2014 (3) TMI 1016 - AT - Income Tax

ITAT rules in favor of assessee, dismissing Revenue's appeal. TDS not required until payment. Consultancy charges are revenue expenditure.

The ITAT upheld the CIT(A)'s decisions in both issues, ruling in favor of the assessee and dismissing the Revenue's appeal in its entirety. The first ... TDS u/s 194H - Addition made on account of dealers commission - failure to deduct TDS on such commission - CIT(A) deleted the addition - Held that:- The amount credited by the assessee is to the provision account and not to the respective agent's accounts. Therefore, it is clear that the assessee has not made any payment to the agents. The provisions of sec.194H would apply when the payments are made to the agents or credited to the agent's accounts, whichever is earlier, and not when the payment is credited to the provision account. As rightly pointed out by the learned counsel for assessee, the agents would get vested right to receive the commission only when they fulfill the obligations under the agreement for commission. We find that the CIT(A) has properly appreciated the issue before deleting the addition made by the AO. In view of the same, we do not see any reason to interfere with the finding of the CIT(A) on this issue - Decided against revenue. Addition made on account of consultancy charges - according to the Revenue, this expenditure is capital in nature and has to be allowed u/s 35D while CIT(A) has allowed it as revenue expenditure - Held that:- The consultancy fees paid by the assessee to M/s.Mckinsey & Co., is to cause a study and prepare a strategy to reduce the cost of production by the assessee. Thus, in effect, profitability of the assessee has increased. As rightly observed by the CIT(A), any strategy for improved costing or improved sale would always yield enduring benefit. Though enduring benefit is one of the criterion to hold an expenditure to be capital in nature, it is not the only criterion to hold it to be so. While considering the nature of expenditure to be capital or revenue, the test to be applied is also whether there is any new asset being created and whether it is giving enduring benefit. As rightly pointed out by the CIT(A), no new asset has come into existence and the study is only for improving the sales and profitability of the assessee. Therefore, in our opinion, the expenditure is clearly revenue in nature and hence, there is no reason to interfere with the order of the CIT(A) on this issue also.- Decided against revenue. Issues involved:1. Deletion of addition on account of dealers commission for failure to deduct TDS.2. Treatment of consultancy charges as revenue expenditure.Issue 1: Deletion of addition on account of dealers commission for failure to deduct TDS:The appeal by the revenue challenged the deletion of addition made on account of dealers commission for failure to deduct TDS. The assessee explained that the provision for commission was made based on sales made during the year and that TDS was made when commission payments were actually made in the subsequent year. The AO disallowed the amount under sec.40a(i)(a) for failure to comply with TDS provisions. The CIT(A) held that until the amounts were credited to the respective parties' accounts, the provisions of sec.194H were not attracted, and hence, deleted the addition. The Revenue contended that sec.194-H required TDS when commission or brokerage was credited, citing relevant case law. The assessee argued that since the conditions for commission payment were not fully met by the end of the financial year, TDS was not required until the commission was credited to the party's account. The ITAT upheld the CIT(A)'s decision, noting that the commission was credited to the provision account and not to the agents' accounts, therefore TDS was not applicable until actual payment was made.Issue 2: Treatment of consultancy charges as revenue expenditure:The second issue involved the treatment of consultancy charges as revenue expenditure. The AO treated the consultancy charges paid by the assessee for a study report as capital expenditure, providing enduring benefit, and amortized it over five years. The CIT(A) disagreed, stating the expenditure was for cost reduction initiatives, not creating a new asset, and hence not subject to sec.35D. He relied on case law to support his decision. The Revenue appealed, arguing that the consultancy fees resulted in increased profitability, constituting capital expenditure. The ITAT, after considering both parties' contentions, agreed with the CIT(A), emphasizing that the study aimed at improving sales and profitability without creating a new asset. The ITAT concluded that the expenditure was revenue in nature, aligning with the CIT(A)'s decision, and dismissed the Revenue's appeal.In conclusion, the ITAT upheld the CIT(A)'s decisions in both issues, ruling in favor of the assessee and dismissing the Revenue's appeal in its entirety.