SMT. FATHIMA HARRIS Vs. INCOME TAX OFFICER

JUDGEMENT

(1.) The appellant is the proprietrix of M/s. Niyaz Apparels engaged in the exports of garments. In the financial year relevant to assessment year 2002-03, the appellant effected payments of commission of an amount of Rs.66,96,570.00 to various entities for the procurement of export orders. This included an entity by the name and style of M/s. Textile Services Limited, based in New Delhi to which an amount of Rs.17,84,293.00 was paid and claimed as expenditure in the computation of income for the purposes of the Income tax Act 1961 (in short 'Act'). When the return of income was taken up for scrutiny, the assessing officer was of the view that tax ought to have been deducted from the commission payment in view of the mandate in section 40(a)(i) of the Act, in the absence of which, the expenditure claimed was liable to be disallowed and added back to the taxable income. The appellant submitted that the payments of commission were, in all cases except Textile Services, made to entities situated outside India, and in the absence of a business connection, there was no liability to taxation in this regard. The assessing officer accepted the submission as regards the overseas commission agents, however adding back the amount of commission paid to Textile Services, Delhi, for non-compliance of the provisions of section 40(a)(i) of the Act.

(2.) The order of assessment dated 31.3.2005 was assailed in appeal before the Commissioner of Income Tax (Appeals) ('CIT (A')). In appeal, the appellant produced an agreement executed between itself and M/s. Textile Services Limited, Hong Kong, pursuant to which, commission was paid for exports booked through this concern to M/s. Textile Services Ltd, Delhi. The appellant contended vide a written submission dated 212005 that since the services were rendered outside India, the payments of commission would not be liable for deduction of tax at source. Though sought, no other details evidencing the nature of services rendered or activity carried on by the Indian entity were furnished. Reliance was placed on Circular No.786 dated 7.2005 issued by the Central Board of Direct Taxes.

(3.) The CIT(A) appears to have sought a remand report from the assessing officer for verification of the details furnished including the address of the entity in Delhi and the assessing officer confirmed the position that the export sales had been effected through the Indian concern that had received the commission payments as well. In this view of the matter, the CIT(A) confirmed the disallowance since according to her, the transaction would come within the sweep of 40(a) of the Act. Reliance on the Circular was negatived on the ground that the payment in the instant case had been made to an Indian recipient.