NIKHIL CONSTRUCTIONS, ,VISAKHAPATNAM vs. THE INCOME TAX OFFICER, WARD-3(2), , VISAKHAPATNAM

consolidated order. Appeal wise adjudication is given in the following paragraphs of this order.

2. This appeal filed by the assessee against the order of the Ld. CIT(A)-1, Hyderabad in appeal No. 0079/2017-18/ITO, Ward-3(2), Vsp/CIT(A)-1/Hyd/2019-20, dated 8/5/2019 arising out of the order passed U/s. 143(3) r.w.s 263 of the Act for the AY 2010-11.

“1. The order passed U/s. 147 r.w.s 143(3) is itself bad in law. As a result the revision order passed by the Ld. Pr. CIT U/s. 263 is bad in law. Consequently the order passed by the Ld. AO U/s. 143(3) r.w.s. 263 is bad in law and void.

2. The Ld. AO is not at all correct in disallowing U/s. 40(a)(ia) the proportionate consideration paid to non-resident towards purchase of immovable property for non-deduction of tax at source in view of the provisions of paragraphs (4) of Article 26 of the DTAA between India and USA.

3. The Ld. AO is not at all correct in disallowing the proportionate consideration paid to non-resident as the non- resident does not have any income chargeable to tax embedded in the payment received from the assessee.

3 4. The Ld. AO is not at all correct in disallowing the consideration paid to the non-resident Indian, as the same is claimed as a direct expenditure U/s. 28, whereas the provisions of section 40(a)(ia) are applicable only to sections 30 to 38.

5. The Ld. AO is not correct in disallowing the whole of the consideration paid to the non-resident Indian as only 30% of the amount can be disallowed as is provided in section 40(a)(ia) and the amendment to section 40(a)(ia) being curative in nature is retrospective in operation.

6. The appellant craves leave to add to, amend, alter, modify or delete all or any of the above grounds of appeal

7. All the above grounds of appeal are mutually exclusive and without prejudice to one another.”

The assessee firm had paid an amount of Rs. 20,00,000/- during the FY 2008-09. However, the Ld. AO noticed that the assessee has not deducted tax at source on the payment made to the non- resident co-owner during the previous year 2009-10 relevant to the AY 2010-11, as required u/s. 195(1) of the Act. Therefore, the Ld. AO was of the opinion that since the assessee firm did not deduct the tax on the payments made to the non-resident, the expenditure claimed by the assessee towards of cost of site at Rs.

5 20,15,420/- attracts proportionate disallowance U/s. 40(a)(ia) of the Act to the extent of amount paid to the non-resident. Before the Ld. AO, it was the submission of the assessee that the disallowance u/s. 40(a)(ia) of the Act is not warranted in the case of the assessee as the payment was made to Power of Attorney holder of the NRI but not directly to the NRI. The assessee further submitted that the NRI has invested the amount received from the assessee in the residential property at Bangalore and since the capital gains on the said house sale transaction is exempted under the provisions of section 54, the assessee has not made any TDS. In support of its argument, the Ld AR of the assessee relied on various decisions. However, not convinced with the submissions of the Ld. AR of the assessee, the Ld. AO observed that as per the development agreement out of the total extent of 444 sq yds, Sri M. Sudhakar (NRI) was in possession of 273 sq yds and the other co-owner Sri A Lakshminarayana Rao was holding 171 sq yds of land. Accordingly, the Ld. AO concluded that the proportionate amount of Rs. 12,39,211/- out of the total expenditure (Rs. 20,15,420/-) claimed by the assessee towards site cost belongs to the NRI co-owner. Thus, the Ld. AO disallowed the proportionate expenditure of Rs. 12,39,211/- u/s. 40(a)(ia) of the Act and added the same to the 6 total income of the assessee. Further, the Ld. AO restricted the claim of deduction made by the assessee U/s. 40(b) of the Act to the extent of Rs.84,973/- as against the assessee’s claim of Rs. 2,29,771/- and made disallowance on the ground that the one of the partners of the assessee-firm failed to offer the interest on capital received by him from the firm. Accordingly, the Ld. AO completed the assessment u/s. 143(3) r.w.s 147 of the Act and determined the assessed income at Rs. 13,50,210/- against the returned income of Rs. 26,021/-.

5. Aggrieved by the order of the Ld. AO, the assessee filed an appeal manually before the Ld. CIT(A)-6, Hyderabad on 02nd May, 2014 and filed appeal electronically on 30/08/2016.

Subsequently, the case was transferred to Ld. CIT(A)-5, Hyderabad vide Notification in F.No. Pr.

CC/Tech/5C(Appeals)Jurs/2017-18, dated 4/10/2017. Later Pr.

CCIT, Hyderabad issue one more Notification vide F.No.

Pr.CC/Tech/5C(Appeals)/Jurs/2018-19, dated 20/11/2018, transferring the case from CIT(A)-5, Hyderabad to CIT(A)-6, Hyderabad. Before the Ld. CIT(A), none appeared on behalf of the assessee and therefore, the Ld. CIT (A) taking into account the facts of the case available on record adjudicated the appeal and 7 granted part relief to the assessee and partly allowed the assessee’s appeal. Aggrieved by the order of the Ld. CIT (A), the assessee is in appeal before the Tribunal in its appeal (AY: 2010-11).

8 6,79,520) as against Rs. 12,39,211/- considered in the assessment order for AY 2010-11. Thus, the Ld. Pr. CIT revised the assessment order and passed the order U/s. 263 of the Act on 31/3/2016. Accordingly, giving effect to the directions of the Ld. Pr. CIT, the Ld. AO passed consequential order u/s. 143(3) r.w.s 263 of the Act. Aggrieved by the order of the Ld. AO, the assessee filed an appeal before the Ld. CIT(A)-1, Hyderabad.

Before the Ld. CIT(A), none appeared on behalf of the assessee.

The Ld. CIT(A) vide his order dated 8/5/2019 observed that in the consequential order passed by the Ld. AO, the Ld. AO has made the additions based on the directions of the Ld. Pr. CIT, U/s. 263 of the Act and no other additions were made and therefore there is no application of mind by the Ld. AO. The Ld. CIT(A) further observed that “an appeal against the assessment completed as per the directions of the Pr. CIT u/s. 263 of the Act could not be decided by the Ld. CIT (A)”. Accordingly, the Ld. CIT(A) dismissed the appeal of the assessee. Aggrieved by the order of the Ld. CIT(A), assessee is in appeal before the Tribunal

Aggrieved by the order of the Ld. AO, assessee filed an appeal before the Ld. CIT(A)-6, Hyderabad and the Ld. CIT(A) granted part relief to the assessee and partly allowed the appeal.

Aggrieved, the assessee filed an appeal before the Tribunal vide ITA No. 132/Viz/2019. In the meantime the Ld. Pr. CIT-1, Visakhapatnam invoked his powers U/s. 263 of the Act and passed the order and enhanced the disallowance to Rs. 36,79,520/- as against Rs. 12,39,211/- made by the Ld. AO. The Ld. AO passed the consequential order U/s. 143(3) r.w.s 263 of the Act giving effect to the directions of the Ld. Pr. CIT.

Aggrieved, the assessee filed another appeal before the Ld. CIT(A)-1, Hyderabad. On appeal, the Ld. CIT(A) dismissed the assessee’s appeal and upheld the consequential order passed by the Ld. AO. Again aggrieved, the assessee filed an appeal before

CIT vide para 5 and its sub-paragraphs which are extracted herein below for reference:

“5. The submissions made by the assessee are carefully examined with reference to the factual matrix of the case, material placed on record including development agreement dated 09-10-2008 and provisions of sec. 263 of the I T Act. The first submission of the assessee in this regard is that the proportionate addition made by the Assessing Officer in the assessment order u/s.40(a)(i) in case of NRI's share is challenged in appeal before the CIT(A) and in view of clause (c) of Explanation-1 to sec. 263, proceedings initiated u/s 263 may be dropped. The contention of the assessee has no merit. The said clause provides that where any order passed by the Assessing Officer had been the subject matter of any appeal filed the powers of the Principal Commissioner or Commissioner under sec. 263 shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal. In the present proceedings, only the quantum of disallowance made by the AO under sec. 40(a)(i) is proposed for revision as there is an apparent error in the apportionment of consideration to the NRI owner on pro-rata basis while making the disallowance u/s 40(a)(i). The issues raised in the grounds of appeal before the CIT(A) i.e. whether the assessee is liable to deduct at source at all from the payments made to NRI owner as the NRI owner is stated to have invested the gain in a new residential house and there is no tax liability from the transaction in his case or whether provisions of sec. 40(a)(i) are applicable when the sums were paid to POA holder of NRI and not directly to NRI are not subject- matter of present revision proceedings. The limited point being considered in the present proceedings is the correctness or arithmetical accuracy of the amount of consideration apportioned by the Assessing Officer to the NRI out of total consideration paid as per the development agreement entered into by the assessee for development of subject property. Therefore, issues which are subject-matter of appeal filed by the assessee before CIT(A) are not being considered and dealt with in the present proceedings.

5.1. Reverting to the issue being considered in the present proceedings i.e., correctness of quantum of disallowance to be made under sec. 40(a)(i), the assessee firm has debited a sum of Rs.50,38,560/- this year which includes a sum of Rs.30 lakhs paid/credited to NRI owner and construction value of Rs. 20,38,560/-.The assessee had shown closing work-in-progress in respect of land at Seetammadhara at Rs.30,23,140/- and credited to the P & L A/C. Therefore, according to the Assessing Officer, net expenditure of Rs.20,15,420/- was charged to the P & L a/c in the year under consideration. The observation of the AO that only net expenditure of Rs.20,15,420/- has to be considered for the purpose of disallowance u/s.40(a)(i) and not the entire expenditure debited to P & L A/c of Rs. 50,38,560/- is not correct as the expenditure towards land cost and development cost debited to the P & L A/c is Rs.50,38,560/-. Merely because a portion of such expenditure was credited to the P & L A/c as work-in- progress or in some other form like closing stock, it does not imply that only net. expenditure is debited to the P & L A/C. What is to be considered for purpose of disallowance u/s 40(a)(i) is the gross expenditure charged to P & L a/c without deducting tax at source. Thus, the Assessing Officer erred in considering only net expenditure excluding closing WIP while making the disallowance u/s 40(a)(i).

5.2. Another inaccuracy noticed in the assessment order is that even presuming for a while that only net expenditure is to be taken into consideration as observed by the AO, out of the said net expenditure considered by the AO, a sum of Rs.14,71,805/- was apportioned to the NRI owner on the basis of land holding of the NRI owner. As tax was not deducted at source from the payments/credits made to NRI, this pro-rata expenditure was subjected to disallowance in the assessment order. But, as already mentioned, as per clauses in the development agreement the entire cash component of consideration amounting to Rs.60 lakhs has to be paid exclusively to the NRI owner and therefore, it is not correct to apportion cash component of consideration to the other owner. The AO ought to have disallowed the entire cash component debited to the P & L

A/c this year (out of total cash consideration of Rs. 60 lakhs), which is relatable to consideration paid to NRI u/s 40(a)(i) without deducting tax at source in addition to proportionate cost of construction attributable to NRI owner as per the land holding pattern. 5.3. From the foregoing discussion, it is clear that the assessment order dated 20.03.2014 passed by the Assessing Officer in the case of the assessee for A.Y. 2010-11 is not only erroneous but also prejudicial to the interests of revenue and the twin conditions as contemplated in sec. 263 are satisfied in the present case. Accordingly, by virtue of the powers vested in the undersigned sec. 263 of the IT Act, the Assessing Officer is directed to disallow entire land cost of Rs. 30,00,000/- paid/credited to NRI and included in the amount of Rs.50,38,560/- debited to P & L a/c this year and also proportionate development expenditure i.e. cost of construction attributable to NRI owner of Rs. 6,79,520/- as worked out by the assessee (out of Rs. 20,38,560/-) based on extent of built of area to be given to NRI in addition to exclusive payment of Rs. 60,00,000/- and revise the disallowance made u/s 40(a)(i) in the assessment order. In other words, the total disallowance to be made u/s 40a(i) is Rs. 36,79,520/- (Rs.30,00,000 plus Rs.6,79,520) as against Rs. 12,39,211/- considered in the assessment order for A.Y. 2010-11.”

Therefore, even when the assessee filed an appeal before the Ld. CIT(A)-1, did not comment on the consequential order passed by the Ld.AO. Therefore, in our considered opinion, the directions given by the Ld. Pr. CIT and consequential order passed by the Ld. AO are in accordance with law. While disposing off the appeal of the assessee, the Ld. CIT (A) relied on the order of the ITAT, Hyderabad in the case of Maheswari Mega Ventures Ltd in to state that the Ld. CIT(A) should not have exercised his appellate powers on an issue which was subject matter of consideration by the CIT U/s. 263…..” and rightly dismissed the appeal of the assessee. Consequently, we are of the considered view that no interference is required in the decision of the Ld. CIT(A)-1, Hyderabad vide order dated 8/5/2019 dismissing the appeal of the assessee.

ITA No. 132/Viz/2019 (AY: 2010-11)

“1. The Ld. AO is not justified in disallowing and the Ld. CIT(A) is not justified in confirming the disallowance u/s. 40(a)(ia) the proportionate consideration paid to non-resident towards purchase of immovable property for non-deduction of tax at source in view of the provisions of Article-26 with respect to non-discrimination of the DTAA between India and USA.

2. The Ld. AO is not justified in disallowing the Ld. CIT(A) is not justified in confirming disallowance the proportionate consideration paid to the non-resident Indian, as the non- resident payee’s taxable capital gain is NIL after claiming exemption U/s. 54F and the same is accepted in his assessment vide order passed U/s. 143(3).

3. The Ld. AO is not justified in disallowing and the Ld. CIT(A) is not justified in confirming the disallowance of the proportionate consideration paid to the non-resident Indian, as the same is claimed as a direct expenditure U/s. 29, whereas the provisions of section 40(a)(i) are applicable only to section 30 to 38.

4. The Ld.AO is not justified in disallowing and the Ld. CIT(A) is not justified in confirming the disallowance of the whole of the consideration paid to the non-resident Indian as only 30% of the amount can be disallowed as is provided in section 40(a)(ia) in view of the non-discrimination provisions contained in Article 26 of the Indo-US DTAA. 5. All the above grounds of appeal

are without prejudice to one another.

6. The appellant craves leave to add to, alter, delete, modify all or any of the above grounds of appeal.”

14. Since we have upheld the decision of the Ld. CIT(A)-1, Hyderabad, order dated 8/5/2019 while adjudicating the assessee’s appeal in (AY 2010-11), the order of the Ld. CIT(A)-6, Hyderabad, dated 18/1/2019, against which the present appeal is filed, is set-aside and accordingly the grounds raised by the assessee are dismissed.

ITA No. 139/Viz/2019 (AY: 2011-12)

“1. The order passed U/s. 147 r.w.s 143(3) is itself bad in law. As a result the revision order passed by the Ld. Pr. CIT U/s. 263 is bad in law. Consequently the order passed by the Ld. AO U/s. 143(3) r.w.s. 263 is bad in law and void.

3. The Ld. AO is not at all correct in disallowing the proportionate consideration paid to non-resident as the non- resident does not have any income chargeable to tax embedded in the payment received from the assessee.

4. The Ld. AO is not at all correct in disallowing the consideration paid to the non-resident Indian, as the same is claimed as a direct expenditure U/s. 28, whereas the provisions of section 40(a)(i) are applicable only to sections 30 to 38.

5. The Ld. AO is not correct in disallowing the whole of the consideration paid to the non-resident Indian as only 30% of the amount can be disallowed as is provided in section 40(a)(ia) and the amendment to section 40(a)(i) being curative in nature is retrospective in operation.

6. The appellant craves leave to add to, amend, alter, modify or delete all or any of the above grounds of appeal.

16 7. All the above grounds of appeal are mutually exclusive and without prejudice to one another.”

ITA No. 133/Viz/2019 (AY: 2011-12)

“1. The Ld. AO is not justified in disallowing and the Ld. CIT(A) is not justified in confirming the disallowance u/s. 40(a)(ia) the proportionate consideration paid to non-resident towards purchase of immovable property for non-deduction of tax at source in view of the provisions of Article-26 with respect to non-discrimination of the DTAA between India and USA.

2. The Ld. AO is not justified in disallowing the Ld. CIT(A) is not justified in confirming disallowance the proportionate consideration paid to the non-resident Indian, as the non- resident payee’s taxable capital gain is NIL after claiming exemption U/s. 54F and the same is accepted in his assessment vide order passed U/s. 143(3).

3. The Ld. AO is not justified in disallowing and the Ld. CIT(A) is not justified in confirming the disallowance of the proportionate consideration paid to the non-resident Indian, as the same is claimed as a direct expenditure U/s. 29, whereas the provisions of section 40(a)(i) are applicable only to section 30 to 38.

4. The Ld.AO is not justified in disallowing and the Ld. CIT(A) is not justified in confirming the disallowance of the whole of the consideration paid to the non-resident Indian as only 30% of the amount can be disallowed as is provided in section 40(a)(ia) in view of the non-discrimination provisions contained in Article 26 of the Indo-US DTAA.

6. The appellant craves leave to add to, alter, delete, modify all or any of the above grounds of appeal.”

22. Since we have upheld the decision of the Ld. CIT(A)-6, Hyderabad, order dated 30/11/2018 while adjudicating the 18 assessee’s appeal in (AY 2011-12), the order of the Ld. CIT(A)-6, Hyderabad, dated 14/12/2018, against which the present appeal is filed, is set-aside and accordingly the grounds raised by the assessee are dismissed.

Pronounced in the open Court on the 23rd January, 2023.