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2017 (3) TMI 262 - ITAT KOLKATA

2017 (3) TMI 262 - ITAT KOLKATA - TMI - Payment of Standby Letter of Credit charges (SBLC) charges - Allowable business expenses or not - Held that:- There is a commercial expediency in payment of SLBC charges by the assessee to M/s. Shalini P.Ltd and hence payment is an allowable expenditure. Therefore the deletion of disallowance made by the ld. CIT(A) is sustained. - Decided in favour of assessee - TDS u/s 194C and 194J - consultancy and professional charges - disallowance made u/s 40(a)( .....

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of omission to deduct tax even the genuine and admissible expenses are to be disallowed. But it sought to remove the rigour of law by holding that the disallowance shall be restricted to the money which is yet to be paid. However, we have observed that in the case of Crescent Export Syndicate (2013 (5) TMI 510 - CALCUTTA HIGH COURT) observed that there can be no denial that the provision in question is harsh. But there is no ground which was not intended by the Legislature. The law was delibera .....

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question is decided in favour of the revenue and against the assessee. - TDS u/s 194I and 194C - failure to deposit within 31st March, 2009 - disallowance u/s 40(a)(ia) - Held that:- The appellant has deducted the tax at source on these payments in the month of Feb. 2009 but has deposited the tax after the end of the accounting year.That the provision of section 40(a)(ia) has been amended by Finance Act 2010. As per the amended provision if the TDS amount is deposited before due date of fili .....

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#8377; 9,38,408/- made by applying the provision of section 40(a)(ia) is delete and thus the appellant gets relief of ₹ 9,38,408/- (11.32.925-194517) on this ground. CIT(A) had rightly sustained the disallowance of ₹ 73556/- u/s 194J of the Act and ₹ 120961/- u/s 194C of the Act in the facts and circumstances of the case. - Decided partly in favour of assessee - I.T.A No. 365/Kol/2013 - Dated:- 3-3-2017 - Sri M.Balaganesh, AM And Shri Partha Sarathi Chaudhury, JM For the Appell .....

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it charges (SBLC) to M/s. Shalini Properties & Developers Limited was allowable due to commercial expediency; whereas, the CIT(Appeals) has come to such conclusion on misconstrued facts. " Ground No.16 : "That, on the facts and circumstances of the case, and in law, the Ld. CIT(A) has erred in deleting the disallowance made by the A. O. of ₹ 2,93,4041- u/s 40(a)(ia) of the Act on account of failure to deduct tax from payments of consultancy and professional fees on which tax .....

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failure to deposit within 31st March 2009 the tax deducted at source upto the month of February, 2009 by the assessee from payments u/s 194C and 194J of the Act in contravention of the provisions of section 40(a)(ia)(B) of the Act." Ground No.19 : "That the appellant craves leave to submit additional grounds of appeal, if any, at or before the time of hearing and/or alter, modify, reframe any grounds of appeal at or before the time of hearing." 2. At the very outset, we find that .....

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143(2) and 143(1) of the Act were issued to the assessee and as and when called for the assessee has produced documentary evidence, books of account, bank statements, agreements etc. The assessment was completed u/s 143(3) of the Act vide order 16.12.2011 on the total income of ₹ 11,57,41,510/- after making some additions/disallowances. That in the grounds of appeal appearing before us it is the numerical format as appearing before the ld. CIT(A).Therefore ground no.19 in the grounds of a .....

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llows :- In the profit and loss account, an amount of Rs.l1, 75,82-,702/- was debited under the head Bank Charges/Guarantee commission which included payment of ₹ 11, 74,12,5001- to M/s: Shalini Properties and Developers Pvt. Ltd. on account of Standby Letter of Credit Charges. However, from the notes contained in the tax audit report, the Assessing Officer observed that (i) "The company has not taken any loans, secured or unsecured, from Companies, firms or other parties covered in t .....

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ointed out to the assessee company. The case of the Assessing Officer for making the impugned addition has been that -the transactions entered into by the assessee company were with group companies having the same management and controlling authority, decisions were taken on behalf of all the companies by only a few; i) The Directors and the principal persons of the assessee company were only aware of the major decisions taken in the entire group. ii) Opportunity was provided. to .the assessee t .....

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, New Delhi and in the case of Kay Cee Electricals v DCIT (2003) 87.ITD 35 (Delhi). iii) the contentions expressed in the copies of the extracts of the board resolution, as claimed by the appellant, has already been duly considered in the assessment stage and strongly refuted in .the assessment order itself with logic as well as relevant case laws. iv) It is also pertinent to mention here that it is incumbent on the Assessing Officer to explore the total gamut' of the affairs of the assessee .....

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so been upheld in the case of CIT vs Indian Express Newspapers Madurai Pvt. Ltd. 238 ITR 70 (Mad.), Thus, the case of the Assessing Officer is that the group companies were managed by a few, who could manage the affairs to reduce the tax burden through colourable devices. 5.1..9 On the other hand, to support its claim, it was explained that the appellant company is the flagship company of the Ruia Group and during the financial year: 2008- 2009, relevant to Asst. Year, 2009-2010 , it had entered .....

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elopers P Ltd. is the entire ,issue for this addition made by the Assessing Officer. The fact is that prior to Asst. Year 2009-10 i. e. in NY 2008-09, the appellant was not having any business activity nor deriving any income and this was also the case in many more previous years. In sum and substance,. it: is submitted that the appellant was not having source of income prior to A.Y 2009-2010. It was looking for avenues to earn income and steps were being taken by the appellant which is the matt .....

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charges to be paid to M/s Shalini Properties & Developers P Ltd. who, in turn, shall pay such charges to ICICI Bank, To this effect, Board of the appellant company passed resolution dated 12th March 2008. Board resolution dated 28th March 2008 was passed by the Board of the appellant which incorporated the agreement entered into by the appellant with Dunlop India Ltd for use of Dunlop' Brand and Logo. The Board's resolution also incorporated and thanked M/s Shalini Properties & D .....

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ing the year, on use of the 'Dunlop' brand name and logo by way of royalty and SBLC charges the appellant had income of ₹ 123643645/-. Not only this, the income earning apparatus of the appellant company being the brand name and logo 'Dunlop' has resulted in much higher income in the subsequent years. Only in respect of royalty income from the use of Dunlop' brand name and logo the jump in the royalty income is as under.- Financial Year Falcon Tyres India Tyre & Rub .....

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ious avenues for augmenting its income and it approached M/s. Shalini Properties and Developers Private Limited to arrange for the assignment of Dunlop brand name and agree to pay/reimburse the standby letter of credit charges to M/s. Shalini. Properties and Developers Private Limited and also agreed to pay a sum of ₹ 200 lakhs to Dunlop India Limited directly. Shalini Properties and Developers Private Limited, according to the appellant, informed it that it was the ultimate shareholder of .....

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ed by the Directors during the period 20th February 2008 to 28th June 2008 as stated above. The appellant's submissions are that the corporate veil is a mere facade and that the expenditure had been incurred for commercial expediency. 5.1.11. It is noted that the Assessing Officer while disallowing the. claim of the appellant of ₹ 1l7412500/- as SBLC charges paid to M/s Shalini Properties & Developers P Ltd. has held the transaction to be a colourable device to eat into the profit .....

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h loan taken by Wealthsea Pte.Ltd. In the remand report the Assessing Officer has not mentioned anything new than what has already been I stated in the assessment order and in fact the Board's resolution which was considered as a fresh evidence has been brushed aside by the Assessing Officer by treating the same to be part of the assessment record and not fresh evidence. M/s Shalini Properties & Developers P. Ltd held 100% shares in Hiland Traders Pvt. Ltd. which, in turn, held substanti .....

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by Letter of Credit was given by Shalini Properties & Developers P. Ltd. being the substantial share holder of Wealth sea Pte. Ltd. M/s Shalini Properties & Developers P. Ltd were not having any income and in order to provide such finance charges it approached the appellant company. The resolutions passed by the Board throw light to the affair of. the appellant company and the method adopted for source of earning by the appellant company. The fact that the appellant was looking for a sou .....

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o a fact that from thy use of the 'Dunlop' brand name, the appellant company has earned substantial income on account of royalty, service charges in the impugned Asst. Year and increasing in subsequent years. It is also illustrated in the chart given above that purely on royalty income-from use of the 'Dunlop' brand name in comparison to reimbursement of SBLC charges in three years, the income has outshown the expenses substantially putting the appellant company in a guided seat .....

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fees/finance charges by whatever name it may be called are a larger picture to the revival of the group company and mainly Dunlop India Ltd. which was to be starting production, up and in running. The arrangement made between the group companies, share holder company has resulted in business in these companies and giving rise to capital generation for benefit of Dunlop India Ltd, as a whole. So, it is incorrect to say that Dunlop India Limited has not been benefited from the finances obtained b .....

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tilization of resources from its group companies and on the other hand resort to a colourful device to eat away into the income. It is unusual because it is' not the case of the appellant company that the income is being earned from third party or it is a fixed income being earned from previous year and in order to eat: into such income a method or a resort is being adopted which is colourful in nature. Here, it is from the AN 2009-10 that the source of income has been generated and Board .....

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hen there can be no question raised as to the colourful device or a method adopted to eat into the profit. A Board's resolution is no doubt an important piece of evidence and even though it is made by the Board of Directors, it has to be considered and taken cognizance of and cannot be brushed aside. The Supreme Court in the case of Union of India Vs Azadi Bacho Andolen 263 ITR 706 (SJ ) after considering the decision of the Supreme Court in the case of MacDowell 154 ITR 148 made a distincti .....

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very drastic change in the final jurisprudence in India, as would entail a departure. In our judgment from Westminister's case to Bank of Chettinands case to Mathurams case despite the hiccups of Maclrowell's case, the law has remained the same. We are unable to agree with the submission that an Act which is otherwise, valid on law can be treated non- est merely on the base of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interest as .....

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9; In the case of Sankarlal Balabhai 69 ITR 186 (Guj) it was held "Tax avoidance postulates that the assessee is in receipt of amount which is really and in truth his income eligible to tax but on which he avoids payment of tax by some artifice or device. Such artifice or device may apparently show the income as accruing to another person, at the same time making it available for use and enjoyment to the 'assessee as in the case falling within section 44D or mask the true character of t .....

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part of the income from the asset goes into the hands of the assessee in shape of income or under any guise." .' 5.1.13. Reliance has been placed by the Assessing Officer in the case of Kaycee Electrical Vs. DCIT 87 ITD 35 (De i) in which case the facts were that the entire transaction which could generate income were kept secret and not entered into the regular books of account it was held to be undisclosed income. The principle laid down in the said decision was where. any assets is f .....

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ment on such borrowers was not deductible u/s 36(1)(iii) and it was held to be a colourful device. The facts of the case are distinguishable and not similar to the facts of the case of the appellant. In the case of Atherton Vs British Insulator and Helsby Cables Ltd. 10 Tax cases 155, 191, it was held - "a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order indirectly .....

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how that the company, M/s Shalini Properties and Developers Ltd., had been controlling the shares of Dunlop India Ltd. The appellant company had furnished copies of resolutions to show that the said company, M/s Shalini Properties & Developers had been instrumental in arranging the transaction of obtaining the rights over the brand name of "Dunlop" to the appellant company. On the other hand, the Assessing Officer has not brought any material on record to show that the transaction .....

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be remembered that the earning of profits and the payments of taxes ,are not isolated and independent activities of a business. These activities are continuous and take place from year to year during the whole period for which the business continues. If the assessee takes steps for reducing its liability to tax: which results in more fund being left for the purpose of carrying on the business there is always a possibility of higher profits. The expenditure which was incurred by the assessee was, .....

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as well as decided cases. General principles to decide whether an expenditure is capital or revenue in nature, the following points of distinction are relevant. (a) Capital expenditure is incurred in acquiring, extending or improving a fixed asset, whereas revenue expenditure is incurred in the normal course of business as a routine business expenditure; (b) Capital expenditure produces benefits for several years, whereas revenue expenditure is consumed within a previous year; (c) Capital expend .....

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It is immaterial whether expenditure is made out of money withdrawn from capital or out of profits- Schenectady Beck India Ltd. v. CIT [2004] 91 ITD 23 (Mum.). It is well-settled that capital expenditure cannot be attributed to revenue and vice versa. Secondly, it is equally clear that a payment in lump sum does not necessarily make the payment a capital one. It may still possess revenue character in the same way as a series of payments. Thirdly, if there is a lump sum payment but there is no po .....

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tio laid down in Indian Mosasses Co.(P.) Ltd. v. CIT [1959] 37 ITR 66 (SC), Hylam Ltd. v. CIT [1973.1,87 ITR 310 (AP). Though the dividing line between a capital and revenue ,expenditure is real, yet sometimes it becomes difficult to draw. Therefore, a decision is to be taken in each case in the light of the facts and surrounding circumstances. However, the following judicial pronouncements should be kept. in view while determining whether a particular expenditure is a capital or revenue in natu .....

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conclusive test and it cannot be applied blindly and mechanical without regard to the particular facts and circumstances of a given case." In the instant case, the payment has not been made for acquiring a brand name, but for facilitating for acquisition of the brand name, which in turn, made substantial improvement in earning capacity of the appellant's business. The payment is in the form of a brokerage or commission or service charges (not-withstanding its liability for TDS), Theref .....

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s( which can be divided into two categories positive tests and negative tests) for deciding whether a particular expenditure can be termed as revenue or capital expenditure. One (at least one) of the positive tests must nod its head and none (not even one) of the negative tests must do so in order to affirmatively hold that the expenditure is deductible under section 37(1). The positive tests are: If the expenditure is incurred: (i) with a view to bring profits or monetary advantage either today .....

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siness prospects, subject to the expenditure being genuine and within reasonable limits; (viii) where it is incurred solely by way of a civil duty owed by the assessee to the society having regard to the nature of his business which brings him profits. but results in some detriment to the public at large either by way of health hazard or ecological pollution or serious inconvenience to the citizens with a view to mitigate the aforesaid evil consequences and consequences of a like nature, subject .....

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show off or impress others with his affluence or for ostentatious purposes; (viii) apparently for a factor listed as a positive factor, but in reality for one of the obnoxious purposes listed as a negative factor; (ix) on a nebulous plea or pretext by way .of an alibi in the name of winning profits in remote future but really for one or the ether tor the purpose listed as negative tests; (x) it is a bogus fictitious or sham transaction; (xi) it is unreasonable and out of proportion; .xii) it is .....

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in order to claim deduction under section 37(1) of the Act. In this case, the expenditure has been incurred with a view to bring profits or monetary advantage either today or tomorrow; the expenditure incurred is such as a wise, prudent, pragmatic and ethical man of the world of business would conscientiously . incur with an eye on promoting his business prospects, subject to the expenditure being genuine and within reasonable limits. Therefore, more than one of the .positive tests have been pr .....

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1(SC) the ratio laid down by the Hon 'ble supreme-Court is that if a payment or expenditure is incurred for the purpose of the trade of the assessee, it is deductible even if it may bring a benefit to a third party. Further, in applying the test of commercial expediency for determining whether an expenditure is wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view-of businessman and not of the revenue as h .....

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tyres, entered into an agreement with a foreign company for technical know-how for manufacture of radial tyres and the assessee got the right to use the licence for a fixed period of 8 years) is deductible. 5.1.16. In view of the above discussion and after perusing the facts and circumstances of the case, analyzing the reported cases cited both by the Assessing Officer and the appellant company, after considering the ratio laid down by the Hon'ble Supreme Court in the case of Union of India .....

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has arranged for lease of Dunlop Brand name, logo etc. in favor of the appellant company for the period of 10 years. As stated in the Board of Director meeting proceeding dated 12.03.2008 M'/s Shalini has agreed to arrange the brand name and logo of Dunlop in favor of the appellant provided the appellant under takes to pay SBLC charges. In the said board meeting the director decided that taking of Dunlop brand name on lease would result in substantial income to the appellant company hence t .....

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appellant. (ii) The Id AR has submitted that the appellant company has paid to M/s Shalini Properties & Developers Pvt. Ltd. and Dunlop India Ltd. ₹ 26,20,42,777/- up to F.Y. 2011-12 as SBLC and for 2011-12 as SBLC and for use of brand name. Whereas the appellant has earned ₹ 45,67,53,657/-up to said period by sub leasing Dunlop brand. This shows that the decision of board of directors of appellant company to approach M/s Shalini Properties & Developers Pvt. Ltd. for assignme .....

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need not necessarily be the business of the assessee itself.) the Revenue cannot justifiably claim to put itself in the arm chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No Businessman can be compelled to maximize his profit. The Income Tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman-would act. The authorities .....

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i Venkata Satyanarayana Rice Mill Contractors Co. v CIT (1997) 113 ITR 101. In that case the Hon 'ble Supreme Court has held as follows : "Business expenditure - Contribution made to District Welfare Fund - The correct test of allowability of such expenditure is commercial expediency and not whether it was compulsory or; not. Contribution was not illegal or opposed to public policy but was for the benefit of the general public - Requiring payment to be made for a just cause which would .....

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39;District Collector, without which contribution he would not get permit, is directly: connected with assessee's carrying on of business - Such contribution is not against public policy, and is allowable under section 37(1)" (v) The Hon'ble Supreme Court in the case of Vodafone International Holdings B.V. v UOl (2012)341 ITR 1 has considered the McDowell case and it's other decisions and held by majority as follows :- "(i) It is the task of the court to ascertain the legal .....

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rties & Developers Pvt. Ltd. and hence this payment is an allowable expense. Accordingly, ground nos. 1 to 15 of the appeal of the appellant are decided in favor of the appellant and the addition of ₹ 11,74,12,500/- made by the AO by way of the disallowance of SBLC is hereby deleted. Thus, the ground nos. 1 to 15 of the appeal of the appellant are allowed. 4. We have perused the case records and heard the rival contentions and considered the facts and circumstances of the case in its e .....

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ppeal is against the deletion of disallowance made u/s 40(a)(ia) of the Act on account of sustenance of professional charges of ₹ 2,93,404/-. 6. This ground of appeal is directed against the disallowance made under sec. 40(a)(ia) on account of consultancy and professional charges of ₹ 2,93,404/-. 7. During the course of assessment proceedings, the appellant company furnished details of tax deducted at source from the payments made regarding Consultancy & Professional fees. From s .....

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erred to under sec. 194C and 194J could not be deducted out of the bill amount for the purpose of tax deduction at source. Therefore, the Assessing Officer concluded that the appellant company ought to have deducted tax at source on the reimbursable out of pocket expenses of ₹ 2,93,404/- which it failed to do, thereby attracting the provisions of section 40(a)(ia) of the LT. Act, 1961. In this background, the amount of ₹ 2,93,404/- was disallowed and added back to the. total income o .....

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pplicability of section 40(a)(ia) of the I.T. Act. The appellant also placed reliance on the decision of the Special Bench of the ITA T, Vishakhapatnam in the case of Merilyn Shipping Transports vs ACIT ITA NO. 477/VIZ/2008, wherein it has been held that only those amounts which are payable at the end of this year can be disallowed and where such payments have been made there is no question of attracting section 40(a)(ia) of the I.T Act. It is stated that in the appellant's case as it has al .....

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e time of payment or at the time of giving credit to the recipient, section 40(a)(ia) is not applicable. In view of the decision of the Special Bench of the Hon'ble ITAT, Vishakhapatnam (supra) relied upon by the appellant and also in view of the ratio laid down by the Hyderabad Tribunal in the case of Teja Constructions v. CIT [2010] 39 SOT 13 (Hyd.)(URO), it is noted that going by the rule of strict interpretation, the default with reference to actual 'payment' of expenditure would .....

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hence, in view of decision of special bench of ITAT in the case of Merlyn Shipping Transports v ACIT ITA No. 477/VIZ/2008 this payment cannot be disallowed by applying section 40(a)(ia). (iii) Since in the remand report the AO has not commented on correctness or otherwise of submission of ld AR hence AO has directed to verify and allow all the payment which were made during the year and to disallow only those payment which were outstanding as on last day of the accounting year. Accordingly this .....

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igh Court had opined that the provisions of section 40(a)(ia) of the Act are application not only in respect of payments outstanding at the end of the year but also in respect of payment which are paid during the year without making TDS. The ld. AR reiterated the submissions made before the subordinate authorities and relied on the order of ld. CIT(A). 11. We have perused the case records and heard the rival contentions analyzing the facts and circumstances herein and we arrive at the considered .....

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to remove the rigour of law by holding that the disallowance shall be restricted to the money which is yet to be paid. However, we have observed that in the case of Crescent Export Syndicate (supra) jurisdictional High Court observed that there can be no denial that the provision in question is harsh. But there is no ground which was not intended by the Legislature. The law was deliberately made harsh to secure compliance of the provisions requiring deduction of tax at source. It is not the case .....

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he Jurisdictional High Court of Calcutta we decide this issue in favour of the revenue and reverse the findings of the order of the ld. CIT(A). Therefore this ground is decided in favour of the revenue. 12. The next ground nos. 17 and 18 as appearing in the grounds of appeal relate to the deletion of disallowance made by the AO of ₹ 11,32,925/- u/s 40(a)(ia) of the Act on account of failure to deposit within 31st March, 2009. The tax deducted at source of the month of March, 2009 by the as .....

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rievance of the revenue on this issue should be restricted to ₹ 9,38,408/- which is the relief granted to the assessee. 14. In these grounds, the revenue is agitated by the disallowance of Rs..l1,32,925/- u/s 40(a)(ia) of the IT Act for default of non-deduction of tax at source under sec. 194I and 194C of the Act. 15. The Assessing Officer on .perusal of the Annexure C of the form 3CD annexed to the Tax Audit Report noticed that the assessee company had defaulted in payment of tax deducted .....

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the Assessing Officer, the Authorised Representative of the appellant company did not furnish details of the payments in respect of which these defaults were made, and, therefore, the amount of payment on which such default on payment of the deducted amount was made by the appellant had to be calculated backwards and it worked out to ₹ 6,49,210/- u/s 194J and ₹ 4,83,715/- u/s 194C. Thus, the total sum of Rs.(649210 + 483715) = ₹ 11,32,925/- was disallowed and added back to the .....

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amount of ₹ 6,49,210/- u/s 1941and ₹ 4,83,7151 u/s 194C to be in violation of the provisions of section 40(a)(ia) of the I.T Act. It is submitted that the issue is covered by the decision of the' Calcutta High Court in the case CIT vs Virgin Creations in ITAT no. 302 of 2011 which has held that the amendment made in section,40(a)(ia) by the Finance Act 2010 as retrospective in nature. Thus, it is contended that even if the payments are made before the due date of filing of return .....

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amended provisions cover the TDS made in the month of March and payable in April and not for the TDS, which had already been made in the month of February and earlier months. TDS made up to February of the financial year had to be deposited within the month of March. The Assessing Officer had found that the company deducted tax within the month of February, 2009 and deposited the same in Central Government account after the end of the financial year, i.e. after 31.03.2009, whereas the same shou .....

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