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2019 (5) TMI 111

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..... see. Disallowance u/s 40 (a) (i) - TDS u/s 195 OR 194A - interest paid to its Banker for import of certain goods from a supplier in USA - remittance to the exporter in USA through his Bank in USA - HELD THAT:- We are satisfied that the learned Assessing Authority was absolutely not justified in invoking Section 195, ignoring the fact of payment made by the Assessee to its own Bank in India. There was no material on record either produced by the Assessee or brought on record by the Assessing Authority, on the basis of which a direct payment by the Assessee to the non-resident company in US could be inferred and, therefore, the applicability of Section 195 was out of question. Still, the Assessing Authority, without having any material on record, chose to ignore the provision of Section 194A (3), which clearly provides that the provisions of Section 194A shall not apply in case such income is credited or paid to any banking company. Payment of interest in question was made by the Asseseee to its own Banker in India for the grace period or period of delay under the contract and such remittance was made to the exporter in USA through his Bank in USA. This is how in normal cours .....

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..... nal allowed the appeal of the Revenue in part for Assessment Year 2002-2003. The two Questions of Law, on which the present Appeal was admitted by a Co-ordinate Bench of this Court on 21.11.2008, are quoted below for ready reference : 1. Whether on the facts and circumstances of the case, the Tribunal was right in holding that the appellant is not entitled to deduction in respect of provision for liquidated damages and retention of money on the ground that it is a contingent liability, without appreciating the facts and the terms of the contract ? 2. Whether on the facts and circumstances of the case, the Tribunal was right in law in confirming the disallowance of interest under Section 40 (a) (i) ignoring the fact that the interest amount is paid by the appellant only to their banker in India and as such no TDS has to be made from interest paid to Indian Bankers under Section 194 A ? 2. As far as Question No.1 is concerned, the learned counsels at Bar fairly submitted that the controversy has been decided in the case of the Assessee itself by a Co-ordinate Bench of this Court for Assessment Year 1998-1999 on 13.08.2018 in FFE Min .....

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..... 2. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation.' 23. Thus, the three tests being that (a) an enterprise has an obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. The Revenue cannot dispute the fact that the assessee in the instant case satisfied test Nos.(a) and (c). 24. To be entitled to a deduction as claimed by the assessee, the assessee has to cumulatively satisfy all the three tests . Therefore, it has to be seen as to whether it is probable that an outflow of resources will be required to settle the obligation. .....

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..... without deduction of tax under chapter XVII B which is liable for disallowance u/s 40 (a) (i) (sic). On pointing out the aspect, the assessee has filed a copy of the letter dt.10.12.83 to the Income-tax Office, International Taxation- III, Chennai-34. In this letter it is stated that the interest payment even received by the supplier in USA and subject to tax in USA under the provision of double taxation agreement. However, in another letter dt.10.12.03, it was undertaken to deduct tax, the payment of interest. In the absence of proper details and clarification the amount on which tax omitted to deduct is disallowed u/s 40 (a) of the Act.'' 6. The CIT (A), however, allowed the appeal of the Assessee on this aspect and deleted the said addition, holding that the amount of interest was paid by the Assessee to its own Banker in India and, in view of the exception under Section 194A (3), when the payment of interest is made by the Assessee to a banking company, no tax was required to be deducted at source and, therefore, the Assessing Authority was not justified in making the addition under Section 40 (a) (i) of the Act, which permits such disallowance to be m .....

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..... heard both the counsels and perused the relevant records. Similar issue was considered by this Tribunal in the case of M/s.Frontier Offshore Exploration (India) Ltd. vs. DCIT in I.T.A.No.2307/Mds/2006 for assessment year 2003-04 vide order dated 28.02.2007 where they have confirmed disallowance u/s 40(a). Moresoever, this issue is also covered by the order of the Delhi Bench of this Tribunal in the case of HNS India VSAT Inc. Vs. Dy. Director of Income Tax (International Taxation) 95 ITD 157 (Del) wherein it was held that when no application was made u/s 195(2), the assessee was under obligation to deduct tax at source and once no such tax was deducted, then disallowance of such payments u/s 40(a) (i) were justified. In view of this, we allow this ground by the Revenue.'' 8. Being aggrieved by the same, the Assessee has come up in appeal before this Court and Question No.2 pertains to the aforesaid controversy. 9. Ms.Mallika Srinivasan, learned counsel for the appellant/Assessee, has urged before us that payment of interest in question was made by the Assessee to its own Bank, which allows some grace period on the Letter of Credit given to t .....

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..... be inferred and, therefore, the applicability of Section 195 of the Act was out of question. Still, the Assessing Authority, without having any material on record, chose to ignore the provision of Section 194A (3) of the Act, which clearly provides that the provisions of Section 194A of the Act shall not apply in case such income is credited or paid to any banking company. 12. We find force in the contention raised on behalf of the learned counsel for the Assessee that payment of interest in question was made by the Asseseee to its own Banker in India for the grace period or period of delay under the contract and such remittance was made to the exporter in USA through his Bank in USA. This is how in normal course export and import transactions take place and without the intervention of Banks, direct payment for import cannot be made and, therefore, the existence of a Bank in India through which such remittance was made by the Assessee during the year in question and payment of interest made by the Assessee to its Bank in India could not have been ignored by the Assessing Authority. Without there being any material on record in this regard, the learned Assessing Auth .....

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..... by the Assessing Authority, just citing two of its decisions in other cases. The final fact finding body, particularly while reversing the order of the First Appellate Authority, was expected to deal with the facts of the case and the legal position in detail, before restoring the addition made in the hands of the Assessee in the present case. The findings of facts by the final fact finding body are not only of great relevance and significance for the higher Constitutional Courts, such as High Court under Section 260A of the Act in the present appeal, but, even otherwise also, the mandate of the Act is that the Tribunal should arrive at its own findings of facts based on relevant and cogent material. 17. Therefore, we direct the Registry of this Court to mark a copy of this order to the President of Income Tax Appellate Tribunals as well as the Tribunal concerned in the present case, namely, Income Tax Appellate Tribunal, Chennai, through the Registrar of Income Tax Appellate Tribunals; and also to the Assistant Commissioner of Income Tax, Company Circle-II (1), Chennai-34, (Mr.V.Munusamy, wherever he is posted now), for their information and needful. - - T .....

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