2018 (5) TMI 2191 - AT - Income Tax

Deduction of Lesser amount of TDS - failure to deduct surcharge along with TDS - TDS u/s 195 - Disallowance u/s 40(a)(ia) - management fees and Licence fees - non deduction of TDS - HELD THAT - In the present case the assessee has paid sums to a foreign party and tax was required to be deducted u/s 195 of the Income Tax Act. The assessee deducted tax at the rate specified in the income tax act however failed to increase the rate of tax by the rate of surcharge thereon. Hence AO disallowed the proportionate amount of expenditure to the amount of surcharge. CIT (A) confirmed the above disallowance. Coordinate bench in case of S. k. Tekriwal 2011 (10) TMI 10 - ITAT KOLKATA has considered an issue that if the taxes deducted under one section and according to revenue it is required to be deducted under other section may be higher rate of tax is prescribed and the assessee was under a bona fide belief that tax is properly deducted then disallowance under section 40 (a) (ia) of the cannot be made. The provisions of section 40 (a) (ia) of Pari materia is similar to the provisions of section 40(a) (i) of the act. The Hon ble high court 2012 (12) TMI 873 - CALCUTTA HIGH COURT affirmed that there is nothing in the provisions of section 40 (a) (ia) which provides for disallowance of the expenditure for short deduction of tax. We also do not find any such provision in section related to disallowance of deduction of expenditure made outside India or to a non-resident. Thus we direct the Ld. assessing officer to delete the disallowance. Decided in favour of assessee. Disallowance of depreciation on lease hold improvement - AO stated that the above expenditure neither falls within the meaning of building or furniture and fittings hence depreciation is not allowable to the assessee - HELD THAT - Assessee has made improvement in the leased property which is used by the assessee for the purposes of the business. Naturally the addition has been made to the building and also part of the furniture and electrical fittings. Even otherwise the assessee has claimed depreciation for the income tax purposes only at the rate of 10% which is less than the depreciation for machinery and plant and equivalent to the depreciation rate for the furniture and fittings. Further the explanation 1 added to section 32 with effect from 1/4/1988 which provides that whether the business or profession of the assessee is carried on in the building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business on the construction of any structure or doing any work in on in relation to and by way of renovation or extension of improvement to the building then the provisions of this clause shall apply as if the said structural work is building owned by the assessee. Therefore according to that even the expenditure incurred by the assessee on the leasehold premises will also satisfy the ownership test. Furthermore the asset is also used by the assessee for the purposes of the business satisfying the user test the depreciation thereon cannot be disallowed. We direct AO to delete disallowance of depreciation on various expenditure incurred for of the business which are capital expenditure in nature and qualifies as building and furniture and fixture. Accordingly we reverse the finding of the Ld. CIT (A) and allow ground No. 2 of the appeal of the assessee. Addition on cessation of liability u/s 28(iv) - difference in the amount of loan and the amount outstanding at the end of the year was on account of exchange fluctuation - HELD THAT - If the loan is taken for trading purposes and was also treated as such from the beginning in the books of account the waiver thereof may result in the income more so when it is transferred to the profit and loss account. Therefore it is not the actual receipt of money but the receipt of a benefit or perquisite which has a monetary value whether such benefit or perquisite is convertible into money or not which is what is covered by section 28(iv). The loan has been received by the assessee on 14/07/2009. According to the above agreement repayment date was 13/07/2012. Therefore in the assessment year 2010 - 11 the assessee has a liability to pay to the above party. It is a capital borrowed by the assessee in the form of loan from those parties on which interest is also payable. The above amount has not been credited to the profit and loss account also. It is correct that ultimately the amount of loan was waived by the lender but that happened on 7th of August 2014 falling into the assessment year 2015 - 16 and not the present assessment year. Therefore the transactions entered into by the assessee for these assessment year is precisely the transaction of the loan on interest from the foreign party. Even otherwise the Ld. assessing officer could not show that what benefit the assessee has obtained which is arising out of the business of the assessee by obtaining loan on interest. It is not also the claim of the revenue that the rate of interest of the agreement is not at commercial rates. As relying on Mahindra and Mahindra Ltd. 2003 (1) TMI 71 - BOMBAY HIGH COURT we allow additional ground raised by the assessee and direct the assessing officer to delete the addition made by him under section 28(iv). Appeal filed by the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the appeal are:

(a) Whether the disallowance of management fees and license fees amounting to Rs. 1,98,615 under section 40(a)(ia) of the Income Tax Act is justified on account of lesser deduction of tax at source (TDS), specifically on the failure to deduct surcharge along with TDS.

(b) Whether depreciation claimed on leasehold improvements amounting to Rs. 79,59,039 (later corrected to Rs. 26,25,414) is allowable under the Income Tax Act, particularly under explanation 1 to section 32(1), considering the nature of expenditure and the ownership/user tests.

(c) Whether the addition of Rs. 1 crore under section 28(iv) of the Income Tax Act on account of cessation of liability of a loan taken from a foreign entity is valid, especially when the loan was neither waived nor credited to profit and loss account in the relevant assessment year.

(d) Admission and consideration of an additional ground of appeal challenging the basic taxability of the Rs. 1 crore loan waiver under section 28(iv), including the timing and nature of such addition.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Disallowance under section 40(a)(ia) on management and license fees for lesser deduction of TDS

Relevant legal framework and precedents: Section 40(a)(ia) mandates disallowance of expenditure where tax is deductible at source but has not been deducted or paid to the government by the due date. The coordinate bench decision in SK Tekriwal (2011) 48 SOT 515 and the subsequent affirmation by the Calcutta High Court clarified that disallowance under section 40(a)(ia) applies only where there is non-deduction of tax, not where tax is deducted but at a lesser rate or under a wrong section, provided the deduction is bona fide.

Court's interpretation and reasoning: The assessee deducted TDS at 20% but failed to deduct the applicable surcharge of 3% on TDS, resulting in a shortfall. The Assessing Officer disallowed Rs. 1,98,615 proportionate to the surcharge amount. The CIT(A) confirmed this disallowance. However, the Tribunal analyzed the SK Tekriwal decision and held that since tax was deducted, albeit without surcharge, and there was no allegation of non-deposit of TDS, section 40(a)(ia) disallowance was not applicable.

Key evidence and findings: The assessee deducted tax under the correct section (section 195) but omitted surcharge. The assessee also submitted a certificate from a Chartered Accountant and evidence that the payment was reversed in a subsequent year due to waiver. The Revenue failed to demonstrate any default beyond the shortfall in surcharge deduction.

Application of law to facts: The Tribunal applied the principle that section 40(a)(ia) disallowance requires complete failure to deduct or pay tax, not mere shortfall due to surcharge omission. The bona fide deduction of tax precludes disallowance. The surcharge is not explicitly mandated under section 195 for TDS calculation.

Treatment of competing arguments: The Revenue argued that surcharge was applicable and non-deduction justified disallowance. The Tribunal rejected this, relying on binding precedents and the statutory language of section 40(a)(ia).

Conclusions: The disallowance of Rs. 1,98,615 was deleted, and ground No. 1 was allowed.

Issue (b): Depreciation on leasehold improvements

Relevant legal framework and precedents: Section 32(1) allows depreciation on tangible assets used for business or profession. Explanation 1 to section 32(1) treats capital expenditure on building renovations or improvements on leased property as if the building were owned by the assessee, allowing depreciation. The Companies Act depreciation is distinct from Income Tax Act depreciation.

Court's interpretation and reasoning: The Assessing Officer disallowed depreciation on Rs. 7,959,039 on the ground that the expenditure did not qualify as building or furniture and fittings. The CIT(A) confirmed this. However, the Tribunal noted the subsequent rectification under section 154, reducing the disallowance to Rs. 2,625,414. The Tribunal examined the nature of the expenditure-civil construction, partitions, plumbing, flooring, false ceiling, lighting panels, sewage connections-and held these qualify as improvements to leasehold premises.

Key evidence and findings: Detailed depreciation charts, invoices, and particulars of the capital expenditure were submitted. The Tribunal found the assets were used for business purposes and fell within the scope of building or furniture and fittings for depreciation.

Application of law to facts: Applying explanation 1 to section 32(1), the Tribunal held that capital expenditure on leasehold improvements is eligible for depreciation as if the building were owned. The depreciation rate claimed (10%) was consistent with furniture and fittings.

Treatment of competing arguments: The Revenue contended the expenditure did not meet the definition of depreciable assets. The Tribunal rejected this, emphasizing the nature and use of the assets and the statutory provision allowing depreciation on leasehold improvements.

Conclusions: The disallowance of depreciation was deleted to the extent of Rs. 2,625,414, and ground No. 2 was allowed.

Issue (c) and (d): Addition under section 28(iv) on cessation of loan liability and admission of additional ground challenging taxability

Relevant legal framework and precedents: Section 28(iv) taxes the value of any benefit or perquisite arising from business or profession, other than in the form of money. The Supreme Court in CIT v. Mahindra & Mahindra Ltd. held that waiver of loan taken for acquiring capital assets does not amount to taxable income under section 28(iv). Waiver of loan taken for trading purposes and credited to profit and loss account may be taxable. High Court decisions (Logitronics (P.) Ltd. and Rollatainers Ltd.) reinforce that mere receipt of loan is not income, and waiver timing is crucial.

Court's interpretation and reasoning: The Assessing Officer added Rs. 1 crore under section 28(iv) on the basis that the loan was not repaid and no RBI approval was obtained. The CIT(A) upheld this. The assessee contended that the loan was a genuine capital borrowing for business expansion, supported by loan agreements, confirmations, RBI filings, and correspondence. The loan was not waived or credited to profit and loss account in the relevant year (AY 2010-11); waiver occurred later in AY 2015-16.

Key evidence and findings: Loan agreement dated 14.07.2009, confirmation letters, Form 83 filed with RBI, correspondence for Foreign Inward Remittance Certificates, and waiver letter dated 07.08.2014 (effective in AY 2015-16). The Tribunal noted that the loan was for capital expenditure and was outstanding during the relevant year.

Application of law to facts: The Tribunal applied the Supreme Court's ruling that only benefits or perquisites other than money are taxable under section 28(iv). Receipt of loan money is not income. Since the loan was outstanding and not waived in the AY under consideration, no income arose under section 28(iv). The addition was thus held to be erroneous.

Treatment of competing arguments: The Revenue argued that the loan amount constituted a benefit and was taxable. The Tribunal rejected this, emphasizing the nature of loan, timing of waiver, and absence of any benefit other than money.

Conclusions: The additional ground was admitted, and the addition of Rs. 1 crore under section 28(iv) was deleted. The appeal on this ground was allowed.

3. SIGNIFICANT HOLDINGS

The Tribunal's key legal reasoning includes the following verbatim excerpts and principles:

Regarding section 40(a)(ia) disallowance for lesser deduction of TDS:

"The conditions laid down u/s. 40(a)(ia) of the Act for making addition is that tax is deductible at source and such tax has not been deducted. If both the conditions are satisfied then such payment can be disallowed u/s. 40(a)(ia) of the Act but where tax is deducted by the assessee, even under bonafide wrong impression, under wrong provisions of TDS, the provisions of section 40(a)(ia) of the Act cannot be invoked."

"There is nothing in the said section to treat, inter alia, the assessee as defaulter where there is a shortfall in deduction."

On depreciation of leasehold improvements:

"Explanation 1 added to section 32 with effect from 1/4/1988 provides that when the business or profession is carried on in a building not owned by the assessee but held under lease or other right of occupancy, any capital expenditure incurred for construction, renovation or improvement shall be treated as if the building is owned by the assessee."

"The expenditure incurred by the assessee on the leasehold premises will also satisfy the ownership test. Furthermore, the asset is also used by the assessee for the purposes of the business satisfying the user test."

On addition under section 28(iv) for cessation of loan liability:

"On a plain reading of Section 28 (iv) of the IT Act, prima facie, it appears that for the applicability of the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision of Section 28 (iv) of the IT Act, the benefit which is received has to be in some other form rather than in the shape of money."

"In the present case, it is a matter of record that the amount of Rs. 57,74,064/- is having received as cash receipt due to the waiver of loan. Therefore, the very first condition of Section 28 (iv) of the IT Act which says any benefit or perquisite arising from the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied."

"If the loan had been taken for acquiring a capital asset, waiver thereof would not amount to any income exigible to tax."

Final determinations:

(i) The disallowance under section 40(a)(ia) on account of lesser TDS deduction (surcharge omission) is not sustainable and is deleted.

(ii) Depreciation on leasehold improvements is allowable under section 32(1) read with explanation 1, and disallowance is deleted to the extent of Rs. 26,25,414.

(iii) Addition of Rs. 1 crore under section 28(iv) on account of cessation of loan liability is incorrect as the loan was outstanding and not waived in the relevant year; the addition is deleted.