S.M. Constructions, Nellore, Nellore vs Assessee

ITA No.837/Hyd/12 : Assessment year 2007-08

M/s. S.M. Constructions V/s. Joint Commissioner of Income-tax Nellore Nellore

(PAN - AAAAM 7464 P )

(Appellant) (Respondent)

Appellant by : Shri A.V.Raghuram

Respondent by : Shri D.Sudhakar Rao, DR

Date of Hearing 11.3.2015 Date of Pronouncement 13.3.2015

ORDER

Per P.M.Jagtap, Accountant Member :

This appeal filed by the assessee is directed against the order of the learned Commissioner of Income-tax, Guntur dated 29.3.2012 passed under S.263, whereby he revised the assessment order passed by the Assessing Officer under S.143(3) with a direction to the Assessing Officer to make a disallowance of RS.80,92,979 under S.40(a)(ia) of the Act.

2. The assessee in the present case is a partnership firm which is engaged in the business as a civil contractor. The return of income for the year under consideration was field by it on 31.10.2007, declaring total income of Rs.53,36,856. In the assessment completed under S.143(3) vide order dated 23.3.2009, the total income of the assessee was computed by the Assessing Officer at Rs.63,36,860. The records of the said assessment subsequently came to be examined by the learned Commissioner and on such examination, he found that a sum of Rs.80,92,979 2 ITA No.837/Hyd/2012 M/s.S.M. Constructions, Nellore

debited by the assessee to the Profit & Loss Account on account of sub-contract commission, was paid without deduction of tax at source. According to the learned Commissioner, the assessee was liable to deduct tax at source from the said payment as per S.194J and having failed to do so, the amount of sub-contract commission was liable to disallowed under S.40(a)(ia). He, therefore, treated the assessment order passed by the Assessing Officer under S.143(3) without making such disallowance as erroneous as well as prejudicial to the interests of the revenue and issued a notice under S.263 on 24.11.2010, requiring the assessee to show cause as to why the said assessment order should not be revised. In reply, it was submitted by the assessee that the amount in question stated to be sub-contract commission/royalty was actually not in the nature of the amount covered under S.194J and therefore, tax at source was not required to be deducted from the said amount. It was also contended that the said amount in fact was retained by the principal contractor, while remitting the balance amount and it was thus a not a case of any payment made by the assessee attracting the provisions of TDS. The explanation of the assessee was not found acceptable by the learned Commissioner. According to him, the amount in question as per the contract agreement dated 19.1.2014 was clearly in the nature of royalty payable by the assessee to M/s. APR Construction at the rate of 5% on the gross bill amount and therefore, the assessee was liable to deduct tax at source from the payment of royalty as per the provisions of S.194J. He also held that even if the said amount is to be considered as payment of commission, the assessee was liable to deduct tax at source under S,194H of the Act. Since no tax at source was deducted by the assessee from the said amount either under S.194H or under S.194J, the assessment order passed by the Assessing Officer under S.143(3) was revised by the learned Commissioner under S.263, with a direction to the Assessing Officer 3 ITA No.837/Hyd/2012 M/s.S.M. Constructions, Nellore

to disallow the expenditure of Rs.80,92,979 under S.40(a)(ia). Aggrieved by the order of the learned Commissioner passed under S.263, the assessee has preferred the present appeal before the Tribunal.

3. In its appeal, the assessee firm has originally raised the following grounds-

"1. The Learned Commissioner of income Tax, Guntur grossly erred is passing orders u/s.263 of the I.T. Act, holding the assessment orders passed u/s 143(3) by the assessing officer for the A. Y. 2007- 08, as erroneous, in so far as it is prejudicial to the interest of the revenue, and directing the assessing officer to recompute income, disallowing, the expenditure of Rs. 80,92,979/- towards sub-contract commission U/S 40(a)(ia). The order of the Learned Commissioner of Income Tax, Guntur is arbitrary and contrary to the fact and circumstance of the case.

2. The Learned Commissioner of Income Tax ought to have seen that the assessing officer had passed orders, had rightly appreciated the submissions given by the assessee, at the time of assessment proceeding, for non applicability of Sec 40(a)(ia), to the facts and circumstance, for the sub-contract commission of Rs. 80,92,979/- debited to profit and loss account.

3. The Learned commissioner of Income tax, Guntur, ought to have appreciated the explanations offered, at the time of proceedings u/s. 263 of the I.T. Act. for non applicability of TDS provisions and non applicability of Sec 40(a)(ia) provisions, to the facts and circumstances of your appellants case .. The reasons adduced by the Learned commissioner of income tax, Guntur, in disallowing the claims of your petitioner, is illegal, unjustified and contrary to the facts and circumstances of the case

4 The Learned Commissioner of Income Tax, Guntur grossly failed to appropriate the fact that the said amount of Rs. 80,92.979/- is not a royalty as defined in explanation 2 is subs-section 9(l)(vi), and also the said expenditure do not fall under expenses between Sec 30 & 38, so as to attract the provision of Sec 40([1)(iaj.

5. Viewed from any angle the order passed by The Learned Commissioner of Income Tax, Guntur u/s.263 is erroneous. unjustified .unwarranted and against the facts and circumstance of the case.

6. For the reason stated and above and any other grounds that may be urged at the time of hearing your appellant, prays the Honourable Income Tax Appellate Tribunal, Hyderabad to kindly cancel the orders passed by the Learned Commissioner of Income Tax, Guntur and do justice."

4 ITA No.837/Hyd/2012 M/s.S.M. Constructions, Nellore

During the course of appellate proceedings, the assessee has moved an application dated 4.9.2014, for admission of the following additional grounds-

"1. On the facts and in the circumstances of the case, as there is constructive payment without deducting taxes, the CIT following the order of Special Bench in the case of Merlyn Shipping ought not to have directed the Assessing Officer to disallow the commission expenditure.

2. The CIT failed to appreciate that when there is no order passed under the provisions of section 201(1) of the Act treating the assessee to be in default, then the question of disallowing the claim of expenditure of commission does not arise."

Since the issues raised by the assessee in the additional grounds are legal issues which are arising from the impugned order of the learned Commissioner under S.263, and adjudication of the same does not require investigation of any new facts, the additional grounds filed by the assessee are admitted, keeping in view the decision of the Hon'ble Supreme Court in the case of NTPC V/s. CIT(229 ITR 393).

4. We have heard the arguments of both the sides and also perused the relevant material on record. As agreed by the ld representatives of both the sides, the issue involved in additional ground No.1 raised by the assessee is squarely covered by the decision of the coordinate bench of this Tribunal in the case of S.S. Net Works V/s. ITO rendered vide order dated 28.01.2015 passed in ITA.No.478/Hyd/2013 wherein it was held, following the decision of Hon'ble A.P. High Court in the case of CIT vs. Janapriya Engineers Syndicate (ITA.No.352 of 2014 dated 24.06.2014) as well as the decision of Special Bench of the Tribunal at Visakhapatnam in the case of Merylin Shipping and Transport vs. 5 ITA No.837/Hyd/2012 M/s.S.M. Constructions, Nellore

Addl. CIT (ITA.No.477/Vizag/2008 dated 29.03.2012), that if the relevant expenditure is found to have been paid within the relevant previous year, no disallowance under section 40a(ia) can be made on the ground that tax at source has not been deducted by the assessee from the payment of the said expenditure. In the present case, the expenditure in question on account of sub-contract commission/royalty was fully paid by the assessee in the year under consideration as clearly noted by the A.O. in his order and we, therefore, hold following the decision of Coordinate Bench of this Tribunal in the case of S.S. Net Works (supra), that no disallowance under section 40a(ia) can be made, on account of such sub-contract commission as the same was fully paid. We, therefore, hold that no disallowance under S.40(a)(ia) is required to be made as directed by the learned Commissioner of Income-tax, and his impugned order passed under S.263 is not sustainable on this count.

5. As regards the additional ground No.2, the learned representatives of both sides have agreed that the issue involved therein is also squarely covered by the decision of the coordinate bench of this Tribunal in the case of M/s. PLR Projects P. Ltd. rendered vide its order dated 12.3.2014, passed in ITA No.1079/Hyd/2013 of the Revenue and CO No.03/Hyd/2014 of the assessee therein, wherein it was held that by virtue of second proviso to S.40(a)(ia), inserted by the Finance Act, 2012 with effect from 1.4.2013, which is held to be retrospective in nature, the disallowance under S.40(a)(ia) cannot be made unless the assessee is deemed to be an assessee in default under the first proviso to S.201(1) of the Act. The assessee in the present case, as submitted by the learned counsel for the assessee, has not been treated as the assessee in default under S.201(1) of the Act for its failure to deduct tax at source from the amount of Rs.80,92,979 6 ITA No.837/Hyd/2012 M/s.S.M. Constructions, Nellore

in dispute, and this position has not been disputed or controverted by the Learned Departmental Representative. We therefore, respectfully follow the decision of the coordinate bench of the Tribunal in the case of PLR Projects (supra) and hold that no disallowance under S.40(a)(ia) is required to be made as directed by the learned Commissioner of Income-tax, and his impugned order passed under S.263 is not sustainable on this count also.

6. At the time of hearing before us, learned counsel for the assessee has also raised various contentions in support of the grounds originally raised in the present appeal challenging the disallowance directed to be made by the learned CIT(A) under S.40(a)(ia) in his impugned order. However, keeping in view our decision rendered on the issues raised in the additional grounds, holding that the disallowance under S.40(a)(ia) is not sustainable on two counts, we do not consider it necessary or expedient to adjudicate upon the original grounds raised by the assessee, which have virtually become infructuous.

7. In the result, appeal of the assessee is allowed.

Order pronounced in the court on 13th March, 2015

Sd/- Sd/- (Asha Vijayaraghavan) (P.M.Jagtap) Judicial Member Accountant Member

Dt/- March, 2015

Copy forwarded to:

1. M/s. S.M. Constructions C/o. Shri I. Sundara Raja Rao, Chartered Accountant, Flat No.3, Mayuri Apartments, Opp. BSNL Office, Nellore 524 003.

7 ITA No.837/Hyd/2012 M/s.S.M. Constructions, Nellore

2. Joint Commissioner of Income-tax, Nellore

3. Commissioner of Income-tax Guntur

4. Departmental Representative, ITAT, Hyderabad.

B.V.S