TaxTMI 
TaxTMI 
2009 (8) TMI 854
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....nt was not an allowable deduction as per the provisions of the Income-tax Act. 2.2 On notice issued in this regard, the assessee submitted before the CIT as under :- "As for the proposal of the Commissioner to disallow the claim of the assessee of interest on delayed payment of withholding of taxes amounting to Rs. 243.50 lakhs, it is presumed that the Hon'ble Commissioner intends to make the disallowance invoking the provisions of section 40(a)( ii) of the Act. In this connection the assessee submits that there was delay in paying withheld taxes to the U.S. Government. The assessee respectfully submits that the power of Assessing Officer to make disallowance under the provision of section 40(a)( ii) of the Act is only in respect of tax payable to the Government of India under the provisions of the Indian Income-tax Act. Section 40(a)( ii) contemplates disallowance only in respect of taxes payable in India and not to any taxes payable outside India under the provisions of Act of any other country. We, therefore, submit that the provisions of section 40(a)( ii) do not confer power to the Assessing Officer to make disallowance of any interest levied and collected by the U.S. Go....
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....n your business is deductible. Penalties : Penalties on underpaid deficiencies and underpaid estimated tax are not interest. You cannot deduct them. Generally, you cannot deduct any fines or penalties." 2.5 The learned counsel of the assessee further submitted a copy of U.S. Department of the Treasury/Internal revenue Service Publication 535 regarding business expenses wherein it was inter alia mentioned that,- "Interest on employment tax deficiency. Interest charged on employment taxes assessed on your business is deductible." Based on these, the learned counsel submitted that the treatment of this interest should be the same as per pronouncement of Indian Courts which is also in agreement with U.S. Laws and, hence, this interest expenditure cannot be disallowed. 2.6 We have carefully considered the issue. A perusal of the records show that assessee had also contended before the learned Commissioner of Income-tax that interest on U.S. withholding taxes is only compensatory in nature and not penal and hence an allowable expenditure. However, the learned Commissioner of Income-tax had not addressed this issue. He held that the assessee's claim of interest on withholdi....
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....ion, the assessee submitted that the amounts pertaining to social security wages and Medicare wages are allowable in computing the assessee company's income. 4.1 We have carefully considered the submissions. We find that by way of the additional grounds, certain important factual aspects relating to the composition of impugned expenditure is now being claimed to be brought on record though the veracity of the same remains to be examined and established. However, in our opinion, the same is crucial and will go to the root of the matter. Hence those grounds are admitted. Since we have already remitted the other matters raised in this appeal to the file of the learned CIT and since these additional grounds were not raised before the learned CIT, we remit them to the file of the learned CIT to consider the same and give a finding. 5. In the result, this appeal filed by the assessee is allowed for statistical purposes. U.B.S. Bedi, Judicial Member. - Despite best persuasion of myself, I have not been able to agree either with the reasoning or conclusion as arrived at by the ld. Accountant Member in his proposed order. So, I write my order as under : 7. This appeal of the ass....
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....an law, therefore, it has rightly been claimed by the assessee and allowed by the Assessing Officer. Therefore, there was no occasion for the ld. CIT to disallow such claim made and allowed by invoking the provision of section 263 of the Act and the order of the ld. CIT should be quashed. 7.3 The ld. DR while relying upon the order of the ld. CIT has strongly pleaded that the assessee is not a foreign company and as per provision to section 40(a)(ii ), tax on income cannot be allowed as deduction and since interest is an accretion to income-tax, therefore, same too cannot be allowed as deduction. The ld. DR further relied upon the decisions of the Bombay High Court as relied upon by the CIT and the provision of section 40(a)(ii ) and pleaded for confirmation of the impugned order. 8. After having heard both the sides, considering the materials on record as well as precedents relied upon by the rival sides, it is found to be an undisputed fact that interest on income-tax payable to U.S. Government has been withheld by the assessee for which interest to the extent of Rs. 243.50 lakhs has been paid and claimed as deduction being provisions of interest on delayed payment of incom....
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....est on which the corpus of the tax amount is enlarged. So, in all these three cases, interest paid has to be regarded as part and parcel of the liability to pay tax. Since any sum paid on account of tax is not deductible under section 40(a)( ii), interest paid under sections 139, 215 and 217 are also not deductible as business expenditure." The Hon'ble Gauhati High Court has concluded the above case as under:- "While coming to the aforesaid conclusion, the Delhi High Court had relied, inter alia, on the decision of the Apex Court in Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 . In that case, the Supreme Court was called upon to decide the question as to whether interest paid by the assessee on the arrears of cess is an allowable revenue expenditure. On the language of section 3(3) of the U.P. Sugarcane Cess Act, 1956, it was held by the Supreme Court that the interest payable under the aforesaid provision was not by way of penalty inasmuch as the section stated that "Any arrear of cess not paid on the date prescribed under sub-section (2) shall carry interest of 6 per cent per annum from such date to date of payment". As to this type of interest which was stated to ....
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....ctible under the Act in view of what has been stated in section 40(a)( ii), interest on it would also not be deductible." 8.4 In authoritative pronouncement of the Hon'ble Supreme Court of India in the case of Smith Kline & French (India) Ltd. v. CIT [1996] 219 ITR 581, while discussing the scope of section 40(a)( ii) in the case of a company in which surtax is levied on profit of the company it has been held that surtax is not deductible under section 40(a)( ii) as under :- "Section 40 of the Income-tax, 1961, opens with a non obstante clause 'notwithstanding anything to the contrary in sections 30 to 39', which means that even if any amount is entitled to deduction under any of the provisions contained in sections 30 to 39, it will be disallowed if it falls, inter alia, within sub-clause (ii) of clause (a) of section 40. Sub-clause (ii) of clause (a ) of section 40 states that any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of any such profits or gains, will not be deductible." 8.5 While following the decision of Hon'ble Supreme Court in the case of Smith Kli....
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....come-tax Act. His action in view of ratio of various decisions and discussion, as held above, is liable to be upheld. 10. So far as assessee's plea/attempt to file/get admitted some fresh unsigned and unauthenticated evidence/papers is concerned, the same cannot be accepted/admitted, as assessee has not been able to show as to how such plea/attempt is justified, when no application under Rule 29 of ITAT Rules has been filed and such documents are only signed by the assessee. As such, these unsigned and unauthenticated papers, are not admitted and would be ignored for the purpose of this appeal and shall not form part of appeal record. As regards, request for admission of additional grounds is concerned, the same is found to raise a plea to bifurcate nature of tax based on unsigned and unauthenticated papers, which have not been admitted and cannot form part of the record as held above. Therefore, the plea for admission of additional grounds cannot be accepted. Moreover, invocation of provision of section 263 envisages record available before the Commissioner at the time of initiating such action and plea being raised now has never been raised earlier before ld. Commissioner. As ....
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....section 263 should be upheld or the matter including the additional grounds should be remitted to him? [by Accountant Member] 2. The facts have been stated in the orders of the dissenting Members. However, in order to bring the controversy to sharp focus, I wish to briefly narrate them. 3. The assessee is an Indian company engaged in manufacture of computers and development of software. In the return of income, it claimed deduction in respect of Rs. 243.50 lakhs as interest on delayed payment of withholding taxes. The assessee had made payments to its employees working in its office in USA, from which it had made deduction for taxes, etc., which had to be deposited with the US Government. Since there was a delay in making the deposit, interest was payable by the assessee, which came to the above figure. The claim was allowed in the assessment completed under section 143(3) of the Income-tax Act by order dated 31-3-2005. Subsequently, the CIT took proceedings for revision under section 263 of the Act by notice dated 5-3-2007 in which he opined that the interest was merely provided for and not actually paid and, therefore, the Assessing Officer ought to have disallowed the same....
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.... a deduction, the interest paid for delayed payment thereof cannot also be allowed as deduction. In this view of the matter the CIT held that the assessment order was erroneous and prejudicial to the interest of the revenue and directed the Assessing Officer to modify the assessment by disallowing the interest claim. 5. The assessee filed an appeal before the Tribunal against the order of the CIT. The ld. Accountant Member who passed the leading order came to the following findings :- (a)The CIT has not addressed the question whether the interest on US withholding taxes was only compensatory in nature as contended before him by the assessee. (b)The assessee has produced certain papers before the Tribunal in the course of hearing which refer to the laws in USA under which such interest is claimed to be allowable as business expenditure as it was not penal in nature. (c)Since this specific issue has not been considered by the CIT, the matter should be remitted to his file for fresh consideration having regard to the laws in USA and the authorities cited on behalf of the assessee. (d)The CIT has also not considered the alternative claim that in any case the assessee's i....
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.... any other provision in support of the claim for deduction. On the basis of the above findings, the ld. Judicial Member upheld the order of the CIT. As regards the additional grounds and the extracts from the US Tax Laws filed by the assessee before the Tribunal in the course of hearing, the ld. Judicial Member, differing from the ld. Accountant Member held that (a) the papers were unsigned and unauthenticated and therefore cannot be accepted, (b) there is no application from the assessee under Rule 29 of the ITAT Rules, and (c) the additional grounds raised a plea to bifurcate the tax based on unsigned and unauthenticated papers and, therefore, cannot be admitted. In this view of the matter, the plea for admission of additional grounds were rejected and the papers filed by the assessee before the Tribunal, containing extracts of US Tax Laws, were not admitted as evidence. Eventually the ld. Judicial Member upheld the order of the CIT and dismissed the appeal filed by the assessee. 7. This is how the matter was referred to me as Third Member. I have considered the facts, the dissenting orders and the rival contentions. At the outset, I wish to make it clear that the taxes paid b....
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....after they have been earned, and to reject the assessee's claim on that basts. The ld. Judicial Member also, with respect, seems to have proceeded on the same basis. The ld. CIT-DR submitted before me that this point was not raised before the CIT in proceedings under section 263. I am however unable to accept the submission because the order under section 263 itself refers to "withholding taxes paid in USA" and from this, it was clear that the taxes payable were not those levied on the assessee's income earned there. The CIT has referred to the general principle that taxes are not allowable as deduction and the law does not differentiate between the raxes paid to Indian Government or the US Government (see paragraph, 4-1.5 of his order). This shows that he was proceeding on the basis that the taxes deducted and paid by the assessee are those levied on its income and since they are not allowed as deduction, the interest is also not allowable. He has also referred to the decision of the Bombay High Court in Inder Singh Gill's (supra). The factual position however, is that the assessee had deducted the taxes from the payments made to its employees in USA and these taxes were deposited....
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....nemployment tax and, therefore, the additional grounds were prepared and filed. It appears to me that the ld. Accountant Member was justified in admitting the additional grounds filed in the above circumstances. The additional grounds have been signed by the Director of the assessee-company and the accompanying documents showing the break up of interest was also so signed. I do not, therefore, see any infirmity in the additional grounds being admitted. The assessee was required to make various deductions from the payments made to the employees. Part of it was for federal and State taxes; the assessee also had to deduct the welfare payments such as social security, medicare and State unemployment tax from the amounts paid to the employees. These were not deductions of taxes but were deductions made in respect of the welfare payments such as we have in India in the form of contribution to ESI, PF etc. The additional grounds gain importance because it would be a matter for argument as to whether interest paid for delayed deposit of the welfare payments deducted from the payments made to the employees can be allowed as a deduction. In any case, the break up gives the factual picture of....
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.... do not find any requirement therein that there should be a formal written application before the Tribunal for admission of the additional evidence. These are rules of procedure and, in a fit case, and depending on the circumstances, it would be open to the Tribunal to admit additional evidence when it is produced in Court and an oral application is made. I do not think that there is any hard and fast rule in this behalf and it should be left to the discretion of the Bench. I am unable to say that the ld. Accountant Member exercised such discretion improperly. Rule 29 permits the Tribunal to admit the additional evidence for any substantial cause. Apparently, the ld. Accountant Member has admitted the additional evidence on this ground with which I am unable to disagree. The intention behind the Rule is that substantial justice should be done and the interest of justice should be the overriding consideration. Having this in mind I hold that there is no error in the ld. Accountnat Member admitting the additional evidence and sending it to the CIT for examination and decision. 11. So far as the main issue is concerned, that is regarding the allowability of the interest, I am unabl....