2011 (12) TMI 798 - AT - Income Tax

Summary

The appeal before the Appellate Tribunal arises from an order of the Commissioner of Income Tax (Appeals) deleting certain disallowances made by the Assessing Officer in the assessment framed under section 143(3) of the Income Tax Act, 1961 for the Assessment Year 2008-09. The revenue challenges the deletion of disallowances relating to depreciation, commission expenses paid to a non-resident without deduction of tax at source (TDS), and addition on account of contingent liabilities. The appeal was admitted after condonation of a five-day delay in filing.

Issue 1: Disallowance of Depreciation on Fixed Assets Due to Absence of Bills

The Assessing Officer disallowed an ad hoc amount of Rs.50,000/- claimed as depreciation on the ground that bills for several fixed assets additions were not available. The revenue contended that the assessee's contentions before the CIT(A) differed from those before the AO, and the deletion of disallowance was erroneous.

The relevant legal framework involves the provisions regarding depreciation allowance under the Income Tax Act, which requires proper evidence of asset acquisition for claim of depreciation. The Assessing Officer's disallowance was based on the absence of bills, which are essential documentary evidence.

The Tribunal examined the record and found that the assessee had submitted complete details of additions to fixed assets for the relevant financial year, along with copies of bills in response to notices under section 142(1). The assessment order did not specify which bills were missing or for which assets. The Tribunal noted that the documents were also before the Assessing Officer at the time of hearing, clarifying the position. The Tribunal held that there was no basis for the ad hoc disallowance without material facts or specific deficiencies.

The Tribunal applied the law to the facts by emphasizing the importance of documentary evidence and found that the assessee had complied with the requirements. The revenue's contention that the assessee's submissions were inconsistent was not substantiated by the record. The Tribunal upheld the CIT(A)'s order deleting the disallowance, dismissing the revenue's appeal on this issue.

Issue 2: Disallowance of Commission Expenses Paid to Non-Resident Without Deduction of TDS

The Assessing Officer disallowed commission expenses amounting to Rs.10,66,902/- paid to a foreign agent without deducting tax at source under section 195(1) and 195(2) of the Act, invoking section 40(a)(ia) for disallowance. The revenue contended that TDS was mandatory on payments to non-residents and no contrary judicial view was available.

Section 195 mandates deduction of tax at source on payments to non-residents if such payments are chargeable to tax in India. Section 40(a)(ia) disallows expenses where TDS is not deducted as required. The controlling principle is that TDS is required only if the income is taxable in India.

The Tribunal referred to the Supreme Court's decision in GE India Technology Centre (P) Ltd. v. CIT, which clarified that TDS under section 195 is required only when the payment to non-resident is chargeable to tax in India. If the taxability is uncertain, the payer may refer the matter to the Assessing Officer under section 195(2). The Tribunal also relied on CBDT Circular No. 23 dated 23.07.1969 and Circular No. 786 dated 07.02.2000, which clarified that commission payments to foreign agents for services rendered outside India are not taxable in India and hence no TDS is deductible.

The assessee produced a declaration from the foreign agent confirming no permanent establishment in India and that the commission related to procuring orders for export sales. The Tribunal noted that the payments were made outside India and income did not arise or accrue in India under section 5(2) of the Act. The revenue's objection that the declaration was not before the AO was rejected as the document was on record at the assessment stage.

The Tribunal held that the commission paid to the non-resident foreign agent for services rendered outside India was not liable to TDS under section 195 and, consequently, disallowance under section 40(a)(ia) was not warranted. The revenue's appeal was dismissed on this issue.

Issue 3: Addition on Account of Contingent Liability Referenced in Tax Audit Report

The Assessing Officer added Rs.1,04,80,652/- on account of contingent liability disclosed in the tax audit report under clause 17(K), relating to bills discounted with the bank. The AO treated this as a liability and disallowed the amount as business expenditure. The revenue contended that the CIT(A) erred in deleting this addition without considering the auditor's reference.

The relevant accounting standard is AS-29, which defines contingent liabilities as possible obligations depending on the occurrence of uncertain future events and mandates that no provision should be made for contingent liabilities in the accounts. Any disclosure should be made separately in the audit report.

The Tribunal examined the facts and found that the assessee had disclosed the bills discounted and the contingent liability in the tax audit report but had not made any provision or claimed the amount as an expense in the Profit & Loss Account. The auditors clarified that the amount was reported under clause 17(K) due to a typing error omitting the phrase "not provided for," and the liability was contingent, not accrued or provided for.

The Tribunal noted that contingent liabilities are not deductible expenses unless they crystallize into actual liabilities. Since the assessee had not claimed the amount in the P&L Account and had only disclosed it as contingent liability, the addition by the AO was unwarranted. The Tribunal relied on a precedent that contingent liabilities must be construed as per AS-29 and cannot be treated as deductible business expenditure unless provided for.

The Tribunal concluded that the addition was not justified and upheld the CIT(A)'s deletion of the addition. The revenue's appeal was dismissed on this issue.

Significant Holdings and Principles Established

On the issue of depreciation disallowance, the Tribunal held: "there is no basis for disallowance of depreciation on estimate basis without any material facts," emphasizing the requirement of specific material for disallowance and the sufficiency of documentary evidence submitted by the assessee.

Regarding TDS on commission payments to non-resident foreign agents, the Tribunal affirmed the principle from the Apex Court's decision that "payment to non-resident is liable to deduct tax in India only when income is taxable in India," and relied on CBDT Circulars to clarify that "no tax is deductible under section 195 and consequently, the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable expenditure."

On contingent liabilities, the Tribunal confirmed that "no provision should be made for contingent liabilities," and mere disclosure in audit reports without provision or claim in accounts does not warrant addition or disallowance. The Tribunal observed that "once above contingent liability...not claimed as deduction or not provided in the Balance Sheet or P&L Account, no addition on this account can be made to returned income."

In all issues, the Tribunal applied the law to facts by closely examining the documentary evidence, audit reports, and relevant judicial precedents and circulars, rejecting the revenue's contentions where unsupported by record or law.

Consequently, the revenue's appeal was dismissed in entirety, affirming the CIT(A)'s orders deleting the disallowances on depreciation, commission expenses without TDS, and contingent liabilities.