2016 (5) TMI 161 - AT - Income Tax

Tribunal dismisses AO's appeals on disallowances under Income Tax Act sections. Distribution costs disallowed.

The Tribunal dismissed the Assessing Officer's appeals on disallowances under Sections 40A(2)(b) and 40(a)(i) of the Income Tax Act. The disallowance of ... Disallowance under section 40A(2)(b) - Held that:- There is categorical finding by the CIT(A) that the assessee and Walt Disney India are no covered by the definition of ‘specified person’ under section 40A(2)(b). Not only these two entities, i.e. the assessee and Walt Disney India, have no shareholdings in each other, directors of none of these companies hold any shares in any of these companies. There is no question of the requirement of holding at least 20% of normal dividend earning shares in the companies in which substantial interest can be said to have been held. These two companies are owned by different shareholders- while 100 % shareholding in the assessee company is held by Walt Disney Co (Southeast Asia) Pte Ltd Singapore, 99.99% of shares in Walt Disney India are held by a USA based company by the name of Disney Enterprises Inc, USA. The requirements of Section 40A(2)(b) is not fulfilled. TDS u/s 195 - applicability of TDS - incidence of tax - Held that:- Assessing Officer has not even disputed that the amounts paid by the assessee resulted in a taxable income in the hands of the recipient, but he has justified the disallowance on the ground that earlier the assessee was deducting tax at source from such payments and that the assessee did not obtain certificate under section 195(2). As for tax deductions at past, it is wholly irrelevant in examining legal obligations of the assessee. What is material is whether the assessee had the obligation to deduct tax at source or not, and unless the assessee had the obligations to do so, his actions as a measure of abundant caution in the past would not put him under obligation to do so in future as well. There is no estoppel against the statute. As for the question of approaching the tax authorities under section 195(2), the law is now well settled by Hon’ble Supreme Court in the case of GE India Information Technology Centre Pvt Ltd Vs CIT [2010 (9) TMI 7 - SUPREME COURT OF INDIA ] which holds that unless the recipient of income has a tax liability in respect of such payments, the person making the payment cannot be saddled with the tax deduction liability just because he did not approach the tax authorities under section 195(2). The grievances raised by the Assessing Officer are thus devoid of any legally sustainable merits. Disallowance with respect to distribution costs - CIT(A) delted the disallowance - Held that:- Learned CIT(A) rightly holds, in his well reasoned and speaking order, the mere fact of wrong characterization does not imply that no services were rendered by the respective vendors. The error committed by the assessee’s staff was of no consequences so far as deductibility of these amounts were concerned. The invoices have been wrongly characterized in the heads is more of a procedural mistake rather than a legally sustainable reason for resorting to disallowance of the expenses concerned Disallowance on account of non reconciliation of ITS details - Held that:- We are of the considered view that the matter is required to be remitted to the file of the Assessing Officer for adjudication de novo by way of a speaking order and in accordance with the law. The nature of ITS detail, which is not reflected in the books of the assessee, needs to be set out and the assessee be asked to explain the particular entries which are not so reflected in the books of accounts. The non reconciliation of ITS detail can only be a starting point of exploring the matter further with respect to making the additions in respect of the revenues which are not accounted for but just because there is some reconciliation difference, the amount of difference cannot be added to income of the assessee. In any event, these inputs are to be dealt with on merits of each input and the explanation of the assessee is to be taken into account for that purpose. Keeping in view these discussions, as also bearing in mind entirety of the case, the matter stands restored to the file of the Assessing Officer on this point. Disallowance of entire dubbing cost - Assessing Officer has virtually treated it as a deferred revenue expenditure by amortizing it over the period of licence of that program - ‘matching principle of income and expenditure’ - Held that:- While the argument of the learned counsel that there is no concept of deferred revenue expenditure, and, as such, once an expenditure is revenue expenditure, it should be allowed in the year in which the expense is incurred, does indeed seem very attractive at the first blush, it may not hold good in the present case. It is a case in which entire useful period, during which the assessee will reap the fruits for investment in the dubbing costs, is known at the point of time when expenses are incurred. The period for which the assessee holds the licence to use the program is known with precision. The benefit of dubbing the program will be available at least for this period. Period over which the benefits will be enjoyed by the assessee is clearly established. The dubbing costs should indeed be, therefore, amortized over this period. In this view of the matter, we see no infirmity in the stand of the authorities below. We confirm the order of the CIT(A) on this point and decline to interfere in the matter. Issues Involved:1. Disallowance under Section 40A(2)(b) of the Income Tax Act.2. Disallowance under Section 40(a)(i) of the Income Tax Act.3. Disallowance of distribution costs.4. Addition on account of non-reconciliation of ITS details.5. Non-allowance of dubbing costs in entirety.Issue-wise Detailed Analysis:1. Disallowance under Section 40A(2)(b) of the Income Tax Act:The Assessing Officer (AO) disallowed Rs. 96,00,000 paid to Walt Disney Company (India) Limited under Section 40A(2)(b) on the grounds that the expenditure was excessive and unreasonable. The CIT(A) deleted this disallowance, stating that the provisions of Section 40A(2)(b) did not apply as the assessee and Walt Disney India were not 'specified persons' under the section. The Tribunal upheld the CIT(A)'s decision, noting that the companies did not meet the criteria of 'substantial interest' as defined in Section 40A(2)(b). The AO's reliance on the notion of group entities without fulfilling the specific conditions was deemed indefensible, referencing the case of CIT Vs VRV Breweries & Bottling Industries Ltd. Thus, the Tribunal dismissed the AO's appeal on this ground.2. Disallowance under Section 40(a)(i) of the Income Tax Act:The AO disallowed Rs. 70,94,817 for non-deduction of tax at source on payments, despite the assessee's reliance on the Tribunal's decision in DCIT Vs Panamsat International Systems Inc. The CIT(A) deleted the disallowance based on the Delhi High Court's judgment in Asia Satellite Telecommunications Ltd Vs DIT, which held that payments for transponder hire were not taxable in the hands of the recipients. The Tribunal upheld the CIT(A)'s decision, emphasizing that the assessee had no obligation to deduct tax at source if the recipient had no tax liability, as established by the Supreme Court in GE India Information Technology Centre Pvt Ltd Vs CIT. The AO's appeal was dismissed on this ground as well.3. Disallowance of Distribution Costs:The AO disallowed Rs. 16,83,689 based on the auditor's report indicating misstatement or improper categorization of vendor invoices. The CIT(A) deleted the disallowance, clarifying that the misstatement did not imply non-provision of services by the vendors. The Tribunal agreed with the CIT(A), noting that the procedural mistake of incorrect categorization did not justify the disallowance of expenses incurred wholly and exclusively for business purposes. The AO's appeal on this ground was dismissed.4. Addition on Account of Non-Reconciliation of ITS Details:The CIT(A) confirmed the addition of Rs. 46,89,670 due to non-reconciliation of ITS details. The Tribunal remitted the matter to the AO for a de novo adjudication, emphasizing the need to set out the nature of ITS details not reflected in the books and to allow the assessee to explain the entries. The Tribunal allowed this ground for statistical purposes.5. Non-Allowance of Dubbing Costs in Entirety:The AO amortized the dubbing costs of Rs. 1,37,94,885 over the license period of the program, treating it as deferred revenue expenditure. The CIT(A) upheld this treatment, applying the 'matching principle of income and expenditure.' The Tribunal confirmed the CIT(A)'s decision, referencing the Supreme Court's observations in Madras Industrial Investment Corpn. Ltd. vs. CIT, which justified spreading the expenditure over the period of benefit. The assessee's appeal on this ground was dismissed.Conclusion:Both appeals filed by the AO were dismissed. The appeal filed by the assessee was partly allowed for statistical purposes, specifically remanding the issue of non-reconciliation of ITS details to the AO for fresh adjudication. The Tribunal's decisions were pronounced on March 31, 2016.