No TDS is required on a commission paid for services rendered entirely outside India by a non-resident agent who has no Permanent Establishment (PE) in the country.

By | September 26, 2025
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No TDS is required on a commission paid for services rendered entirely outside India by a non-resident agent who has no Permanent Establishment (PE) in the country.

Issue

Is an Indian company required to deduct tax at source (TDS) under Section 195 of the Income-tax Act, 1961, on commission payments made to a non-resident agent who provides all services outside India and has no PE in India?

Facts

  • The assessee-company paid a commission to a non-resident agent for helping it secure foreign buyers. The assessee did not deduct any TDS from this payment.
  • The Assessing Officer (AO) disallowed the entire commission expense under Section 40(a)(i). The AO’s view was that the commission income was taxable in India, which created an obligation to deduct TDS.
  • The assessee successfully demonstrated that the non-resident agent rendered all its services entirely outside India and had no PE or business connection in India.

Decision

The Tribunal ruled in favour of the assessee.

  • It held that when a non-resident agent performs all services outside India and has no PE in India, the commission income they earn is not chargeable to tax in India.
  • Since the income itself was not taxable in India, there was no obligation on the assessee to deduct TDS under Section 195.
  • Consequently, the disallowance made under Section 40(a)(i) for non-deduction of TDS was invalid and was directed to be deleted.

Key Takeways

  • Taxability Precedes TDS: The requirement to deduct TDS under Section 195 is triggered only if the payment made to the non-resident is chargeable to tax in India. If the income isn’t taxable here, no TDS is required.
  • Source of Service is Decisive: For services like sales commission, if the agent operates and performs all their key activities outside India, the income is generally not considered to have a source or business connection in India.
  • No PE, No Business Profit Tax: Under most tax treaties, the business profits of a foreign company are not taxable in India unless that company has a Permanent Establishment (PE) in India through which it conducts its business.

A director’s medical expenses are a valid business expense if they are authorized by a formal Board Resolution of the company.

Issue

Can the reimbursement of a director’s medical expenses by a company be disallowed under Section 37(1) of the Income-tax Act, 1961, on the grounds that it is a “personal” expense?

Facts

The assessee-company claimed a deduction for medical expenses it had reimbursed to one of its directors. The Assessing Officer (AO) disallowed this, treating it as a personal expense of the director and not an expense incurred for the company’s business. In its defense, the company produced a copy of the Board resolution that specifically authorized the reimbursement of actual medical expenses incurred by its directors.

Decision

The Tribunal ruled in favour of the assessee.

  • It held that a company, being a juristic person, cannot have any “personal” needs or expenses of its own.
  • When an expenditure is incurred pursuant to a valid and duly passed resolution of the Board of Directors, it legally takes on the character of a business expenditure.
  • Therefore, the reimbursement was an allowable deduction under Section 37(1).

Key Takeways

  • A Board Resolution is Crucial: A valid Board resolution is the key piece of evidence to demonstrate that an expenditure, which might otherwise appear personal in nature, was incurred as part of the company’s official remuneration policy and for the purposes of its business.
  • A Company has No Personal Needs: The concept of a “personal expense” applies to individuals, not to a corporate entity. For a company, the only valid test is whether the expense was incurred wholly and exclusively for its business, a fact which a Board resolution helps to establish.

No disallowance under Section 14A is warranted if the assessee’s own interest-free funds far exceed its investments, and in any case, the disallowance cannot exceed the exempt income.

Issue

Is a disallowance of interest expenditure under Section 14A of the Income-tax Act, 1961, read with Rule 8D, justified when the assessee’s own funds are significantly larger than its investments, and the computed disallowance is more than the exempt income earned?

Facts

The Assessing Officer (AO) made a disallowance of interest expenditure under Section 14A and Rule 8D, alleging that borrowed funds must have been used for investments that yielded exempt income. The assessee countered this with several key facts:

  • Its own interest-free funds (share capital and reserves) of ₹15.48 crores were far greater than its total investments of ₹4.23 crores.
  • The AO had failed to establish any direct link between the specific borrowings (which were for fixed assets and working capital) and the investments.
  • The total disallowance sustained by the authorities was greater than the actual exempt income earned by the assessee during the year.

Decision

The Tribunal ruled in favour of the assessee and deleted the disallowance.

It held that no disallowance was warranted for two primary reasons:

  1. When an assessee has sufficient own funds, the legal presumption is that the investments were made from these interest-free funds, not from borrowings.
  2. It is a settled legal principle that the total disallowance computed under Section 14A cannot exceed the total tax-exempt income earned in that year.

Key Takeways

  • Sufficient Own Funds is a Strong Defense: If an assessee can demonstrate that its own interest-free funds are more than the investments it has made, the onus is on the AO to prove a direct link between borrowed funds and those investments. Without such proof, no disallowance of interest is justified.
  • Disallowance is Capped by Exempt Income: An assessee cannot be penalized more than the benefit they have received. The disallowance under Section 14A is logically capped at the amount of exempt income earned, as you cannot have an expense to earn an income that is greater than the income itself.

Disputed interest income is taxable in the year the dispute is settled and the income is really earned, not in the year it’s merely reflected in Form 26AS.

Issue

Should interest income be taxed in the year the corresponding Tax Deducted at Source (TDS) is reflected in Form 26AS, or in the year it is actually received or the right to receive it is established, especially when the income itself is under dispute?

Facts

The Assessing Officer (AO) noticed from the assessee’s Form 26AS that a company, WWIL, had deducted tax on interest payable to the assessee in the financial year 2013-14. However, the assessee had not shown this interest as income in its books for that year (AY 2014-15). The AO added this amount as undisclosed income. The assessee explained that there was a genuine dispute with WWIL over the liability to pay this interest, and therefore, it had not accrued. The dispute was only resolved in a later year (AY 2017-18), and the assessee had duly recognized and offered the income to tax in that year.

Decision

The Tribunal remanded the matter back to the AO.

  • It invoked the doctrine of real income, which states that tax can only be levied on real income that has actually accrued or been received, not on hypothetical or disputed income.
  • The AO was directed to verify the assessee’s claim that the income had in fact been offered to tax in AY 2017-18.
  • If the AO found this to be true upon verification, the addition made in the earlier year (AY 2014-15) was to be deleted.

Key Takeways

  • The Doctrine of Real Income: Taxation is based on real income, not notional or hypothetical income. If the fundamental right to receive an income is under a genuine dispute, it does not “accrue” for tax purposes until that dispute is finally settled.
  • Form 26AS is Not Conclusive Proof of Accrual: While Form 26AS is an important piece of information, it is not the final word on when income has accrued. The assessee always has the right to demonstrate that the underlying income did not actually accrue in that year due to a valid dispute or other reasons.

A provision for warranty is an allowable business expense if it’s based on a contractual obligation and is calculated using a scientific and reasonable method.

Issue

Is a provision made for future warranty expenses an allowable deduction under Section 37(1) of the Income-tax Act, 1961, or should it be disallowed as an unascertained, contingent liability?

Facts

The assessee created a provision for warranty of ₹22 lakhs. This was not an arbitrary figure. It was based on a specific contractual obligation to provide a five-year warranty on a project, and the amount was computed scientifically at 1.5% of the project cost, a rate derived from the company’s past experience. The Assessing Officer (AO) disallowed the entire provision, treating it as a contingent liability. The assessee was able to demonstrate that the provision was actually used to meet warranty expenses in the following years, and any unutilized balance was reversed and offered back to tax.

Decision

The Tribunal ruled in favour of the assessee.

  • It held that since the provision was created to meet a present obligation that arose from a contract, and it was calculated based on a reasonable and scientific method (past experience), it was not a mere contingent liability.
  • The fact that the provision was actually utilized and the balance was properly reversed in later years further proved its scientific basis and genuineness. The disallowance was therefore directed to be deleted.

Key Takeways

  • Provision vs. Contingent Liability: A provision for a present obligation that is likely to arise and can be reasonably estimated is an allowable expense. This is different from a contingent liability, which is only a possible future obligation and is not deductible.
  • A Scientific Basis is Key: The most important factor in allowing a provision for an expense like warranty is demonstrating that it has been calculated using a logical, scientific, and consistent method, usually based on historical data and specific contractual terms. A wild guess will not be allowed.
  • Reversal of Unused Provision: Showing that the company has a system to track the utilization of the provision and to reverse any excess amount back to its income in later years is strong evidence of the provision’s legitimacy.
IN THE ITAT AHMEDABAD BENCH ‘B’
Roomag Motors & Controls (P.) Ltd.
v.
Deputy Commissioner of Income-tax
T.R. Senthil Kumar, Judicial Member
and MAKARAND V. MAHADEOKAR, Accountant Member
IT Appeal No. 796 (Ahd.) of 2025
[Assessment year 2014-15]
SEPTEMBER  9, 2025
Tushar Hemani, Sr. Adv. and Kushal Fofaria, AR for the Appellant. Abhijit, Sr. DR for the Respondent.
ORDER
Makarand V. Mahadeokar, Accountant Member.- This appeal by the assessee is directed against the order dated 25.02.2025, passed by the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “CIT(A)”] arising out of the assessment order passed under section 143(3) of the Income-tax Act, 1961 [hereinafter referred to as “the Act”] by the Deputy Commissioner of Income-tax, Anand Circle, Anand [hereinafter referred to as “Assessing Officer or AO”], dated 27.12.2016, for the Assessment Year 2014-15.
2. Facts in Brief
2.1 The assessee, Rotomag Entrtec Ltd. (formerly known as Rotomag Motors & Controls (P) Ltd.), a company engaged in the business of manufacturing of engineering goods, filed its return of income on 11.10.2014 declaring total income of Rs.4,65,34,343/-. The case was selected for scrutiny and statutory notices were issued.
2.2 The Assessing Officer completed the assessment u/s 143(3) on 27.12.2016 assessing the total income at Rs.5,21,42,750/-, after making the following disallowances and additions aggregating to Rs.56,08,404/-:
i.Disallowance of commission paid to foreign agents for non-deduction of TDS u/s 195 (Rs. 1,42,197/-).
ii.Disallowance of employees’ contribution to PF for delayed payment u/s 36(1)(va) (Rs. 20,250/-).
iii.Disallowance of interest on late payment of TDS (Rs. 3,693/-).
iv.Disallowance of medical expenses of directors as non-business expenditure u/s 37(1) (Rs. 1,00,901/-).
v.Disallowance of expenditure u/s 14A r.w.r. 8D (Rs. 11,97,333/-).
vi.Addition of interest income as per Form 26AS treated as undisclosed receipts (Rs. 19,44,030/-).
vii.Disallowance of provision for warranty expenses as contingent liability (Rs. 22,00,000/-).
Penalty proceedings u/s 271(1)(c) were also initiated separately.
2.3 The assessee carried the matter in appeal before the learned CIT(A). During appellate proceedings, notices were issued on various dates and written submissions were filed. However, the request for adjournment dated 24.02.2025 was not entertained, and the appeal was adjudicated on the basis of material available on record. The learned CIT(A), after considering the assessment order and submissions, confirmed all the additions/disallowances made by the AO.
3. Aggrieved, the assessee is now in further appeal before us raising following grounds of appeal:
1.The learned CIT(A) has erred in law and on facts of the case in upholding addition made by ld. AO Rs. 1,42,197/- u/s 40(a)(i) r.w.s 195 of the Act on the alleged ground of failure to deduct tax at source on the payment of commission to non-resident agents.
2.The learned CIT(A) has erred in law and on facts of the case in nonappreciation of the Double Tax Avoidance agreement between India and Germany.
3.The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO of disallowing employee’s contribution towards PF amounting to Rs. 20,250/- u/s 36(1)(va) of the Act.
4.The learned CIT(A) has erred in law and on facts of the case in not appreciating and confirming action of the Id. AO u/s 37(1) of the Act of disallowing the medical expenses claimed as a business expenditure on account of commercial expediency amounting to Rs. 1,00,901/- of a director who is also an employee of the appellant.
5.The learned CIT(A) has erred in law and on facts of the case in confirming action of ld. AO in invoking the provisions of Rule 8D of Income Tax Rules, 1962 in routine manner without recording any dissatisfaction to the claim of appellant.
6.The learned CIT(A) has erred in law and on facts of the case in confirming disallowance made by Id. AO u/s 14A of the Act r.w.r 8D of the Rules amounting to Rs. 11,97,333/-.
7.Without prejudice to the above, the learned CIT(A) has erred in law and in facts of the case where even if Rule 8D is applied, no interest element can be disallowed under Rule 8D(2)(ii) read with Section 14A as the Appellant had ample own funds.
8.Without prejudice to the above, the learned CIT(A) has erred in law and in facts in confirming the action of the learned AO without appreciating the law that the disallowance u/s. 14A cannot in any case exceed the exempt income earned during the year being Rs. 1,68,932.
9.Without prejudice to the above it is prayed that the Id. AO has failed to appreciate that even while applying rule 8D, while calculating average investment, only those investments on which exempt income (being dividend) is earned during the year needs to be considered & not the total investments.
10.The learned CIT(A) has erred in law and in facts of the case in confirming addition made by Id. AO of Rs. 19,44,030/- as undisclosed receipts even though the same has already been offered for in subsequent AY 2017-18.
11.The learned CIT(A) has erred in law and in facts confirming the action of the Id. AO in making addition of the interest income basis information in Form 26AS without appreciating the facts that the said interest income from customer was not accrued to the Appellant in year under consideration as the receipt of interest from such buyer was under dispute which was later settled in AY 2017-18.
12.The learned CIT(A) has erred in law and on facts of the case in confirming the disallowance made by the Id. AO for provision of warranty expenses amounting to Rs. 22,00,000/- without appreciating that the amount in dispute represents the present liability of warranty obligation on the sale of pumping system to be met over the subsequent five years.
13.The learned CIT(A) has erred in law and in facts in confirming the action of the Id. AO in disallowing warranty expenses of Rs. 22,00,000/- without appreciating the fact that the Appellant had actually incurred expenses of Rs. 18,49,415 in subsequent years which justifies beyond doubt that the accuracy the provision and its allowability under provisions of the Act.
14.Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. The action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.
15.The learned CIT(A) has erred in not appreciating the adjournment request filed dated 24.02.2025 along with request of scheduling video conferencing as per the Act before taking any adverse actions thereby grossly violating principles of natural justice.
16.The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in levying interest u/s. 234A/B/C and 244A of the Act.
17.The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in initiating penalty proceedings under Section 274.r.w.s 271(1)(c) of the Act.
18.The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.
4. We have carefully considered the orders of the Assessing Officer and the learned CIT(A), and examined the material placed on record. The appeal of the assessee arises from a series of additions and disallowances made by the Assessing Officer and confirmed by the learned CIT(A), aggregating to Rs.56,08,404/-. Since the issues are distinct and independent in nature, we deem it appropriate to deal with them issue-wise in the succeeding paragraphs.
5. The learned Authorised Representative reiterated the facts and made issue-wise submission before us whereas the learned Departmental Representative (DR) relied on the orders of lower authorities.
6.1 Issue No. 1 – Disallowance of Foreign Commission u/s.40(a)(i) r.w.s. 195 (Rs.1,42,197/-) – Ground No. 1 and 2
6.1.1 During assessment proceedings, the Assessing Officer noticed that the assessee had paid commission to non-resident agents without deduction of tax at source. According to the AO, such payments represented income deemed to accrue or arise in India within the meaning of section 9(1)(i) of the Act, and therefore the assessee was obliged to deduct tax at source u/s.195. Since no TDS was deducted, the AO invoked section 40(a)(i) and disallowed Rs.1,42,197/-.
Before the AO, the assessee contended that the commission was paid for services rendered outside India, that the foreign agents had no business connection or permanent establishment in India, and that under the Double Tax Avoidance Agreement, the commission was not taxable in India. The AO rejected the plea.
6.1.2 On appeal, the CIT(A) confirmed the disallowance, holding that the assessee had not furnished satisfactory evidence to establish that the services were rendered wholly outside India or that the recipients had no business connection in India. The plea regarding DTAA was also rejected for want of proper documentation.
6.1.3 Before us, the learned AR reiterated that the commission was paid to Octacom Antriebstechnik, Germany, a non-resident vendor who has neither earned income through any business connection in India, nor through or from any property/asset situated in India, nor through transfer of capital assets situated in India. The AR stated that vendor had no permanent establishment in India and the commission was paid outside India and received outside India. It was further submitted that the commission was purely for introducing prospective foreign clients and was not taxable in India under section 9(1)(i) of the Act or under the India-Germany DTAA. It was further argued that both the AO and CIT(A) ignored the binding effect of the DTAA provisions, which prevail over the Act in terms of section 90(2). Reliance was placed on the following decisions:
i.Pr. CIT v. Nova Technocast (P.) Ltd.   322 (Gujarat).
ii.Dy. CIT v. Gujarat Microwax (P.) Ltd.   644 (Ahmedabad – Trib.).
iii.Dy. CIT v. Mc Fills Enterprise (P.) Ltd.  174 ITD 667 (Ahmedabad – Trib.).
It was contended that in light of the above binding precedents, no disallowance u/s 40(a)(i) could be made.
6.1.4 We have given thoughtful consideration to the rival submissions and perused the material placed on record. The issue before us is whether commission paid to Octacom Antriebstechnik, Germany is chargeable to tax in India, thereby necessitating deduction of tax u/s 195, failing which disallowance u/s 40(a)(i) would be attracted.
6.1.5 It is a settled legal position, as reiterated by the Hon’ble Supreme Court in GE India Technology Cen. (P.) Ltd. v. CIT  327 ITR 456 (SC), that the obligation to deduct tax u/s 195 arises only when the payment made to a non-resident is chargeable to tax in India. The Hon’ble Gujarat High Court in Nova Technocast (supra) has held that where non-resident agents render services outside India in connection with export sales, the commission paid is not taxable in India, and consequently there is no obligation to deduct tax at source. Similar views have been taken by the Co-ordinate Bench in Gujarat Microwax (P.) Ltd. (supra) and Mc Fills Enterprise (P.) Ltd. (supra).
6.1.6 In the present case, the assessee has consistently claimed that the non-resident agent had no permanent establishment or business connection in India and that the services were rendered outside India. These submissions are supported by the nature of transaction, namely, commission for introducing foreign buyers. The revenue has not brought any material on record to show that the services were rendered in India or that the non-resident had a business connection in India. Mere procurement of export orders through agents based abroad, by itself, does not establish accrual of income in India.
In our considered view, the disallowance sustained by the CIT(A) does not stand in light of the above settled judicial position. The DTAA between India and Germany further supports the assessee’s case, as business profits of a non-resident are taxable in India only if the non-resident has a permanent establishment in India.
6.1.7 In the totality of facts and in light of binding precedents, we hold that the commission payment of Rs.1,42,197/- made to Octacom Antriebstechnik, Germany, is not chargeable to tax in India. Consequently, there was no obligation on the assessee to deduct tax u/s 195, and the disallowance made u/s 40(a)(i) is directed to be deleted. These grounds of the assessee are allowed.
6.2 Issue No. 2 – Disallowance of Employees’ Contribution to PF (Rs. 20,250/-) – Ground No. 3
6.2.1 At the time of hearing, the learned Authorised Representative fairly submitted that this ground is not pressed in view of the settled position of law against the assessee. The same is therefore dismissed as not pressed.
6.3 Issue No. 3 – Disallowance of Medical Expenses of Director (Rs.1,00,901/-) – Ground No. 4
6.3.1 The assessee claimed an amount of Rs.1,00,901/- as business expenditure towards reimbursement of medical expenses of one of its directors. The Assessing Officer held that such expenditure was personal in nature and not incurred wholly and exclusively for the purpose of business. Invoking section 37(1), the AO disallowed the claim.
6.3.2 Before the CIT(A), the assessee submitted that the Directors are employees of the company, and reimbursement of medical expenses constitutes part of their remuneration, which is contractually authorizing. It was also submitted that the Board of Directors had passed a resolution (Pg. 175 of PB-2) authorizing such reimbursement. IT was further submitted that the expenditure was incurred on grounds of commercial expediency since the director was a key managerial person and a driving force behind the company’s business. It was argued that a company, being a juristic person, cannot incur “personal expenses”; therefore, disallowance on that ground was misconceived. Reliance was placed on several judicial precedents before CIT(A).
6.3.3 The learned CIT(A), however, concurred with the AO’s findings, holding that personal medical expenses of directors do not fall within the ambit of section 37(1) unless covered under a contractual or statutory obligation.
6.3.4 The learned AR reiterated the submissions before the CIT(A) and also placed reliance on decision of Co-ordinate Bench in case of Dy. CIT v. Paradeep Oxygen (P.) Ltd. [2001] 71 TTJ 662 (Cuttack), wherein the Co-ordinate Bench held that reimbursement of medical expenses to the managing director, duly authorized by a bona fide Board Resolution, is allowable u/s 37(1) as expenditure wholly and exclusively for business purposes.
6.3.5 We have carefully considered the rival submissions, perused the orders of the authorities below, and examined the material placed on record including the Board Resolution dated 12.04.2011 (Pg. 175 of PB-2). On consideration, we note that the assessee has indeed placed on record the copy of the Board Resolution dated 12.04.2011, authorized reimbursement of actual medical expenses incurred by directors. The company, being a juristic person, cannot have personal needs of its own, and once the expenditure is incurred pursuant to a valid resolution of the Board and in discharge of contractual obligation, the same partakes the character of business expenditure. The Cord0nate Bench in Paradeep Oxygen (P) Ltd. (supra) has also held that reimbursement of medical expenses of a managing director, when duly authorized by Board resolution, is allowable u/s 37(1) as expenditure incurred wholly and exclusively for business purposes.
6.3.6 In light of these binding precedents and the factual position of authorisation by the Board Resolution, we are of the considered view that the disallowance sustained by the authorities below is not justified. We, accordingly, direct deletion of the addition of Rs.1,00,901/-. This ground of appeal is allowed.
6.4 Issue No. 4 – Disallowance u/s 14A r.w. Rule 8D (Rs.11,97,333/) – Ground No. 5 to 9
6.4.1 The Assessing Officer observed that the assessee had investments in shares and mutual funds aggregating to Rs.4,23,83,696/- as on 31.03.2014, and had debited finance cost of Rs.1,01,98,358/- in the Profit & Loss Account. Holding that part of this interest expenditure was attributable to investments yielding exempt income, the AO invoked Rule 8D and computed disallowance of Rs. 13,58,171/-, of which Rs.11,97,333/-was attributed to interest and Rs. 1,60,838/- to administrative expenses (0.5% of average investments). Since the assessee had already disallowed Rs.1,60,838/- suo motu, the AO sustained the balance disallowance of Rs.11,97,333/-.
6.4.2 Before CIT(A) the assessee contended that the exempt dividend income earned during the year was only Rs.1,68,932/- and the assessee had substantial interest-free funds (capital and reserves of Rs.15.48 crore) which were much higher than the investments of Rs.4.23 crore. Hence, no borrowed funds were utilised for making such investments. The assessee also submitted that the AO had not recorded the mandatory dissatisfaction under section 14A(2) with respect to the suo motu disallowance offered by the assessee. The assessee further submitted that no part of interest expenditure was incurred in relation to exempt income, as the loans were availed for specific business purposes (term loans for fixed assets, cash credit against hypothecation of stock and book debts).
6.4.3 The assessee argued that disallowance u/s 14A cannot exceed exempt income, as held in several judicial pronouncements. The assessee also relied upon numerous judicial precedents including CIT v. Reliance Utilities & Power Ltd. 313 ITR 340 (Bombay), CIT v. HDFC Bank Ltd.  366 ITR 505 (Bombay), CIT v. Gujarat State Fertilizers & Chemicals Ltd.   343 (Gujarat). It was further pointed out that in Asst.Year 2012-13, on similar facts, the CIT(A), Vadodara, had deleted disallowance u/s 14A in assessee’s own case.
6.4.4 The learned CIT(A), however, confirmed the AO’s action
6.4.5 Before us the learned AR reiterated the submissions made before CIT(A) and 10mphasized that the disallowance made by the AO exceeded the exempt income of Rs.1,68,932/-, which is impermissible in law.
6.4.6 We have heard the rival submissions and perused the record. The Assessing Officer disallowed a sum of Rs.11,97,333/- under section 14A read with Rule 8D(2)(ii), holding that part of the assessee’s interest expenditure was relatable to investments yielding exempt income. The learned CIT(A) has confirmed the disallowance.
6.4.7 It is not in dispute that the assessee earned exempt dividend income of Rs.1,68,932/- during the year. The assessee has demonstrated from its audited accounts that its capital and reserves as on 31.03.2014 stood at Rs.15.48 crore, far in excess of the investments of Rs. 4.23 crore. The assessee has also explained that interest-bearing borrowings comprised term loans for acquisition of fixed assets and cash credit against hypothecation of stock and book debts, which were utilised for business purposes. No nexus has been established by the Assessing Officer between the interest expenditure and the investments yielding exempt income.
6.4.8 We further note that the Assessing Officer has not recorded any dissatisfaction regarding the correctness of the suo motu disallowance of Rs.1,60,838/- made by the assessee in its return of income. Recording of satisfaction is a mandatory precondition under section 14A(2) before invoking Rule 8D, as held by the Hon’ble Supreme Court in Godrej & Boyce Manufacturing Company Ltd. v. Dy. CIT  394 ITR 449 (SC).
6.4.9 It is also a settled legal position that the disallowance under section 14A cannot exceed the exempt income earned during the year. The Hon’ble Jurisdictional High Court in CIT v. Corrtech Energy (P.) Ltd. 372 ITR 97 (Gujarat) has so held. In the present case, the disallowance sustained at Rs. 11,97,333/- is far greater than the exempt income of Rs.1,68,932/-, which itself renders the disallowance unsustainable.
6.4.10 In assessee’s own case for AY 2012-13, the learned CIT(A), Vadodara had deleted a similar disallowance on identical facts, which lends further support to the assessee’s contention.
6.4.11 Having regard to the above factual matrix and settled judicial precedents, we hold that no disallowance of interest expenditure is warranted under section 14A r.w.r. 8D(2)(ii) in the present case. The suo motu disallowance of Rs. 1,60,838/- offered by the assessee in respect of administrative expenditure is reasonable. We accordingly direct deletion of the disallowance of Rs. 11,97,333/- sustained by the CIT(A). These grounds of appeal are allowed.
6.5 Issue No. 5 – Addition of Rs. 19,44,030/- as undisclosed receipts (Form 26AS mismatch) – Ground No. 10 and 11.
6.5.1 The Assessing Officer noted a discrepancy between the assessee’s books of account and the details reported in Form 26AS, showing interest income of Rs.19,44,030/- from M/s. Wind World India Ltd. The AO observed that while TDS was deducted on the said amount during FY 201314, the corresponding interest income was not reflected in the assessee’s books for the relevant previous year. The AO, therefore, treated the said sum as undisclosed income of the assessee and added the same to the total income. The learned CIT(A) confirmed this addition.
6.5.2 Before the CIT(A), the assessee reiterated the facts It was explained that M/s. Wind World India Ltd. had deducted TDS on interest for the year under consideration. However, there was a dispute with the said party regarding the liability to pay such interest. Since the receipt of interest was under dispute, the assessee did not account for the same in its books in the year relevant to Asst.Year 2014-15. The dispute was eventually resolved in Asst.Year 2017-18, and the assessee recognized and offered the said income to tax in that year. It was, therefore, contended that the impugned sum has already been taxed in Asst.Year 2017-18 and the addition in Asst.Year 2014-15 would amount to double taxation of the same income. The assessee relied on ledger accounts of M/s. Wind World India Ltd. and interest income account, placed in the paper book, to substantiate its contention. However the CIT(A) confirmed the addition made by the AO.
6.5.3 Before us, the learned Authorised Representative reiterated that the assessee was supplying goods to M/s. Wind World India Ltd. and as per the terms of sales, in case of delayed payment, interest was chargeable. Since there was a dispute regarding the payment of such interest, the assessee did not recognise the same as income in AY 2014-15 even though TDS was deducted by the payer. Subsequently, in FY 2016-17 relevant to AY 201718, the dispute was settled and the assessee duly accounted for the interest income of Rs.19,44,030/- in its books and offered it to tax. Copies of ledger accounts (PB pages 215-219) were placed on record to demonstrate that the impugned sum was reflected in AY 2017-18. It was submitted that income accrues only when there is a corresponding right to receive and, therefore, taxing the same amount in AY 2014-15 would lead to double taxation.
6.5.4 We have carefully considered the rival contentions and perused the material on record. The Assessing Officer made the addition of Rs.19,44,030/- as undisclosed receipts on the basis of Form 26AS. The assessee’s contention is that although TDS was deducted in AY 2014-15, the right to receive the interest was under dispute and the amount was not actually received. The assessee has brought on record ledger accounts and supporting documents evidencing that the amount was finally recognised and offered to tax in AY 2017-18 upon resolution of the dispute.
6.5.5 In principle, the submission of the assessee is well founded. The doctrine of real income mandates that only real income which has accrued or is received can be brought to tax and not hypothetical accrual. At the same time, the possibility of double taxation on the same amount cannot be countenanced in law. In the interest of justice, therefore, while we accept the assessee’s contention that the amount of Rs. 19,44,030/- should not be taxed twice, we restore the matter to the file of the Assessing Officer with a direction to verify from the assessee’s accounts and records whether the said sum has in fact been offered and assessed to tax in AY 2017-18. If on verification it is found to be so, the addition made in AY 2014-15 shall be deleted.
This ground of appeal is allowed for statistical purposes, subject to verification by the Assessing Officer.
6.6 Issue No.6 – Warranty Provision of Rs. 22,00,000/- – Ground No. 12-13
6.6.1 The Assessing Officer disallowed the claim of warranty expenses amounting to Rs. 22,00,000/- treating the same as an unascertained and contingent liability. The AO held that no scientific basis was furnished for computing the provision, and in absence of cogent evidence, the same could not be allowed under the Act. The learned CIT(A) confirmed the action of the AO.
6.6.2 Before the CIT(A), the assessee submitted that it had executed an agreement with RHDS Project, Rajasthan, for supply of 348 pumping systems carrying a warranty obligation of five years. To meet such contractual obligation, the assessee estimated warranty expenses at 1.5% of the project cost and created a provision of Rs.22,00,000/- in its books. It was contended that out of the above provision, actual expenditure of Rs.6,87,397/- was incurred during the year, and the balance of Rs.15,12,603/- was credited back to income in the audited accounts, thereby ensuring that there was no excess claim. The assessee pointed out that the disallowance resulted in double taxation. Further reliance was placed on the audited balance sheet, ledger of warranty expenses and and judicial precedents, particularly the ratio laid down by the Hon’ble Supreme Court in Rotork Controls India (P) Ltd. v. CIT  314 ITR 62 (SC), wherein it was held that provisions for warranty are allowable if based on scientific estimation and past trend.
6.6.3 The learned CIT(A), however, confirmed the disallowance made by the AO. He held that the assessee had not substantiated the basis of computation of the provision with reliable estimation basis.
6.6.4 Before us, the learned AR reiterated the above contentions and further submitted that the issue stands covered in assessee’s own case for A.Y. 2017-18 in Rotomag Motors And Controls (P.) Ltd. v. Asstt. CIT  209 ITD 329 (Ahmedabad – Trib.)/[ITA No. 666/Ahd/2024], where the Tribunal has accepted similar claim. It was argued that the warranty provision was created on a rational basis linked to contractual terms, and the actual expenses incurred in subsequent years substantiate the accuracy of the provision. It was also pointed out that as per the ledger (PB-2, page 220) and supporting details (PB-1, page 155), an amount of Rs. 18,49,415/- had already been incurred against this provision in succeeding years, which evidences that the liability was not contingent but an ascertained business obligation.
6.6.5 We have carefully considered the rival submissions and perused the material available on record. The law on allowability of warranty provisions is settled by the Hon’ble Supreme Court in Rotork Controls India (P.) Ltd.(supra), wherein it was held that such provisions are deductible if: (i) a present obligation arises from a past event, (ii) an outflow of resources is probable, and (iii) a reliable estimate can be made on the basis of scientific method or past data.
6.6.6 In the present case, the assessee has demonstrated that the warranty provision was created pursuant to a contractual obligation under the RHDS Project for supply of pumping systems carrying a five-year warranty. The provision of Rs.22,00,000/- was computed at 1.5% of project cost, based on commercial prudence and past experience. Out of the provision, actual expenditure was incurred in subsequent years, aggregating to Rs.18,49,415/-, and the balance amount was duly reversed and offered to tax.
6.6.7 Further, in assessee’s own case for A.Y. 2017-18, the Co-ordinate Bench in ITA No.666/Ahd/2024 dated 30.08.2024, after elaborate analysis of the same issue, accepted the allowability of warranty provision. In that year, the Co-ordinate Bench held that a provision for warranty, even in the first year of contract, is allowable where it is made on a rational basis and complies with AS-29. The Co-ordinate Bench noted that the assessee had consistently made such provisions in earlier and later years, and that the provision was reversed and offered as income on expiry of warranty period, thereby evidencing the correctness of the estimate.
6.6.8 Respectfully following the ratio laid down by the Hon’ble Supreme Court in Rotork Controls (supra), Bharat Earth Movers v. CIT 245 ITR 428 (SC), and the binding decision of Co-ordinate Bench in assessee’s own case for A.Y. 2017-18 (supra), we hold that the disallowance of warranty provision in the present year is unsustainable. Accordingly, the addition of Rs.22,00,000/- is directed to be deleted. This ground of appeal is allowed.
7. In the combined result, the appeal of the assessee is partly allowed.