Whether when assessee receives payments after TDS and such deduction is deposited in Treasury, assessee can still write off such sum as short receipt merely because it did not receive TDS Certificates from payers - NO: ITAT

THE questions before the Bench are - Whether expenditure incurred on issuance of shares is revenue in nature; Whether when the business of the assessee is continuing, merely writing off of the various security deposits made to Electricity Board, Telecom Department and Customs for issuance of import licence in the books is allowable - Whether when the assessee receives certain payments after deduction of tax at source and such deduction is deposited in the Treasury, the assessee can still write off such sum as short receipt merely because it did not receive TDS Certificates from payers. And the verdict goes against the assessee.

Facts of the case

The assessee incurred expenses of Rs.2,89,898 on account of share issue expenses and claimed deduction for this sum in entirety. On being called upon to explain as to why such expenses should not be partly disallowed, the assessee submitted that in pursuance to the scheme of amalgamation of Gestetner India Limited (GIL) with Ricoh India Limited (RIL) as approved by the Bombay and Calcutta High Courts, one share in GIL was allotted six equity shares to RIL. The said expenditure of Rs.2.89 lakh was claimed to have been incurred on account of issuance of share certificates of RIL to the erstwhile shareholders of GIL. It was, therefore, claimed that the entire expenditure should be allowed as deduction u/s 37(1) of the Act. The Assessing Officer did not accept the assessee’s contention and held that only a sum of Rs.57,980 was deductible u/s 35DD. Resultantly the remaining amount of Rs.2,31,918 was disallowed to be amortized in subsequent four years. No relief was allowed in the first appeal.

Assessment Year 2007-2008

First ground of the appeal is against the confirmation of disallowance of Rs.1,29,855 written off in respect of security deposits not recoverable. The assessee claimed deduction for this amount. The Assessing Officer observed that this deduction was not permissible because the amount was given as deposit to Government towards electricity deposits etc. He, therefore, refused to allow deduction. The CIT(A) upheld the assessment order on this issue.

The third ground is against the confirmation of disallowance of Rs.13,19,872 in respect of tax deducted at source for which TDS certificates were not received from parties. The assessee claimed deduction for this sum on writing off the amount of TDS receivable by contending that it was not in a position to recover the TDS certificate from the parties, who deducted tax at source. It was claimed that this amount was nothing but short recovery of the revenue receipts from the payers. The A.O. refused this claim on the ground that it was nothing but payment of income tax which cannot be allowed as deduction. The CIT(A) approved the action of the A.O.

On appeal, the Tribunal held that,

++ after perusing the relevant material on record, we find that the assessee incurred the expenditure of Rs.2.89 lakh on issuance of shares. By no standard this expenditure can be considered as revenue. Since the Assessing Officer himself has allowed deduction u/s 35DD at the rate of 1/5th of the total expenses, we hold that no further relief can be allowed. This ground is, therefore, not allowed.

++ the second ground is against the confirmation of disallowance of Rs.1,11,918 on account of postal expenses incurred in relation issuance of shares. The assessee claimed expenditure of Rs.1,31,718 as deductible u/s 37(1). The Assessing Officer allowed deduction u/s 35DD at 1/5th of the expense and disallowed the remaining part. The learned CIT(A) confirmed the order on this issue.

++ we have heard the rival submissions. Such postal expenses were incurred in relation to the issue of shares, being the subject matter of ground no.1, which has been dismissed by us above. Following the same view, we approve the impugned order on this score;

Assessment Year 2007-2008

++ after considering the rival submissions and perusing the relevant material on record, we find that detail of such deposits written off is placed at page 78 of the paper book. Major amount is against deposits given to Electricity Board; to Collector of Custom against import clearance; to Indian Oil Corporation against gas cylinders; and to Posts & Telegraphs Department against telephone connections. Except for some minor amounts included in this sum, the larger chunk represents deposits given to the Government Departments / PSUs. On a specific query raised from the Bench, the AR conceded that the business of the assessee-company was continuing. We fail to understand the rationale in claiming deduction for security deposits given during the currency of business to various Government Departments. When the business is going on and the electricity and other facilities as provided against such security deposits are being used, how these Departments can refund the security deposit given at the time of installation of meters or availing the facility. The assessee has written off the said amount by claiming it to be irrecoverable, which in our considered opinion, is not acceptable. One cannot accept that the Government has failed to refund any sum legitimately becoming due to its citizens. When the amount has not become due for refund because of the continuation of business, how the assessee becomes entitled to its refund, is beyond our comprehension. Under such circumstances, we are of the considered opinion that the authorities below were justified in refusing deduction for such amount on a mere write off;

++ the econd ground is against the confirmation of disallowance of Rs.8,59,952 in respect of custom duty drawback not recoverable. Here also the facts are almost similar to the first ground. The assessee wrote off this sum due from Government being duty drawback. No material has been placed on record to show as to how the amount of duty draw back became irrecoverable from Government. Following the view taken hereinabove in respect of ground no.1, we approve the learned CIT(A)’s opinion on this ground as well. This ground is also not allowed;

++ we find that the claim of the assessee is that certain parties made payments to the assessee after deduction of tax at source, but failed to issue TDS certificates and hence the amount of TDS certificates not recovered should be allowed as deduction as business loss. We are not convinced with this submission because the parties, on deduction of tax at source, made the payment to the assessee for the remaining amount and duly deposited tax at source with the treasury. Once the assessee received the net amount and further the amount of TDS certificates also stood deposited in the Government exchequer, the position of the assessee vis-à-vis the parties stands neutralized as nothing remains due from them. In such a situation, there can be no question of incurring any business loss or treating the amount of TDS certificates not received as short receipts. Since this amount represents tax deducted at source by the parties on behalf of the assessee, the same is in the nature of TDS receivable. It is settled position that tax payment is not a charge against but application of income. That is why section 40(a)(ii) clearly provides that any sum paid on account of taxes on the profits or gains of any business or profession, is not deductible. In view of the foregoing reasons, we are of the considered opinion that the authorities below were justified in not allowing deduction for this amount. This ground fails.