Income Tax Appellate Tribunal - Ahmedabad
Dharamsinh Rajabhai Makwana, Anand vs Assessee on 4 September, 2012
1 I TA No. 1090/AHD/2009
. Assessment Year 2005-06
.
IN THE INCOME TAX APPELLATE TRIBUNAL "A " BENCH, AHMEDABAD
(BEFORE SHRI G.C.GUPTA VICE PRESIDENT & SHRI ANIL CHATURVEDI, A.M.)
I.T. A. No. 1090/AHD/2009
(Assessment Year: 2005-06)
M/s. Dharamsinh R.Makwana Vs. Assistant Commissioner of
Chandralok Building, Anand Circle,
Bhalej Road, Anand.
Anand.
(Appellant)
(Respondent)
PAN: AABFD 2427P
Appellant by : Ms. Urvashi Shodhan
Respondent by : Shri Raj Mehra, Sr. D.R.
आदे श)/ORDER
(आदे Date of hearing : 04- 09-2012 Date of Pronouncement : 2-11-2012 PER: SHRI ANIL CHATURVEDI, A.M. This appeal is directed against the order of Ld. CIT (A)-IV, Baroda dated 26-2-2009 for the assessment year 2005-06.
2. Assessee is a civil Contractor engaged in the business of Civil Construction work mainly for Government and Semi-Government 2 I TA No. 1090/AHD/2009 . Assessment Year 2005-06 .
organizations. It filed return of income on 27-10-2005 declaring total income of Rs.5,06,800/-.The case was selected for scrutiny and subsequently the assessment was framed u/s. 143(3) vide order dated 27- 12-2007 and the total income was assessed at Rs. 1,02,86,550/-. Aggrieved by the order of A.O., assessee preferred appeal before CIT (A). CIT (A) vide order dated 26-2-2009 granted partial relief to assessee. Aggrieved by the order of CIT (A), the Assessee is now in appeal before us.
3. 1st Ground is with respect to holding relationship of assessee and the assignee of contractor and sub-contractor and thereby holding that provisions of sec. 194C (2) are applicable.
4. From the perusal of Profit and loss account filed, the A.O. observed that the Gross sales of the assessee was Rs.2,98,36,651/- from, which the assessee had deducted amount of Rs.90,69,706/- on account of assigned contract given to Shri Ramansinghbhai Keshavbhai Prajapati (Rs.89,52,766/-) and Vijaybvhai Bhurabhai Prajapati (Rs.1,16,940/-).The assessee submitted that the assessee had during November, 2003 submitted a tender for construction of quarters for Gujarat State Police Housing Corporation (GSPHC). The assessee's tender was accepted. It was submitted that since the key working partner, Shri Motibhai Dharamshibhai Makwana had expired in July the assessee was finding it difficult to complete the work in time. The assessee accordingly assigned the entire contract to Shri Ramsingh Prajapati with no interest or any right or title in the said work. Accordingly the entire income arising from the said 3 I TA No. 1090/AHD/2009 . Assessment Year 2005-06 .
work contract stood diverted in favour of assignee by virtue of diversion of income by overriding title and hence the same was not considered as assessee's contract. It was further submitted that the entire income/profit or loss arising out of the execution of the said work was to the account of the assignee only and that the assessee had no right or interest in the income or profit or loss arising out of the said contract. The work was assigned work and not subcontracted or sublet by the assessee.
5. The A.O. also observed that a contract at Kandla for the construction of warehouse was assigned to Shri Vijaybhai Prajapati. The contract value was Rs.1,16,940/-.No reason for assignment of Kandla contract was submitted to the A.O. The A.O. was of the view that contract value being small it could have been easily completed by the assessee.
6. The A.O. did not accept the contentions of the assessee. He was of the view that the contract work was given to Shri R.K. Prajapati on certain terms and conditions. He also noticed that all receipts net of deductions was received by the assessee, TDS certificates were issued in the name of the assessee and the assessee had also claimed credits for the TDS certificates in its return of income. He held that the alleged assignment of work by the assessee to Shri Ramsingh Prajapati and Vijaybhai Prajapati was in the nature of sub-contract and the assessee was under the obligation to deduct TDS as per the provisions of Sec.194C. Since the assessee had failed to deduct TDS, before crediting the amount to the account of Prajapati, he disallowed the aggregate credits amounting to Rs.81,00,531/- u/s. 40(a)(ia) and added to the total income of the 4 I TA No. 1090/AHD/2009 . Assessment Year 2005-06 .
assessee. Aggrieved by the action of A.O., the assessee carried the matter before CIT (A). CIT (A) upheld the addition made by the A.O. by holding as under:-
"2.2. I have carefully considered the facts of the case and submissions. It was the appellant, who participated in the tenders floated by Gujarat State Police Housing Corporation Ltd. for construction of quarters at Mangrol, Surat and was awarded the same. Thus there is no dispute that appellant is the "contractor", who was awarded the work of construction. Though an agreement with Shri R.K. Prajapati, appellant entrusted the work received from GSPHCL to Shri R. K. Prajapati. Under section194C (2), any person being a contractor, responsible for paying any sum to any resident in pursuance of a contract, is under obligation to deduct tax at source. Such other person is termed as a subcontractor in section 194C (2).The way section 194C (2) is worded, Shri R.K. Prajapati and Shri V. B. Prajapati automatically become subcontractors, being residents receiving payments from a contractor in pursuance of a works contract. Moreover, it was the appellant, who was always responsible to GSPHCL under the contract. Had there been any breach of contract, GSPHCL would have proceeded against the appellant only and not against Shri R. K. Prajapati. It cannot therefore, be said that the contract was assigned by appellant to R.K .Prajapati. Any such assignment would have been with consent of the principal, i.e. GSPHCL, which is not the case here. The fact that no profit was retained by the appellant does not make any difference to the status of R.K. Prajapati, being a subcontractor. Relationship between parties are to be adjudged from, the point of view of contractual relationships and making of profit is an irrelevant consideration. It is to be noted that Shri R.K. Prajapati, in his own return of income showed income on this count as subcontract income from DR, i.e. the appellant.
Regarding appellant's contention for assignment of work and transfer of income through overriding title, the case laws relied upon is on the issue that income transferred through overriding title is not to be taxed in the hands of transferor of income. The limited issue in appellant's case is regarding applicability of TDS provisions, i.e. whether R.K. Prajapati was a subcontractor within the meaning of 5 I TA No. 1090/AHD/2009 . Assessment Year 2005-06 .
section 194C (2) or not. As discussed, the appellant and Shri R. K. Prajapati did have a contractor-subcontractor relationship. Provisions of section 194C (2) were therefore, clearly applicable. In the case of Shri V. B. Prajapati, no submissions were made either at assessment stage or before me. Shri V. B. Prajapati is also a subcontractor and it is held that appellant was liable to deduct tax at source from the payments made to Shri V. G. Prajapati, which fall under section 194C (2)."
7. Aggrieved by the order of CIT (A) the assessee is in appeal before us.
8. Before us the Ld. A.R. submitted that the entire contract work for the construction of police quarters which was awarded to assessee was assigned to Ramsingh Prajapati with no interest or any right or title in the said work and the entire income arising from the said work contract stood diverted in favour of assignee (i.e. Ramsingh Prajapati) by virtue of diversion of income by overriding title. The assessee had no right or interest whatsoever in the income or profit or loss that would arise in execution of the said work. The work was given to Ramsing Prajapati on assignment basis and it was not sublet or subcontracted. The Ld. A. R. relying on the decision of CIT vs. Sitaldas Tirathdas (1961) 41 ITR 367 (SC) submitted that since the assessee had collected the income not as its own income but for and on behalf of the assignee, it could not be contended that the income collected in respect of assigned work was assessee's income. It was further submitted that since the entire amount of consideration was passed on to the assignee as per the terms of assignment of work, it cannot be held as claim of expenditure and hence 6 I TA No. 1090/AHD/2009 . Assessment Year 2005-06 .
provisions of section 40(a)(ia) did not have application to the assessee's case and therefore the disallowance of Rs.81,00,531/- needed to be deleted. The Ld. A.R. placed on record the copies of correspondence and its free English translation between the assessee and Ramsingh Prajapati at pages 13 to 43 of the paper book.
8. On the other hand the Ld,. D.R. pointed out to the observation made by the A.O. in the assessment order and submitted that the work relating to construction of Police quarters was tendered in November, 2003 by the firm in response to the tender announcement. The key working partner Mr. Motibhai Dharamshibhai Makwana expired on 17-7-2003. Thus the submission of the assessee that it was finding it difficult to complete the work due to the death of main working partner does not seem to be logical in view of the fact that the assessee decided to apply for the contract during November, 2003 i.e. well after the death of Mr. Motibhai Makwana. It was submitted that the contention seem to be afterthought to justify the claim of alleged assignment of contract. It was further submitted that since the primary responsibility of complete of the tendered work was on the assessee there could not have been any occasion to assign the entire contract and therefore the arrangement was in the nature of subcontract. It was further submitted that all the receipts (net of deduction) was received by the assessee, TDS certificates were issued in favour of the assessee and the assessee had claimed credits for the TDS. It was submitted that by virtue of provisions of Sec. 199, since the assessee had claimed credit for tax deducted on the amount of Rs.90,69,706/-, the gross receipts forms part of the turnover of the assessee. It was further submitted that contract 7 I TA No. 1090/AHD/2009 . Assessment Year 2005-06 .
receipts have been received by the assessee and it is not the case where the payments have been directly made by the principal party (GSPHCL) to subcontracting parties was issued. It was submitted that the payments received were in consequence of contract between the assessee and GSPHCL. The payments made to Prajapati were consequent to separate contract where GSPHCL had no role to play. Thus the contention that the case is of diversion of income by overriding title is misplaced. In view of these facts it was submitted that the A.O. was perfectly justified in concluding that the provisions of section 40 (a)(ia) are applicable to the present case.
9. We have heard the rival submissions and perused the material on record. The factual matrix of the case is that the assessee is a firm engaged in the business of Civil Contractor. In November, 2003 it submitted a tender for construction of quarters for GSPHCL and the tender was accepted. It is assessee's submission that due to the death of its key working partner, Shri Motibhai Makwana, it was finding difficult to complete the contract in time and it therefore assigned the entire contract to Shri Ramsingh Prajapati (assignee) with no interest or any right or title in the said work. Accordingly the entire income arising from the said work contract stood diverted in favour of assignee by virtue of diversion of income by overriding title and therefore the contract was not considered as assessee's contract. The A.O. considered it to be a case of subcontract and not of assignment and therefore the assessee was required to deduct TDS u/s. 194C.The reason for assigning the contract for construction of police quarters according to the assessee was that it was finding it difficult to 8 I TA No. 1090/AHD/2009 . Assessment Year 2005-06 .
complete the contract due to the death of its main working partner Shri Motibhai Makwana. The A.O. has observed that the firm had submitted the tender in the month of November,2003 (well after the death of working partner which took place inJuly,2003) thereby being fully aware that the difficulties it might face in executing the contract. In view of these facts the argument of the assessee that it in the absence of its main working partner it was finding difficult to complete the work in time did not seem to be logical and it appeared to be afterthought on the part of the assessee. The Ld. A.R. could not controvert the aforesaid fact with any convincing facts. It is also seen that the TDS certificates were issued by the contractor in the name of the assessee and the assessee had taken credit for the TDS certificates while filing its return of income. As per the provisions of sec.199 of the I.T. Act, TDS is considered as payment of tax on behalf of the person from whose income the deduction was made. Since the assessee has claimed credit for TDS, the corresponding contract amount received/receivable with respect to TDS is to be considered of that of the assessee. It is further seen that in the contracts entered by the assessee with GSPHCL and Central Warehousing Corporation, the primary responsibility continued with that of assessee. Further nothing has been brought on record to prove that the primary responsibility was shifted to the assignees and the contractors had agreed to it. The A.O. has given a finding that the amount of Rs.1,88,049/- (being the TDS amount) and Rs.3,63,234/0 (being the deposit on assigned work) was not credited to the account of Prajapati though the assessee was following the mercantile system of accounting. The Ld. A.R. could not controvert this fact by bringing any material to the contrary on record. The assessee has placed 9 I TA No. 1090/AHD/2009 . Assessment Year 2005-06 .
on record at page 24 of the paper book the English translation of the letter dated 1-2-2004 written by assessee to Ramsingh Prajapati wherein as per clause 1 it is stated that "all profits and gains from the said work shall go to you". There is no mention with respect to the loss if any which may arise in the said contract meaning thereby that if there is loss in the contract it will be borne by the assessee. This is in contradiction to the submission of the assessee that the entire contract was assigned to Mr. Prajapati with no interest or any right or title in the said work. At page 42 of the paper book, the Ld. A.R. has placed free English translation of the letter dated 11-8- 2008 written by GSPHCL Ltd. to assessee wherein it is stated that "your representative Ramsingh has handed the work of construction (with electrification) of police housing units....".This also indicates that Ramsingh Prajapati was representative of the assessee. With respect to Shri V.B. Prajapati CIT (A) has given a finding that no submission was made either at the assessment stage or before him. In view of these facts we are in agreement with the findings of the CIT (A) that Shri Ramsingh Prajapati and Shri V. B. Prajapati were subcontractors of the assessee and the assessee was liable to deduct TDS from the payments made to them. Thus, we dismiss this ground of the assessee.
Ground No.2 is with respect to the disallowance of Rs.81,00,531/-u/s. 40(a)(ia):
10. The A.O. held that the payments by assessee to the sub-contractors namely Shri Ramsingh Prajapati and Shri Vijay Prajapati were covered u/s. 194 C. Since the assessee had not deducted TDS before making the 10 I TA No. 1090/AHD/2009 . Assessment Year 2005-06 .
payment, the provisions of Sec. 40(a)(ia) are applicable and therefore the entire amount was disallowed. Aggrieved by the action of the A.O., the assessee carried the matter before CIT (A). CIT (A) upheld the disallowance by holding as under:-
"2.2.1. Next issue is regarding applicability of section 40 (a)(ia). Appellant's contention before the A.O. was that question of invoking section 40(a)(ia) arose only when an expenditure was claimed by an assessee under sections 30 to 38. During appeal proceedings also, appellant's main argument was that payments to Shri R. K. Prajapati and Shri V. B.Prajapati were not claimed as expense. Sectiion 40(a) (ia) reads as under:-
"40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head 'profits and gains of business or profession':
(a) in the case of any assessee -
(b) any..... amounts payable to...... subcontractor, being resident for carrying out any work, on which tax is deductible at source under Chapter XVIIB....."
As per Schedule H of the profit and loss account for F.Y. 2004-05, appellant had passed following entries:-
Contract income. .. Rs. 2,98,36,651/-
Less: Assigned contract. .. Rs. 90,69,706/-
Appellant had thus reduced the subcontract payment from the contract income on the credit side of Profit and loss account, instead of debiting them on the expenses side. However, the effect and essence of the transaction remains the same. There is hardly any difference between reducing payments to the subcontractor from the contract income like as done by the appellant and in debiting the 11 I TA No. 1090/AHD/2009 . Assessment Year 2005-06 .
same on the expenditure side. Net effect in both cases is same, i.e. a deduction is made from income. Sec, 40(a)(ia) ,as reproduced above, does not refer to claim of expenditure, but uses words 'shall not be deducted', i.e. the section stipulates non deduction of various amounts including amounts paid to subcontractor, if tax is not deducted at source. The amount reduced directly from sales as done by the appellant is a deduction only in computing income and is therefore, covered by Sec. 40 (a) (ia), if tax at source was liable to be deducted therefrom and was not deducted. The disallowance of Rs.81,00,531/- under Sec. 40(a)(ia) is upheld."
11. Aggrieved by the action of CIT (A), the assessee is now in appeal before us. Before us, the Ld. A.R. submitted that the issue is now covered in its favour by the decision of Special Bench in the case of Merliyn Shipping & Transporter (477/Viz./2008 for A.Y. 2005-06 dated 29-3-2012). On the other hand the Ld. D.R. relied on the order of A.O. and CIT (A).
12. We have heard the rival submissions and perused the material on record. We find that the A.O. has made disallowance for the reason that the assessee has not deducted TDS before the due dates before making the payment to the subcontractors. In the case of Merilyn Shipping & Transporters (supra) it has been held that the provisions of section 40(a)(ia) are applicable to the expenditure which remains payable on 31st March of every year and cannot be invoked to disallow the amounts which have already been paid in the previous year without deduction of tax at source. We find that the issue has not been examined by the A.O. by considering the aspect as to whether the assessee had paid all the amounts before the year end and there was no amount outstanding at the year end. We therefore feel that the issue of payment to the subcontractors 12 I TA No. 1090/AHD/2009 . Assessment Year 2005-06 .
needs to be examined in the light of the Special Bench decision in the case of Merilyn Shipping & Transporters (supra). We therefore, remit this issue to the file of the A.O. for examination in the light of decision of Special Bench in the case of Merilyn Shipping (supra). Needless to say that the A.O. shall provide adequate opportunity of hearing to the assessee. In the result, this ground of assessee is allowed for statistical purposes.
Ground No.3 relates to the confirming the disallowance of Rs.7,80,144/- Claimed u/s. 40(a)(ia) and further directing A.O. to verify the claim for Rs.1,24,740/- to be allowed being covered by Proviso below Sec. 194C (3) of the Act.
13. A.O. observed that the assessee had made payments to labour and transport contractors aggregating Rs.9,04,880/- which were liable for deduction of tax source but the assessee had failed to deduct TDS and pay the same in accordance with the provisions of Sec. 40(a)(ia). He accordingly disallowed Rs.9,04,880/-. Aggrieved by the action of A.O. assessee preferred appeal before CIT (A). CIT (A) confirmed the disallowance of Rs.7,80,144/- by holding as under:-
"2.2.2. Regarding disallowance of Rs.9,04,884/-, the Assessing Officer may verify appellant's contention regarding entries at Sr. Nos.1,2,7 and 8 totaling to Rs.1,24,740/- being covered by Proviso below Section194C (3) and allow the same, subject to such verification. The balance disallowance i.e. of Rs.7,80,144/- is upheld."13 I TA No. 1090/AHD/2009
. Assessment Year 2005-06 .
14. We have heard the rival submissions and perused the material on record. We find that the A.O. has made disallowance for the reason that the assessee has not deducted TDS before making the payment to the various contractors. In the case of Merilyn Shipping & Transporters (supra) it has been held that the provisions of section 40(a) (ia) are applicable only to the expenditure which remains payable on 31st March of every year and cannot be invoked to disallow the amounts which have already been paid in the previous year without deduction of tax at source. We find that the issue has not been examined by the A.O. by considering the aspect as to whether the assessee had paid all the amounts before the year end and there was no amount outstanding at the year end. We therefore feel that the issue of payment to the contractors needs to be examined in the light of the Special Bench decision in the case of Merilyn Shipping & Transporters (supra). We therefore remit this issue to the file of the A.O. for examination. Needless to say that the A.O. shall provide adequate opportunity of hearing to the assessee. In the result, this ground is allowed for statistical purposes.
Ground No.4 relates to confirming the addition of Rs.6,48,983/-out of total addition of Rs.7,74,339/- made by A.O. by treating TDS deduction of Rs.1,88,049/-, deposit by the subcontractors of Rs.3,63,234/- and salvage deduction of Rs.9,700/- as not eligible deduction of expenditure.
15. A.O. observed from the table given on page-17 of the order that aggregate amount of Rs.7,74,339/- was not in the nature of expenditure since it comprised of subcontractor deposit, TDS, salvage and time limit. The A.O. was of the view that it was in the nature of profits and therefore 14 I TA No. 1090/AHD/2009 . Assessment Year 2005-06 .
added it to the income. Aggrieved by the action of A.O., the assessee carried the matter before CIT (A). CIT (A) gave partial relief to the assessee by holding as under:-
"3.2. I have considered the matter. The sum of Rs.1,88,049/- is the tax deducted at source by GSPHCL and Central Warehouse Corporation from the payments made to the appellant for the work done. It is tax charged on appellant's income and as per Section 40
(a)(ia), deduction from income in respect of the same is not allowed.
Moreover, the tax deducted at source from payments to appellant @ 20% under section 194C (1) has not been passed on to the subcontractors. The amount is neither paid nor credited to the subcontractors. Thus, deduction in respect of TDS of Rs.1,88,049/- is upheld. Regarding deduction of subcontract deposit of Rs.3,63,234/-, it appears that the principal GSPHCL deducted the said amount from contract payments. However, the receipts chargeable to tax will be the gross contract income and cannot be reduced by the subcontract deposit. It is held that the subcontract deposit of Rs.3,63,234/- cannot be reduced from the gross receipts of Rs.9,06,706/- and the Assessing Officer was justified in adding back the same to the income. The deduction of Rs.1,22,056/- made on account of time limit was explained by the A.R. to be the deduction made by the principal for non performance or for not meeting the time limits as per the contract. Deduction in respect of the same is justified and addition on this ground is cancelled. Regarding salvage deduction of Rs.1,01,000/-, the A.R. explained the same to be made by the principal on account of the likely income to the appellant on sale of salvage, etc. Appellant has shown salvage income of Rs.3,300/- only in this year, which appears to be grossly understated. The principal must have estimated the salvage income of appellant on sound appraisal realistically. Deduction of salvage of Rs.1,01,000/- is held to be allowable only to the extent of Rs.3,300/-.To sum up, out of addition of Rs.7,74,339/-, addition is confirmed to the extent of Rs.6,48,983/- and balance, i.e. Rs.1,25,356/- is deleted."
15 I TA No. 1090/AHD/2009. Assessment Year 2005-06 .
16. Aggrieved by the action of CIT (A), the assessee is now in appeal before us. Before us it was submitted that the income from salvage has already been offered for tax. CIT (A) has considered the salvage to the extent of Rs.3,300/-. CIT (A) has not justified the reason for giving deduction of only Rs.3,300/-. It was thus submitted that the addition be disallowed. On the other hand the Ld. D.R. supported the order of A.O.
17. We have heard the rival submissions. We find that CIT (A) has not supported by evidence the reason for giving deduction of Rs.3,300/- on account of salvage. On the other hand the Ld. A.R. submitted that salvage has already been offered to tax. In view of these circumstances we are of the view that the addition of salvage to the extent of Rs.97,700/- (1,01,000
- 3300) is uncalled for. We accordingly direct to delete the addition on account of salvage. With respect to other additions we find no reason to interfere in view of the reasons while considering the other grounds hereinabove.
18. Ground No.5 and 6 are related to levy of penalty u/s.271(1) (c) and levy of interest u/s. 234B are not adjudicated as they are consequential in nature.
16 I TA No. 1090/AHD/2009. Assessment Year 2005-06 .
19. In the result appeal of the assessee is partly allowed.
Order pronounced in Open Court on 2 - 11- 2012.
Sd/- Sd/-
(G.C.GUPTA) (ANIL CHATURVEDI)
VICE PRESIDENT ACCOUNTANT MEMBER
Ahmedabad.
S.A.Patki.
Copy of the Order forwarded to:-
1. The Appellant.
2. The Respondent.
3. The CIT (Appeals) -IV, Baroda.
4. The CIT concerned.
5. The DR., ITAT, Ahmedabad.
6. Guard File.
By ORDER
Deputy/Asstt.Registrar
ITAT,Ahmedabad