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Income Tax Appellate Tribunal, BANGALORE BENCH A, BANGALORE
Before: SHRI. VIJAY PAL RAO & SHRI. INTURI RAMA RAO
IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'A', BANGALORE BEFORE SHRI. VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI. INTURI RAMA RAO, ACCOUNTANT MEMBER I.T.A No.1135/Bang/2013 (Assessment Year : 2008-09) Dhanashekar Muniswamy, No.52A, 2nd cross, 2nd Main, Prakash Nagar, Bengaluru 560 021 .. Appellant PAN : AHBPM4579A v. Asst. Commissioner of Income-tax, Circle -6(1), Bangalore .. Respondent Assessee by : Shri. G. Bhaskar, Advocate Revenue by : Smt. Swapna Das, JCIT Heard on : 23.08.2016 Pronounced on : 08.09.2016 O R D E R PER VIJAY PAL RAO, JUDICIAL MEMBER:
This appeal by the assessee is directed against the order dt.18.03.2013 of CIT (A)-III, Bengaluru, for the assessment year 2008-09.
There is a delay of 33 days in filing the appeal. The assessee has filed a petition for condonation of delay. An affidavit of the CA of the assessee is also filed explaining the cause of delay as it has escaped his attention due to heavy pressure of outstanding audits of cooperative banks. Subsequently he realised the receipt of the impugned order and then took the steps to prepare the appeals and filed the same without further delay.
Ld. AR of the assessee has submitted that the delay in filing the appeal was due to an inadvertent and bonafide mistake on the part of the CA because of his business and heavy pressure of work of outstanding audits of banks. Thus the Ld. AR has submitted that the delay of 33 days is neither intentional nor deliberate but due to unavoidable reasons which were beyond the control of the assessee. Accordingly the same may be condoned.
On the other hand the Ld. AR has opposed the condonation of the delay.
Having considered the rival submissions and careful perusal of the contents of the affidavit, we find that the assessee has explained a reasonable cause for not filing the appeal within the period of limitation. We do not find any reason to disbelieve the reasons explained in the
affidavit which has been solemnly affirmed by the CA of the assessee. Accordingly in the facts and circumstances we condone the delay of 33 days in filing the appeal.
Assessee has raised the following grounds :
At the time of hearing the Ld. AR of the assessee has stated that assessee does not press grounds 1.1 to 2.2 and the same may be dismissed as not pressed. Ld. DR has raised no objection if these grounds of appeal are dismissed as not pressed. Accordingly grounds 1.1 to 2.2 are dismissed being not pressed.
Grounds 3.1 and 3.2 are regarding disallowance made by the AO u/s.40(a)(ia) of the Income-tax Act, 1961 (‘the Act’ in short), for non- deduction of tax at source. The assessee is carrying on the business as direct marketing agent of ICICI Bank Ltd, in the name and style of ‘Star Financial Services’ as well as business of real estate developer in the name and style of ‘Star Builders’. For construction of apartment of twelve units in a joint venture with one Mr. Armugam, a labour contract was entered into for supply of labourers by one Shri. Venkatesh. During the construction of the said apartment, the materials were also procured through the labour contractor Shri. Venkaresh. The details of the amounts paid during the year to the labour contractor are reproduced by the AO at page 6, as under :
Sl Nature of Expenses Amount TDS No. 1. Labour charges 34,40,000.00 77,950.00 2. Supply of Materials 63,23,430/- N.A Total 97,63,430.00
AO noted that the assessee has deducted TDS in respect of labour charges. However, the assessee has not deducted tax at source on the amount of Rs.63,23,430/- paid / payable to Shri. Venkatesh. The assessee explained before the AO that the said payment was made for supply of materials and it was in the nature of reimbursement of expenses and therefore, TDS was not required to be deducted on the said payment. The AO did not accept this contention of the assessee and held that the contract in question is a composite work contract for construction of flat. Therefore the assessee ought to have deducted tax at source on the entire amount. Accordingly the AO disallowed the said amount of Rs.63,23,430/- by invoking the provisions of Section 40(a)(ia) of the Act.
On appeal, the assessee has reiterated its contention that the contract was only for labour charges and there is no contract between the assessee and Shri. Venkatesh regarding supply of material. However the material
was purchased through Shri. Venkatesh. The assessee also pointed out that the material was purchased by the assessee directly in his name, through the contractor and the invoices were issued by the vendor of the material in the name of the assessee. Therefore, this payment was only reimbursement of the cost of the material. The CIT (A) was not impressed with the contention of the assessee and confirmed the disallowance.
Before us, the Ld. AR of the assessee has submitted that the payment in question was nothing but reimbursement of the amount for purchase of material through Shri. Venkatesh. He has referred to the labour contract agreement and submitted that as per clause 3 of the agreement the assessee was responsible to supply the necessary material including cement, sand, steel etc., The quality of the same shall be approved by the contractor. Therefore the assessee was under obligation to supply the material as per the required quality to be approved by the contractor. To avoid any dispute between the parties in respect of the quality of the material to be used in the construction, the assessee asked the contractor to purchase the material on assessee’s behalf and therefore this payment is nothing but reimbursement of the purchase of material through the contractor. Thus the Ld. AR has submitted that when no income or profit element is involved in the said
payment no TDS is required to be deducted at source. In support of his contention he has relied upon a decision of the coordinate bench of this Tribunal in the case of Udbhav Construction v. DCIT [(2016) 46 CCH 0377] and submitted that the provisions of Section 40(a)(ia) of the Act, cannot be invoked in the case of short-deduction of tax at source. The Tribunal has decided this issue by holding that Section 40(a)(ia) cannot be applied only for the reason that there was a short-deduction of tax. He has then referred to the decision of Hon’ble jurisdictional High Court in the case of CIT v. HP (India) Sales P. Ltd [382 ITR 496] and submitted that the similar view taken by the Tribunal has been upheld by the Hon’ble jurisdictional High Court.
On the other hand the Ld. DR has relied upon the orders of the authorities below and submitted that there is a concurrent finding by the AO as well as the CIT (A) that the payment in question was made as a composite payment under the work contract and therefore the provisions of Section 194C of the Act are attracted on this payment. Since the assessee has failed to deduct the tax at source the provisions of Section 40(a)(ia) are attracted.
We have considered the rival submissions and considered the relevant material on record. As it is clear from the details of the payments that assessee made the payments under two heads, one for labour charges and another for the supply of material. The AO held that payment was made as a composite payment under the contract agreement dt.16.07.2007 and therefore the provisions of Section 194C of the Act are applicable in this case. We find that the contract in question was entered into by the assessee and the labour contract or for supply of the labour. It is also specifically provided under the contract in question that the assessee shall pay the contractor Rs.34 lakhs for providing labour for construction of the apartments in question. Clause 3 of the contract stipulates as under:
“3. The Owner shall supply necessary materials including cement, sand, steel, etc the quality of shall be approved by the Contractor. The Contractor shall also assist the Owner in finalising the supplier for various materials and all the materials even if purchase orders are placed by Contractor shall be in the name of the Owner.” 14. Thus it is clear that the assessee was to supply necessary material including cement, stand, steel etc., subject to the quality approval of the contractor. Assessee has explained that to avoid any dispute on the quality of the material to be used in the construction the assessee procured the material through the contractor. Therefore, it is manifest from the record
and particularly from the contract that the contract in question was exclusively for supply of labour in the construction of the apartments and therefore the material procurement was outside the agreement in question. The CIT (A) though admitted this fact that the contract is only in respect of labour charges but has held in para.7.1, as under : 7.1 I have considered the Issue. I note that there is a contract agreement with respect to the labour charges, but no separate contract for the material purchases. The AO has proceeded on the assumption that since Sri Venkatesh's name appears as a creditor in the balance sheet, and the ledger account reflects payments to pay - for supply of materials as per invoice, the contention of the appellant that it had purchased the materials directly in Its name is not correct. The appellant in his written submission made on 5.11.2012 has clearly stated that "the payments (for the materials) were routed through the contractor" for reasons of "ease of operations". Before me, it is also stated that the expenditure is genuine and the AO has not doubted the same. However, I have to note that the issue here is not regarding the genuineness or otherwise of the expenditure, but rather whether tax was to be deducted on the same. It is clear from the ledger account of Sri Venkatesh as well as the written submission of the appellant that the payment was not made directly to the vendor of the construction materials, but was rather made to Sri Venkatesh by credit to his ledger account. I am of the view that the services rendered by Sri Venkatesh with respect to the procurement of materials, in the context of the 'ease of operations' referred to by the appellant, actually represent a contract with the payments towards the same being exigible to tax deduction at source, By simply insisting that the purchases were made in the name of the appellant, It does not change the character of the relationship with Sri .Venkatesh, which is of a regular supply contract for materials. I also have to note in passing here that in his written submission itself, the appellant refers to Sri Venkatesh. as a "contractor". The
appellant has relied on two case laws of the ITAT Jaipur and Hyderabad Benches, which are however found to be based on a separate set of facts and premises. Hence, the same are clearly distinguishable from the facts involved in the current appeal. 15. It is also found that the invoices for purchase of material in question was in the name of the assessee and therefore the contractor Shri. Venkatesh has a limited role of inspecting the quality of material in procurement of the material. It is not the case of the Revenue that the contractor has charged anything for the purpose of procurement of the material used in the construction. The payment made by the assessee is only the cost of the material purchased and therefore there was no element of any income or profit of the contractor in respect of the procurement of material in question. It was found that the contract agreement in question is only in respect of labour charges for a fixed amount of Rs.34 lakhs and further the material purchased through the contract was in the name of the assessee as the invoices were issued by the vendor of the material in the name of the assessee. In these undisputed facts and circumstances, this payment of Rs.63,23,430/- cannot be attributed as a part of the contract charges under the work contract and therefore the provisions of Section 194C of the Act, are not applicable on such payment.
Though the Ld. AR has relied upon a decision of this Tribunal in the case of Udbhav Construction Ltd (supra) as well as the judgment of Hon’ble jurisdictional High Court in the case of HP India Sales P. Ltd (supra), however, we find that those decisions cannot be applied to the facts of the case of the assessee as there is no dispute regarding the rate of TDS as it was in those cases. Therefore the short deduction on account of rate of TDS would not attract the provisions of Section 40(a)(ia) as held by the Tribunal as well as by the Hon’ble jurisdictional High Court. However in the case of the assessee it is not a case of short deduction due to different rate of TDS under different provisions of Chapter XVII of the IT Act, 1961, but the dispute is regarding a particular payment on which the assessee has not at all deducted tax at source. In any case, when the payment in question is not forming part of the work contract and it was only a reimbursement of purchase of material that too in the name of the assessee, then the provisions of Section 194C of the Act are not applicable on such payment. Accordingly the disallowance made by the AO is not justified and the same is deleted.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 8th day of September, 2016.
Sd/- Sd/-
(INTURI RAMA RAO) (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER MCN* Copy to: 1. The assessee 2. The Assessing Officer 3. The Commissioner of Income-tax 4. Commissioner of Income-tax(A) 5. DR 6. GF, ITAT, Bangalore By Order
Assistant Registrar