannot be allowed as bad debt;
On the contrary, the assessee submitted that the assessee company entered into an agreement with M/s S Kumar Tyre Manufacturing Co for acting as its conversion agent for manufacture of automobile tyres and tubes. The raw material for manufacture of tyres and tubes would be supplied by the assessee to its conversion agent. Advance amounts were also paid by the company to the conversion agent over a period of time which will be adjusted against the bill raised by the conversion agent. According to assessee the advance amount was given to the commission agent for smooth running of its manufacturing activity so that uninterrupted supplies of its product could be maintained. Subsequently, the business relationship with S Kumar Tyre Manufacturing Co was terminated and the advances paid to the said company could not be recovered in spite of best efforts of the assessee. Therefore, the Board of Directors of the company decided to write it off as irrecoverable balance. Hence, this loss incurred by the assessee company in the course of its business activity is a business loss, as such, it has to be allowed while computing the total income as revenue loss;
Payment towards employees’ contribution to provident fund - The AO also disallowed employees’ contribution to provident fund since the payment was not made by the due date. However, the CIT(A) allowed the claim of the assessee on the ground that the same was paid before the due date of filing the return of income.
On further appeal by the assessee as well as the Revenue, the ITAT held that,
++ Disallowance u/s 40(a)(ia) of the Act - section 40(a)(ia) enables the AO to disallow any payment towards interest, commission or brokerage, fee for professional service, fees for technical service etc. on which tax is deductible at source under Chapter XVIIB and if such tax has not been deducted or after deduction has not been paid;
++ Section 201(1A) enables the AO to levy interest in case the tax was not deducted either wholly or partly or after deduction it was not paid as required under the Act. In fact, the provisions of section 201(1A) was amended by Finance Act, 2001 with retrospective effect from 01-04-1962;
++ as rightly pointed out by the assessee in section 201(1A) the legislature intended to levy interest even in case of short deduction of tax. In other words, if any part of the tax which required to be deducted was found to be not deducted then interest u/s 201(1A) can be levied in respect of that part of the amount which was not deducted. Whereas the language of section 40(a)(ia) does not say that even for short deduction disallowance has to be made proportionately. Therefore, the legislature has clearly envisaged in section 201(1A) for levy of interest on the amount on which tax was not deducted whereas the legislature has omitted to do so in section 40(a)(ia) of the Act. In other words, the provisions of section 40(a)(ia) does not enable the AO to disallow any proportionate amount for short deduction or lesser deduction;
++ the Andhra Pradesh High Court in the case of P.V. Rajagopal, while considering the provisions of section 201 which stood for the AYs 1989-90 to 1993-94, found that there is nothing in the section to treat the employer as the defaulter where there is a shortfall in the deduction of tax at source. After considering the provisions of section 201(1A) before amendment by Finance Act, 2001, the Andhra Pradesh High Court found that “as required under this Act” does not refer to mean to deduct tax in accordance with computation under the Act. In fact, the Parliament amended the section 201(1A) after this judgment of Andhra Pradesh High Court by incorporating the words “the whole or any part of tax” by Finance Act, 2001. The Division Bench of the Mumbai Bench of this Tribunal in the case of Chandabhoy and Jassobhoy had an occasion to consider an identical issue. The Mumbai Bench found that short deduction of TDS, if any, could have been considered as liability under the Income-tax Act as due from the assessee. Therefore, the disallowance of the entire expenditure, whose genuineness was not doubted by the AO is not justified;
++ in view of the above, this Tribunal is of the considered opinion that section 40(a)(ia) does not envisage a situation where there was short deduction / lesser deduction as in case of section 201(1A) of the Act. There is an obvious omission to include short deduction / lesser deduction in section 40(a)(ia) of the Act. Therefore, this Tribunal is of the considered opinion that in case of short / lesser deduction of tax, the entire expenditure whose genuineness was not doubted by the AO, cannot be disallowed. Accordingly, the orders of lower authorities are set side and the entire disallowance is deleted;
++ Disallowance due to foreign exchange fluctuation loss - The question arises for consideration is – whether loss suffered by the assessee in settling the forward contract before the due date is a capital loss or a revenue loss? It is well settled principle of law that the expenditure incurred by the assessee in the process of earning of profit is a revenue expenditure. However, if any expenditure was incurred in the process of establishing a capital asset either by expanding the existing unit or by expanding the profit making apparatus it has to be treated as capital expenditure;
++ in the above background, it has to be seen whether acquisition of tyre manufacturing company along with the distribution network at South Africa would expand the business and profit making apparatus of the assessee or not? The assessee, instead of acquiring the company directly, established a company in Mauritius as 100% subsidiary company and the said subsidiary company has established another company in South Africa. The motive and intention behind the establishment and creation of two intermediary companies is for the purpose of acquiring Dunlop Tyres International (proprietory) Ltd. The loan in foreign exchange was granted to achieve the above object of acquiring the company in South Africa. This Tribunal is of the considered opinion that by acquisition of a company in South Africa, the manufacturing base and distribution network, in other words, the capital base of the company, expands considerably and the profit making apparatus also expanded. Though the company was acquired through a subsidiary company this Tribunal of the considered opinion that it is only an arrangement made by the assessee to acquire Dunlop Tyres International (proprietory) Ltd. In effect, the assessee is holding and controlling the subsidiary company as well as Dunlop Tyres International (proprietory) Ltd. This Tribunal is of the considered opinion that the entire arrangements made by the assessee by establishing two intermediary subsidiary companies would come to light once the corporate veil is lifted. Therefore, the loss suffered was in the process of acquisition of Dunlop Tyres International (proprietory) Ltd in South Africa. In other words, the loss was suffered in the process of acquisition of a capital asset which expands the manufacturing facility as well as the profit making apparatus of the company. Therefore, this Tribunal is of the considered opinion that the loss suffered by the assessee by settling the forward contract in the process of acquisition of Dunlop Tyres International (proprietory) Ltd is a capital loss which cannot be allowed as a revenue loss or as an item of expenditure. This is not an expenditure incurred in the course of earning of profit. Therefore, this Tribunal do not find any infirmity in the order of the lower authority. Accordingly the order of CIT(A) on this issue is confirmed;
++ loss on account of raw material being destroyed in fire - Though the AO refers that it is a premature claim, he refused to entertain the same on the ground that it was not made through a revised return in view of the judgment of the Apex Court in the case of Goetze (India) Ltd. In view of the judgment of the Apex Court it is obvious that the power of the Income-tax Appellate Tribunal to entertain an additional claim will not impinge. Therefore, even if the claim of loss was not made in the return of income, the CIT(A) ought to have admitted the claim as an additional ground and examined the issue on merit. This Tribunal also has to entertain the same as additional ground since the claim was made in the course of assessment proceedings in view of the judgment of the Apex Court in the case of CIT vs Shelly Products. In view of the above, the CIT(A) is not justified in rejecting the claim of the assessee. However, since the AO has not considered the matter on merit, this Tribunal is of the considered opinion that the matter has to be adjudicated by the AO at the first instance. Accordingly, the orders of lower authorities are set aside and the issue of loss of Rs.18,26,47,613 on account of fire is remitted back to the file of the AO. The AO shall consider the issue on merit and thereafter decide the same in accordance with law after giving reasonable opportunity of hearing to the assessee;
++ Club expenditure - for the AY 2005-06 in the assessee’s own case in ITA No.729/Coch/2008 order dated 08-02-2013, this Tribunal remitted the matter back to the file of the AO for reconsideration. This Tribunal specifically observed that expenditure incurred towards entrance fee / subscription fee can be termed as business expenditure and the cost of service could be allowed if the commercial expediency in incurring the expenditure is proved. Since the matter was remitted back to the file of the AO for 2005-06 on identical set of facts, this Tribunal is of the considered opinion that the CIT(A) was not justified in deleting the disallowance made by the AO. Accordingly we set aside the order of the lower authority and restore the issue back to the file of the AO. The AO shall decide the issue afresh in the light of observation of this Tribunal for the AY 2005-06 in accordance with law after giving reasonable opportunity of hearing to the assessee;
++ Bad debt written off - It is not in dispute that the advance was made to S Kumar Tyre Manufacturing Co in the course of business activity of the assessee for manufacturing tyres and tubes. When the assessee advanced the amount in the course of its business activity for the purpose of manufacturing tyre and tubes, the irrecoverable part of the advance has to be treated as business loss. Therefore, any business loss has to be allowed while computing the taxable income. This Tribunal is of the considered opinion that though the claim of the assessee cannot be allowed u/s 37(1) as a business expenditure it has to be deducted as a business loss while computing the taxable income. In view of the above, the order of the CIT(A) on this issue is confirmed;
++ Payment towards employees’ contribution to provident fund - The CIT(A) allowed the claim of the assessee after finding that the payments were made before filing of return of income. Second Proviso to section 43B was deleted and all sub clauses under section 43B were brought under the First Proviso to section 43B. Therefore, the payments covered by section 43B needs to be allowed if the same was paid before the due date for filing the return of income. In this case, it is not in dispute that the contribution to provident fund was paid before the due date for filing the return of income. Therefore, this Tribunal is of the considered opinion that the CIT(A) has rightly deleted the disallowance.
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