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2015 (7) TMI 612 - ITAT KOLKATA

2015 (7) TMI 612 - ITAT KOLKATA - TMI - Revision proceedings under section 263 by CIT(A) - assessee has not deducted TDS on management service fee and royalty, the debit to the profit and loss account, within the time frame prescribed u/s 40(a)(ia) of the Act, the expenses should have been disallowed - The assessee submits that as it had deducted and deposited TDS before the due date of filing of return, the provision of section 40(a)(ia) of the Act are not attracted - Held that:- We are not in .....

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s well as for royalty. The reasons stated by the assessee that the company was going through the process of demerger does not impress us at all. The provision of deduction on TDS are mandatory and strict in nature and cannot be given a go-by as done by the assessee.

We are in agreement with the reasoning given in the impugned order of the ld. CIT that the assessee had failed to deduct TDS during the previous year on payments of management service fee and royalty debited to the profit .....

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much as the mandatory statutory provision of section 40(a)(ia) of the Act were ignored. The ld. CIT was within its jurisdiction to invoke powers u/s 263 of the Act. The object of the provision is to correct the erroneous order which is prejudicial to the interest of the revenue, as the department has no right to file an appeal against the order of AO. Whether the ingradients of the section are satisfied will depend on the facts of each case. - Decided against assessee. - ITA No. 1236/Kol/2014 - .....

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and in the circumstances of the case, the learned CIT erred in initiating the revision proceedings under section 263 of the Act even though the conditions governing initiation of proceedings under section 263 of the Act are not satisfied in case of the Appellant. 3. That on the facts and in the circumstances of the case, the learned CIT erred in holding that the order of the Assessing Officer is prejudicial to the interests of the revenue without appreciating the fact that the Appellant had dul .....

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arges and royalty expenses, after proper application of his mind and verifying all the material and facts on record. 5. That on the facts and in the circumstances of the case, the learned CIT erred in not appreciating the fact that the Appellant could not deduct taxes on management service fees in PY 2008-09 since the liability towards these expenses pertained to the product division of McNally Bharat Engineering Company Limited ('MBECL') which was under the demerger process and was pend .....

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on towards management service fees and royalty in the subsequent AY, i.e, AY 2010-11. 7. Without prejudice to the above, the learned CIT erred in not directing that if the said expenses towards management service fees and royalty are disallowed in AY 2009-10, then the same should be allowed as deduction in AY 2010-11 since taxes have been duly deducted and deposited to the credit of Central Government in AY 20 I 0-11 and the deduction has to be allowed in at least one AY. The above grounds of ap .....

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l income of ₹ 18,90,41,880/- and claimed a refund of ₹ 54,48,962/-. Subsequently the assessee filed a revised return of income on 30th March, 2011 declaring an income of ₹ 16,42,34,158/-. In the computation of income and in the return of income, the assessee had inter-alia claimed deduction under the head "management service fee of ₹ 3,52,76,000/- and provision of royalty expenses of ₹ 1,02,87,073/-. The case was selected for scrutiny in CASS and the assessment .....

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cial to the interest of the revenue in so far the deduction with respect to the payments of management service fee of ₹ 3,52,76,000 and provision for royalty expenses for ₹ 1,02,87,073/-was concerned. The ld. CIT vide impugned order dated 26th March, 2014 set aside the assessment order on these two aspects , with the direction to the AO that the allowability of these two expenses should be re-assessed after bringing all the facts on records as per law. 3.2. The ld. CIT was of the vie .....

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rder passed by the ld. CIT does not disclose that the assessment order is erroneous and prejudicial to the interest of the revenue. According to the assessee, on this ground alone, the impugned order should be set aside. To support his submission the assessee has relied upon numerous judgments including CIT vs Kashi Nath & Co.170 ITR 28 (All), CIT vs R.K.Metal Works 112 ITR 445 (P&H), Deccans Safety Glass works Pvt. Ltd. vs CIT (ITA NO.697/Kol/2014). 4. The ld. DR, on the other hand, had .....

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uishable as in these cases, the ld. CIT failed to furnish any reason whatsoever to exercise powers u/s 263 of the Act. The ld. CIT in the impugned order as well as in the notice u/s 263 of the Act had clearly stated the grounds on which the assessment order was proposed to be revised u/s 263 of the Act. He has specifically recorded reasons, which according to him makes the order erroneous and prejudicial to the interest of the revenue. The ld. CIT had stated that as the assessee has not deducted .....

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the tenability of the grounds on which assessment order was set aside. It is pertinent to refer to the observations made by the ld. CIT in the impugned order with respect to the grounds on which the assessment order was sought to be revised. "2. On perusal and examination of assessment record for the year under consideration, the following observations were made: i) In schedule 19 (Expenses), Management Services Fee of ₹ 3,52,76,000/- was debited to P&L Alc. which was actually pa .....

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ervices Fee of ₹ 3,52,76,000/- attracted provisions of section 40(a)(ia) and was required to be disallowed and added back to the total income of the assessee during the year. As this was not done, there was underassessment of income of ₹ 3,52,76,000/-. ii) Royalty amount of ₹ 1,07,09,0001- was debited to P&L A/c. and from the clause 17(f) of TAR, it is observed that an amount of ₹ 10,20,38,906/- was inadmissible u/s.40(a) which included an amount of ₹ 1,02,87,07 .....

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owed. The non-deduction of TDS attracted provision of section 40(a). However, provision for expenditure on account of Royalty payment of ₹ 1,02,87,073/- was not an allowable deduction and therefore was required to be disallowed and added back to total income. As this was not done, there was underassessment of income of ₹ 1,02,87,073/-. 3. In view of the facts narrated above, it was apparent that the A.O. had failed to take notice of all facts and had failed to examine the correctness .....

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of the Government on 24th September, 2009 before the date of filing of return of income for the previous year. Furthermore, it is the case of the assessee that it has not claimed the said amount in the subsequent assessment year 2010-11. It is further contended that the management service fee for A.Yr.2009-10 pertained to the division of the assessee company which was under the process of the merger before the Hon ble Calcutta High Court and the assessee could not have deducted tax on these expe .....

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see was granted certain services with respect to the specific product in India, by using the knowhow of Outotech Pvt. Ltd, the ld. AR contended that during the relevant assessment year the provision for royalty fee was made for payment to be made to Outotech Pvt. Ltd. However, since the technology transfer was not complete this provision was reversed back on 1st April, 2009 and consequently no tax at source was deducted on the same. On receipt of invoice dated 14th April, 2009 from Outotech Pvt. .....

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t order u/s 143(3) of the Act was simultaneously erroneous and prejudicial to the interest of the revenue and whether the assessment could be set aside on the ground that TDS was not deposited in the time limit framed u/s 40(a)(ia) of the Act. The grounds of appeal raised are inter related and can be answered collectively by us. 7.1. Before adverting to the merits of the issue in hand it is pertinent to note the legislative history of section 40(a)(ia) of the Act which is reproduced herein below .....

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to make payment to the account of the Central Government, attracts disallowance of such payments in the hands of the payer. Deduction of such sum is, however, allowed in the computation of income if tax is deducted, or after deduction, paid in any subsequent year in computing the income of that year." Section 40(a)(ia) as introduced through Finance Act 2004 Section 40. Notwithstanding anything to the contrary in Section 30 to 38, the following amounts shall not be deducted in computing the .....

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ed or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of Section 200. Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of Section 200, such sum shall be allowed as a deduction in computing the income of the previous .....

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l have the same meaning as in Explanation III to Section 194C. By the taxation Laws (Amendment) Act 2006 w.r.e.f. 01.04.2006, "rent and royalty" was also brought within the purview of provisions of Section 40(a)(ia) of the Act. With a view to liberalize provisions of Section 40(a)(ia) of the Act, the Finance Act 2008 brought amendment w.r.e.f. 01.04.2005 as under In Section 40 of the Income Tax Act, in clause (a),- (a) in sub-clause (ia), with effect from the 1st day of April, 2005, - .....

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ion (1) of Section 139; or (B) in any other case, on or before the last day of the previous year". (ii) for the proviso, the following proviso shall be substituted and shall be deemed to have been substituted, namely :- "Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted - (A) during the last month of the previous year but paid after said due date; or (B) during any other month of the previous year but paid after the end o .....

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quot;has not been paid, - " and ending with the words "the last day of the previous year", the words, brackets and figures " has not been paid on or before the due date specified in subsection (1) of Section 139" shall be substituted; (b) for the proviso, the following proviso shall be substituted, namely - Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due dat .....

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before the last date of the previous year. 7.3. The rigour of the aforesaid section was further relaxed by the amendment brought forth by Finance Act 2010 whereby it was provided that no disallowance would be made, if after deduction of tax during the previous year, the same has been paid on or before the due date of filing of return of income as specified in section 139(1) of the Act. The said amendment has been held retrospective by various judicial pronouncements. 7.4. The assessee submits th .....

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ot been deducted by the assessee during the previous year and therefore disallowances ought to have been made for the payments made for management service fee as well as for royalty. The reasons stated by the assessee that the company was going through the process of demerger does not impress us at all. The provision of deduction on TDS are mandatory and strict in nature and cannot be given a go-by as done by the assessee. 7.5. We are in agreement with the reasoning given in the impugned order o .....

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sfied simultaneously in the present case. 7.6. The Order passed by the AO suffers from non application of mind in as much as the mandatory statutory provision of section 40(a)(ia) of the Act were ignored. The ld. CIT was within its jurisdiction to invoke powers u/s 263 of the Act. The object of the provision is to correct the erroneous order which is prejudicial to the interest of the revenue, as the department has no right to file an appeal against the order of AO. Whether the ingradients of th .....

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d. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase prejudicial to the interests of the revenue is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The High Court of Calcutta in Dawjee Dada .....

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as in Venkatakrishna Rice Company Vs. Commissioner of Income-tax [163 ITR 129] interpreting prejudicial to the interests of the revenue. The High Court held, In this context, it must be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the Order passed by the Income-tax Officer, which might set a bad trend or pattern for similar assessments, which on a broad reckoning, the Commissioner might think to b .....

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e read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneou .....

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of Incometax, West Bengal [88 ITR 323]. In the instant case, the Commissioner noted that the Income-tax Officer passed the order of nil assessment without application of mind. Indeed, the High Court recorded the finding that the Income-tax Officer failed to apply his mind to the case in all perspective and the order passed by him was erroneous. It appears that the resolution passed by the board of the appellant-company was not placed before the Assessing Officer. Thus, there was no material to s .....

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Section 263(1) was justified. The second contention has to be rejected in view of the finding of fact recorded by the High Court. It was not shown at any stage of the proceedings, the amount in question was fixed or quantified as loss of agricultural income and admittedly it is not so found by the Tribunal." 7.8. In the case of CIT vs Jawahar Bhattacharjee 341 ITR 434 (Gauhati) the High Court has held as under :- "22. We have already referred to judgments of this Court in Rajendra Sin .....

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in assessment order, by ignoring relevant material. Not holding such inquiry as is normal and not applying mind to relevant material would certainly be erroneous assessment warranting exercise of revisional jurisdiction. Judgment has to be read as a whole and an observation during the course of reasoning in the judgment should not be divorced from the context in which it was used. The judgment is neither to be interpreted as an Act of Parliament nor as a holy book. If this principle is kept in m .....

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e case of CIT vs Deepak Kumar Garg 299 ITR 435 it was held as under :- "4. After hearing rival submissions and considering material available on record, we are of the view that the Tribunal's order is unsustainable. At the outset, it is clarified that we have no quarrel with the principles laid down in the cases relied upon by the learned senior counsel for the assessee. After going through them, we can safely say that no thumb rule of universal application is evolved or laid down for t .....

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, after hearing Authorised Representative, the Commissioner has recorded a clear finding that the order of assessing officer was erroneous as well as prejudicial to the interest of revenue. From the order of the assessing officer, it is clear that for want of time, assessing officer had done only a semblance of enquiry and that too, in very slip-shod manner, as is clear from the post script in the order of assessing officer. Assessing Officer accepted the version of the assessee without proper e .....

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