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Income Tax Appellate Tribunal, HYDERABAD BENCHES “B”, HYDERABAD
Before: SMT. P. MADHAVI DEVI & SHRI D.S. SUNDER SINGH
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “B”, HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER
Stay Application No. 58/Hyd/2018 (Arising out of ITA No. 1527/Hyd/2016) Assessment Year : 2009-10 Andhra Pradesh State Deputy Commissioner Police Housing Vs. of Income Tax, Corporation Limited, Circle-1(1), HYDERABAD HYDERABAD [PAN: AABCA6502B]
[Applicant] [Respondent] I.T.A. No. 1527/HYD/2016 Assessment Year: 2009-10 Andhra Pradesh State Deputy Commissioner Police Housing Vs of Income Tax, Corporation Limited, Circle-1(1), HYDERABAD HYDERABAD [PAN: AABCA6502B]
(Appellant) (Respondent) For Assessee : Shri Laxminiwas Sharma, AR For Revenue : Smt. N. Swapna, DR Date of Hearing : 22-03-2018 Date of Pronouncement : 23-03-2018 O R D E R PER D. S. SUNDER SINGH, A.M. :
S.A.No. 58/Hyd/2018:
This Stay Application is filed by the assessee. At the time of hearing, Ld.AR argued that there is a merit in this case to
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succeed the appeal. However, Ld.AR could not submit the latest financial position to establish that the assessee is not able to meet the demand. Since the appeal is posted on even date i.e., on 22-03-2018, in the absence of latest financial position, the application made by the assessee for stay of demand could not be considered favourably. Accordingly, the Stay Application of the assessee is dismissed.
ITA No. 1527/Hyd/2016:
This is an appeal filed by the assessee for the AY. 2009-10 against the order of the Commissioner of Income Tax (Appeals)-1, Hyderabad, dated 20-07-2016.
Briefly stated, assessee is a company established under the Companies Act with an objective of construction of housing schemes to the benefit of the employees of the Police Department of the Government of Andhra Pradesh. The company undertakes the construction of buildings for the housing personnel of the Police Department and for construction of the buildings for Police stations and other offices and facilities for the Police Department. The company is established only with the purpose of construction of residential houses for Police Department and Police stations. The company was established in the year 1971 and the share capital is fully subscribed by the Government of Andhra Pradesh.
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The Government of Andhra Pradesh also issued an order vide G.O.Ms.No. 517, dated 25th September, 1980, clarifying that Government will arrange funding of the corporation for construction of houses in the shape of advances not bearing interest and the corporation shall build the houses and handed over them to Government within a reasonable time from the date of drawl of the advances. The corporation should not include interest on these advances while computing the cost of the quarters. When the quarters are handed over to the Government, the cost of this quarters will be adjusted against the advances given by the Government.
The first issue is related to the addition made u/s. 43B of the Income Tax Act [Act]. The assessee filed its return of income declaring total income of Rs. 13,26,020/- on 03-03- 2011. The AO selected the case for scrutiny and from the Balance Sheet and the P&L A/c, AO noticed that assessee has debited an amount of Rs. 951.14 Lakhs to the P&L A/c towards interest paid to financial institutions on loans. Out of the above sum the assessee has not paid the amount of Rs. 2,13,45,293/- before the due date for filing the return of income. Therefore, the AO has called for the explanation from assessee as to why the said amount should not be disallowed u/s. 43B of the Income Tax Act [Act]. The assessee argued that the company constructed the buildings to the Government of Andhra Pradesh on no profit and no loss basis and disallowance of any expenditure would result into income which the assessee has not derived from carrying on its operations. The assessee further stated that a sum of
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Rs. 2,22,505/- pertaining to LIC housing finance has been paid on 29-09-2009 before filing the return of income. Considering the payment of Rs. 2,22,505/- the AO held that the balance amount of Rs. 2,11,22,788/- was the interest outstanding which remained unpaid before filing the return of income. Hence, brought to tax u/s. 43B of the Act.
5.1. Aggrieved by the order of the AO, assessee went on appeal before the CIT(A).
5.2. The Ld.CIT(A) confirmed the addition made by the AO. Therefore, the assessee is in further appeal before the Tribunal.
Appearing for the assessee, the Ld.AR argued that assessee is a company registered under the Companies Act, operating with an intention of no profit and no loss basis and entirely funded by the Government of Andhra Pradesh. Only for the purpose of taking loans from public financial institutions, the Government of Andhra Pradesh established the corporation. All the loans taken by the corporation would be reimbursed by the Government of Andhra Pradesh. The source of funds was the share capital contributed by the Andhra Pradesh, loans advanced by the Andhra Pradesh State Government and the amounts borrowed from Housing and Urban Development Corporation Ltd., [HUDCO]. According to the G.O.Ms.No. 517, dated 25th September, 1980, the amounts given by the Statement Government as loans to the corporation would be treated as non interest bearing advances. The
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advances would be given by the Government of Andhra Pradesh to repay the principal and interest for the loans taken from the HUDCO Ltd. and other financial institution and the same will be adjusted against the constructed housing quarters of the corporation which would be handed over to the Government of Andhra Pradesh. The Ld.AR submitted that there are no sales in the case of the assessee and there is no expenditure in the hands of the assessee for construction for the activity carried on by the assessee. The entire expenditure to be borne by Government of Andhra Pradesh. The entire interest required to be paid to the LIC of India, HUDCO would be given by the Government of Andhra Pradesh as interest free loan. Therefore, argued that there is no income earned by the assessee and there is no expenditure claimed towards interest in the P&L A/c. The Ld.AR invited our attention to Page No. 53 of Paper Book in Schedule-L, wherein it was mentioned that interest of Rs. 951.14 Lakhs [from Government of Andhra Pradesh for payment of financial institutions on loans], which indicates that the assessee is required to receive the sum of Rs. 951.14 Lakhs representing the interest payable to Financial institutions on loans which was categorised as income in the hands of the assessee and the same amount was shown as interest expenditure which is a contra entry. Since interest is only a notional income and the entry is passed to comply with the companies act the Ld.AR argued that there is no real income. Since the expenditure was not claimed there is no case for disallowance u/s. 43B of the Act. Ld. Counsel for the assessee relied on the decision of CIT Vs. Chamanlal Mangaldas & Co., [39 ITR 8] (SC).
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On the other hand, Ld.DR argued that the assessee is a company registered under the Companies Act and following the Mercantile System of accounting. Therefore, the assessee is required to make the payment of dues on or before filing the return of income. In this case, the assessee has failed to make the payment of interest to the financial institutions, hence, the disallowance attracts u/s. 43B of the Act, which the AO has rightly made. Thus, argued that the orders of the lower authorities be upheld.
We have heard both the parties and perused the material on record. From the Memorandum of Association and Articles of Association, it is established that the assessee- company is established to execute the housing schemes for the benefit of employees of Police Department of Government of Andhra Pradesh. The company is receiving share capital and the loans, interest free advances from the Government of Andhra Pradesh and also accepting the loans from HUDCO and LIC for construction of housing schemes for Police and Police Stations. The company is utilizing the share capital advances received from Government of Andhra Pradesh and the advances received from the public financial institutions for the purpose of construction of Police Housing Schemes and Police Stations and the constructed area is handed-over to the Government and the same is adjusted against the advances received from the Government of Andhra Pradesh. Similarly, the assessee has borrowed funds from the public financial institutions and the same was also funded by the Government of Andhra Pradesh as interest free loans which is being utilised
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for the purpose of repayment of loans. There are no sales involved in the entire activity and there is no income generation activity except other income interest and misc., income. For the year ending 31-03-2009, the assessee has calculated the interest payable to the public financial institutions which represents the expenditure and passed journal entries both for income and expenditure as contra entries. In fact, there is no income received by the assessee from the Government of Andhra Pradesh and there is no expenditure related to the earning of the income. Both the income and expenditure were debited to the P&L A/c under the Income and Expenditure head as contra entries. The interest expenditure on loans is payable to the public financial institutions and the same is to be reimbursed by the Government of Andhra Pradesh as interest free loans. In the result, neither income accrued to the assessee nor the expenditure claimed by the assessee.
The assessee relied on the decision of CIT Vs. Chamanlal Mangaldas & Co., [39 ITR 8] (SC), wherein the Hon'ble Supreme Court held that if incomes does not result at all, there cannot be tax though the book keeping entry is made about hypothetical income which does not materialize. Ld.AR also relied on the decision of Co-ordinate Bench of ITAT, Ahmedabad in ITA No. 2549/Ahd/2013 (AY. 2010-11) in the case of Gujarat State Police Housing Corporation Ltd., Vs. ACIT, dt. 18-07-2014, wherein the Co-ordinate Bench of ITAT held as under:
“The whole of funds belonged to the state Exchequer and the appellant was only to channelize them for the objects of Police
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Housing. It was holding the funds received from the Government including the interest income earned from parking with GSFS in Trust and there was an overriding obligation to hold and utilize for Police Housing on behalf of the State Government. The interest income did not reach to the appellant as its own income so as to be chargeable in its hands, it may be stated that insofar as the buildings so constructed by the appellant, it has now been settled position that the same do not belong to the appellant-Corporation as held in its own case for A.Y.1996-97 in Tax Appeal No. 1103 of 2009 by decision dated 1.3.2011 of Hon. Gujarat High Court. The appellant is carrying on activities on no-profit no-loss basis and the funds are transferred / utilized for earmarked activities/purposes. This practice is being followed since inception and it has been accepted by department so that following the Rule of Consistency, the interest income ought not to have been held as belonging to the appellant Corporation and chargeable in its hands."
9.1. National Dairy Development Board Vs ACIT (2008) [114 TTJ Ahd 145], Ahmadabad ITAT it was held that :
“the assessee is only acting as a nodal agency and the interest income ultimately has to go to the project/Government and the assessee is only supposed to utilize it either as per the directions given or refund it to the Government. All these facts establish that such money and interest thereon never became the income of the assessee. It is a case where the income was diverted by an overriding title and it never reached the assessee. Even if the assessee collects such income it never was its income; it was not its income because such income was not collected as part of assessee's own income, but for and on behalf of agencies who have entrusted the assessee with the projects and given funds for the same. It was, in any case, to be refunded back. (Pg No.129-165)”
9.2. In Commissioner Of Income Tax And ... vs. Karnataka Urban Infrastructure 284 ITR 582 the Karnataka High Court held that:
"The assessee in fact acted as an agent of the Governments of both the Central and the State for implementing the scheme of the Government, This being the factual position, the lower authorities committed serious error in treating the interest as income of the assessee and bringing the same to tax." Therefore, the Tribunal set
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aside the orders of the AO and the first appellate authority and the claim of the assessee was allowed. (Pg No.166-167)”.
In the assessee’s case, the entire amount of funds were received from Government of Andhra Pradesh as interest free advance which utlised for construction of police housing and after completion of construction, the property is handed over to the Government of Andhra Pradesh and the loan / advance interest gets adjusted towards cost of construction. The interest payment has to be received from the Government of Andhra Pradesh. Neither the income is accrued nor the assessee claimed the interest expenditure which remained unpaid. Hence, we hold that Section 43B of the Act not is applicable in assessee’s case. However it is not clear from the assessment order or the P&L account whether the assessee has claimed the interest due to financial institutions i.e Rs. 2,11,22,788/- in other income. Hence we remit the matter back to the file of the AO to examine whether the impugned expenditure is claimed in other income (other than income of interest from Govt. of AP as per schedule –L) or not and decide the issue as per merits. In case the assessee has not claimed the expenditure in other income the same is not to be disallowed u/s 43B. The assessee’s appeal on this ground is allowed for statistical purposes.
Ground No. 4 is related to the disallowance u/s. 40(a)(ia) of the Act. During the assessment proceedings, AO found that the assessee has made payments to the contractors but not deducted TDS as required u/s. 194C of the Act to the extent of Rs. 1,26,25,001/-. Therefore, AO made the addition
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u/s. 40(a)(ia). Aggrieved by the order of AO, assessee went on appeal before the CIT(A) and the Ld.CIT(A) enhanced the addition made by the AO to the extent of Rs. 4,62,88,562/-. Aggrieved by the order of the Ld.CIT(A), assessee filed an appeal before the Tribunal.
During the appeal hearing, the Ld.AR submitted that the AO determined the addition u/s 40(a)(ia) at Rs. 1,26,25,00/- and the Ld.CIT(A) has determined the same at Rs. 4,62,88,562/-. Assessee submitted that Ld.CIT(A) has not given enhancement notice and opportunity for enhancement. The total expenditure outstanding for non deduction of TDS in aggregate was Rs. 5,20,88,872/-, out of which the Ld.CIT(A) allowed only the amount pertaining to Hyderabad city and the balance was disallowed. Assessee has furnished the details in the Paper Book as per which the details were furnished with regard to the provisions made as on 31-03-2009 and payments made with dates of remittances to Government A/c. As per the details furnished by assessee in the Paper Book, the correct amount was Rs. 1,26,25,001/- but not Rs. 4,62,88,562/-. On the other hand the Ld.DR relied on the orders of the Ld.CIT(A).
We have heard both the parties and perused the materials placed on record. As per the paper book page No. 72 the amount of the amount of Rs.5,20,88,872/- was the amount of break up of expenditure incurred on contractors and TDS required to be deducted as on 31/03/2009. From page No.73 onwards the assessee has submitted the details of payments made and remittances made to gobvernemtn account before
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filing the return and balance remained was only Rs. 1,26,25,001/- for non deduction of tax at source. The Ld.DR did not dispute the fact. Therefore, we do not find any justifiable reason for the enhancement made by the CIT(A). Hence the enhanced addition made by the Ld.CIT(A) is unsustainable and accordingly deleted.
The next issue is with regard to the addition of Rs. 1,26,25,001/- u/s 40(a)(ia) of the act. The Ld.AR argued that the assessee has neither made the payment to the contractor nor credited the amount to the account of the contractor. Only provision was made on estimation basis in the books of account to arrive at the true and correct state of affairs. As per Section 194C of the Act, assessee is required to deduct the tax at the time of payment or at the time of crediting the amount to the contractor. In this case, since assessee neither credited the payment to the contractor nor paid the amount, the question of TDS does not arise. Only journal entries are passed by assessee and the same were reversed immediately on the first day of succeeding year. Per contra the Ld.DR supported the orders of the lower authorities.
We have heard both the parties and perused the material on record. As per the provisions of Section 194C the TDS is required to be made when the payment is made to the contractor or the amount is credited to the account of the contractor. For ready reference, we extract hereunder the relevant provisions of Section 194C.
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“194C. (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to— (i) one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family; (ii) two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family, of such sum as income-tax on income comprised therein.
(2) Where any sum referred to in sub-section (1) is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
(3) Where any sum is paid or credited for carrying out any work mentioned in sub- clause (e) of clause (iv) of the Explanation, tax shall be deducted at source— (i) on the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or (ii) on the whole of the invoice value, if the value of material is not mentioned separately in the invoice.
(4) No individual or Hindu undivided family shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family.
From the plain reading of Section 194C of the Act reproduced above, the provisions of Section 194C are applicable at the time of payment or at the time of making credit to the account. In this case, the assessee has neither measured the work-in-progress nor the contractor has raised the bill and the assessee has made the provisions on estimation basis. The assessee has submitted that neither it had made the payment nor credited the amount to the account
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of the contractor. Assessee also submitted that journal entries have been passed on 31st March only for the sake of showing the true and correct financial affairs and the same was reversed immediately in the beginning of the subsequent year. Further, assessee also in the subsequent year made the payments and the TDS was made on respective payments. Therefore, there is no loss to the Government. Since the assessee has neither made the payment nor credited the contractors account, there is no case for deduction for TDS tax at source u/s. 194C. Consequently, there is no case for deduction of TDS u/s 194C and does not attract the consequent disallowance u/s. 40(a)(ia) of the Act. Hence, the orders of the lower authorities are set a side and the appeal of assessee on this ground is allowed.
Ground Nos. 1 and 7 are general in nature.
In the result, appeal is partly allowed.
To sum-up, the Stay Application is dismissed and appeal of assessee is partly allowed.
Order pronounced in the open court on 23rd March, 2018
Sd/- Sd/- (P. MADHAVI DEVI) (D.S. SUNDER SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated 23rd March, 2018 TNMM
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Copy to :
Andhra Pradesh State Police Housing Corporation Limited, & Shri Laxminiwas Sharma, D.No. 6-3-569, 4th Floor, Opp: RTA Office, Above BMW Showroom, Khairatabad, Hyderabad.
Dy. Commissioner of Income Tax, Circle-1(1), Hyderabad.
CIT(Appeals)-1, Hyderabad.
Pr.CIT-1, Hyderabad.
D.R. ITAT, Hyderabad.
Guard File.