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2026 Supreme(Online)(ITAT) 10137
INCOME TAX APPELLATE TRIBUNAL (AHMEDABAD BENCH)
Annapurna Gupta, Accountant Member, Siddhartha Nautiyal, Judicial Member
Kiri Industries Ltd. – Appellant
Versus
Deputy Commissioner of Income Tax – Respondent
I.T.A. No.2065/Ahd/2025
For the Appellants/Petitioners: Tushar Hemani
For the Respondents: Rameshwar P Meena
Commission paid to non-resident agents for services rendered entirely outside India is not taxable in India; likewise, interest disallowance is unwarranted if available interest-free funds exceed investments in CWIP. However, delayed employee PF/ESI contributions are non-deductible regardless of return filing dates.
Headnote:The appeal revolves around disallowances made under S. 40(a)(i), S. 36(1)(iii), and S. 36(1)(va) of the Income-tax Act, 1961. The assessee challenged the disallowance of commission paid to non-resident agents for export services, interest expenses on borrowed funds used for capital work-in-progress (CWIP), and delayed deposits of employees' PF/ESI contributions. The court found that services rendered outside India by non-residents without a permanent establishment do not accrue income in India, and substantial interest-free funds create a presumption that CWIP was funded without borrowings. The primary issues were whether commission paid to foreign agents was taxable in India, whether interest should be capitalized when sufficient interest-free funds exist, and whether delayed employee contributions are deductible. The court reasoned that "once the income is not chargeable to tax in India, the provisions of section 195 of the Act are not attracted" and that "where interest-free funds available with the assessee are sufficient to meet the investments, it shall be presumed that such investments are made out of interest-free funds". Regarding PF/ESI, the court held that deposits beyond statutory due dates are non-deductible. In the result, the appeal of the assessee is partly allowed.
O R D E R
PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER:
This appeal has been filed by the Assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals), (in short “Ld. CIT(A)”), National Faceless Appeal Centre (in short “NFAC”), Delhi vide order dated 13.08.2025 passed for A.Y. 2021-22.
The assessee has raised the following grounds of appeal:
“1. The Ld. CIT(A) and Ld. AO has erred in law and on facts in disallowing expenses claimed as commission paid on exports of-Rs.88,61,356 u/s 40(a)(i) of the Act, on account of non-deduction of tax at source.
2. The Ld. CIT(A) and Ld. AO has erred in law and on facts in disallowing interest expenses of Rs.2,70,98,027 u/s36(1)(iii) of the Act.
3. The Ld. CIT(A) and Ld. AO has erred in law and on facts in disallowing employees contribution towards Provident Fund and Employee State Insurance Scheme of Rs.7,11,142 u/s 36(1)(va) of the Act.
4. 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. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.
5. The Ld. CIT(A) has erred in law and on facts of the case in confirming action of the Ld. AO in levying interest u/s. 234B and 234C of the Act wherever applicable.
6. The learned AO has erred in law and on facts in initiating penalty proceedings under Section 270A of the Act.
7. 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.”
The brief facts of the case are that the assessee is a company engaged in business activities and its return of income for A.Y. 2021–22 was subjected to scrutiny assessment under section 143(3) read with section 144B of the Income-tax Act ("the Act"), 1961. During the course of assessment proceedings, the Assessing Officer firstly disallowed commission expenditure of ₹88,61,356/- paid to non-resident agents by invoking section 40(a)(i) of the Act on the ground that the assessee failed to deduct tax at source under section 195 of the Act. The Assessing Officer held that although the agents rendered services abroad in procuring export orders, the right to receive commission arose in India upon execution of such orders and therefore the income was deemed to accrue or arise in India under section 9(1)(i) of the Act. The Assessing Officer further observed that the assessee had not made an application under section 195(2) of the Act to determine taxability and had unilaterally assumed that the payments were not chargeable to tax. Secondly, the Assessing Officer disallowed interest expenditure of ₹2,70,98,027/- under section 36(1)(iii) of the Act by holding that borrowed funds were utilized for capital work-in-progress and therefore proportionate interest ought to have been capitalized till such assets were put to use. The Assessing Officer noted that the assessee had mixed funds and failed to demonstrate direct nexus of borrowings with business operations, and accordingly computed proportionate disallowance based on average borrowed funds and CWIP. Thirdly, the Assessing Officer made an addition of ₹7,11,142/- under section 36(1)(va) read with section 2(24)(x) of the Act on account of delayed deposit of employees’ contribution towards PF and ESI beyond the due dates prescribed under the respective statutes. Though the assessee had suo motu disallowed a substantial portion, the balance amount was treated as income by the Assessing Officer.
Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(Appeals). With respect to Ground Nos. 1 the assessee submitted that commission paid to foreign agents was not chargeable to tax in India since the services
