Advance received to do job work not to be held as income if wrongly shown as transportation charges in TDS certificate

By | October 21, 2015

Facts of the case :-

Assessee entered into an agreement with one ‘B’ to do job work for ‘B’ . Under said agreement, ‘B’ provided adjuAdvancestable advances/deposits of Rs. 34 lakhs to assessee towards cost of plant and machinery and reimbursement for construction of factory shed, etc. . Initially in TDS certificate, ‘B’ showed nature of payment of Rs. 34 lakhs as transportation charges instead of job work . Subsequently, ‘B’ admitted that advance payment of Rs. 34 lakhs was to be adjusted against running bills for conversion charges and due to oversight nature of payment was mentioned as transportation charges instead of job work in TDS certificate

Issue :-

Assessing Officer added aforesaid amount of Rs. 34 lakhs in income of assessee as undisclosed income from transportation charges

Held :-

In peculiar facts of case, it could not be said that income had accrued to assessee

IN THE ITAT KOLKATA BENCH ‘C’

Income-tax Officer

v.

Shree Vinayak Udyog

MAHAVIR SINGH, JUDICIAL MEMBER
AND SHAMIM YAHYA, ACCOUNTANT MEMBER

IT APPEAL NO. 1584 (KOL.) OF 2012
[ASSESSMENT YEAR 2004-05]

OCTOBER  28, 2014

Arindam Bhattacharjee for the Appellant. P.R. Kothari for the Respondent.

ORDER

Shamim Yahya, Accountant Member – This appeal by the Revenue is directed against the order of learned CIT(A)-XX, Kolkata dt. 18th July, 2012 and pertains to asst. yr. 2004-05.

2. The grounds of appeal raised by the Revenue read as under :

”1. In the facts and circumstances of the case, the order of CIT(A) is erroneous due to the fact that it is not treating the receipt as income.
2. The appellant craves leave to make any addition, modification and remodelling of the grounds.”

3. This is the second round in which the appeal has come to the Tribunal. Earlier the issue has been remitted to the file of AO by Tribunal. The brief facts of the case are as under :

”The appellant entered into an agreement (MOU) on 24th Feb., 2003 with ‘Balasore Alloys’ under which the appellant was required to process the chrome ore supplied by ‘Balasore Alloys’ after setting up required upgradation plant. Under the said MOU, ‘Balasore Alloys’ was required to give certain adjustable advances/deposits to the appellant towards cost of plant and machinery and reimbursement for construction of factory shed, boring well and the office space and accommodation. Accordingly, Balsore Alloys made claim of the following payments towards aforesaid advance/deposits and reimbursements :

(a) Directly to the appellant : Rs. 27,00,000
(b) Paid to third parties : Rs. 7,00,000
Rs. 34,00,000

Out of Rs. 27 lakhs paid directly to the appellant, a sum of Rs. 5,81,083.80 were appropriated by the appellant as reimbursement against the cost incurred for factory shed and borewell and balance amount of Rs. 21,18,916.20 was shown as liability in appellant’s balance sheet as on 31st March, 2004. The job charges done for Balasore Alloys worth Rs. 2,00,616.08 during the year under consideration were shown as income in the P&L a/c of the appellant and said amount was reflected as sundry debtors in the balance sheet of the appellant as at 31st March, 2004. The appellant was following mercantile system of accounting.

Balasore Alloys deducted a sum of Rs. 70,000 as TDS on aforesaid payments and filed TDS return. Initially ‘Balasore Alloys’ showed the nature of payment of Rs. 34,00,000 as transportation charges’ in its TDS certificate for Rs. 70,000 deducted as TDS but by a clarification letter dt. 27th July, 2009 subsequently issued by Balasore Alloys as well as an affidavit by Balasore Alloys sworn on 11th Jan., 2011 it admitted that the TDS was against the advance payment of Rs. 34 lakhs made by them which was to be adjusted against the running bills for conversion charges and due to oversight, the nature of payment was mentioned as ‘Transportation charges’ instead of ‘job work’ in the TDS certificate. On account of disputes between the appellant and Balasore Alloys, Balasore Alloys filed an arbitration petition before Hon’ble Orissa High Court on 29th July, 2005. Ultimately, the appellant had to pay back mutually settled Rs. 25,00,000 under an arbitration award dt. 20th Oct., 2009. The appellant filed before the AO written submission with evidences dt. 2nd June, 2011 as well as a letter dt. 29th Aug., 2011 explaining and reconciling the different amounts as pointed out by Tribunal in its order setting aside the issue to file of AO.

4.2 The AO added the aforesaid amount of Rs. 34,00,000 as undisclosed income from ‘transportation charges’ in the impugned order as was done by his predecessor in the order which was set aside by the Tribunal by its aforesaid order dt. 11th June, 2010. The AO made addition based on following observations :

(a) The rate of TDS is noted @2.1 per cent which establishes that the payment was made under s. 194C.
(b) The arbitration petition filed before the Hon’ble Orissa High Court by Balasore Alloys does not take a shape in determining the income of the assessee for the concerned assessment year.
(c) “The issue involved in this case is not a case of the principal of method of accounting i.e. cash basis, mercantile basis and hybrid basis. The issue involved in the instant case clearly violated the provisions of TDS r/w s. 198 of the IT Act, 1961 which clearly describes that all sums deducted in accordance with s. 194 r/w provisions of this chapter shall for the purpose of computing the income of an assessee, be deemed to be the income received, provided that the sum being tax paid under sub-s. (1A) of s. 192 for the purpose of computing the income of an assessee shall not be deemed to be income received.
The assessee claimed the entire amount of TDS of Rs. 70,000 for the year under consideration and accordingly, it has to offer the income accrued on making such TDS on the amount to be the total income in its computation which is categorically and specifically stated in s. 198 of the IT Act, 1961. The assessee has taken a credit of Rs. 70,000 on account of TDS and also claimed a refund of Rs. 70,000 corresponding to the figure of TDS in its return of income filed on 1st Nov., 2004. The refund was duly issued giving interest under s. 244A of Rs. 8,400 totalling of Rs. 78,400.”
(d) The assessee encashed the said refund voucher.
(e) The claim of assessee that it received Rs. 27,00,000 only as against Rs. 34,00,000 claimed to have been paid by Balasore Alloys is not at all tenable and acceptable as Balasore Alloys has already stated in his subsequent letter that Rs. 34,00,000 were paid/credited to the assessee on account of job charges instead of transportation charges.
(f) Despite repeated opportunities, the issue raised by Hon’ble Tribunal remained unanswered by the assessee as it failed to reconcile the payment received with the schedule of payment as per the agreement with Balasore Alloys Ltd. as well as the details of payment received by it and payment made to other parties as claimed.”

4. Against the above order the assessee appealed before learned CIT(A) and filed elaborate submissions. The learned CIT(A) referred to MOU between the assessee and Balasore Alloys dt. 24th Feb., 2003. The learned CIT(A) deleted the addition by observing as under :

”In view of aforesaid clauses, it is clear that the Balasore Alloys was required to pay Rs. 14 lacs as adjustable advances and Rs. 7 lacs as deposit which was refundable at the time of termination of contract thus totalling Rs. 21 lacs. Thus, out of Rs. 27 lacs acknowledged to have been received by appellant under the said MOU, Rs. 21 lacs were towards adjustable advances/refundable deposits as described above. Apart from said Rs. 21 lacs, Balasore Alloys was required to reimburse cost of factory shed and tubewell/borewell against which the appellant adjusted Rs. 5,54,639.80 against cost of factory shed and Rs. 26,000 against the cost of tubewell. The appellant’s claim of escalation of reimbursement against factory shed to Rs. 5.55 lacs was due to increase in cost is reflected in its books of account. The appellant had not claimed any depreciation on cost of factory shed and tubewell because of reimbursement of cost by Balasore Alloys. The balance amount i.e. Rs. 27 lacs less appropriation towards reimbursement of cost of fixed assets had been shown as liability in the Balance Sheet as at 31st March, 2004. Thus, the receipt of Rs. 27 lacs out of Rs. 34 lacs is fully explained and reconciled and as per clauses of the MOU as reproduced hereinabove, there is no doubt that the receipt of Rs. 27 lacs was in the nature of adjustable advance/refundable deposits and reimbursement against cost of fixed assets.

So far as the claim of Balasore Alloys about the payment of Rs. 7 lacs to third parties on behalf of the appellant is concerned, though the said claim was not acknowledged by the appellant, the whole of Rs. 34 lacs, which includes Rs. 7 lacs claimed to have been given to third parties, categorically accepted to have been given as advances against job charges as is evident from the clarification letter dt. 27th July, 2009 and affidavit dt. 10th Jan., 2011 of the Balasore Alloys. There is nothing on record to dispute the assertion/clarification made by Balasore Alloys in this regard. The rate of TDS @ 2.1 per cent or mentioning of s. 194C in the TDS certificate or TDS return does not go against the claim of payment of Rs. 34 lacs as advance as even in case of advance against job charges, the rate of TDS would be 2.1 per cent and section would be 194C. Once the payment is demonstrated to be advance or deposit or reimbursement of capital cost, there is no question of treating the same as ‘income’ unless the job against which the said advance was given, is performed as the appellant was undisputedly following the mercantile system of accounting. The ultimate repayment of Rs. 25 lacs by the appellant under the arbitration award is also a pointer in this regard. As per affidavit dt. 11th Jan., 2011 of Balasore Alloys Ltd., the non charging, as its revenue expenses of the year under consideration, of Rs. 4 lacs paid by it, also strengthens the view that subject sum was not in the nature of any charges paid for job already performed in the year under consideration. The job performed during the year was already shown as income in the P&L a/c of the appellant. The judgments in CIT v. Coral Electronics (P) Ltd. and K.K. Khullar v. Dy. CIT quoted by the appellant are applicable to the facts of the instant appeal.

So far as issue of claim of TDS of Rs. 70,000 by the appellant and thereby exigibility of sum of Rs. 34 lacs to tax as claimed by AO is concerned, the claim of the AO in this regard is unacceptable. Only because of TDS, the amount on which tax is deducted does not become liable to tax. Sec. 198 nowhere provides so. Sec. 198 covers only the amount of tax deducted and not the entire amount on which tax was deducted. Taxability of a receipt depends upon the accrual or receipt of an amount depending upon the mercantile or cash system of accounting followed by the appellant and not on the claim of TDS made. On the other hand, credit of TDS is allowable only upon showing as income the corresponding amount on which tax is deducted. Furthermore, s. 198 does not override s. 145 which income is computed as per method of accounting regularly employed by the assessee. The claim of TDS by appellant had been admitted to be a mistake but said mistake cannot be so fatal to make the appellant liable to pay tax on the amount not yet accrued as per mercantile system of accounting regularly followed by it. The wrong grant of refund can be rectified by refusing to grant credit of TDS and recover the amount already refunded with due interest. The judgment in ITO v. Sikka International Freight Services (P) Ltd. quoted by the appellant is applicable for this issue. The appellant claimed that it had already deposited the said refunded amount with interest thereon.

It is also noticed that appellant in his submission has explained and reconciled the different figures of Rs. 34 lacs, Rs. 27 lacs and Rs. 28 lacs as pointed out by Tribunal and said reconciliation was explained to AO also by letter dt. 29th Aug., 2011 filed before him and there is no material on record to dispute or disprove appellant’s explanation/reconciliation in this respect.

So far as mentioning of transportation charges’ as nature of payment in the TDS certificate is concerned, the appellant cannot be made liable to tax only because of mistake originally committed by Balasore Alloys which was subsequently clarified/explained by Balasore Alloys itself. There is nothing on record to suggest that any transport vehicle was owned by the appellant or any expenses relating to Income from transportation charges were incurred by it and without any vehicle owned and without any corresponding expenses, how appellant can be said to have earned transportation charges to the tune of Rs. 34 lacs.

In view of the facts and circumstances of the case as discussed above and in law, the appeal on this ground is allowed and thereby the addition made by the AO is directed to be deleted subject to the direction that the Credit for TDS of Rs. 70,000 shall not be allowed to the appellant in the year under consideration.”

Against the above order the Revenue is in appeal before us.

5. We have heard both the counsel and carefully perused the records. We find that assessee in this case has entered into an agreement (MOU) with Balasore Alloys under which the assessee was required to process the chrome ore supplied by Balasore Alloys after setting up required upgradation plant. Under the MOU, Balasore Alloys was required to give certain adjustable advances/deposits to the assessee towards cost of pant and machinery and reimbursement for construction of factory shed, bore well and the office space and accommodation. Accordingly. Balasore Alloys made claim of the following payments towards aforesaid advance/deposits and reimbursements :

(a) Directly to the assessee : Rs. 27,00,000
(b) Paid to third parties : Rs. 7,00,000
Rs. 34,00,000

Out of Rs. 27 lakhs paid directly to the assessee, a sum of Rs. 5,81,083.80 were appropriated by the assessee as reimbursement against the cost incurred for factory shed and borewell and balance amount of Rs. 21,18,916.20 was shown as liability in assessee’s balance sheet as on 31st March, 2004. The job charges done for Balasore Alloys worth Rs. 2,00,616.08 during the year under consideration were shown as income in the P&L a/c of the assessee and said amount was reflected as sundry debtors in the balance sheet of the assessee as on 31st March, 2004. The assessee was following mercantile system of accounting.

Balasore Alloys deducted a sum of Rs. 70,000 as TDS on aforesaid payments and filed TDS return. Initially ‘Balasore Alloys’ showed the nature of payment of Rs. 34,00,000 as ‘transportation charges’ in its TDS certificate for Rs. 70,000 deducted as TDS but by a clarification letter dt. 27th July, 2009 subsequently issued by Balasore Alloys as well as an affidavit by Balasore Alloys sworn on 11th Jan., 2011 it admitted that the TDS was against the advance payment of Rs. 34 lakhs made by them which was to be adjusted against the running bills for conversion charges and due to oversight, the nature of payment was mentioned as ‘Transportation charges’ instead of ‘job work’ in the TDS certificate. On account of disputes between the assessee and Balasore Alloys, Balasore Alloys filed an arbitration petition before Hon’ble Orissa High Court on 29th July, 2005. Ultimately, the assessee had to pay back mutually settled Rs. 25,00,000 under an arbitration award dt. 20th Oct., 2009. The assessee filed before the AO written submission with evidences dt. 2nd June, 2011 as well as a letter dt. 29th Aug., 2011 explaining and reconciling the different amount as pointed out by Tribunal in its order setting aside the issue to the file of AO.

5.1 The above explanation was not found satisfactory by the AO. He proceeded to add again Rs. 34,00,000 as undisclosed income from transportation charges. One of the main reasons cited by the AO was that the assessee failed to reconcile the payment received as per the agreement with Balasore Alloys Ltd. We find that the learned CIT(A) is correct in holding that the assessee has duly explained the entire amount received from M/s Balasore Alloys Ltd. as advances/deposits and reimbursements. The fact that under the arbitration the assessee had to pay Rs. 25,00,000 is also a pointer to the veracity of the assessee’s submissions. The learned CIT(A) has also given a finding that the assessee has duly explained before the AO and gave a reconciliation by a letter dt. 29th Aug., 2011 filed before AO. Nothing has been brought out by the Revenue or the AO to dispute assessee’s explanation/reconciliation in this respect. We agree with the learned CIT(A) that mainly because the transportation charges was mentioned as payment in TDS certificate that cannot be a conclusive evidence that income has accrued to the assessee. The fact that it was a mistake was duly clarified by Balasore Alloys. In these circumstances, in our considered opinion, the assessee has duly explained all the facts necessary. The entire receipt cannot be treated as income. Accordingly, we do. not find any infirmity in the order of the learned CIT(A). Accordingly, we uphold the same.

6. In the result the appeal filed by the Revenue stands dismissed.

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