ACIT, Circle-1, Nellore V. M/s R. Balarami Reddy & Co., Nellore Dist.

ITA 2224/HYD/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 74673 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 2 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-03-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 29-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: A V RAGHURAM
• Keywords: Opportunity of being heard; Principle of natural justice; Revenue expenditure
• Section: 194C; 201(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 2224/HYD/2011 ASSESSMENT YEAR: 2008-09 ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 1, NELLORE. VS. M/S R. BALARAMI REDDY & CO., CHINNACHERUKUR VILL, T.P. GUDUR MANDAL, NELLORE DIST. PAN AACFR6407J APPELLANT RESPONDENT REVENUE BY: SRI JEEVAN LAL LAVIDIYA ASSESSEE BY: SRI A.V. RAGHU RAM DATE OF HEARING: 04/03/2014 DATE OF PRONOUNCEMENT: 04/03/2014 O R D E R PER CHANDRA POOJARI, AM: THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED AG AINST THE ORDER OF THE CIT(A), GUNTUR, DATED 21/10/2011 FOR T HE ASSESSMENT YEAR 2008-09 WHEREIN THE REVENUE HAS RAISED THE FOL LOWING SUBSTANTIAL GROUNDS: 2 ) THE LEARNED CIT(A) HAS FAILED TO APPRECIATE THE A CTION OF THE ASSESSING OFFICER WITH REGARD TO DISALLOWANCE OF H IRE CHARGES AND INTEREST ON MOBILISATION ADVANCE PAID TO JV, U/ S 40(A)(IA). 3) THE CIT(A) OUGHT TO HAVE UPHELD THE ACTION OF T HE ASSESSING OFFICER WITH REGARD TO LIABILITY OF THE ASSESSEE FO R TDS ON PAYMENTS OF EITHER IN THE WAY OF HIRE CHARGES OR IN THE WAY OF INTEREST, ON THE PAYMENT OF HIRE CHARGES, TREATIN G AS REVENUE EXPENDITURE AND DEBITED TO P&L A/C. 4) THE CIT(A) OUGHT TO HAVE UPHELD THE ACTION OF TH E ASSESSING OFFICER IN DISALLOWANCE OF INTEREST ON MOBILISATIO N ADVANCE FOR NON-COMPLIANCE OF TDS PROVISIONS, WHEN IT IS A FACT THAT THE ASSESSEE HAS PAID INTEREST TO THE JV, WHICH IS A SEPARATE ENTITY. 2 ITA NO. 2224/H/2011 M/S. R. BALARAMI REDDY & CO. 2. BRIEFLY THE FACTS RELATING TO THE DISALLOWANCE OF EXPENDITURE OF RS. 58,42,152/- U/S 40(A)(IA) OF THE ACT REPRESENTING H IRE CHARGES IN RESPECT OF HIRE PURCHASE AGREEMENTS, ARE THAT THE A PPELLANT IS A CONTRACTOR FIRM, EXECUTING CONTRACT WORKS. THE ASSE SSEE E-FILED ITS RETURN OF INCOME FOR THE AY 2008-09 ON 01/10/2008 D ECLARING TOTAL INCOME AT RS. 2,22,13,140/- ON A TOTAL TURNOVER OF RS. 67,21,04,989/-. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD C LAIMED EXPENDITURE OF RS. 58,42,152/- TOWARDS HIRE CHARGES AGAINST HIRE AGREEMENTS AND THE PAYMENTS WERE MADE TO L&T FINANC E AND SREI FINANCE TOWARDS PURCHASE OF TIPPERS, MACHINERY AND OTHER EQUIPMENT. WHILE COMPLETING THE ASSESSMENT U/S 143(3), THE ASS ESSING OFFICER HAD DISALLOWED THE SAID AMOUNT OF RS. 58,42,152/- U /S 40(A)(IA) ON THE GROUND THAT THE ASSESSEE HAD FAILED TO DEDUCT T AX ON THE HIRE CHARGES MADE TO THE ABOVE TWO CONCERNS U/S 194A/194 I OF THE ACT. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEA L BEFORE THE CIT(A). 3. BEFORE THE CIT(A), IT WAS SUBMITTED THAT FOR THE PURPOSE OF ITS BUSINESS; IT HAS ACQUIRED MACHINERY UNDER HIRE PURC HASE AGREEMENTS FROM L& T FINANCE LTD., AND SREI INFRASTRUCTURE FIN ANCE LIMITED. THE FIRM IS PAYING HIRE CHARGES IN RESPECT OF HIRE AGRE EMENTS FROM YEAR TO YEAR. AT THE TIME OF PURCHASE OF MACHINERY THE FINA NCE PROVIDED BY THE HP COMPANIES TOGETHER WITH THE CHARGES FOR THE ENTIRE CONTRACT PERIOD IS CLUBBED AND DIVIDED THE SAME WITH THE NUM BER OF INSTALMENTS AS PER CONTRACT. THE ACCOUNTING OF HIRE CHARGES IN RESPECT OF HP AGREEMENTS IS THAT THE TOTAL HIRE CHARGES WIL L BE CREDITED TO THE ACCOUNT OF HIRE FINANCE COMPANIES AND DEBITED THE S AME TO UN MATURED HIRE CHARGES AT THE TIME OF ACQUISITION OF MACHINERY AND THE HIRE CHARGES PROPORTIONATE TO THE PERIOD DURING THE FINANCIAL YEAR IS DEBITED TO P&L A/C BY TRANSFERRING THE SAME FROM UN MATURED HP FINANCE CHARGES. THE APPELLANT HAS NOT PAID ANY INT EREST TO, HP FINANCE COMPANIES, SO AS TO ATTRACT THE PROVISIONS OF SEC 194A, 3 ITA NO. 2224/H/2011 M/S. R. BALARAMI REDDY & CO. WHICH CLEARLY SAYS THAT THE PROVISIONS ARE APPLICAB LE ONLY FOR INTEREST, OTHER THAN INTEREST ON SECURITIES. 3.1 THE AR OF THE ASSESSEE SUBMITTED THAT THE ASSES SING OFFICER HELD THAT SUCH HIRE PURCHASE FINANCE CHARGES PAID B Y THE ASSESSEE TO HP FINANCE COMPANIES CONSTITUTE INTEREST BY QUOTING INTEREST DEFINITION GIVEN IN SEC 2(28A) OF THE IT ACT AND AL SO REFERRED TO IT CIRCULAR NO. 738 DATED 25-03-1996, I NTEREST AS PER SEC 2 (28A) OF TILE I.T.ACL,1961, MEANS INTEREST PAYABLE IN ANY MANNER IN RESPECT OF MONEY BORROWED OR DEBT INCURRED (INCLUDI NG A DEPOSIT, CLAIM OR OTHER SIMILAR RIGHT OR OBLIGATION AND INCLUDE ANY SERVICE FEE OR OTHER CHARGE IN RESPECT OF THE M ONEYS BORROWED OR DEBT INCURRED OR IN RESPECT OF ANY CRED IT FACILITY AVAILED. 3.2 THE AR OF THE ASSESSEE SUBMITTED THAT THE ABOV E SECTION REFERS SIMPLY THE MANNER IN WHICH THE INTEREST PAYA BLE IN RESPECT OF ,!L10NEY BORROWED WHICH MEANS, INTEREST PAID IN CAS H I CHEQUE I ADJUSTMENT OF ACCOUNTS ETC. THE SECTION DOES NOT RE FER INTEREST PAID IN WHAT EVER NAME CALLED AND IT REFERENCES THE MANN ER OF PAYMENT OF INTEREST. IN THE PRESENT CASE, THE ASSESSEE HAS NOT PAID ANY INTEREST, IT PAID ONLY HIRE CHARGES IN RESPECT OF HP AGREEMEN T AND THE DEFINITION AS GIVEN ABOVE IS NOT APPLICABLE TO THE NATURE OF PAYMENT MADE BY YOUR APPELLANT. FURTHER, THE ASSESSING OFFICER REFERRED CIRCULAR NO.738 DATED 25.03.1996. THE SAID CIRCULAR REFERS TO CLARIFICATION GIVEN BY THE BOARD, IN RESPECT OF FIN ANCE CHARGES ACCRUING OR ARISING TO HP FINANCE COMPANIES FOR THE LIMITED PURPOSE OF TAXABILITY UNDER INTEREST TAX ACT GIVEN IN SEC 2 (7) OF THE INTEREST TAX ACT; IT IS NOT APPLICABLE TO HIRE CHARGES PAID BY T HE FIRMS TO HIRE PURCHASE FINANCE COMPANIES. 3.3 THE AR OF THE ASSESSEE SUBMITTED THAT IN FINAN CE TRANSACTIONS OTHER THAN HIRE PURCHASE, THE COMPANIES PROVIDING F INANCE HAVE NO POWER TO SEIZE THE MACHINERY IN CASE OF ANY DEFAULT IN DISCHARGING 4 ITA NO. 2224/H/2011 M/S. R. BALARAMI REDDY & CO. FINANCE CHARGE PAYMENTS, BUT HAVE TO APPROACH COURT S FOR SEIZURE OF ASSETS. BUT IN THE CASE OF HIRE PURCHASE FINANCE, T HE HP COMPANIES CAN SEIZE THE MACHINERY AND AUCTION THE SAME WITHOU T INTERFERENCE OF THE COURTS, IN CASE OF DEFAULTS. SO THE AMOUNT OF H IRE CHARGES PAID TO HP COMPANIES IS NOT INTEREST WITH IN THE MEANING GI VEN IN THE ACT. HENCE, THE PROVISIONS OF 194A ARE NOT APPLICABLE TO THE N ATURE OF PAYMENTS MADE BY THE ASSESSEE AND THE CIRCULAR REFERRED BY THE AO IS NOT APPLICABLE TO ASSESSEES CASE. 3.4 THE AR OF THE ASSESSEE SUBMITTED THAT FURTHER T HE AO HELD IF THE NATURE OF PAYMENT MADE BY THE ASSESSEE IS NOT I NTEREST. IT WOULD AMOUNT TO RENT, WHICH IS HIT BY SEC 1941 WITH EFFECT FROM A.Y. 2007-08 AS THE DEFINITION OF SEC 1941 IS BROAD ENED TO INCLUDE THAT ANY PAYMENT BY WHATEVER NAME CALLED, UNDER ANY LEASE, SUBLEASE, TENANCY OR ANY OTHER AGREEMENT OR ARRANGE MENT FOR THE USE OF (EITHER SEPARATELY OR TOGETHER) ANY - LAND O R BUILDING (INCLUDING FACTORY BUILDING) OR LAND APPURTENANT TO A BUILDING (INCLUDING FACTORY BUILDING) OR MACHINERY OR PLANT OR EQUIPMENT OR FURNITURE OR FITTINGS, WHETHER OR NOT ANY OR ALL OF THE ABOVE ARE OWNED BY THE PAYEE ATTRACTS THE PROVISIONS OF TDS U /S 1941. 3.5 THE AR OF THE ASSESSEE SUBMITTED THAT THE NATU RE OF PAYMENTS MADE BY IT IS NOT RENT WITHIN THE MEANING OF THE DEFINITION GIVEN IN EXPLANATION TO SECTION 1941, SI NCE, THE MACHINERY ON WHICH HIRE CHARGES PAID IN RESPECT OF HP AGREEMENT IS OWNED BY YOUR PETITIONER AND IS ALSO CLAIMING DE PRECIATION ON THE SAME. NO ONE PAYS RENT FOR THE ASSETS OWNED BY HIM. IN VIEW OF THE ABOVE EXPLANATION, THE NATURE OF PAYMENTS MA DE BY YOUR PETITIONER IS NOT INTEREST WITHIN THE MEANING OF NE ITHER SEC 2 (28A) TO ATTRACT THE PROVISIONS OF SEC 194A NOR RENT WITH IN THE MEANING OF EXPLANATION TO SECTION 194I OF THE IT ACT TO ATT RACT THE PROVISIONS OF SEC 40(A)(IA). 3.6 WITHOUT PREJUDICE TO THE ABOVE ARGUMENTS, THE A R OF THE 5 ITA NO. 2224/H/2011 M/S. R. BALARAMI REDDY & CO. ASSESSEE SUBMITTED THAT EVEN IT IS TREATED AS RENT, THE OF HIRE CHARGES PAID IN RESPECT OF HP AGREEMENT, ARE NOT HI T BY THE PROVISION OF SEC 194I. SEC 194I CAME INTO STATUE WI TH EFFECT FROM 13/07/2006, RELATING TO AY 2007-08. IN RESPECT OF T HE FOLLOWING AGREEMENTS, THE HIRE CHARGES IN RESPECT OF HP AGREE MENTS WERE ALREADY TRANSFERRED TO UN-MATURED HIRE CHARGES BEFO RE THE DATE OF 13.07.2006. AGREEMENT NO. L & T FINANCE LTD. 3 NOS. VOLVO TIPPERS 5,78,200 PC 300 2,69,315 8,47,515 SREI INFRASTRUCTURE FINANCE LTD . AGREEMENT NO. 8071 52,444 AGREEMENT NO. 7361 1,59,461 AGREEMENT NO. 5629 3,42,333 AGREEMENT NO. 5205 7,75,000 13,29,238 21,76,753 ========= IF AT ALL THERE IS APPLICABILITY OF PROVISIONS OF S EC 1941, IT IS NOT APPLICABLE TO AMOUNT OF HP FINANCE CHARGES OF RS. 2 1,76,753/-, AS THE AMOUNT WAS CREDITED TO THE RESPECTIVE HIRE P URCHASE COMPANIES PRIOR TO 13.07.2006, THE DATE OF APPLICAB ILITY OF SEC 1941.' 4. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESS EE AND THE ORDER OF THE ASSESSING OFFICER, THE CIT(A) OBSERVED THAT AS EXPLAINED BY THE AR THE PROVISIONS OF SECTION 40(A)(IA) ARE N OT APPLICABLE TO FINANCE CHARGES, WHICH IS NOT INTEREST AND AS SUCH THE SUBMISSION THAT THE CONCERNED PAYMENTS ARE OUT SIDE THE PURVIEW OF SECTION 194A IS ACCEPTABLE. THE ALTERNATIVE MEASURE ADOPTED BY THE AO THAT IN CASE THE PAYMENT OF HIRE PURCHASE FINANCE CHARGES ARE N OT INTEREST THEN SUCH CHARGES HAVE TO BE TREATED AS RENT PAID ON PRO VIDING ASSETS WAS ALSO CORRECTLY COUNTERED BY THE AR, AS IN CASE OF A SSETS PROVIDED ON RENTAL BASIS THE OWERNSHIP OF THE ASSETS LIE WITH THE PERS ON WHO HAS RENT SUCH ASSETS, WHERE AS IN HIRE PURCHASE THE APPELLANT IS THE OWNER OF THE ASSETS. THUS, IT IS A CASE WHERE THE F INANCE CHARGES PAID 6 ITA NO. 2224/H/2011 M/S. R. BALARAMI REDDY & CO. BY THE APPELLANT ARE NOT COVERED EITHER BY THE PROV ISIONS OF SECTION 194A OR THE PROVISIONS OF SECTION 1941. IF THE IMPU GNED PAYMENTS ARE THUS NOT COVERED EITHER BY THE PROVISIONS OF SECTIO N 194A OR THE PROVISIONS OF SECTION 194I, THEN APPLICATION OF THE PROVISIONS OF SECTION 40(A)(IA) ARE NOT AT ALL APPLICABLE AND AS SUCH THE SUBMISSION OF THE AR THAT THE AO HAS ERRED HOLDING THE APPELLA NT IN DEFAULT IN NOT SUBJECTING PAYMENT OF FINANCE CHARGES TO TDS AND CO NSEQUENTLY FURTHER HOLDING THAT THE PROVISIONS OF SECTION 40(A )(IA) ARE ATTRACTED AS NOT CORRECT. IN VIEW OF THE ABOVE OBSERVATIONS, THE CIT(A) HELD THAT THERE IS NO DEFAULT COMMITTED BY THE APPELLANT IN A S MUCH AS THE TDS PROVISIONS ARE CONCERNED AND AS SUCH DISALLOWANCE O F SUCH PAYMENTS IN TERMS OF THE PROVISIONS OF SECTION 40(A)(IA) IS NULLIFIED. IN THE CIRCUMSTANCES, THIS GROUND OF APPEAL IS TREATED AS ALLOWED. 5. WE HAVE HEARD THE ARGUMENTS OF BOTH THE PARTIES, PERUSED THE RECORD AND HAVE GONE THROUGH THE ORDERS OF THE AUTH ORITIES BELOW. WE FIND THAT THE ISSUE IN DISPUTE WHETHER IT IS INTERE ST OR NOT ON HIRE PURCHASE CONTRACT HAS BEEN DECIDED BY THE HONBLE A P HIGH COURT IN THE CASE OF CIT VS. M/S M.G. BROTHERS FINANCE LTD., VIDE ITTA NOS. 43,44,45, 50 OF 2007 AND 761 OF 2006, JUDGMENT DATE D 05/12/2013, WHEREIN THE HONBLE COURT HELD AS FOLLOWS: THE OWNER OF THE GOODS, WHICH ARE USABLE MOVABLE GO ODS LET OUT TO THE HIRER ON PAYMENT OF CERTAIN AMOUNT EITHE R ON MONTHLY OR QUARTERLY OR YEARLY BASIS AND AFTER PAYMENT OF T HE ENTIRE AMOUNT AS CLAIMED BY THE OWNER BEING THE PRICE OF T HE GOODS, IT IS OPTIONAL FOR THE HIRER TO BUY UP TO BECOME OWNER OR NOT. IN THE EVENT, HE EXERCISES HIS OPTION T BUY THEM, THEN, TH E OWNER OF THE GOODS IS BOUND TO CONVEY THE SAME BY TRANSFERRI NG TITLE IN FAVOUR OF THE HIRER. ON THE OTHER HAND, IF THE HIRE R DOES NOT EXERCISE HIS OPTION, THEN THE GOODS IN QUESTION MUS T BE RETURNED AND THE PAYMENTS SO FAR MADE ARE TREATED T O BE RENTALS. THEREFORE, THE WHOLE CONCEPT IS WITH REGARD TO PAYM ENT OF CONSIDERATION MONEY OR RENTAL NOT REPAYMENT OF LOAN AMOUNT IN FINANCIAL TRANSACTION. UNLESS THERE IS INVOLVEMENT OF LOAN TRANSACTION, THE QUESTION OF PAYMENT OF INTEREST DO ES NOT ARISE. THE AFORESAID PECULIAR SITUATION WITH REGARD TO THE HIRE PURCHASE AGREEMENT HAS BEEN EXPLAINED BY THE SUPREME COURT Q UITE LONG 7 ITA NO. 2224/H/2011 M/S. R. BALARAMI REDDY & CO. TIME BACK IN THE CASE OF SUNDARAM FINANCE LTD. VS. THE STATE OF KERALA. IN PARAGRAPH-24 OF THE SAID JUDGMENT, TH EIR LORDSHIPS HAVE EXPLAINED THE POSITION STATING THUS: BUT A HIRE PURCHASE AGREEMENT..................... ....IS MORE COMPLEX TRANSACTION. THE OWNER UNDER THE HIRE PURCH ASE AGREEMENT ENTERS INTO A TRANSACTION OF HIRING OUT G OODS ON THE TERMS AND CONDITIONS SET OUT IN THE AGREEMENT, AND THE OPTION TO PURCHASE EXERCISABLE BY THE CUSTOMER ON PAYMENT OF ALL THE INSTALMENTS OF HIRE ARISES WHEN THE INSTALMENTS ARE PAID AND NOT BEFORE. IN SUCH A HIR E PURCHASE AGREEMENT THERE IS NO AGREEMENT TO BUY GOO DS; THE HIRER BEING UNDER NO LEGAL OBLIGATION TO BUY, H AS AN OPTION EITHER TO RETURN THE GOODS OR TO BECOME ITS OWNER BY PAYMENT IN FULL OF THE STIPULATED HIRE AND THE P RICE FOR EXERCISING THE OPTION. THIS CLASS OF HIRE PURCHASE AGREEMENT MUST BE DISTINGUISHED FROM TRANSACTION IN WHICH THE CUSTOMER IS THE OWNER OF THE GOODS AND WI TH A VIEW TO FINANCE HIS PURCHASE HE ENTERS INTO AN ARRANGEMENT WHICH IS IN THE FORM OF A HIRE PURCHASE AGREEMENT. IN THIS CASE, THE LEARNED TRIBUNAL HAD ADMITTEDLY H ELD THAT THERE IS A HIRE PURCHASE AGREEMENT FACTUALLY. THEREFORE, WE AFFIRM THE JUDGMENT AND ORDER OF THE LEARNED TRIBUNAL. THE APP EALS FAIL AND THEY RE ACCORDINGLY DISMISSED. 5.1 IN VIEW OF THE ABOVE JUDGMENT, THE PAYMENT MADE BY THE ASSESSEE ON ACCOUNT OF HIRE PURCHASE TRANSACTION A ND PAYMENT OF FINANCE CHARGES/HIRE CHARGES CANNOT BE CONSTRUED AS INTEREST SO AS TO DEDUCT TDS U/S 194A OF THE IT ACT. ACCORDINGLY, TO THAT EXTENT, THE CIT(A) JUSTIFIED IN OBSERVING THAT SECTION 40(A)(IA ) IS NOT APPLICABLE. HOWEVER, WE FIND THAT INSERTION OF EXPLANATION 1 TO SECTION AFTER AMENDMENT OF SECTION 194A BY TAXATION LAWS (AMENDME NT) ACT, 2006, WITH EFFECT FROM 13/07/2006, PAYMENT BY THE ASSESSEE TOWARDS HIRE CHARGES ON HIRE PURCHASE AGREEMENT TO BE LIABL E FOR TDS U/S 194I OF THE ACT. ACCORDINGLY, WE DIRECT THE ASSESSING OF FICER TO RECOMPUTE THE DISALLOWANCE U/S 40(A)(IA) IN THE LIGHT OF THE AMENDED PROVISIONS, WHICH CAME INTO EFFECT FROM 13/07/2006. ACCORDINGLY , THIS GROUND OF APPEAL IS PARTLY ALLOWED. 8 ITA NO. 2224/H/2011 M/S. R. BALARAMI REDDY & CO. 6. THE NEXT GROUND IS WITH REGARD TO THE DISALLOWAN CE OF EXPENDITURE OF RS. 39,72,000/- REPRESENTING INTERES T ON MOBILISATION ADVANCE. 7. IN THIS CASE THE ASSESSEE CLAIMED THE ABOVE EXPE NDITURE UNDER THE HEAD INTEREST ON MOBILISATION ADVANCE. THE AS SESSING OFFICER QUESTIONED THE NATURE OF PAYMENT, IN REPLY, THE ASS ESSEE SUBMITTED THAT M/S SRINVASA CONSTRUCTIONS COMPANY AND R. BALA RAMI REDDY & CO, TWO INDIVIDUAL FIRMS, WHO FORMED A JOINT VENTUR E AS SRINVASA CONSTRUCTIONS COMPANY AND R. BALARAMI REDDY & CO. (JV) FOR THE PURPOSE OF EXECUTION OF CONTRACT WORKS AND ALSO TO SATISFY THE ELIGIBILITY CRITERIA IN THE EXECUTION OF CONTRACT W ORKS OF GOVT. OF MAHARASHTRA. THIS JV PARTICIPATED IN A TENDER AND C OULD SUCCESSFULLY BID THE TENDER IN THE IRRIGATION DEPARTMENT OF MAHA RASHTRA. TOWARD SUCH TENDER, AN AMOUNT OF RS. 13,00,02,000/- WAS RE LEASED AS INITIAL DISBURSEMENT TOWARDS MOBILISATION ADVANCE TO THE J V. THE ACCOUNT COPY OF THE ASSESSEE IN THE BOOKS OF THE JV CLEARLY INDICATED THAT THE INTEREST OF RS. 39,72,000/- WAS PAID BY THE ASSESSE E TO JV WHICH IS A DIFFERENT LEGAL ENTITY. ACCORDINGLY, THE ASSESSING OFFICER HELD THAT THE ASSESSEE IS LIABLE TO DEDUCT TDS U/S 194A OF THE AC T, WHICH FAILED TO DO SO BY THE ASSESSEE, HE INVOKED THE PROVISIONS OF SECTION 40(A)(IA) AND DISALLOWED THE INTEREST PAID BY THE ASSESSEE OF RS. 39,72,000/-. AGGRIEVED, THE ASSESSEE WENT IN APPEAL BEFORE THE C IT(A). 8. BEFORE THE CIT(A), THE AR OF THE ASSESSEE SUBMIT TED THAT INTEREST ON MOBILIZATION ADVANCE IS PAID TO IRRIGAT ION DEPARTMENTS OF THE GOVT. OF MAHARASTRA THROUGH JV FIRM M/S SRINIVASA CONSTRUCTIONS COMPANY AND R. BALARAMI REDDY & CO (JV). IT IS NOT IN DISPUTE THAT SRINIVASA CONSTRUCTIONS COMPANY AND R. BALARAMI RED DY & CO (JV) BOTBANDEPENDENT FIRMS CONVERGED TOGETHER AS J V FOR THE PURPOSE OF EXECUTION OF CONTRACT WORKS OF GOVT. OF MAHARASTRA AND THE GOVT. OF MAHARASTRA GIVEN MOBILIZATION ADVANCE TO JV AND ALS O JV IS SEPARATELY ASSESSED TO TAX. SINCE THE JV IS FORMED BY SRINIVASA CONSTRUCTIONS COMPANY & R. BALARAMI REDDY & CO, THE WORKS ALSO 9 ITA NO. 2224/H/2011 M/S. R. BALARAMI REDDY & CO. SHARED BY THE INDEPENDENT FIRM SO MUCH SO THE MOBIL ISATION ADVANCE RECEIVED FROM GOVT. OF MAHARASTRA. FOR THE UTILISAT ION OF MOBILIZATION ADVANCE, INTEREST IS TO BE PAID AS SUCH INTEREST TO THE SHARE OF M/S. R. BALARAMI REDDY &CO IS RS. 39,72,000/-. THE NATURE OF PAYMENT NO DOUBT IS INTEREST BUT IT IS PAID BOTH THE FIRM OF J V, CONTRIBUTING THE PROPORTION OF INTEREST WITH REFERENCE TO MOBILIZATI ON ADVANCE TAKEN AND IS PAID TO THE GOVT. OF MAHARASTRA. 8.1 FURTHER, THE AR SUBMITTED THAT THE CASE LAW REF ERRED BY THE LEARNED JOINT COMMISSIONER OF INCOME TAX IN CIT VS CENTARY BUILDING INDUSTRIAL (P) LIMITED 293 ITR 194 HAS NO APPLICABILITY TO YOUR PETITIONER'S CASE SINCE IN THE CITED CASE THE COMPA NY BORROWED FUNDS AND GIVEN TO ITS DIRECTORS AND THE HONOURABLE SUPRE ME COURT OBSERVED THAT THOUGH THE LOANS WERE MERELY ROUTED T HROUGH COMPANY BECAUSE THERE WERE THE TWO TRANSACTIONS ONE BETWEEN THE CREDITOR AND COMPANY AND THE OTHER BETWEEN COMPANY AND DIREC TORS, IT WAS HELD THAT TAX SHOULD HAVE BEEN DEDUCTED. IN THE CAS E CITED BY LEARNED JCLT THAT THE DIRECTORS OF THE ASSESSEE COM PANY BORROWED LOAN FROM CREDITORS OF COMPANY AND THE WHOLE TRANSACTION ARE NOT RECORDED IN THE ASSESSEE COMPANY, BUT RECORDED AS L OAN IN DIRECTORS BOOKS AS LOANS. ON SURVEY, THE DEPARTMENT DETECTED TAKING OF LOAN BY DIRECTORS OF THE COMPANY IS THEIR INDIVIDUAL CAPACI TIES FROM CREDITORS IN NAME OF THE COMPANY. FURTHER, THE HONOURABLE SUP REME COURT IN THE SAME CASE OBSERVED THAT THERE IS NO RESOLUTION OF THE ASSESSEE COMPANY PLACED BEFORE THE ASSESSING OFFICER WHEREBY THE' COMPANY HAS AGREED TO ACT AS MEDIUM FOR, ROUTING THE BORROW INGS AND REPAYMENTS. IN THESE CIRCUMSTANCES, THE HONOURABLE SUPREME COURT HELD THE CASE LIKE THAT. 8.2 THE AR SUBMITTED THAT THE ULTIMATE PAYEE IS TH E IRRIGATION DEPARTMENT OF GOVT. OF MAHARASHTRA ON WHICH TDS NEE D NOT BE DEDUCTED. FURTHER, THE JV IS SOLELY FORMED FOR EXEC UTION OF CONTRACT WORKS AND TAKING OF MOBILISATION ADVANCE AND PAYMEN T OF INTEREST FROMS AN INTEGRAL PART OF THE BUSINESS OF EXECUTION OF CONTRACT WORKS. 10 ITA NO. 2224/H/2011 M/S. R. BALARAMI REDDY & CO. HENCE, THE CASE LAW CITED BY THE LEARNED JCLT, NELL ORE, IS NOT APPLICABLE IN THIS CASE. 8.3 THE AR REFERRING TO THE JUDGMENT OF SUPREME COU RT IS HINDUSTAN COCA COLA BEVERAGES PRIVATE LIMITED 293 I TL 226(SC), WHEREIN IT WAS HELD THAT IF THE TAX HAS BEEN PAID B Y THE DEDUCTEES, SO THAT WHERE THIS COULD BE SHOWN TO HAVE BEEN SO, THE RE CAN BE NO LIABILITY FOR DEDUCTION ITSELF. IN THIS CASE, THE JV (DEDUCTEE) HAS DISCHARGED AND PAID ALL THE TAX LIABILITY AT THE PO INT OF TIME WHERE LIABILITY FOR DEDUCTION OF TDS ARISES. HENCE, EVEN BY VIRTUE OF THE ABOVE DECISION OF THE SUPREME COURT, NO LIABILITY T O DEDUCT TDS ARISES AND HENCE PROVISIONS OF SEC. 40A (IA) HAVE N O APPLICATION. 9. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSE E, THE CIT(A) DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFI CER BY OBSERVING AS UNDER: 6.2. I HAVE CONSIDERED THE SUBMISSIONS MADE BY THE APPELLANT, GONE THROUGH THE ORDER OF THE AO AND HEARD THE AR I N PERSON. IN THIS REGARD, I HAVE SEEN THE MATERIAL PRODUCED B Y THE AR AND ALSO SEEN THE CASE LAW CITED BY THE APPELLANT. THE FIRST SUBMISSION IS THAT THE RECIPIENT IS A GOVERNMENT BO DY AND AS SUCH THERE IS NO DEFAULT IN NON DEDUCTION OF TDS, WHICH IS CONVINCING. FURTHER SUBMISSION THAT IN THI S CASE, THE JV IS SOLELY FORMED FOR EXECUTION OF CONTRACT WORKS AN D TAKING OF MOBILIZATION ADVANCE AND PAYMENT OF INTEREST FORMS AN INTEGRAL PART OF THE BUSINESS OF EXECUTION OF CONTRACT WORKS IS ALSO CONVINCING. ANOTHER SUBMISSION BASED ON THE DECISIO N OF SUPREME COURT IN THE CASE OF HINDUSTAN COCA COLA BEVERAGES PRIVATE LIMITED, REPORTED IN 293 ITL 226( SC), WHEREIN IT WAS HELD THAT IF THE TAX HAS BEEN PAID B Y THE DEDUCTEES, SO THAT WHERE THIS COULD BE SHOWN TO HAV E BEEN SO, THERE CAN BE NO LIABILITY FOR DEDUCTION ITSELF. IN THIS CASE THE JV (DEDUCTEE) HAS DISCHARGED AND PAID ALL THE TAX LIABILITY AT THE POINT OF TIME WHERE LIABILITY FOR DEDUCTION OF TDS ARISES. HENCE, EVEN BY VIRTUE OF THE ABOVE DECI SION OF THE SUPREME COURT, NO LIABILITY TO DEDUCT TDS AR ISES AND HENCE PROVISIONS OF SECTION 40(A)(IA) HAVE NO APPLICATION IS ALSO QUITE CONVINCING. IN THESE CIRCUMSTANCES, IT IS HELD THAT THERE WAS NO DEFAULT COMMITTED BY THE APPELLANT AND ACCORDINGLY IT IS HE LD THAT THE ASSESSING OFFICER HAS WRONGLY APPLIED THE PROVI SIONS OF SECTION 40(A)(IA) IN AS MUCH AS THE PAYMENT OF I NTEREST 11 ITA NO. 2224/H/2011 M/S. R. BALARAMI REDDY & CO. ON MOBILISATION ADVANCE IS CONCERNED. IN THE CIRCUMSTANCES, THIS GROUND OF APPEAL IS ALSO TREATE D AS ALLOWED. 10. AGGRIEV ED BY THE ORDER OF THE CIT(A), THE REVENUE IS IN APPEAL BEFORE US. 11. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE REC ORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. I N OUR OPINION, THIS PAYMENT OF INTEREST IS THE INCOME OF THE JV AND IF THIS INCLUDED AS INCOME IN THE JV AS INCOME, ASSESS EE HAS NOT DEDUCTED THE TAX IN VIEW OF THE AMENDED PROVISIONS OF SECTION 40(A)(IA) OF THE ACT, WHEREIN IT WAS HELD THAT SEC OND PROVISO TO SECTION 40(A)(IA) INSERTED BY THE FINANCE ACT, 2012 WITH EFFECT FROM 01/04/2013, WHICH IS CLARIFICATORY IN NATURE A ND THE BENEFIT OF THE SAME SHOULD BE APPLIED RESTROSPECTIVELY AS H ELD BY THE COCHIN BENCH IN THE CASE OF ANTONY D. MUNDACKAL VS. ACIT IN ITA NO. 38/COCHI/2013 VIDE ORDER DATED 29/11/2013 F OR AY 2009-10. THE RELEVANT FINDINGS OF THE BENCH IN THE SAID CASE AS UNDER: 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND CAREFULL Y PERUSED THE RECORD. ACCORDING TO THE ASSESSEE, THERE IS NO WRITTEN CONTRACT BETWEEN HIM AND THE PERSONS DOING POLISHIN G WORKS. ACCORDINGLY, THE ASSESSEE HAS CONTENDED BEFORE US T HAT THE PROVISIONS OF SEC. 194C SHALL NOT APPLY TO THE POLI SHING CHARGES. HOWEVER, WE NOTICE THAT THE ASSESSING OFFICER HAS G IVEN A CLEAR FINDING THAT ESSENTIAL INGREDIENTS OF A CONTRACT AR E VERY MUCH AVAILABLE IN THE POLISHING WORKS ENTRUSTED BY THE A SSESSEE. FURTHER WE NOTICE THAT THE CBDT, VIDE CIRCULAR NO.4 33 DATED 25- 09-1985 (1986)(157 ITR ST. 27) HAS CLARIFIED THAT T HE PROVISIONS OF SEC. 194C ARE WIDE ENOUGH TO COVER ORAL CONTRACT S ALSO. A CONTRACT IS NORMALLY REDUCED IN WRITING IN ORDER TO MAKE CLEAR THE TERMS AND CONDITIONS, OBLIGATIONS OF THE PARTIE S TO THE CONTRACT ETC. IF THE CONDITIONS OF CONTRACT ARE OTH ERWISE UNDERSTOOD BY THE PARTIES, IN VIEW OF THE REPEATED TRANSACTIONS, IN OUR VIEW, THE ABSENCE OF A WRITTEN CONTRACT WOUL D NOT MAKE ANY DIFFERENCE. IN THE INSTANT CASE, THE ASSESSEE I S REPEATEDLY GIVEN WORKS TO THE POLISHING PEOPLE AND HENCE THE T ERMS AND CONDITIONS OF THE WORK WOULD BE CLEARLY UNDERSTOOD BY BOTH THE PARTIES. ACCORDINGLY, WE REJECT THIS CONTENTION OF THE ASSESSEE 12 ITA NO. 2224/H/2011 M/S. R. BALARAMI REDDY & CO. AND HOLD THAT THE PROVISIONS OF SEC. 194C SHALL APP LY TO THE POLISHING WORKS GIVEN BY THE ASSESSEE. 7.1 ACCORDING TO LD A.R, THE ASSESSEE HAS ACTED AS A CONDUIT PIPE IN CONNECTION WITH THE POLISHING WORKS BETWEEN THE CUSTOMERS AND THE PERSON DOING POLISHING JOB. ACCOR DINGLY, IT WAS SUBMITTED THAT THERE IS NO PROFIT ELEMENT IN TH E SAID TRANSACTIONS. THE LD A.R FURTHER SUBMITTED THAT THE ASSESSEE HAS INCLUDED THE COST OF POLISHING WORKS IN THE SAL E VALUE OF ALUMINIUM EXTRUSIONS, WITHOUT KNOWING TAX IMPLICATI ONS. HOWEVER, WE NOTICE THAT THE ASSESSEE DID NOT FURNIS H ANY PROOF TO SUBSTANTIATE THE ABOVE SAID CLAIMS. THE ASSESSEE , BEING A DEALER IN ALUMINIUM EXTRUSIONS, HAS ONLY SUPPLIED T HE PRODUCTS AFTER CARRYING OUT THE POLISHING WORKS ACCORDING TO THE TASTE AND REQUIREMENT OF CUSTOMERS. IT IS ONLY ONE OF THE MAN Y BUSINESS TECHNIQUES NORMALLY ADOPTED BY A BUSINESS MAN TO IM PROVE HIS SALES, SINCE IT WILL BE VERY DIFFICULT FOR CUSTOMER S TO IDENTIFY THE POLISHING PEOPLE AND GET THE WORK DONE BY THEMSELVE S. HENCE, WE ARE OF THE VIEW THAT IT MAY NOT BE CORRECT TO AR GUE THAT THE CONTRACT EXISTED BETWEEN THE CUSTOMERS AND THE POLI SHING PEOPLE. IN FACT, THE CUSTOMER MAY NOT HAVE ANY CONT ACT WITH THE POLISHING PEOPLE IN THIS TYPE OF TRANSACTIONS. HENC E, IT IS HARD TO BELIEVE THE CLAIM OF THE ASSESSEE THAT HE HAS ACTED AS MERE CONDUIT PIPE BETWEEN THE CUSTOMERS AND POLISHING PE OPLE. ACCORDINGLY, THE CLAIM THAT THE ASSESSEE STANDS IN A FIDUCIARY CAPACITY IS ALSO LIABLE TO BE REJECTED. IN THIS KIN D OF FACTUAL SITUATION, IN OUR VIEW, THE EXISTENCE OR ABSENCE OF PROFIT ELEMENT IN THE POLISHING WORKS DOES NOT MAKE ANY DIFFERENCE . 7.2 THE LD COUNSEL, BY PLACING RELIANCE ON THE DECI SION OF SPECIAL BENCH IN THE CASE OF MERYLINE SHIPPING AND TRANSPORTS (SUPRA) CONTENDED THAT THE PROVISIONS OF SEC. 40(A) (IA) SHALL APPLY ONLY TO AMOUNT PAYABLE AND NOT TO THE AMOUNT PAID. HOWEVER, THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. SIKANDAR KHAN N TUNVAR (357 ITR 312) AND THE HON'BL E CALCUTTA HIGH COURT IN THE CASE OF CIT VS. CRESCENT EXPORT SYNDICATE (ITAT 20 OF 2013) HAVE HELD THAT THE DECI SION RENDERED BY THE SPECIAL BENCH IN THE CASE OF MERYLI NE SHIPPING & TRANSPORTS IS NOT A GOOD LAW. THE LD A.R, HOWEVER , PLACED RELIANCE ON THE DECISION OF HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF VECTOR SHIPPING SERVICES (357 ITR 642). ON A CAREFUL PERUSAL OF THE DECISION GIVEN BY HON'BLE ALLAHABAD HIGH COURT, WE NOTICE THAT THE HIGH COURT HAS DECIDED THE ISSUE REFERRED TO IT ON A DIFFERENT FOOTING AND HAS MADE A PASSING CO MMENT ABOUT THE DECISION RENDERED BY THE SPECIAL BENCH. THUS, T HE RATIO OF THE SAID DECISION IS DIFFERENT FROM THAT RENDERED I N THE CASE OF MERYLINE SHIPPING AND TRANSPORTS BY THE SPECIAL BEN CH. HENCE, WE ARE INCLINED TO REJECT THE CONTENTIONS OF THE AS SESSEE ON THIS POINT ALSO. 13 ITA NO. 2224/H/2011 M/S. R. BALARAMI REDDY & CO. 7.3 THE ASSESSEE PLACED RELIANCE ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF HINDUSTAN COCO-COLA BE VERAGES LTD (SUPRA) IN ORDER TO CONTEND THAT THE REVENUE IS NOT ENTITLED TO RECOVER TAXES, IF THE RECIPIENT HAS DECLARED THE PAYMENTS IN HIS RETURN OF INCOME. WE NOTICE THAT THE ABOVE SAID DECISION WAS RENDERED IN THE CONTEXT OF THE PROVISIONS OF SE C. 201(1) AND HENCE, WE ARE OF THE VIEW THAT THE RATIO OF THE SAI D DECISION CANNOT BE APPLIED TO THE DISALLOWANCE MADE U/S 40(A )(IA) OF THE ACT. 7.4 THE LAST CONTENTION OF THE ASSESSEE IS THAT THE SECOND PROVISO TO SEC. 40(A)(IA) OF THE ACT, INSERTED BY T HE FINANCE ACT, 2012 WITH EFFECT FROM 1.4.2013 IS CLARIFICATORY IN NATURE AND HENCE THE BENEFIT OF THE SAME SHOULD BE APPLIED RET ROSPECTIVELY. HOWEVER, THE CORRECTNESS OF THIS CONTENTION HAS NOT BEEN EXAMINED BY THE TAX AUTHORITIES. HENCE, IN THE INTE REST OF NATURAL JUSTICE, WE ARE OF THE VIEW THAT THIS CONTE NTION OF THE ASSESSEE REQUIRES EXAMINATION AT THE END OF THE ASS ESSING OFFICER. ACCORDINGLY, WE MODIFY THE ORDER OF THE LD CIT(A) AND SET ASIDE THIS GROUND TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO EXAMINE THE ABOVE SAID CONTENTION OF T HE ASSESSEE AND DECIDE THE SAME IN ACCORDANCE WITH THE LAW, AFT ER AFFORDING NECESSARY OPPORTUNITY OF BEING HEARD. WE MAKE IT CL EAR THAT WE HAVE, IN EFFECT, REJECTED ALL THE CONTENTIONS OF TH E ASSESSEE EXCEPT THE GROUND RELATING TO APPLICABILITY OF THE SECOND PROVISO TO SEC. 40(A)(IA) OF THE ACT TO THE YEAR UNDER CONS IDERATION. 11.1 THE SAID VIEW WAS FOLLOWED BY PUNE BENCH OF IT AT IN THE CASE OF GAURIMAL MAHAJAN & SONS IN ITA NO. 1852/PUN E/2012 FOR AY 2008-09 VIDE ORDER DATED 06/01/2014. THE LEA RNED AR RELIED ON THE DECISION OF THE COORDINATE BENCH OF I TAT, HYDERABAD IN THE CASE OF M/S HINDUSTAN RATNA JV IN ITA NO. 372/HYD/2013 FOR AY 2009-10 ORDER DATED 18/12/2013, WHICH IS NOT APPLICABLE TO THE FACTS OF THE CASE OF THE ASSE SSEE. 11.2 FOLLOWING THE DECISION OF THE COORDINATE BENCH OF ITAT, COCHIN IN THE CASE OF ANTONY D. MUNDACKAL VS. ACIT( SUPRA), WE DIRECT THE ASSESSING OFFICER TO SEE WHETHER JV H AS PAID TAX ON THE INCOME OR NOT ON THIS INCOME AND DECIDE THE ISSUE IN ACCORDANCE WITH LAW. ACCORDINGLY, THIS GROUND OF AP PEAL IS ALLOWED FOR STATISTICAL PURPOSE. 14 ITA NO. 2224/H/2011 M/S. R. BALARAMI REDDY & CO. 12. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 04/03/2014. SD/- (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED 04/03/2014. KV COPY FORWARDED TO: 1. ACIT, CIRCLE 1, NELLORE 2. M/S R. BALARAMI REDDY & CO., CHINNACHERUKUR VILL , T.P. GUDUR MANDAL, NELLORE DT. 3. CIT(A), GUNTUR 4. CIT, GUNTUR 5. THE DR, ITAT, HYDERABAD