2016 (4) TMI 524 - AT - Income Tax

Tribunal overturns tax disallowance and notional interest income, ruling in favor of appellant

The Tribunal allowed the appeal, overturning the disallowance of Rs. 71,519 under Section 40(a)(ia) for non-deduction of tax at source on payments to C ... Section 40(a)(ia) disallowance for non-deduction of tax at source - Section 194C applicability to payments to clearing and forwarding agents - Reimbursement of expenses versus taxable payment - privity of contract - Threshold exemption for deduction under Section 194C - Notional interest on interest free advances and deemed income - Presumption of deployment of owned funds and diversion of borrowed fundsSection 40(a)(ia) disallowance for non-deduction of tax at source - Section 194C applicability to payments to clearing and forwarding agents - Reimbursement of expenses versus taxable payment - privity of contract - Threshold exemption for deduction under Section 194C - Whether the expenditure of Rs. 71,519 paid to the clearing and forwarding agent could be disallowed under Section 40(a)(ia) for non-deduction of tax at source under Section 194C. - HELD THAT: - Tribunal found that Rs. 67,297 of the total payment constituted reimbursement of air freight, insurance and postage paid to third party carriers (airlines) and not remuneration or service income of the clearing and forwarding agent; such reimbursements fall outside the ambit of Section 194C because of privity of contract and the established position that mere reimbursement of expenses to an agent for payment to a carrier does not attract TDS. The Tribunal relied on the reasoning in the decision of the Hon'ble Delhi High Court in CIT v. Opera Global Private Limited (as discussed in the order) and on Circular No. 715/1995 which distinguishes travel/airline ticketing and reimbursements from contractual carriage by an independent contractor. The Tribunal held that the separate element of agency/service charges of Rs. 4,222 constituted the clearing/forwarding agent's remuneration but that amount fell below the threshold for deduction under Section 194C. On these factual findings that the larger sum was pure reimbursement and only a small component was below the TDS threshold, there was no liability on the assessee to deduct tax and accordingly no basis to invoke Section 40(a)(ia); the AO's disallowance was therefore deleted.Disallowance of Rs. 71,519 made under Section 40(a)(ia) was deleted and the CIT(A) order confirming the disallowance was set aside.Notional interest on interest free advances and deemed income - Presumption of deployment of owned funds and diversion of borrowed funds - Whether notional interest on interest free loans advanced by the assessee should be charged as income, or alternatively whether proportionate disallowance of interest deduction is warranted by diversion of borrowed funds. - HELD THAT: - The AO had treated the interest free advances as giving rise to notional interest income and made an addition. The CIT(A) held that addition of notional interest per se is not permissible under the Act but directed the AO to examine and, if necessary, make a proportionate disallowance out of interest claimed under Section 36(1)(iii) where there is diversion of borrowed funds to interest free advances. On facts the Tribunal found that the assessee's owned funds (capital) substantially exceeded the interest free advances outstanding, giving rise to the presumption that the advances were made out of owned (interest free) funds. Applying the jurisdictional High Court precedents relied upon by the Tribunal, the presumption supported deletion of the notional interest addition. Consequently, the addition made as notional interest was deleted.Addition of notional interest of Rs. 118,000 was deleted on the finding that advances were made out of owned funds and no deemed interest income arose.Final Conclusion: The appeal for Assessment Year 2008 09 is allowed: the disallowance under Section 40(a)(ia) in respect of reimbursements to the clearing and forwarding agent is deleted, and the addition on account of notional interest on interest free advances is also deleted. Issues Involved:1. Applicability of Section 40(a)(ia) of the Income Tax Act, 1961 concerning non-deduction of tax at source on payments made to C & F agents.2. Addition of notional interest as income under the head 'income from other sources.'Issue-wise Detailed Analysis:1. Applicability of Section 40(a)(ia) concerning non-deduction of tax at source on payments made to C & F agents:The assessee's sources of income included house property, business, and other sources. The AO observed that the assessee made a payment of Rs. 71,519 to a C & F agent without deducting tax at source, which should have been done under Section 194C of the Act. Consequently, the AO disallowed the expenditure under Section 40(a)(ia) and added it to the total income.The assessee contended before the CIT(A) that the provisions of Section 40(a)(ia) apply only to amounts payable at the end of the year and not to amounts already paid. Additionally, the assessee argued that a significant portion of the payment was for reimbursement of expenses (air freight and insurance) and not subject to TDS. The CIT(A) rejected these arguments, distinguishing the cited case laws and confirming the AO's action.On appeal, the Tribunal noted that Rs. 67,297 out of the total payment was for reimbursement of air freight and insurance charges, which are not subject to TDS as per the Delhi High Court's decision in CIT v. Opera Global Private Limited. The Tribunal held that these reimbursements are excluded from the provisions of Section 194C, as they do not include any element of commission or service charges. Consequently, the disallowance of Rs. 71,519 was deleted, allowing the assessee's appeal on this ground.2. Addition of notional interest as income:The AO observed that the assessee had taken loans on which interest was paid and had also given interest-free loans to two parties. The AO added notional interest of Rs. 118,000 as income under 'income from other sources,' reasoning that a prudent businessman would charge interest on such loans.The assessee argued before the CIT(A) that the loans were given out of own resources for purchasing land and constructing a residential house, and no interest-bearing funds were diverted. The CIT(A) upheld the AO's decision, directing a proportionate disallowance of interest claimed under Section 36(1)(iii) based on the principle that borrowed funds should be used for business purposes.On further appeal, the Tribunal found that the assessee had sufficient own funds (capital) to cover the interest-free loans given. Citing the Bombay High Court's decisions in CIT v. Reliance Utilities and Power Limited and CIT v. HDFC Bank Limited, the Tribunal presumed that the interest-free loans were made from the assessee's own funds. Therefore, the addition of notional interest was deleted, allowing the assessee's appeal on this ground.Conclusion:The appeal filed by the assessee was allowed, with the Tribunal deleting the disallowance of Rs. 71,519 under Section 40(a)(ia) and the addition of Rs. 118,000 as notional interest income. The Tribunal's decision was pronounced in the open court on 11th April 2016.