MUMBAI ITAT laying down detailed and succinct principles on cash credit section 68 (source of source; duty of AO; requisite explanation etc all explicated at length) (Note: High courts have held where creditor is tax assessee, AO required to communicate with creditor's coordinate AO failing which addition shall be vitiated); Luck bench ITAT held failure to follow cbdt scrutiny guideline/instruction in issuing timely notice u/s 143(2) will nullify the whole action/assessment; Mumbai ITAT 40(a)(ia) not apply to expense not claimed by assessee in P&L account; delhi itat relying on agra itat held finance act 2012 amendment is retrospective (payee paid taxes will insulate payer from tds disallowance u/s 40(a)(ia); Mumbai ITAT held new explanations in royalty definition shall not apply to section 40(a)(i) for disallowance as latter adopts old royalty explanation no. 2 only; Cargo handling charges will not fall for TDS u/s 194J; section 195 shall not apply to reimbursement to overseas agent

[Kapil Goel]

• MUMBAI ITAT laying down detailed and succinct principles on cash credit section 68 (source of source; duty of AO; requisite explanation etc all explicated at length) (Note: High courts have held where creditor is tax assessee, AO required to communicate with creditor's coordinate AO failing which addition shall be vitiated);
  
• Luck bench ITAT held failure to follow cbdt scrutiny guideline/instruction in issuing timely notice u/s 143(2) will nullify the whole action/assessment;
  
• Mumbai ITAT 40(a)(ia) not apply to expense not claimed by assessee in P&L account;
  
• delhi itat relying on agra itat held finance act 2012 amendment is retrospective (payee paid taxes will insulate payer from tds disallowance u/s 40(a)(ia);
• Mumbai ITAT held new explanations in royalty definition shall not apply to section 40(a)(i) for disallowance as latter adopts old royalty explanation no. 2 only;
  
• Cargo handling charges will not fall for TDS u/s 194J;
• section 195 shall not apply to reimbursement to overseas agent for advertisement expenses; section 195 shall not apply to overseas institution for educational material/kit supply payments; 
  

ITA No.1341/Mum/2011 Assessment Year 1996-97 Arun Kumar Muchhala ,

 INCOME TAX APPELLATE TRIBUNALMUMBAI BENCHES “I” MUMBAI  Date of Pronouncement: 30/07/ 2014

 

Over the years law regarding cash credits have evolved and has taken a definite shape. So, before proceeding further, we would like to mention a few important aspects of the law; culled out from the decisions of the Hon’ble Court;with regard to Sec.68 and same can be enumerated as under :

 

i).Provisions of the Section 68 can be invoked when following three conditions are satisfied- first when there is credit of amounts in the books maintained by

the assessee and secondly such credit  has to be a sum of money during the previous year  ii) either the assessee offers no explanation  about the nature and source of such credits found in the books or the explanation offered by the

assessee,in the opinion of the AO,is not satisfactory. It is only then that the sum so credited may be charged to income-tax as the income of the assessee

.

ii). Assessee has to establish identity and creditworthiness of the creditor as well as the genuineness of the transaction. All the three ingredients are cumulative and not exclusive.

 

iii). In matters regarding cash credit the onus of proof is not a static one. As per the provisions of the section the initial burden of proof lies on the assessee. Amount appearing in the books of a/cs. of the assessee is considered a proof against him.  He can prove the identity of the creditors by  either furnishing their PANs or assessment orders. Similarly, genuineness of the transaction can be

proved by showing that the money was received by an account payee cheque or by draft. Credit worthiness of the lender can be established by attending circumstances. Once the assessee produces evidences about identity,genuineness and credit worthiness of the lender onus of proof

shifts to the Revenue.

 

iv). Under section 68 of the Act,the AO has jurisdiction to make enquiries with regard to the  nature and source of a sum and it is immaterial as

to whether the amount credited is given the  colour of a loan or a sum represents sale proceeds or it is share application money.

 

v). The expression the assessee offers no explanation means the it offers no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the  assessee.The opinion of the AO for not accepting the explanation of the assessee as not  satisfactory is required to be based on proper appreciation of material and other attending  circumstances available on the record. The opinion  of the AO is required to be formed objectively  with reference to the material on record file.

 

vi). Phrase nature and sources of such credits has to be understood in right prespective, so that  genuineness of the transaction can be decided on merits and not on prejudices. Courts are of the firm view that the evidence produced by the assesse e cannot be brushed aside in a causal manner.

 

vii). Once the explanation of the assessee is found unbelievable or false,the AO is not required to bring positive evidence on record to treat amount in question as income of the assessee.While considering the explanation of the assessee,the AO  has to act reasonably-application of mind is  the sine qua non for forming the opinion.

 

viii). Matters related to section 68 should be decided on  the particular facts of the case as well as  on the basis of preponderance of probabilities. Credibility of the explanation, not the materiality of  evidences, is the basis for deciding the cases falling under the section.

 

ix). Confirmatory letters or A/c. payee cheques do not p rove that the amount in question is  properly explained for the purpose of section 68 of the Act.In other words money coming by way  of bank cheques and being paid through the process  of banking transaction are not by itself of any  consequence for deciding the cash credit issue.

 

x). Contents of section 68,may be divided into two parts-(a) It requires the assessee to explain the  sum found credited in the books of the assessee abo

ut the nature and source thereof.This part only  requires the assessee to disclose the source from which the money has been received by him.This  does not require the assessee to disclose the source of that source, i.e., the source from which the donor or investor has received the money which has  been invested. (b) It consists of offering an  explanation which is satisfactory in the opinion of

the AO.What explanation would be considered  satisfactory and how much of details should be furnished to make the explanation satisfactory  normally depend upon the facts.

 

xi).But,the doctrine of source of source or origin of origin cannot be applied universally, without  reference to the factual matrix and facts of each case.The said test in case of normal business  transactions may be light and not vigorous.The said doctrine is applied when there is evidence to  show that assessee may not be aware, could not have knowledge or was unconcerned as to the  source of money paid or belonging to the third party.This may be due to the nature and character of the commercial/business transaction relationship

between the parties, statutory postulates, etc. But,when there is surrounding evidence and material manifesting and revealing involvement of

the assessee in the transaction and that it is not  entirely an arm's length transaction, resort  or  reliance to the said doctrine may be counter-productive and contrary to equity and justice. The  doctrine is not an eldritch or a camouflage to circulate ill-gotten and unrecorded money.

 

xii).The burden is on the assessee to take the plea that ,even if the explanation is not acceptable, the material and attending circumstances available on record do not justify the sum found credited in the books being treated as a receipt of income nature.

 

xiii).In the context of unexplained cash credits,when an assessee does not produce evidence or tries to avoid appearance before the AO,it necessarily creates difficulties and prevents ascertainment of the true and correct facts as the AO is denied the advantage of the contention or factual assertion by the assessee before him. If an assessee deliberately and intentionally fails to

produce evidence before the AO with the desire to prevent inquiry or investigation, an adverse  inference should be drawn.Mere production of Perman

ent Account Number(PAN)or assessment  particulars does not establish the identity of a person. The identification of a person includes the

place of work, the staff and the fact that that person was actually carrying on business and further  recognition of the company or individual in the eye

s of public.PANs are allotted on the basis of  applications without actual de facto verification of the identity or ascertainment of the active  nature of business activity. PANs are allotted as a facility to the Revenue to keep track of transac -

tions.They cannot,blindly and without consideration of surrounding circumstances,be treated as  sufficiently disclosing the identity of the person.

In a case of accommodation entries, in view of  the link between the entry providers and incriminating evidence,the mere filing of permanent

account numbers,acknowledgment of income-tax returns of the entry providers and bank account  statements,is not sufficient to discharge the onus

on the assessee.(361ITR258)

 

xiv).A conclusion regarding creditworthiness or otherwise of a person is essentially one of fact.

 

5.1.Here,we would like to refer to the case of Pushp Trading Co.,delivered by the Hon’ble Delhi High Court(190ITR618).In that matter certain cash credits were assessed as the assessee's income for a particular year.The original assessment was set aside on the ground that the assessee had not been granted full opportunity and wanted further opportunity to substantiate its claim that the cash

credits were genuine. A fresh assessment was passed after 14 years treating the cash credits as the assessee's income.Tribunal held that the assessee w

as not able to produce any evidence to establish the genuineness of the cash credits and also rejected the assessee's reference application.On an application for calling for a reference before the High Court, it was contended on behalf of the assessee that, after a lapse of 14years, it was not possible to have the creditors produced for cross-examination. Dismissing the petit

ion,Hon’ble Court held as under:

“The assessee was not unaware of the evidence to be produced to substantiate its claim with regard to the genuineness of the cash credits. Having succeeded in its claim that full opportunity had not been granted to substantiate the claim, it was not open to the assessee thereafter to turn round and say that, after the lapse of many years,

it was not possible for it to lead any evidence.  The Tribunal was right in holding that no question of law arose out of its order.”

 

 

 

ITA No.669/lkw/2010 Assessment Year:2004-05

Vishal Madnani

IN THE INCOME TAX APPELLATE TRIBUNAL

LUCKNOW BENCH“B”, LUCKNOW

Date of pronouncement:15/07/2014

 

The ld. counsel for the assessee has invited our attention to the

assessment order with the submission that the assessee has filed the return  of income on 1.11.2004 declaring income at Rs.90,000/-

and it was  processed under section 143(1) of the Act vide order dated 28.3.2006.  Thereafter assessee’s case was taken up for scrutiny and notice under section 143(2) of the Act was issued on 20.9.2005. The ld. counsel for the  assessee has invited our attention to the Instruction No.10/2004 dated 20.9.2004 issued by the Board with regard to scrutiny of assessment and in case of scrutiny assessment, the process of selection for scrutiny for returns filed upto 31.3.2004 must be completed by 15.10.2004 and for the returns filed during the current financial year i.e. 2004-05,selection of case for scrutiny will have to be completed within three months from the date of filing of the return. In the instant case, undisputedly return was filed on 1.11.2004 and as per Instruction, it can only be selected for scrutiny within a period of three months from filing of the return i.e. upto 31.1.2005, whereas it was selected for scrutiny and notice was issued on 20.9.2005  after the period prescribed under the Instruction. Therefore, assessment  framed is not in accordance with the Instructions issued by the Board vide Instruction No.10/2004 dated 20.9.2004. In support of his contention that selection for scrutiny was not within the prescribed period and the assessment framed consequent thereto is not valid, the ld. counsel for the assessee has placed reliance upon the judgments of the  Hon'ble Chhattisgarh High Court in the case of DCIT vs. Sunita Finlease Ltd., [2011]  330 ITR 491 and Hon'ble Calcutta High Court in the case of Amal Kumar Ghosh vs. ACIT and Others [2014] 361 ITR 458 (Cal).

The impugned issue has already been examined by the Hon'ble  High Courts by giving a categorical finding that the Instructions issued by the Board are binding on the Department and its Circulars are to be strictly complied with and if it is not followed in letter and spirit, the assessment framed consequent thereto is not valid. In the instant case, since the case was selected for scrutiny after the period prescribed as per Instruction, the selection is not proper. Therefore, the assessment framed consequent thereto is not valid. We accordingly annul the assessment and set aside the order of the ld. CIT(A)

 

IN THE INCOME TAX APPELLATE TRIBUNAL

“K” Bench, Mumbai I.T.A. No.1382/Mum/2014

(Assessment Year : 2009-10) M/s. NGC Networks (I) Pvt.

Ltd. Date of Pronouncement : 09.07.2014

 

 Further, we find force in the contention of the ld. Sr. Counsel that

payment in question does not fall under the term royalty as defined in

Explanation-2 of section 9(1)(vi) and Explanation-6 can not be pressed into

service as the definition of royalty for the purpose of section 40 is taken only

under Explanation-2 to section 9(1)(c). An identical issue was considered and

decided by this Tribunal in case of SKOL Breweries Ltd. vs. ACIT (supra), in

para 19.1 to 19.4 as under :-

 

5.3 In view of the above discussion as well as the decision of Hon'ble

Calcutta High Court and the co-ordinate Bench of this Tribunal we do not find

any reason to interfere with the direction of the DRP.

 

 

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, CHENNAI M/s.Myrind School of Catering &

Computer Management (P) Ltd., I.T.A. No. 411/Mds/2012 Assessment Year : 2008-09 Date of Pronouncement : 16-06-2014

 

The assessee is conducting hotel management course in

association with international acclaimed institutions, such as,

Regency Australia and Centennial College, Canada. During the

period relevant to the AY under consideration, the assessee paid

an amount of `48,64,161/- towards examination fees study

material and books to Regency, Australia and Centennial Canada

without deduction of tax at source. The Assessing Officer vide

assessment order dt.31-12-2010 inter alia made dis-allowance

u/s.40(a)(i) for non-deduction of tax at source on the payment of

said amount. The Assessing Officer held the payment as fee for

technical services.

We have heard the submissions made by the

representatives of both the sides and have perused the orders of

the authorities below. We have also examined the Co-operation

Agreement between MIC and Centennial College of Applied Arts

and Technology, Canada placed before us. The dispute in the

appeal relates to the payment of `48,64,161/- by assessee to the

overseas institution without deduction of tax at source as

envisaged u/s.195 of the Act. The contention of the assessee is

that the payments are made towards the cost of books and study

material whereas, the stand of the Revenue is that the payment is

in nature of technical fees.From the conjoint reading of Article 2 & 3, it is evident that the fees

is paid towards the study curriculum which includes teachers

textbooks, teaching aids, associated marketing tools and materials

etc. There is no transfer of any technical know-how or technical

services. The Revenue has not been able to substantiate its plea,

as to how the amount paid falls in the category of technical fee.

We do not find any infirmity in the impugned order. Thus, the

appeal of the Revenue is dismissed being devoid of merit

 

 

IN THE INCOME TAX APPELLATE TRIBUNAL

(DELHI BENCH ‘I’ : NEW DELHI) ITA No.3688/Del./2012

(ASSESSMENT YEAR : 2002-03) M/s. Kohinoor Foods Ltd.,

 

While pleading on behalf of the assessee, ld. AR submitted that M/s. Nashar

Trading Company is a distributor company of the assessee company. It was agreed with M/s. Nashar Trading Company that advertisement / promotional expenses incurred by the said company shall be reimbursed by the assessee company to the extent of 50% and due to the efforts of M/s. Nashar Trading Company during the year, the sale of branded goods in Saudi Arabia was enhanced to Rs.7,22,58,758/- in comparison to the immediately preceding year sales of Rs.5,95,93,429/-. The assessee has reimbursed this amount as its share in the promotional expenses incurred by M/s. Nashar Trading Company. The expenditure was rightly claimed by the assessee and it was for commercial expediency  and it was incurred wholly and exclusively for the purpose of business and such expenses

are allowable u/s 37(1) of the Act. Since it was a reimbursement of expenses to the

distributor for promotion of brand and advertisement, therefore, there was no liability of

TDS on the assessee. It does not include any income which is liable to be taxed in India

in the hands of the non-resident. Reliance was placed on the decisions of ITO vs.

Willmar Schwobe India P. Ltd. – 95 TTJ 53 (Del.), Nature Bio Foods Ltd. Vs. ACIT in

ITA No.4522/Del/2012 and DCIT vs. M/s. Dhaanya Seeds Pvt. Ltd. In ITA

No.1523/Bang/2012 order dated 27.09.2013. It was also submitted that AO was not

justified by invoking the provisions of section 195 (1) of the Act as per the Double

Taxation Avoidance Agreement between the two countries and such income is not

taxable in India as M/s. Nashar Trading Company has no Permanent Establishment in

India. All the expenses have been incurred outside India, hence, no tax was deducted.

Further, the AO’s reliance on the provisions of section 40(a)(i) to hold that the amount of

expenses incurred for advertisement is not allowable, is completely uncalled for as no

TDS was required to be deducted from this payment.

 

 

23. We have heard both the sides on the issue. M/s. Nashar Trading Company is a

distributor of the assessee and has been reimbursed 50% of the advertisement of the

promotional expenses incurred as per the mutual understanding of the assessee. In our

considered view, the revenue has failed to bring on record anything which can show that this expenditure was not incurred wholly and exclusively for the purpose of business. The assessee is selling Basmati rice through its distributor in Saudi Arabia. The sales have been increased for the year. In such circumstances and in absence of any adverse material, we find that this expenditure was incurred for commercial expediency and it is allowable u/s 37 (1) of the Act. Further such expenditure was not liable to be taxed in India as it was reimbursed to a non-resident, therefore, we direct to allow this expenditure and delete the addition.

 

 

IN THE INCOME TAX APPELLATE TRIBUNAL “J” BENCH, MUMBAI Jet Lite (India) Ltd /Date of Pronouncement :09.7.2014 I.T.A. No.4635/M/2012 (AY:2009-2010)

 

Firstly, we shall take up the appeal ITA No.4635/M/2012, which is filed by

the Revenue on 9.7.2012 against the order of the CIT (A)-14, Mumbai dated

30.4.2012 for the assessment year 2009-2010. In this appeal, Revenue raised the

following grounds which read as under:

“i) The ld CIT (A) has erred on facts and circumstances of the case and in law

not appreciating the fact that cargo handling charges to be taxed u/s

194J @ 5% instead of 194 @ 2%.

ii) The Ld CIT (A) has erred on the facts and circumstances of the case and law

in not appreciating the fact that cargo handling requires highly

mechanized machines and skilled and technical competent persons.

iii) The Ld CIT (A) on the facts and in the circumstances of the case and in law

in not appreciating the fact that payment made under cargo handling

charges clearly falls within the purview of section 194J and fees for

technical services is liable for deduction u/s 194J of the Act.

iv) The Ld CIT (A) has erred on the facts and circumstances of the case and in

law deleting the demand of Rs. 3,03,930/- without property appreciating the

factual & legal matrix of the case as clearly brought out by the AO in order

u/s 201(1) & 201(1A) of the Act.”

 

From the above, we find that while deciding the issue of whether the cargo

handling charges paid by the assesssee attracts the provisions of section 194C or

194J, the CIT (A) has rightly adjudicated the issue by following the earlier year‟s

orders of the Revenue Authorities as well as the order of the ITAT, Delhi in the case

of Glaxo Smithkline Consumer Healthcare Ltd (supra). Considering the settled

position of the issue and respectfully following the order of the ITAT, Delhi Bench,

we of the opinion that the decision taken by the CIT (A) in deleting the demand of

tax u/s 201(1) of the Act in respect of Cargo Handling Charges is fair and reasonable

and it does not call for any interference. Accordingly, grounds no.(i) to (iv) raised

by the Revenue are dismissed.

 

                IN THE INCOME TAX APPELLATE TRIBUNAL

"C" Bench, Mumbai ITA No.2188/Mum/2013

(Assessment year: 2009-10)

Paramount Health Services

(TPA) Pvt. Ltd. Date of Pronouncement : 25/07/2014

 

Though the assessee is under the obligation to deduct tax at

source under section 194J however, the consequential liability is only

under section 201 and 201(1A) and the disallowance under section

40(a)(ia) cannot be automatic when the assessee has not claimed this

payment as expenditure against the income. The assessee has shown the

income, only the service charges receivable from insurance companies for

rendering services as 3rd party administrator and not having any margin

or profit element in the payment received from the insurers for the

purpose of remitting to the hospitals to settle medical claim of the

insured. Therefore, when the said payment has not been claimed as

expenditure incurred for earning the income by the assessee then the

provisions of section 40(a)(ia) is not attracted for non deduction of tax at

source in respect of the said payment. Following the decisions of the

Tribunal as relied upon by the assessee and discussion above we hold

that no disallowance can be made under section 40(a)(ia) in respect of

the payment in question. Accordingly the ground raised in assessee’s

appeal is allowed and ground raised in the revenue’s appeal is dismissed.

               

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH ‘A’: NEW DELHI ITA No. 2859/Del/2012

Assessment Year: 2008-09 Ansal Landmark

Townships (P) Ltd.,

 

This is appeal filed by the assessee. The main issue is disallowance u/s

40(a)(ia). The assessee moved an application under Rule 11 of the ITAT

Rules to file the following additional grounds:

“Without prejudice to Grounds Nos. 1, 2 & 3, the

impugned payment of Rs. 5,30,96,607/- could not in law

be disallowed u/s 40(a)(ia) in view of the insertion of

the second proviso to section 40(a)(ia) by the Finance

Act, 2012 because of the fact that the recipient, Ansal

Properties & Infrastructure Limited had already

included the income embedded in these payments in its return of income filed on 31.03.2010 and had paid tax

thereon.”

As this is a legal ground and as the proviso itself was inserted by the

Finance Act, 2012, we admit the ground.

10.1 The assessee submits that the payee i.e. Ansal Properties &

Infrastructure Limited has paid all its taxes and filed its return of income.

And hence the second proviso to section 40(a)(ia) by Finance Act, 2012

w.e.f. 01.04.2013 is applicable. He relied on the orders of the Agra Bench of

the Tribunal in ITA No. 337/Agra/2013 order dated 29th May, 2013 for the

proposition that the second proviso to section 40(a)(ia) is declaratory and

curative in nature and it has retrospective effect from 01.04.2005.

11. Ld. Departmental Representative, Ms. A. Mishra opposed the

contention of the assessee. 13. Respectfully following the same, we set aside the issue to the file of

AO for the limited purpose of verification. The AO shall verify whether the

payee has filed his return of income and paid of the taxes within stipulated

time. If it has done so no disallowance shall be made.

14. In the result, the appeal of the assessee is allowed in part.