Income Tax Act, 1961 – Sections - 147, 148, 40(a)(ia) and 194C - The assessee a sales promoter for Jagjit Industries Ltd. (JIL), received Rs.8,35,59,810 as commission and reimbursement of expenses during AY 2016-17. The firm claimed Rs.16,70,639 as TDS but failed to deduct tax on payments made to retailers and vendors. Following an initial scrutiny assessment under Section 143(3), the AO reopened the case under Section 147, alleging that Rs.2,50,67,943 (30% of the reimbursement expenses) should be disallowed under Section 40(a)(ia) for non-compliance with TDS provisions. The reassessment was completed ex parte under Section 147 r.w.s. 144, adding Rs.2,50,67,943 to taxable income and initiating penalties under Sections 270A and 271(1)(b) - Whether reopening of assessment under Sections 147 and 148 was valid in light of non-communication of reasons for reopening - Whether the disallowance under Section 40(a)(ia) for non-deduction of TDS on reimbursement expenses was justified - Whether the procedural deficiencies in serving notice impacted the legality of the assessment - HELD - Failure to provide reasons for reopening constituted a clear violation of the principles laid down in G.K.N. Drive Shafts (India) Ltd. v. ITO. As the reassessment proceedings were based on non-communication of reasons and notices sent to incorrect email addresses, the process was procedurally flawed - The tribunal observed that payments made by the assessee to retailers and vendors may have embedded profit or income requiring TDS compliance under Section 194C. However, the mere clssification of such payments as reimbursement did not exempt the assessee from TDS obligations - The ITAT emphasized that when expenditures are claimed in books of accounts, both the assessee and the AO must verify whether the recipients of payments had discharged their tax liabilities. Since this verification was not conducted, the case was remanded to the CIT(A) for fresh adjudication, with directions to call for a remand report from the AO to establish whether the recipients had paid taxes on the amounts received - The appeal was allowed for statistical purposes. The ITAT remanded the matter to the CIT(A) to reassess the disallowance under Section 40(a)(ia) after verifying the tax compliance of payment recipients and ensuring procedural adherence to reopening requirements
2024-VIL-1795-ITAT-HYD
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES “B” HYDERABAD
ITA No. 732/Hyd/2024
Assessment Year: 2016-17
Date of Hearing: 04.12.2024
Date of Pronouncement: 05.12.2024
BHARGAVI MARKETERS
Vs
THE INCOME TAX OFFICER
Assessee by: Shri V. Venkata Rao, C.A.
Revenue by: Ms. Kavitha Rani, Sr.A.R.
BEFORE
SHRI LALIET KUMAR, JUDICIAL MEMBER
SHRI MADHUSUDAN SAWDIA, ACCOUNTANT MEMBER
ORDER
PER LALIET KUMAR, J.M:
This appeal is filed by the assessee feeling aggrieved by the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi dated 12.06.2024 for the AY 2016-17.
2. The grounds raised by the assessee read as under:
1) The Assessing Officer erred in reopening the assessments u/s 147 of I.T.Act, as the same was on the basis of change of opinion of the same issue which has been verified during the course of original assessment proceedings u/s 143(3) of IT Act dated 19.12.2018.
2) The action on the part of the Assessing Officer that there is escapement of income is contrary to provisions of law, settled judicial precedents and hence void ab initio and liable to be quashed as because the assumption of jurisdiction is bad in law from the beginning and therefore all other subsequent actions including passing of the assessment order is not sustainable.
3) The Assessing officer erred in passing the order u/s 147 r.w.s 144 of I.T. Act disallowing the business promotion expenditure u/s 40a(ia) of I.T. Act without considering that such item has already been verified and found to be in order while completing the scrutiny assessment u/s 143(3) of IT Act. Therefore, the order of the Assessing officer is bad in law and addition is liable to be deleted.
4) The Assessing Officer failed to communicate the reasons for reopening the assessment to the appellant before initiation of the proceedings which is against the laid down principles of provisions of law therefore the proceedings of the Assessing officer for reopening the assessment is bad in law.
5) The ld CIT(A) erred in confirming the order of the Assessing Officer though the reopening of the assessment was based on change of opinion by the Assessing Officer in the case of duly supported by the decision of the honourable Apex court in the case of CIT Vs Kelvinator of India Ltd (2002) 256 ITR 1(Del)(FB) approved by the supreme court in (2010) 320 ITR 561 (SC) which has been held to be against the provisions of law by various appellate authorities and hence the order of the ld CIT(A) required to be quashed.”
3. The brief facts of the case are that assessee, a firm e-filed its return of income for the A.Y. 2016-17 on 13-10-2016, declaring a total income of Rs.9,96,870/-, which was accepted under scrutiny assessment u/s 143(3) on 19-12-2018. Subsequently, it was found that the assessee, acting as a sales promoter for Jagjit Industries Ltd (JIL), received Rs.8,35,59,810/- as commission during the year and claimed TDS of Rs.16,70,639/- u/s 194C. However, the firm did not deduct tax on payments made to retailers amounting to Rs.8,35,59,810/-, which were claimed as expenditure, attracting disallowance u/s 40(a)(ia) of the Act. Accordingly, 30% of the sales promotion expenses, amounting to Rs.2,50,67,943/-, was proposed to be added to income. Despite several notices and opportunities, the assessee failed to respond, leading to an ex-parte assessment u/s 147 r.w.s 144, adding the said amount and initiating penalty proceedings u/s 270A and 271(1)(b) for non-compliance and misreporting. Hence, the Assessing Officer completed the assessment interalia making addition of Rs.2,50,67,943/- towards disallowance u/s 40(a)(ia) of the Act and passed assessment order u/s 147 r.w.s. 144 of the Act dt.28.03.2022.
4. Aggrieved with such assessment order, assessee filed an appeal before the LD.CIT(A), who dismissed the appeal of assessee by holding as under :
“7. Ground No.1 to 5 are relating to reopening of assessment by issue of notice u/s.148 of the Act being bad in law and without providing adequate opportunity of being heard. The facts of the case are that the appellant had claimed huge expenditure as reimbursement in its P&L A/c. The appellant had not deducted TDS on the payments made to various agencies which was claimed as reimbursement of expenses. In the original assessment completed u/s.143(3) of the Act, this issue was not examined by the AO as to whether the expenditure incurred by the appellant was subjected to provisions of TDS. Accordingly, the AO after recording reasons that the appellant’s income had escaped assessment, issued notice u/s.148 of the Act. The contention of the AO at the time of reopening of the assessment was that the appellant is a sales promoter for a liquor company M/s. Jagatjit Industries Ltd. and received commission from the said company. Apart from the commission, the appellant also received Rs.8,35,59,810/- towards incurring various expenses for promotion of sales of the brands of the principal company as reimbursement of expenses. The appellant had incurred this expenditure without deducting any tax claiming the same as reimbursement of expenses. In these set of facts, the AO held that once the appellant had shown a particular amount as receipt and booked that amount as expenditure, the provisions of tax deduction at source would attract and if the appellant fails to do the TDS, the provisions of section 40(a)(ia) of the Act would attract.
7.1 In the instant case, as disallowance was to be made u/s.40(a)(ia) of the Act for failure to deduct tax at source, it is a case of appellant’s income escaping assessment, which was chargeable to tax. The AO who had done the original assessment has totally ignored this issue that the expenditure in question was liable to TDS provisions. Hence, the AO has rightly reopened the assessment after following due procedure of recording reasons to believe and also after obtaining approval of the competent authority. It is not a case of change of opinion for the reason the first AO who completed the assessment u/s.143(3) of the Act did not form any opinion with reference to applicability of TDS Provisions to the expenditure incurred. Therefore, notice issue u/s.148 of the Act by the AO was found to be in order. As seen from the assessment order, the AO has given sufficient opportunities to the appellant to furnish the details called for. But as the appellant did not furnish the details, the AO was constrained to complete the assessment due to its very nature of getting it barred by limitation. Thus, grounds 1 to 5 raised by the appellant have no merit and accordingly, they are dismissed. 8. Ground No.6 is relating to disallowance made by the AO u/s.40(a)(ia) of the Act. Here, the contention of the appellant is that appellant is not liable to make any TDS as the expenditure incurred is in the nature of reimbursement.
8.1 During the appellate proceedings, the appellant has produced the agreement with its principal M/s. Industries Ltd. As per para 12 of the agreement, the appellant is eligible to get the remuneration per case of the liquor sold on which TDS has been done by the principal. Para 13 talks about the nature of work relating to marketing to be carried on by the appellant on behalf of the principal. In this clause, it is made clear that the appellant would not get any profit on the expenditure incurred and it is in the nature of reimbursement. As there is no profit element involved in these reimbursements, the principal has not deducted tax at source on these reimbursements. However, when the appellant has incurred this expenditure, though on behalf of the principal, the recipient of the income certainly has an element of income in its receipts. Whenever there is element of income in the receipts of the other person who is receiving the income, the TDS has to be deducted. For instance, the appellant has made payments to various retailers for showcasing the company’s products or to advertisement agencies for display of advertisements, the income received by these retailers/companies/vendors do have an element of profit/income embedded in such receipts. Whenever, an element of income/profit is embedded in the receipts of the other person, the person making the payment has to deduct tax at source. The receipt in the hands of the appellant may be a reimbursement as there is no profit element involved in such receipt. But out the said reimbursement received, if the appellant incurs any expenditure which cannot be termed as reimbursement for the recipient of the amount and therefore, TDS Provisions are applicable for such expenses incurred by the appellant out of reimbursements received. Further, the expenditure in question has been claimed by the appellant in the P&L A/c, which can be allowed only if provisions of TDS are complied with and there is no default as per the provisions of Section 40(a)(ia) of the Act.
8.2 It is very much necessary to understand as to why TDS is necessary and in what circumstance the TDS needs to be made. Whenever, any payment made by a person to the other person involves an element of income or profit in it, in such case from such payment TDS has to be done, which has dual benefit i.e. first benefit is the tax on income gets automatically deducted and the transaction in question gets reflected in the Form 26AS of the recipient. Thus, once TDS is done the transaction in question comes in the tax net on which the recipient needs to pay tax. In absence of TDS being done on such transactions, the income earned by the recipients escapes from the tax net.
8.3 In the case of the appellant, the payments made on behalf of the principal may be in the nature of reimbursement for appellant as there is no profit element involved therein. But when the appellant is incurring the expenditure, may be on behalf of the principal and making a payment to retailers, advertisers, vendors etc. such payment made has element of income/profit embedded in it. Hence, there is a need for making the TDS on such payments, else such payments would escape the tax net.
8.4 In view of these facts, the payments made by the appellant to various parties for marketing the products of its principal are subjected to tax deduction at source. If the tax has not been deducted, provisions of Section 40(a)(ia) of the Act are attracted. Hence, the disallowance made by the AO u/s.40(a)(ia) of the Act of Rs.2,50,67,943/- is upheld. Ground No.6 is dismissed.”
5. Aggrieved with the order of LD.CIT(A), the assessee is now in appeal before us.
6. Before us, the ld.AR submitted that initially an order u/s 143(3) of the Act was passed in the hands of the assessee by the Assessing Officer and after examining the deduction under limited scrutiny, whether the deduction claimed on account of sales promotion expenses was admissible or not and thereafter, notice u/s 148 of the Act was issued to the assessee for reopening of the assessment. He further submitted that a show cause was also issued by the Assessing Officer on 10.03.2012 which is to the following effect :
“Notice Under Section 148 Of The Income Tax Act, 1961 dated 31/03/2021 with DIN & Notice No: ITBA/AST/S/148/2020- 21/1032120317(1) was served on you since there exists reasons to believe that your Income chargeable to Tax for the Assessment Year 2016-17 has escaped Assessment within the meaning of section 147 of the Income Tax Act, 1961. It is regretted to note that you have neither filed your return of income for the AY u/s 139 of the Act nor in response to the notice u/s 148.”
7. The ld.AR further submitted that the reasons for re-opening of the assessment are available at page 2 of the assessment order which is to the following effect :
“3. Assessee is a firm derived income under the head income from profits and gains of Business filed return of income for the AY 2016-17 on 13-10-2016 admitting income at Rs.9,96,870/-. Scrutiny assessment u/s.143 (3) of the Act was completed on 1912-2018 by accepting the income returned.
4. Later on, on verification of assessment records, it was found that the assessee firm acted as sales promoter to Ms/.Jagjit Industries Ltd and received commission. During the year, the assessee received a total sum of Rs.8,35,59,810/- from Jagjit Industries Ltd and Rs.16,70,639/- was claimed TDS u/s.194C.3.
5. Further, it was found that the assessee was not deducted tax on the payments made amounting to Rs.8,35,59,810/- to different retailers. Once the firm had shown as receipt and booked entire amount as expenditure, provisions of 194C would attract. Therefore 30% of sales promotion expenses paid during the year of Rs.2,50,67,948/- (30% of 8,35,59,810/-) brought to tax.
6. The following opportunities were provided to you during the assessment proceedings:
7. In spite of the opportunities provided, you have not filed your return of income in response to the notice u/s 148 or uploaded any evidence or explanation called for. Under the circumstances, the undersigned was constrained to complete the assessment ex-parte to the best of my knowledge and belief as under
8. Thus as mentioned above 30% of sales promotion expenses paid during the year of Rs.2,50,67,948/- (30% of 8,35,59,810/-) is proposed to be brought to tax.
9. However you have been accorded one FINAL opportunity in this regard to show cause as to why the assessment should not be completed at an income of Rs.2,50,67,948/- for the AY 2016-17.
10. You are requested to upload your explanation / objection in this regard on or before 16/03/2022.”
8. It was further submitted by the ld. AR that the Assessing Officer, at the time of reopening, had issued notice to an email address that was not related to or pertaining to the assessee. Therefore, the assessee failed to appear before the Assessing Officer, and the Assessing Officer passed an order holding that 30% of sales promotion expenses were required to be disallowed, as the assessee had failed to deduct TDS u/s 194C of the Act. The ld. AR further submitted that the above fact of non-receipt of the notice was duly raised by the assessee before the Ld. CIT(A). Our attention was drawn to the order of the Ld. CIT(A), wherein the above aspect was captured in para 5.1, which is to the following effect :
“5.1 The AO passed the reassessment order u/s 147 r.w.s. 144 of the Act. Therefore, based on the details filed by the appellant, a remand report was called for from the AO. The AO has submitted the remand report, which is reproduced as under:
“The assessee Bhargavi Marketers is a Firm filed its return of income for the assessment year 2016-17 on 13.10.2016 admitting an income of Rs. 9,96,870/-. The case was selected for scrutiny under CASS for limited purpose of examining the following.
1. Whether refund is justified and
2. Whether deduction claimed on account of sales promotion expenses is admissible.
The AO has issued notices U/s 143(2) and 142(1) calling for information from the assessee in respect of the above mentioned issues. After verifying the details furnished by the assessee, scrutiny assessment was completed U/s 143(3) on 19.12.2023.
Later on, on verificationof assessment records, it is seen that the assessee firm acted as sales promoter to M/s Jagjit Industriet Ltd and received commission. It is observed that during the year the assessee received a total asum of Rs. 8,35,59,810/- from Jagjit Industries Ltd. and Rs. 16,70,639/- was claimed TDS U/s 194C. It was also found that the assessee has not deducted tax on the payments made amounting to Rs. 8,35,59,810/- to different retailers. Once the firm has shown as receipt and booked entire amount as expenditure, provisions of 194C would attract.
Accordingly the case was reopened and sufficient opportunities were provided to the assessee to defend his contention. As the assessee neither filed and ROI in response to the notice U/s 148 nor has replied to the show cause notice . Hence, 30% of sales promotion expenses paid during the year i.e., Rs. 2,50,67,948/- (30% of Rs. 8,35,59,810/-) was brought to tax and the assessment was completed U/s 147 r.w.s. 144 r.w.s. 144B of the Income tax Act, 1961 raising a demand of Rs. 1,85,58,241/-. Aggrieved by the same, the assessee preferred appeal before the Hon’ble CIT(A).
2. During the course of appeal proceedings assessee has filed and written submissions in support of the grounds of appeal before the Honorable CIT(A). The assessee has submitted documents related to appointment as sales promoter. The Honorable CIT(A) required Remand Report duly examining the contentions of the assessee, relating to the sales promotion expenditure.
3. During the course of Remand proceedings, this office vide letter dated 30.10.2023 has asked to furnish details in support of the claim of the assessee. Assessee is also asked to submit the list of documents submitted during the assessment proceedings and Appeal proceedings. In response to the notice issued, Shri Laxman Rao, CA has appeared and explained the working of the Bhargavi marketers and submitted copies of the documents sent through ITBA portal vide its letter dated 05.11.2023.
The list of the documents submitted is given below
1. Written submissions made before the Hon’ble CIT (A), NFAC, Delhi
2. Appointment letter as sales promoter of Jagjit Industries Ltd
3. Computation P & L Account and balance sheet for the AY 2016-17 .
4. The relevant portion of the Payments and Receipts of reimbursement. The assessee has not submitted the list of the documents submitted before the Assessing Officer and Learned CIT(A). On verification of the submissions of the assessee and the information available in the assessment folder, it is observed that the assessee has produced the same documents which were already produced before the assessing officer. No additional evidence is produced by the assessee during the Remand proceedings.
5. 1. Based on the information available with this office, another opportunity has been provided to the assessee by issuing a letter on 7.12.2023 granting 15 days time for submission of further necessary information. The assessee neither complied to the letter issued not made any submissions as requested. As the assessee has not responded to the letter issued, calling for various details in connection with the claims made, it is evident that the assessee is not in a position to substantiate its claim. 6. In view of the above facts and circumstances of the case, the appeal may be decided on the merits of the case.”
9. The ld.AR further submitted that the notice had not been received at the email address given. A remand report was called for in response to this claim. However, in the remand report the Assessing Officer has not made any comment on the alleged sending of notice to an incorrect email address. The remand report, referenced by the LD.CIT(A) in paragraph 5.1 at pages 12 and 13 of their order, was reproduced hereinabove. Despite the above, the Ld.CIT(A) has also called upon the assessee to submit the documents in respect of the expenditure related to promotion and marketing expenses. However, the Ld.CIT(A) has disallowed the entire expenditure and upheld the order passed by the Assessing Officer.
10. The ld.AR further submitted that since the assessee was exparte before the Assessing Officer, the matter may be remitted back to the file of Assessing Officer / Ld.CIT(A) with a direction to decide the appeal afresh after affording opportunity of hearing to the assessee. It was further submitted that expenditure claimed by the assessee were duly accounted for in the books of accounts and the recipients of the payments were also subjected to income tax and therefore, no addition can be made in the hands of the assessee. For the above said purposes, the ld.AR has relied upon judgment of hon'ble Supreme Court in the case of Hindustan Coca- Cola Beverages Pvt. Ltd. Vs. DCIT.
11. Per contra, ld.DR has submitted that regardless of whether the notice was sent to the correct email address, the Ld.CIT(A) had examined the documents submitted by the assessee and called for a remand report. It was submitted that in paragraph 5.1, the Assessing Officer provided the findings of the remand report.
12. We have heard both parties and perused the material on record. In this case, it is an undisputed fact that the notice issued under Section 148 of the Income Tax Act was sent to an incorrect email address, and the reasons for reopening the assessment were not provided to the assessee. Further, as noted in paragraph 5.1 of the Ld.CIT(A)'s order, the Assessing Officer mentioned in the remand report that the assessee did not comply with the letters issued and failed to submit documents to substantiate its claims. In the absence of such submissions, the Assessing Officer and the Ld.CIT(A) confirmed the additions.
13. In our considered view, the failure to provide the assessee the reason for reopening the assessment constitutes a clear violation of law, as established in the case of G.K.N. Drive Shafts (India) Ltd Vs. ITO and others. Furthermore, when the assessee has made payments to various parties and claimed the expenditure in its books of accounts, with the recipients' names and PAN details available, then it is the responsibility of the Assessing Officer as well as the assessee to verify whether the said recipients of the amounts were subjected to tax or not. Since the requisite exercise has not been done either by the authorities or the assessee before us, therefore, we deem it appropriate to remand back the matter to file of Ld.CIT(A) with a direction to call for remand report from the Assessing Officer and find out whether the recipient of the claimed expenditure amounts have paid the due taxes or not. Furthermore, the assessee is also directed to file all necessary evidence as required by the LD.CIT(A). The LD.CIT(A) shall then decide the matter afresh in accordance with law. Accordingly, the appeal of the assessee is allowed for statistical purposes.
14. In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the Open Court on 05th December, 2024.
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