Margadarsi Chit Fund Private Limited, ... vs Assessee

ITA Nos.1620 and 1564 of 2013 Margadarsi Chit Fund (P) Ltd Hyderabad.

IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad 'A' Bench, Hyderabad

Before Shri P.M. Jagtap, Accountant Member and Smt.Asha Vijayaraghavan, Judicial Member

ITA No.1620/Hyd/2013 (Assessment year: 2010-11)

Dy. Commissioner of Income Vs. M/s. Margadarsi Chit Tax, Circle 16(2) Fund Private Limited Hyderabad Hyderabad PAN: AABCM 4751 G (Appellant) (Respondent) ITA No.1564/Hyd/2013 (Assessment year: 2010-11)

M/s. Margadarsi Chit Fund Vs. Dy. Commissioner of Private Limited Income Tax, Circle 16(2) Hyderabad Hyderabad PAN: AABCM 4751 G (Appellant) (Respondent)

Department by: Smt. G. Aparna Rao, DR Assessee by: Shri K. Gopal Rao, Advocate

Date of Hearing: 27/01/2015 Date of Pronouncement: 11/02/2015

ORDER

Per Smt. Asha Vijayaraghavan, J.M.

These are cross appeals by the Department and the assessee against the order of the CIT (A)-V Hyderabad, dated 30.08.2013, passed for A.Y 2010-11.

2. Brief stated, the assessee company is engaged in the business of running chit fund besides other things. For the A.Y 2010-11 the assessee company filed its return of income on 13.10.2010 admitting total income of Rs.99,26,19,487. The AO completed the assessment u/s 143(3) of the Act and determined

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the total income at Rs.460,69,81,030/- after making certain disallowances.

3. On appeal, the CIT (A) deleted the addition towards dividend/interest paid without making TDS u/s 40(a)(ia) of the Act. The CIT (A) held that the dividend paid by the assessee company to various chit members was not in the character of the interest payment and therefore, the provisions of section 194 of the Act was not applicable to the assessee. He held that no liability was found on the part of the assessee to deduct chit fund dividend and consequently applicability of section 40(a)(ia) of the Act is incorrect. The Department has agitated this issue in Ground Nos. 2, 3 and 4 which are as follows:

"2. The ld CIT (A) erred in deleting the addition made towards dividend/interest paid in subscription falls within the ambit of section 194H whether paid directly or indirectly and failure to deduct tax at source calls for disallowance u/s 40(a)(ia) of the Act.

3. The ld CIT (A) erred in directing to delete the addition made towards dividend/interest as subscribers pay the subscription amount as per the highest bidder. The profit is earned by others at the cost of highest bidder i.e. the bidder pays the interest as he needs the money most and other subscribers enjoy interest through the assessee company.

4. The ld CIT (A) erred in deleting the addition made towards dividend/interest paid in subscription when the assessee is treating the highest bidder as debtor and earning interest".

4. We find that this issue has been decidd by the ITAT in the assessee's own case for A.Y. 2005-06 in ITA No.1553/Hyd/2010 dated 24th September, 2014 wherein it has been held as follows:

"15. Now, we shall take the Revenue's appeal, being ITA No.1553/Hyd/2010, which involves a solitary issue relating to deletion by the learned CIT(A) of the disallowance of

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Rs.188.44 crores made by the Assessing Officer under S.40a(ia) of the Act, on account of dividend paid by the assessee company to its chit subscribers without deduction of tax at source, treating the same as expenditure in the nature of interest.

16. We have heard the arguments of both the sides and also perused the relevant material on record. As agreed by the learned representatives of both the sides, the issue involved in the appeal of the Revenue is squarely covered in favour of the assessee by the decision of the coordinate bench of this Tribunal in assessee's own case for assessment year 2008-09 rendered vide order dated 24.2.2012 in ITA No.973/Hyd/2011, wherein a similar disallowance made by the Assessing Officer was held to be unsustainable, following the decision of the Madras high Court in the case of Bilahari investments (P)Ltd.(288 ITR 39), wherein it was held that the dividend distributed by the assessee did not part-take the character of interest and consequently, the assessee was not liable to deduct tax at source. The said decision of the Tribunal rendered in assessee's own case for assessment year 2008-09 has been upheld by the Hon'ble Andhra Pradesh High Court vide its judgment dated 10th July, 2013 passed in ITTA No.228 of 2013 and even the SLP filed by the revenue against the order of the Hon'ble Andhra Pradesh High Court has also been dismissed by the Hon'ble Supreme Court recently on 30th July, 2014 in Petition for Special leave to Appeal (C) No.9457/2014. Respectfully following these judicial pronouncements in assessee's own case on similar issue, we uphold the impugned order of the learned CIT(A), deleting the disallowance made by the Assessing Officer under S.40a(ia) on account of dividend paid by the assessee to the chit subscribers for non-deduction of tax at source and dismiss the appeal of the Revenue".

5. Respectfully following the above decision, we dismiss the Departmental grounds of appeal on this issue.

6. The next issue is with respect to proportional disallowance of expenses amounting to Rs.18,87,903. The following reasons were given by the A.O:

"5.1 On going through information submitted by assessee company, it is observed that different offices of assessee company have made collections on behalf of its subsidiary companies. In this connection the assessee company was asked to explain why proportionate expenses should not be disallowed as

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the expenditure is not incurred in connection with assessee's business. In response to this assessee submitted that these collections are very meager and it is only a mutual help amongst holding and subsidiary companies in furthering their business. IN this connection the assessee company relied on decision of Hon'ble Supreme Court in the case of SA Builders Ltd v. CIT (2007) 288 ITR 1. On going through the decision it is observed that the decision is in the context of allowance of interest whereas facts of the present case are different and hence not considered and proportionate expenditure of net collections made by assessee company is worked out as under:

Net subscriptions collected by M/s 4,11,93,126 Margadarsi Chit Fund Pvt. Ltd Total expenditure as per Profit & Loss 120,81,98,504 account Total Turnover of the company 2636,23,00,000 Proportionate disallowance 120,81,98,504 x 4,11,93,126/2636,23,00,000 = 18,87,903"

7. The assessee stated during appeal proceedings that it is not just the assessee company which makes certain collections on behalf of the other group companies, but the other group companies also reciprocate. However, it was stated that the AO had made the disallowance proportionate to the entire expenditure debited to the P&L a/c. It was submitted that if at all proportional disallowance was to be made, it was to be made from the subscription expenses and not from the entire expense.

8. The CIT (A) held that a very small portion of expense can actually be imputed to collection of subscriptions for other group companies and the entire expenditure of Rs.120.00 crores

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cannot be proportionately allocated as it is only the staff in certain branches who would be collecting such subscriptions along with their own work. The CIT (A) observed that such expenditure cannot be clearly discerned from P&L a/c and hence restricted the disallowance to Rs.2.00 lakhs as expenditure on collection of subscription for other group companies. Aggrieved, Revenue has raised Ground 5 as follows:

"Ground No. 5. The CIT (A) ought to have confirmed the addition regarding proportionate expenses disallowed as the expenditure which is not incurred in connection with assessee's business"

9. The ld DR stated that the order of the CIT (A) was not based on proper reasoning, while the ld Counsel relied on the order of the CIT (A).

10. We heard both the parties. We find that the AO has wrongly disallowed proportionate expenditure from the entire expenditure debited to the P&L A/c. As submitted by the assessee, proportionate disallowance is to be made from only subscription expenses. The CIT (A) has rightly held that some amount has to be disallowed being expenditure of collection of subscription for other group companies. Since it was stated that certain staff in particular branches were collecting subscription along with their own work.

11. We do not find any infirmity in the CIT (A)'s disallowing meager expenditure of Rs.2.00 lakhs only, as a very little expenses would be actually deployed for collection of subscription from other group companies. Collection was done

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as minor additional work along with their regular employment. We confirm the order of the CIT (A) on this issue.

11.1 In the result, the Revenue appeal is dismissed.

ITA No.1564/Hyd/2013 - Assessee's Appeal 12. The assessee has come up on appeal on the disallowance made by the AO u/s 40(a)(ia) for non deduction of taxes on the payment made by the assessee to M/s Ushakiron Movies Ltd of Rs.52,12,366. AO made the addition by giving the following reasons:

"4.1 Non deduction of taxes on payments made to M/s Usha Kiron Movies Ltd.

During the course of assessment proceedings, it is observed that the assessee company has made different payments to M/s Ushakiron Movies Ltd. Out of these payments, TDS is made on some of the payments whereas TDS is not made on some other payments. During financial year 2008-09, it is observed that the assessee company has made a payment of Rs.1,36,88,882 to M/s Ushakiron Movies Ltd on which no tax is deducted at source. In this connection, the assessee company asked to explain why these payments should not be disallowed as these payments are made towards composite contract entered into with M/s Ushakiron Movies Ltd. In response to this the assessee company replied that these payments made to M/s Ushakiron Movies Ltd amounting to Rs.52,12,366 will not attract TDS as most of the head of accounts invoices include VAT which were treated as purchases in nature. Further it is submitted by the assessee that all payments are made as per MoU entered by both parties.

On verification of MOU it is observed that M/s Movies Ltd has to provide marketing services to M/s Margadarsi Chit Fund Pvt Ltd for the purpose of commercial exploitation of the various facilities created in film city. In this MOU there is a clause as per which M/s Margadarsi Chit Fund Pvt Ltd has to reimburse all the charges/costs for utilizing

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infrastructural facilities. This clearly shows that all the payments made by M/s Margadarsi Chit Fund Pvt Ltd to M/s Ushakiron Movies Ltd is as per this MOU. Out of these payments some are subjected to TDS in thepretext of purchases. This is not acceptable. Because all the payments are made in connection with a composite contract with M/s Ushakiron Movies Ltd in connection with marketing of various facilities created in film city. Hence irrespective of nature of each payment, all the payments should have subjected to TDS. In this connection it is relied on Hon'ble Supreme Court decision in case of Chatturbhuj Vithaldas Jasari v. Moreshwar Parashram (1954) AIR 1954 S.C 236. In this case Hon'ble Apex Court opined as under:

"When a contract consists of a number of terms and conditions, each condition does not form a separate contract but is an item in the one contract of which it is a part. The consideration for each condition in a case like this is the consideration for the contract taken as a whole. It is not split up into several considerations apportioned between each term separately".

In view of the above, it is very clear that the assessee company defaulted in deducting tax on payments of Rs.52,12,366 made to M/s Ushakiron Movies Ltd. Hence the same is disallowed u/s 40(a)(ia) and added to the income returned"

13. During the appellate proceedings, the assessee stated that the payments in question, did not require deduction of TDS as they did not fall under any section of the Income Tax Act.

14. The CIT (A) held as follows:

"That section 194C of the Act states that all the payments made to contractors with respect to any comprehensive contract are subjected to TDS. In this regard the AO has rightly observed that there is memorandum of understanding (MOU) between the appellant and M/s Ushakiron Movies. As per this MOU, the appellant obtains marketing services from M/s Usha Kiron Movies for the purpose of commercial exploitation of various facilities created in film city. AO has investigated the issue and has categorically observed that all payments made are

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on account of this contract or MOU. The CIT (A) agreed with the AO that the appellant makes all payments as a part and parcel of this comprehensive contract. Therefore, it can choose to make one comprehensive payment or breakup the marketing services into various parts and then make the payment. The essence and nature of the contract or payment does not change. For example, the appellant has made a payment of Rs.32,81,230 on water charges for gardens. On this payment, TDS has not been deducted as the appellant claims that this was a purchase of water. The appellant's explanation is not the correct interpretation because M/s Usha Kiron Movies is neither is a seller or reseller of water. The MOU is comprehensive in that it provides for payments with regard to all of marketing services. Obviously M/s Ushakiron Movies will have some expenses pertaining to marketing services. By artificially breaking up the marketing service expenses into reimbursement of expenses and other payments, the nature of the payment made by the appellant does not change. For example, if there is a contract for construction, TDS is to be deducted on the entire payment made to the contractor. If the contractor artificially breaks up the payment into reimbursement of expenses on cement, labour, steel etc and the balance amount not connected to materials, it is nothing but a methodology for non deduction of TDS. In the same way, the appellant cannot artificially break up the contract into TDS vs. non-TDS components. The contract with M/s Ushakiron Movies was for providing marketing services and all components are part and parcel of this contract. Hence, the CIT(A) agreed with the AO and confirmed the addition of Rs.52,12,366 u/s 40(a)(ia) of the Act".

15. On appeal before us, the ld Counsel for the assessee filed petition to admit additional evidence under Rule 29 of the I.T. Rules which read as follows:

"3. The applicant submits that the payment made by it to M/s Ushakiron Movies Ltd is included by them in their regular income and the same was offered for tax.

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Thus, as per the amended provisions of section 40(a)(ia) of the Act, no disallowance can be made if the payee has accounted the income received from the payer and offered the same for tax. Your honours would appreciate that the proviso inserted by the Finance Act, 2012 w.e.f. 01.04.2013 is held to be declaratory and curative in nature and is applicable retrospectively from 1.4.2005 as held by the Hon'ble Bangalore Appellate Tribunal in the case of DCIT vs. Ananda Markala reported in (2014) 150 ITD 323 (Bang.) and also by the Hon'ble Agra Appellate Tribunal in the case of Rajeev Kumar Agarwal vs. ACIT (ITA No.337/Agra/2013 A.Y. 2006-07 order dated 29.05.2013.

4. Thus, as the payee has already offered the amount in question in their regular income and paid the taxes, the provisions of section 40(a)(ia) is not applicable in its case and the disallowance made by the lower authorities is uncalled for. The appellant to support its contention is furnishing herewith certificates and ledger accounts received from M/s. Ushakiron Movies Ltd to show that the amount in question had already been offered for tax. The appellant further submits that there has been no occasion to furnish the above certificates before the lower authorities, though the relevant details of payments have already been furnished. The applicant, therefore, prays that, in the interest of justice, the Hon'ble Bench may be pleased to admit the additional evidence furnished at S.No.112 and S.No.189 of paper book-II.

5. The appellant submits that the document complied at S.Nos.112 and 189 have got a direct bearing on the issues involved in the present appeal. The appellant submits that the Hon'ble Bench has been vested with the discretion to admit the additional evidence under rule 29 of the Income Tax Appellate Tribunal Rules, 1963".

16. We admit the additional evidence as the same substantiated the merits of the case and the evidence goes to the root of the issue, relying on the decision of the Hon'ble Bombay

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High Court in the case of Smt. Prabhavati S. Shah vs Commissioner Of Income-Tax (231 ITR 1) (Bom.) and Abhay Kumar Shroff vs. Income Tax Officer (63 ITD 144) (Patna 3rd Member). We set aside the issue to the file of the AO to consider the additional evidence and re-decide the issue in accordance with law.

17. In the result appeal of the assessee is allowed for statistical purposes.

18. Thus, appeal filed by the Revenue is dismissed and the appeal of the assessee is allowed for statistical purposes.

Order pronounced in the Open Court on 11th February, 2015.

Sd/- Sd/- (P.M. Jagtap) (Asha Vijayaraghavan) Accountant Member Judicial Member

Hyderabad, dated 11th February, 2015.

Vnodan/sps Copy to:

1. Dy. Commissioner of Income Tax, Circle 16(2) Hyderabad

2. M/s Margadarsi Chit Fund (P) Ltd.,5-10-195 Fateh Maidan Road, Hyderabad 500004

3. The CIT(A)-V Hyderabad

4. The CIT Hyderabad

5. The DR, ITAT, Hyderabad

6. Guard File

By Order

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