TMI Blog2009 (8) TMI 854X X X X Extracts X X X X X X X X Extracts X X X X ..... as a deduction. The ld. JM upheld the order of the CIT. As regards the additional grounds and the extracts from the US Tax Laws filed by the assessee before the Tribunal in the course of hearing, the ld. JM, differing from the ld. AM held that ( a ) the papers were unsigned and unauthenticated and therefore cannot be accepted, ( b ) there is no application from the assessee under Rule 29 of the ITAT Rules, and ( c ) the additional grounds raised a plea to bifurcate the tax based on unsigned and unauthenticated papers and, therefore, cannot be admitted. Whether, by admitting additional grounds based on fresh unsigned and unauthenticated papers in the absence of application under Rule 29 of ITAT Rules, 1963 or calling for such papers by the Tribunal, the order of CIT, u/s 263, could be set aside and remitted back for reconsideration on such basis - Whether the CIT s order u/s 263 should be upheld or the matter including the additional grounds should be remitted to him? HELD THAT:- The ld. AM was right in admitting the additional grounds. Here I have to mention that the CIT initiated the revision proceedings u/s 263 by notice dated 5-3-2007. The assessee submitted written ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... publication has also been issued by the Department of Treasury, Internal revenue Service, Washington DC. This gives details of what interest an assessee can and cannot deduct under the US Tax Laws. Another document filed before the Tribunal was an E-mail from the IRS, US Department of the Treasury which explains what are employment taxes, what is federal tax and so on. All these seem to have been gathered by the assessee from the Website of the IRS of USA. I am unable to say that the ld. AM exercised such discretion improperly. Rule 29 permits the Tribunal to admit the additional evidence for any substantial cause. Apparently, the ld. AM has admitted the additional evidence on this ground with which I am unable to disagree. The intention behind the Rule is that substantial justice should be done and the interest of justice should be the overriding consideration. Having this in mind I hold that there is no error in the ld. AM admitting the additional evidence and sending it to the CIT for examination and decision. Allowability of the interest - In the light of this factual position, the decision of the ld. Judicial Member that the taxes paid by the assessee on its foreign i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of section 40( a )( ii ) of the Act. In this connection the assessee submits that there was delay in paying withheld taxes to the U.S. Government. The assessee respectfully submits that the power of Assessing Officer to make disallowance under the provision of section 40( a )( ii ) of the Act is only in respect of tax payable to the Government of India under the provisions of the Indian Income-tax Act. Section 40( a )( ii ) contemplates disallowance only in respect of taxes payable in India and not to any taxes payable outside India under the provisions of Act of any other country. We, therefore, submit that the provisions of section 40( a )( ii ) do not confer power to the Assessing Officer to make disallowance of any interest levied and collected by the U.S. Government. In the circumstances, we request the Commissioner to kindly drop the proposal to issue directions to the Assessing Officer to disallow the claim of interest on delayed payment of withheld taxes. Moreover, the interest on US withholding taxes is only compensatory in nature and not penal and hence an allowable expenditure." 2.3 However, the learned Commissioner of Income-tax did not accept the conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned that, "Interest on employment tax deficiency. Interest charged on employment taxes assessed on your business is deductible." Based on these, the learned counsel submitted that the treatment of this interest should be the same as per pronouncement of Indian Courts which is also in agreement with U.S. Laws and, hence, this interest expenditure cannot be disallowed. 2.6 We have carefully considered the issue. A perusal of the records show that assessee had also contended before the learned Commissioner of Income-tax that interest on U.S. withholding taxes is only compensatory in nature and not penal and hence an allowable expenditure. However, the learned Commissioner of Income-tax had not addressed this issue. He held that the assessee s claim of interest on withholding taxes cannot be entertained as permissible. Now, the assessee is producing document before us wherein reference is also being made to U.S. Laws under which such interest is claimed to be allowable as business expenditure inasmuch as they are claimed to be not penal in nature. Principally, the views of Indian Courts are also not found to be deviating from these principles though it has been admitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the same remains to be examined and established. However, in our opinion, the same is crucial and will go to the root of the matter. Hence those grounds are admitted. Since we have already remitted the other matters raised in this appeal to the file of the learned CIT and since these additional grounds were not raised before the learned CIT, we remit them to the file of the learned CIT to consider the same and give a finding. 5. In the result, this appeal filed by the assessee is allowed for statistical purposes. U.B.S. Bedi, Judicial Member. - Despite best persuasion of myself, I have not been able to agree either with the reasoning or conclusion as arrived at by the ld. Accountant Member in his proposed order. So, I write my order as under : 7. This appeal of the assessee emanates from the order of the ld. CIT III, Chennai, dated 28-3-2007 passed under section 263 of the Act relevant to the assessment year 2002-03, whereby action of the ld. CIT in invoking of provisions of section 263 of the Act and directing the Assessing Officer to disallow the assessee s claim of interest of Rs. 243.50 lakhs on withholding tax has been challenged. 7.1 On this issue, the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee is not a foreign company and as per provision to section 40( a )( ii ), tax on income cannot be allowed as deduction and since interest is an accretion to income-tax, therefore, same too cannot be allowed as deduction. The ld. DR further relied upon the decisions of the Bombay High Court as relied upon by the CIT and the provision of section 40( a )( ii ) and pleaded for confirmation of the impugned order. 8. After having heard both the sides, considering the materials on record as well as precedents relied upon by the rival sides, it is found to be an undisputed fact that interest on income-tax payable to U.S. Government has been withheld by the assessee for which interest to the extent of Rs. 243.50 lakhs has been paid and claimed as deduction being provisions of interest on delayed payment of income-tax. As per the decision of Hon ble Bombay High Court in the case of S. Inder Singh Gill ( supra ) in which Question No. 3, which was referred to the Hon ble High Court for reference reads as under : "Question No. 3. Whether, for the purpose of computing the total world income of the assessee as defined in section 2(15) of the Income-tax Act, the income accruing in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ble Gauhati High Court has concluded the above case as under: "While coming to the aforesaid conclusion, the Delhi High Court had relied, inter alia , on the decision of the Apex Court in Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 . In that case, the Supreme Court was called upon to decide the question as to whether interest paid by the assessee on the arrears of cess is an allowable revenue expenditure. On the language of section 3(3) of the U.P. Sugarcane Cess Act, 1956, it was held by the Supreme Court that the interest payable under the aforesaid provision was not by way of penalty inasmuch as the section stated that "Any arrear of cess not paid on the date prescribed under sub-section (2) shall carry interest of 6 per cent per annum from such date to date of payment". As to this type of interest which was stated to be different from the interest imposed by section 3(5) of the Cess Act, it was stated that the interest payable on the arrear was in reality part and parcel of the liability to pay cess. It was opined that this type of interest was an accretion to the cess. The enlargement of the cess liability being automatic and for which no specific order was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of a company in which surtax is levied on profit of the company it has been held that surtax is not deductible under section 40( a )( ii ) as under : "Section 40 of the Income-tax, 1961, opens with a non obstante clause notwithstanding anything to the contrary in sections 30 to 39 , which means that even if any amount is entitled to deduction under any of the provisions contained in sections 30 to 39, it will be disallowed if it falls, inter alia , within sub-clause ( ii ) of clause ( a ) of section 40. Sub-clause ( ii ) of clause ( a ) of section 40 states that any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of any such profits or gains, will not be deductible." 8.5 While following the decision of Hon ble Supreme Court in the case of Smith Kline French (India) Ltd. ( supra ), the Hon ble Jurisdicationl High Court, in the case of Tea Estates India Ltd. v. CIT [2000] 241 ITR 778 (Mad.) while relying upon the above Supreme Court decision has held as under: "Held, ( i ) that the surtax levied under the Companies (Profits) Surtax Act, 1964 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has not been able to show as to how such plea/attempt is justified, when no application under Rule 29 of ITAT Rules has been filed and such documents are only signed by the assessee. As such, these unsigned and unauthenticated papers, are not admitted and would be ignored for the purpose of this appeal and shall not form part of appeal record. As regards, request for admission of additional grounds is concerned, the same is found to raise a plea to bifurcate nature of tax based on unsigned and unauthenticated papers, which have not been admitted and cannot form part of the record as held above. Therefore, the plea for admission of additional grounds cannot be accepted. Moreover, invocation of provision of section 263 envisages record available before the Commissioner at the time of initiating such action and plea being raised now has never been raised earlier before ld. Commissioner. As such, the plea not raised before the ld. CIT, in my considered view, could not be raised before the Tribunal, as additional grounds and, therefore, is liable to be dismissed. In view of the facts, circumstances and in the light of discussions as held above, the plea for admission of additiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them. 3. The assessee is an Indian company engaged in manufacture of computers and development of software. In the return of income, it claimed deduction in respect of Rs. 243.50 lakhs as interest on delayed payment of withholding taxes. The assessee had made payments to its employees working in its office in USA, from which it had made deduction for taxes, etc., which had to be deposited with the US Government. Since there was a delay in making the deposit, interest was payable by the assessee, which came to the above figure. The claim was allowed in the assessment completed under section 143(3) of the Income-tax Act by order dated 31-3-2005. Subsequently, the CIT took proceedings for revision under section 263 of the Act by notice dated 5-3-2007 in which he opined that the interest was merely provided for and not actually paid and, therefore, the Assessing Officer ought to have disallowed the same in the assessment. The assessee objected to the revision proceedings. In the first written objections dated 19-3-2007, the assessee stated that it was presumed that the CIT intended to disallow the interest by invoking section 43B of the Act, and that since the section can apply on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment by disallowing the interest claim. 5. The assessee filed an appeal before the Tribunal against the order of the CIT. The ld. Accountant Member who passed the leading order came to the following findings : ( a )The CIT has not addressed the question whether the interest on US withholding taxes was only compensatory in nature as contended before him by the assessee. ( b )The assessee has produced certain papers before the Tribunal in the course of hearing which refer to the laws in USA under which such interest is claimed to be allowable as business expenditure as it was not penal in nature. ( c )Since this specific issue has not been considered by the CIT, the matter should be remitted to his file for fresh consideration having regard to the laws in USA and the authorities cited on behalf of the assessee. ( d )The CIT has also not considered the alternative claim that in any case the assessee s income enjoys exemption under section 10A and, therefore, even if the interest is disallowed the resultant income would be exempt from tax. ( e )The additional grounds raised by the assessee before the Tribunal to the effect that the entire Rs. 243.50 lakhs consis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee before the Tribunal in the course of hearing, the ld. Judicial Member, differing from the ld. Accountant Member held that ( a ) the papers were unsigned and unauthenticated and therefore cannot be accepted, ( b ) there is no application from the assessee under Rule 29 of the ITAT Rules, and ( c ) the additional grounds raised a plea to bifurcate the tax based on unsigned and unauthenticated papers and, therefore, cannot be admitted. In this view of the matter, the plea for admission of additional grounds were rejected and the papers filed by the assessee before the Tribunal, containing extracts of US Tax Laws, were not admitted as evidence. Eventually the ld. Judicial Member upheld the order of the CIT and dismissed the appeal filed by the assessee. 7. This is how the matter was referred to me as Third Member. I have considered the facts, the dissenting orders and the rival contentions. At the outset, I wish to make it clear that the taxes paid by the assessee are not Indian taxes. The assessee has some activities in USA in the course of which it had to make payments to its employees there. From these payments, the assessee was required by the US Tax Laws to deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s point was not raised before the CIT in proceedings under section 263. I am however unable to accept the submission because the order under section 263 itself refers to "withholding taxes paid in USA" and from this, it was clear that the taxes payable were not those levied on the assessee s income earned there. The CIT has referred to the general principle that taxes are not allowable as deduction and the law does not differentiate between the raxes paid to Indian Government or the US Government ( see paragraph, 4-1.5 of his order). This shows that he was proceeding on the basis that the taxes deducted and paid by the assessee are those levied on its income and since they are not allowed as deduction, the interest is also not allowable. He has also referred to the decision of the Bombay High Court in Inder Singh Gill s ( supra ). The factual position however, is that the assessee had deducted the taxes from the payments made to its employees in USA and these taxes were deposited with the Government of USA after a delay for which interest was charged. It is this interest that is claimed as a deduction and the question is whether it is allowable as claimed. 9. In the papers s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve circumstances. The additional grounds have been signed by the Director of the assessee-company and the accompanying documents showing the break up of interest was also so signed. I do not, therefore, see any infirmity in the additional grounds being admitted. The assessee was required to make various deductions from the payments made to the employees. Part of it was for federal and State taxes; the assessee also had to deduct the welfare payments such as social security, medicare and State unemployment tax from the amounts paid to the employees. These were not deductions of taxes but were deductions made in respect of the welfare payments such as we have in India in the form of contribution to ESI, PF etc. The additional grounds gain importance because it would be a matter for argument as to whether interest paid for delayed deposit of the welfare payments deducted from the payments made to the employees can be allowed as a deduction. In any case, the break up gives the factual picture of the entire interest and it is necessary that a decision should be taken only after bringing on record the necessary and relevant facts. By admitting the additional grounds and asking the CIT to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, and depending on the circumstances, it would be open to the Tribunal to admit additional evidence when it is produced in Court and an oral application is made. I do not think that there is any hard and fast rule in this behalf and it should be left to the discretion of the Bench. I am unable to say that the ld. Accountant Member exercised such discretion improperly. Rule 29 permits the Tribunal to admit the additional evidence for any substantial cause. Apparently, the ld. Accountant Member has admitted the additional evidence on this ground with which I am unable to disagree. The intention behind the Rule is that substantial justice should be done and the interest of justice should be the overriding consideration. Having this in mind I hold that there is no error in the ld. Accountnat Member admitting the additional evidence and sending it to the CIT for examination and decision. 11. So far as the main issue is concerned, that is regarding the allowability of the interest, I am unable to agree with the ld. Judicial Member that the assessee s claim should be dismissed. As already noted by me, the correct break up of the interest requires to be considered in proper perspect ..... X X X X Extracts X X X X X X X X Extracts X X X X
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