IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : KOLKATA

[Before Hon’ble Sri N.V.Vasudevan, JM & Shri J.Sudhakar Reddy, AM]

I.T.A No. 409/Kol/2015
Assessment Year : 2011-12

D.C.I.T., Circle-3(2), -vs.- M/s. Mount Distilleries Ltd.

Gangtok Sikkim Sikkim
[PAN : AAHCM 0027 H]
(Appellant) (Respondent)
For the Appellant : Shri Sallong Yaden, Addl. CIT
For the Respondent : Shri Subhash Agarwal, Advocate

Date of Hearing : 16.08.2017.

Date of Pronouncement : 23.08.2017.
ORDER

Per N.V.Vasudevan, JM

This is an appeal by the Revenue against the order dated 20.02.2015 of

C.I.T(A)-Siliguri relating to A.Y.2011-12.

2. Grounds raised by the Revenue in this appeal reads as follows :-

“1. That, on the facts and circumstances of the case, the learned Commissioner of
Income Tax (Appeals), Siliguri has failed to appreciate that the liability of TDS u/s
194H of the I.T. Act, 1961 is dependent on the status of the deductor, not that of the
deductee and further, that all the conditions laid down in section 194H were
satisfied in the instant case.

2. That, on the facts and circumstances of the case, the learned Commissioner of
Income Tax (Appeals), Siliguri has failed to appreciate that the claim of exemption
u/s 10(26AAA) of the LT. Act, 1961 is conditional and such claim is to be decided
by the Assessing Officer of the deductee; and the deductor cannot, in any manner,
take decision on the same.

3. That, on the facts and circumstances of the case, the learned Commissioner of
Income Tax (Appeals), Siliguri has erred in placing reliance on the decision of the
Hon'ble ITAT, Kolkata in the case of M/s Gauri Shankar Bihani Vs. DCIT, Circle-
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A.Y.2011-12
34, Kolkata in ITA No. 1127/KoI/2011 as the issue is squarely distinguishable from
the case of the assessee.

4. That, on the facts and circumstances of the case, the learned Commissioner of
Income Tax (Appeals), Siliguri has failed to appreciate that the assessee was under
Obligation to deduct tax at source as a person/deductor responsible to do so
despite all the conditions laid down in section 194H of the I.T. Act, 1961 were
satisfied and since no certificate u/s 197(1) of the LT. Act, 1961 was obtained and
furnished by the distributor from the Assessing Officer for no deduction or lower
deduction of tax at source.

5. That, on the facts and circumstances of the case, the assessee-company has
violated the conditions laid down in section 40(a)(ia) of the LT. Act, 1961.

6. That, in view of the above, the learned Commissioner of Income Tax (Appeals),
Siliguri has erred in facts as well as circumstances of the case in directing to delete
the addition of Rs. 1,00,00,000/- made by the Assessing Officer for violation of
section 40(a)(ia) by the assessee-company; and

7. That the Department reserves the right to add, delete, review, change or modify
any ground in the course of hearing.”

3. The Assessee is a company. It carries on the business of distillery. During the

relevant previous year the assessee paid a sum of Rs.Rs.1 crore to Shri R.D.Bhutia,
distributor appointed by the company. The assessed did not deduct tax at source on the
payment of Rs.1 Crore to Shri R.D.Bhutia. The AO was of the view that u/s 194H of
the Income Tax Act, 1961 (Act), the assessee ought to have deducted tax at source on
the payment of commission to Shri R.D.Bhutia and since the assessee failed to deduct
tax at source a sum of Rs.1 crore which was claimed as deduction while computing the
income under the head “income from business” cannot be allowed as deduction in view
of the provision of section 40(a)(ia) of the Act. U/S.40(a)(ia) of the Act any expenses
which is claimed as deduction in computing income from business on which the
Assessee was obliged to deduct tax at source and where the Assessee either has not
deducted or after deduction or has not paid the tax deducted to the credit of the
Government, then the expenditure claimed would not be allowed as deduction.

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4. The plea of the assessee before the AO was that Shri R.D.Bhutia who is an
individual was sikkimese and as per the provision of section 10(26AAA) of the Act in
the case of an individual being a sikkimese any income which accrues or arises from
any source in the State of Sikkim or by way of dividend or interest on securities shall
not be included in computing his total income. The assessee further submitted that since
the sum of Rs.1 crore was exempt u/s 10(26AAA) of the Act, the same was not
chargeable to tax and the obligation to deduct tax at source will arise only when the
payment is chargeable to tax in the hands of the person to whom the payment is made.
Since there is no obligation to deduct tax at source, the provision of section 40(a)(ia) of
the Act cannot have been invoked by the AO to disallow deduction of a sum of Rs.1
crore.

5. The plea of the assessee was not accepted by the AO for the reason that the
assessee had not produced non deduction certificate from the AO of Mr. R.D.Bhutia as
is required u/s 197A of the Act. It is not in dispute that before the AO the assessee had
filed a letter dated 29.01.2014 issued by DCIT, Circle, Gangtok, Sikkim which reads as
follows :-
“TO WHOM IT MAY CONCERN

Section 10(26AAA) of the Income Tax Act, 1961 provides exemption to an

individual, being a “Sikkimese “ in respect of any income which accrues or arises
to him/her –
a) From any source in the State of Sikkim or
b) By way of dividend or interest on securities.

Sri Rinzing Dorjee Bhutia, son of late Gyampu Tsering, resident of Ben, South
Sikkim, is a Sikkimese within the meaning of section 10(26AAA) of the Income
Tax Act, 1961 and is exempt from tax on his income accruing or arising to him
from any source in the State of Sikkim.”

6. The AO did not make any reference to the aforesaid letter but proceeded to make
disallowance u/s 40(a)(ia) of the Act.

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7. On appeal by the assessee the CIT(A) following the decision of the Hon’ble
ITAT, Kolkata Bench in the case of Gauri Shankar Bihani vs DCIT in ITA
NO.1127/Kol/2011 dated 18.12.2014 held that the disallowance u/s 40(a)(ia) of the Act
cannot be sustained because the commission in question was not chargeable to tax in
the case of Shri R.D.Bhutia by raising the provision of section 10(27AAA) of the Act.
The following are the relevant observations of CIT(A) :-
“Conclusion- It is seen that the payment of commission to Sikkimese individual
does not attract the provisions of TDS because this does not fall in the category of
income in the hands of recipient. The Honourable ITAT Kolkata in the case cited
above has observed - "In view of the above fact, we are of the view that in the
instant case no tax was deductible at source under section 194-I read with section
204 comprised in Chapter XVII-B from the rent paid by the assessee to KPT. This
is because such rent was not to be included in the total income of the KPT and was,
therefore, not chargeable under the provisions of the Act. In the case law referred
by Ld Sr DR the fact relating to the claim of exemption of the income of KPT was
not before Tribunal or that issue was not raised but in the instant case, KPT was
not required to pay any tax and in turn cannot be treated to be in default within the
meaning of section 201 (1). Accordingly, we are of the view that no disallowance
ought to have been made under section 40(a)(ia) of the Act." In view of the
judgment of Honourable ITAT Kolkata which has followed several other
judgments of higher courts, the AO is directed to delete this addition. The appeal of
the assessee is allowed.”

8. Aggrieved by the order of CIT(A) the revenue has preferred the present appeal
before the Tribunal.

9. Before us the ld. DR submitted that the decision of the Tribunal in the case of
Gauri Shankar Bihani vs DCIT (supra) is not applicable to the facts of the assessee’s
case. According to him the certificate produced by the assessee before the AO with
regard to the income Tax liability of Shri R.D.Bhutia was dated 29.01.2014 whereas
the previous year in the present case is financial year 2010-11 (A.Y.2011-12).
According to him therefore there cannot be any presumption that the certificate of the
AO dated 29.01.2014 will hold good even for A.Y.2011-12. He also brought to our

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notice that the Hon’ble Gauhati High Court in the case of Sing Killing –vs ITO 255 ITR
444 (Gau) has held that income of Sikkimese as an individual is exempted provided a
certificate u/s 197 of the Act is obtained. Since there is no such certificate for
A.Y.2011-12 the ld. DR submitted that disallowance made by the AO has to be
sustained.

10. The ld. Counsel for the assessee relied on the order of CIT(A) and also filed
before us a copy of the decision rendered in the case of M/s. Gourishankar Bihani.

11. We have given a very careful consideration to the rival submissions. It is clear
from the evidence on record that even before AO the assessee has filed certificate from
the Assessing Officer of Shri R.D.Bhutia wherein it has been specifically mentioned
that Shri R.D.Bhutia, is a Sikkim resident and therefore income accruing or arising to
him from any source of the state of Sikkim will not be chargeable to tax. It is not
disputed by the revenue that commission income of a sum of Rs.1 crore claimed as
exempt by Shri R.D.Bhutia was from a source in the state of Sikkim. In this
circumstance, we fail to see as to how the sum of rs.1 crore can said to be chargeable to
tax under the Act in the hands of Shri R.D.Bhutia. The fact that the certificate of the
AO dated 29.01.2014 does not relate to the previous year relevant to AY 11-12, cannot
be the basis to come to a conclusion that Shri R.D.Bhutia was not a resident of Sikkim
in the previous year relevant to A.Y.2011-12. It is not disputed by the revenue that Shri
R.D.Bhutia is not a sikkimese in the previous year relevant to A.Y.2011-12. In the
event of any doubt, the nothing prevented the AO seek clarification from the AO of
Shri R.D.Bhutia regarding income tax liability of Shri R.D.Bhutia for A.Y.2011-12. We
are therefore of the view that the CIT(A) was right in coming to the conclusion that the
commission income in question is not chargeable to tax and therefore there was no
obligation to deduct tax at source on the payment of commission on the part of the
assessee u/s 194H of the Act. Consequently the CIT(A) was also justified in his

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conclusion that no disallowance u/s 40(a)(ia) of the Act can be made. We find no
grounds to interfere with the orders of CIT(A). Consequently the appeal by the revenue
is dismissed.

12. In the result the appeal by the revenue is dismissed.

Order pronounced in the Court on 23.08.2017.

Sd/- Sd/-
[J.Sudhakar Reddy] [ N.V.Vasudevan ]
Accountant Member Judicial Member

Dated : 23.08.2017.
[RG PS]

Copy of the order forwarded to:

1. M/s. Mount Distilleries Ltd., paljor Stadium Road, Gangtok, P.O., Gangtok, East
Sikkim-737101.
2. D.C.I.T., Circle-3(2), Gangtok, Sikkim.
3. C.I.T.(A)-Siliguri 4. C.I.T.-Siliguri
5.CIT(DR), Kolkata Benches, Kolkata.

True copy
By Order

Senior Private Secretary

Head of office/ D.D.O., ITAT , Kolkata Benches

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