MR. BINNY VINOD SHAH,MUMBAI vs. ITO WARD 24(1), MUMBAI

At the outset, we noticed that there is a delay of 87 days in filing the present appeal. In this regard, the assessee has filed an application along with a supporting affidavit explaining the reasons for the delay. We have heard counsel for both parties and perused the material placed on record, including the affidavit filed by the assessee. Considering the entire factual matrix and keeping in view the principles laid down by the Hon’ble Supreme Court in the case of Collector Land Acquisition, Anantnag & Ors. vs. Mst. Katiji & Ors. (1987 AIR 1353 / 1987 SCR (2) 387), wherein it was held that when substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred, we find that the explanation offered by the assessee constitutes "sufficient cause" for the delay. Since the delay was neither deliberate nor intentional, and adopting a liberal and justice-oriented approach, we condone the delay of 87 days in filing the appeal. Consequently, the appeal is admitted to be heard on merits.

The sole substantive grievance of the assessee is against the disallowance sustained by the learned CIT(A) under section 40(a)(ia) of the Income-tax Act, 1961 (“the Act”) aggregating to Rs.79,60,116/- on account of alleged failure to deduct tax at source under section 194C of the Act. The disallowance comprises the following:

During the course of hearing before us, the Ld. AR drew our attention to an application filed under Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 (“the ITAT Rules”), seeking admission of additional documentary evidence, including bills, invoices, ledger extracts and certificates in Form No. 26A, as well as the plea based upon such material.

The learned AR submitted that before the lower authorities the assessee was under a bona fide belief that the provisions of section 194C were not attracted, inter alia, on the ground that the assessee's accounts were not liable to tax audit in the immediately preceding year. It was submitted that, subsequently, on a proper appreciation of the provisions of section 194C, including Explanation (iv) thereto, the assessee has realised that the nature of the transactions undertaken with several of the parties is material for determining whether the payments fall within the ambit of “work” for the purposes of section 194C.

It was further submitted that out of the 18 parties to whom aggregate payments of Rs.2,42,43,720/- were made, a substantial portion of the transactions represented manufacture/supply of products according to the requirements or specifications of the assessee, where the material used by the contractors was purchased by them from persons other than the assessee or his associates. According to the learned AR, such transactions are covered by the exclusion contained in clause (A) of Explanation (iv) to section 194C and, therefore, do not fall within the definition of “work” for the purposes of the said provision.

The learned AR further submitted that, in respect of the following four parties, namely, M/s Arya Enterprises (Rs.19,12,000/-), M/s Purva Enterprises (Rs.11,00,000/-), M/s Kshitij Constructions (Rs.18,68,000/-) and M/s Shrimati Developers (Rs.18,57,000/-), aggregating to Rs.67,37,000/-, certificates in Form No.26A, duly accompanied by the relevant details, have been obtained and placed on record. It was submitted that the said certificates establish that the respective resident payees had furnished their returns of income, taken the corresponding receipts into account while computing their income and paid the taxes due thereon.

Similarly, in respect of POP expenses of Rs.10,90,000/- paid to Shri Sarvarali Choudhary, the learned AR submitted that Form No.26A has also been furnished.

It was accordingly submitted that the additional evidence and the accompanying legal plea go to the root of the issue and are necessary for determining the correct tax liability of the assessee. The learned AR, therefore, prayed that the additional evidence be admitted and the matter be restored to the file of the AO for examination and fresh adjudication in accordance with law.

The learned Departmental Representative (“DR”), on the other hand, opposed the admission of the additional material, submitting that the assessee had not produced the relevant particulars before the AO and that the plea sought to be raised at this stage involves examination of fresh factual aspects. However, the learned DR fairly submitted that the invoices, nature of contracts and Form No.26A would require verification by the AO.

We have heard the rival submissions and perused the material available on record, including the application filed under Rule 29 of the ITAT Rules and the documents placed in the paper book.

As regards admission of the additional evidence, it is well settled that the Tribunal, in the exercise of its appellate jurisdiction, has wide powers to admit material which is necessary for deciding the issue before it and for advancing the cause of substantial justice. The Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 (SC) has held that the appellate authority has jurisdiction to examine a question of law arising from the facts available on record, even if such question was not raised before the lower authorities.

In the present case, the additional material sought to be produced is directly relevant to the controversy before us. The invoices, bills and other supporting documents are relevant for determining the precise nature of the transactions and, consequently, whether the payments made to the respective parties fall within the definition of “work” under section 194C. Likewise, the certificates in Form No.26A are relevant for examining the applicability of the second proviso to section 40(a)(ia) read with the first proviso to section 201(1) of the Act.

We are, therefore, of the considered view that the additional evidence deserves to be admitted in the interest of substantial justice. At the same time, since the documents and factual claims require verification by the AO, the matter cannot be conclusively adjudicated by us at this stage.

Coming to the merits, clause (iv) of the Explanation to section 194C defines the expression “work”. Clause (A) thereof excludes from the definition of “work” the manufacture or supply of a product according to the requirement or specification of a customer by using material purchased from a person other than such customer or his associate.

Thus, where a contractor manufactures or supplies a product according to the requirements or specifications of the customer by using material purchased independently from a third party, and the material is not supplied or purchased by the customer or his associate, the transaction would require examination in the light of the aforesaid exclusion. The applicability of section 194C cannot, therefore, be determined merely by describing the payments as labour or contract payments; the actual terms and nature of the underlying transactions have to be examined.

In the present case, the assessee has contended that, in respect of a number of the 18 parties, the contractors independently procured the material and supplied/manufactured the requisite products in accordance with the assessee's specifications. This factual assertion has not been examined by the AO in the context of clause (A) of Explanation (iv) to section 194C. The invoices, bills and other documents now placed on record are, therefore, required to be examined to determine the true nature of the transactions.

The assessee has also placed on record certificates in Form No.26A in respect of certain payments. The second proviso to section 40(a)(ia) provides that where an assessee fails to deduct the whole or any part of the tax on a sum payable to a resident, but the resident payee has furnished its return of income under section 139, has taken such sum into account in computing income in such return, has paid the tax due on the income declared by it, and the assessee furnishes a certificate from an accountant in the prescribed form, the assessee shall be deemed to have deducted and paid the tax on such sum on the date of furnishing the return of income by the resident payee.

The corresponding conditions prescribed under the first proviso to section 201(1) and the second proviso to section 40(a)(ia) are required to be verified with reference to the certificates in Form No.26A and the underlying records. If, upon verification, the statutory conditions are found to be satisfied, the consequential relief, as permissible under law, would follow.

In view of the above discussion, and having regard to the nature of the additional evidence admitted by us, we deem it appropriate to restore the issue relating to the disallowance under section 40(a)(ia) to the file of the AO for fresh adjudication.

The AO shall examine, in respect of the payments aggregating to Rs.2,42,43,720/- made to the 18 parties, the relevant agreements/contracts, bills, invoices, ledger accounts and other supporting documents and determine the actual nature of each transaction. The AO shall specifically examine whether, in any of the cases, the transaction is covered by clause (A) of Explanation (iv) to section 194C, having regard to the source of the material used by the contractor and the terms under which the product was manufactured or supplied.

The AO shall also verify the certificates in Form No.26A furnished by the assessee, including those relating to M/s Arya Enterprises, M/s Purva Enterprises, M/s Kshitij Constructions, M/s Shrimati Developers and Shri Sarvarali Choudhary, and examine whether the conditions prescribed under the second proviso to section 40(a)(ia) read with the first proviso to section 201(1) are duly satisfied. Appropriate consequential relief shall be allowed in accordance with law, if the prescribed conditions are found to be fulfilled.

As regards the disallowance of Rs.3,60,000/- relating to sales expenses and brokerage, the AO shall examine the nature and particulars of the respective payments, the applicability of the relevant TDS provisions, and the assessee's explanation and supporting evidence, and thereafter decide the issue afresh in accordance with law.

Needless to say, the assessee shall furnish all relevant documents and supporting evidence before the AO and extend full cooperation in the verification process. The AO shall provide reasonable opportunity of being heard to the assessee and shall pass a speaking order in accordance with law.

We make it clear that we have not expressed any final opinion on the allowability of any individual payment or on the applicability of section 194C or section 40(a)(ia) to any particular transaction. All such issues are left open for consideration by the AO in the light of the material furnished by the assessee and the applicable provisions of law.

In the result, the appeal of the assessee is allowed for statistical purposes.