Margadarsi Chit Funds Private Limited, ... vs Department Of Income Tax

2. Brief facts are that the assessee company is engaged in the business of running chit fund business, entertainment, food processing and farm maintenance. For A.Y 2011-12, assessee company filed its return of income on 29.09.2011 admitting total income of Rs.88,24,87,208 and later filed a revised return of

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income on 15.3.2013 admitting gross total income of Rs.88,10,55,036. The AO completed the assessment u/s 143(3) of the Act determining the total income of the assessee company at Rs.540,53,59,193 by making disallowance u/s 40(1)(ia) for non deduction of taxes on payments made to M/s. Usha Kiron Movies Ltd of Rs.38,66,773, among other disallowances.

3. During the course of assessment proceedings, it was observed that the assessee company had made different payments to M/s Usha Kiron Movies Ltd. Out of this payments, TDS is made on some of the payments, whereas TDS has not been made on some other payments.During financiial year 2010- 11, it was observed that the assessee company has made a payment of Rs.1,27,66,093 to Usha Kiron Movies on which no tax was deducted at source on an amount of Rs.38,66,773. In this connection assessee company was asked to explain why these payments should not be disallowed as these payments are made towards composite contract entered into with M/s Usha Kiron Movies Ltd. In response to this, assessee company replied that these payments were made to M/s Usha Kiron Movies amounting to Rs.38,66,773 will not attract TDS as most of the head of accounts invoices includes VAT which were treated as purchases in nature. Further it was submitted by the assessee that all the payments were made as per MoU entered by both the parties.

4. AO stated as follows:

"On verification of MOU, it is observed that M/s Usha Kiron Movies Ltd has to provide marketing services to M/s Margadarsi Chit Fund Pvt. Ltd for the purpose of commercial exploitation of the various

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facilities created in film city. In this MOU there is a clause as per which M/s Margadarsi Chit Fund Pvt. Ltd has to reimburse all the charges/costs for utilizing infrastructural facilities. This clearly shows that all the payments made by M/s Margadarsi Chit Fund Pvt Ltd to M/s Usha Kiron Movies Ltd is as per this MOU. Out of these payments, some are subjected to TDS, whereas some are not subjected to TDS in the pretext of purchases. This is not acceptable. Because all the payments are made in connection with a composite contract with M/s Usha Kiron Movies Ltd in connection marketing of various facilities created in film city. Hence irrespective of nature of each payment, all the payments should have subjected to TDS. In this connection it is relied on Hon'ble Supreme Court decision in case of Chatturbhuj Vithaldas Jasar v. Moreshwar Parashram (1954) AIR 1954 SC 236. In this case, Hon'ble Apex Court opied as under:

"When a contract consists of a number of terms and conditions, each condition does not form a separate contract, but is an item in the one contract of which it is a part. The consideration for each condition in a case like this is the consideration for the contract taken as a while. It is not split up into several considerations apportioned between each term separately".

In view of the above it is very clear that the assessee company defaulted in deducting tax on payments of Rs.38,66,773 made to M/s. Usha Kiron Movies Ltd. Hence the same is disallowed u/s 40(a)(ia) and added to the income returned".

5. Aggrieved, assessee preferred appeal before the CIT (A) and submitted that a sum of Rs.38,66,773 was made for purchases on which VAT was levied and hence provisions of section 194C regarding deduction of tax on works contract will not apply. Alternatively, assessee submitted that if it is treated as single contract, the total value of the contract was Rs.11,27,66,093 the

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deduction u/s 194C on this amount works out to Rs.2,55,322 and as the assessee had paid TDS of Rs.4,88,590 on this contract, there shall be no disallowance on the same.

6. The CIT (A) held that he had already decided the issue in his order for A.Y 2010-11 and for the same reasons the AO is justified in making the addition of Rs.38,66,773. Thus, the CIT (A) confirmed the order of the AO.

7. Aggrieved, the assessee preferred appeal before and raised the following effective grounds:

"2(a) The CIT (A) grossly erred in sustaining the disallowance of Rs.38,66,773 u/s 40(a)(ia) for non- deduction of TDS on payments made to Usha Kiron Movies stating that all payments made to Usha Kiron Movies are by virtue of a contract and therefore, such payments are liable for TDS irrespective of the fact that whether such payments are liable for TDS or not under Chapter XVII-B of the Income Tax Act 1961. The CIT (A) failed to note that most of the items for which payments were made were for supply of goods which do not attract the provisions of tax deduction under chapter XCIIB of the I.T. Act. 1961.

(b) Without prejudice to the above, the appellant submits that since tax was deducted on payments made to Usha Kiron Movies, though at lower rate, no disallowance is warranted u/s 40(a)(ia)".

8. Further, the assessee raised the following additional grounds:

"1. The CIT (A)-V Hyderabad (hereinafter referred to as the "ld CIT (A)") erred in confirming the disallowance of rs.38,66,773 made by the ld.AO u/s 40(a)(ia) of the Act without appreciating the fact that the Appellant has paid Rs.1,27,66,093 against the composite contract and has deducted TDS of Rs.4,38,590. Hence the disallowance by invoking section 40(a)(ia) on the ground that tax is not deducted at source is not at all justified and the same may be deleted.

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2. Without prejudice to the above the ld CIT (A) erred in disallowing amount of Rs.38,66,773 by invoking section 40(a)(ia) without appreciating the fact that the said amount has been accounted by the payee in its regular books of accounts and considered for computing income for the impugned A.Y. Hence the disallowance of Rs.38,66,773 u/s 40(a)((ia) is not at all justified and the same may be deleted".

9. The ld DR relied on the decision of SA Builders (289 ITR 26) and objected for the additional grounds to be admitted. The DR also relied on the decision in the case of CIT vs.Southern Group Industries Ltd (300 ITR 113) (Chennai) and the ITAT Hyderabad 'B' Bench decision in IT(SS)A No.26/Hyd/2009 in the case of Jawaharlal vs. DCIT dated 3.9.2004.

10. The ld Counsel for the assessee countered the arguments of the DR and stated that the issues raised in the additional grounds were already there before the AO and the CIT (A) and no fresh facts or additional facts have been brought out by these additional grounds.

11. We heard both the parties. We find that the said issues raised in the additional grounds of appeal are legal issues and go to the root of the matter. Relying upon the decision of the Apex Court in the case of National Thermal Power Corporation (229 ITR 383 (S.C) and the decision of the Hon'ble Bombay High Court in the case of Ahmedabad Electric Company Ltd vs. CIT (199 ITR 351), we admit the additional grounds of appeal.

12. We are of the opinion that the contention of the assessee is to be accepted. If any payment is made towards purchase of articles on which VAT is leviable, then section 194C will not apply for the same. Even if it is assumed that the entire tax is to

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be taken as a single one and the purchases on which VAT was paid should not be segregated, even then the assessee has paid TDS of Rs.4,38,590 which is in excess of the required rate u/s 194C on the total value of the contract amounting to Rs.1,27,66,093. Further the assessee has paid the entire amount of Rs.38,66,773 before the closure of the year and no part of the same is outstanding as on 31.3.2011. The said amount has been accounted by the payee in its regular books of accounts and considered for computing income for the impugned A.Y. Hence applying the decision of the Special Bench in the case of Merilyn Shipping & Transports vs. Additional CIT (A) (16 ITR Trib-1 Visaka SB), we hold that the disallowance u/s 40(a)(ia) cannot be made in respect of the amount which has also been paid during the year. In view of the above discussion, we delete the disallowance of Rs.38,66,773 u/s 40(a)(ia) for non deduction of TDS and allow the appeal of the assessee.

13. In the result appeal in ITA No.1700/Hyd/2014 is allowed.

ITA No.1718/Hyd/2014- Revenue's appeal 14. The first issue is regarding disallowance of dividend/interest paid on subscription paid to the subscribers without deducting tax u/s 194H. The AO held that the payment of dividend to chit fund subscribers takes on the character of interest on deposits and accordingly TDS was to be deducted on these payments. Addition of Rs.451,72,94,766 u/s 40(a)(ia) of the Act made. The CIT (A) deleted the addition. Revenue is in appeal before us.

15. We find that this issue has been decided in favour of the assessee by the jurisdictional High Court for the A.Y 2008-09 in

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assessee's own case, wherein the appeal filed by the Department was dismissed by the Hon'ble High Court and the Hon'ble Supreme Court upheld the judgment of the Hon'ble High Court of Andhra Pradesh dismissing the SLP filed by the Revenue in SLP No.9454/2014. In this view of the matter, respectfully following the decision of the jurisdictional High Court, whose decision was upheld by the Hon'ble Supreme Court, we dismiss the appeal of the Revenue regarding disallowance of interest/dividend paid to the subscribers without deduction of tax.

16. The next issue is regarding proportionate disallowance of expenses on the ground that different Officers of the assessee company made collection on behalf of its subsidiary companies and accordingly proportionate expenses apportioned on the basis of collection were disallowed by the AO.

17. Before the CIT (A), assessee relied on the decision in the case of SA Builders v. CIT (288 ITR 1). Following the decision of the earlier years, the CIT (A) disallowed a sum of Rs.3.00 lakhs being the expenses incurred on behalf of the subsidiary company.

18. We find that the issue is covered by the decision of the Hyderabad Bench of the ITAT in assessee's own case for A.Y 2010-11 in ITA No.1620/Hyd/2013 dated 11/02/2015 wherein it was held that only the expenditure incurred for collection of subscription of the other group companies should be proportionately disallowed in that year. The CIT (A) disallowed an expenditure of Rs.2.00 lakhs on the ground that very little expenditure were deployed for collection of subscription from

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other group companies. Thus collection was done as minor additional work along with regular employment. In this view of the matter, the disallowance of Rs.2.00 lakhs was confirmed by the Tribunal.

19. We find that the facts of disallowance of Rs.3.00 lakhs is identical with those for the earlier A.Y 2010-11 and the CIT (A) has made disallowance of Rs.3.00 lakhs on the same basis as has been done for the A.Y 2010-11. In these circumstances, we have no hesitation in accepting the disallowance of Rs.3.00 lakhs made by the CIT (A) and dismiss the appeal of the Revenue seeking a higher disallowance. Hence the appeal of the Revenue is dismissed.

20. In the result, appeal in ITA No.1718/Hyd/2014 filed by the Revenue is dismissed.

Order pronounced in the Open Court on 13thMay, 2015.

Sd/- Sd/- (P.M. Jagtap) (Asha Vijayaraghavan) Accountant Member Judicial Member Hyderabad, dated 13 May, 2015. th

Vnodan/sps Copy to:

1. Margadarsi Chit Fund (P) Ltd., 5-10-195 Corporate Office, Opp: Police Control Room, Hyderabad 500004

2. Dy. Commissioner of Income Tax Circle 16(2) Hyderabad

3. CIT(A) -V Hyderabad

4. CIT -IV Hyderabad

5. The DR, ITAT, Hyderabad

6. Guard File By Order

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