2011 (9) TMI 904 - AT - Income Tax

TDS u/s 194C - disallowance made u/s. 40(a)(ia) - Held that We are aware of the fact that the agreement can be oral but the essence of contract lies on the fact whether assessee had the control of the work i.e. the manner in which the work has to be done. In case it lies with the assessee then it is not the subcontract so as to attract the provisions of section 194C(2) of the Act and subsequently the rigour of section 40(a)(ia) would not come into play for executing centring, tiling and fabrication through different persons. In instant case, the control lies with the assessee and the alleged subcontractor are merely executing the work of centring and fabrication under the full control of the assessee itself. Even nomenclature used by parties as subcontract does not change the real spirit of contract. Under facts and circumstances, revenue authorities were not justified in making disallowance by invoking provisions of section 40(a)(ia) of the Act. Same is directed to be deleted. Similar disallowance has been made in the year 2006-07. Facts being similar so following same reasoning, disallowance in question are directed to be deleted. Addition on account of long term capital gains resorting to the provisions of section 50C - Held that - We find that proper opportunity was provided to the assessee to putforth his grievance before the DVO. However, the assessee has not been able to take that opportunity. No other material was placed on record for rebutting the findings of the CIT(A). In view of this, we do not see any reason to interfere in the well reasoned of the CIT(A) and, accordingly, we uphold the same. Disallowance made out of sand and labour charges, out of petrol expenses and out of telephone expenses - personal expenses - Held that - AO has made the disallowance on the ground that the element of personal use with regard to telephone, vehicle could not be ruled out. The bills with regard to labour charges were also not fully verifiable. However, to meet the ends of justice, the CIT(A) restricted the disallowance to 50% of the disallowance made by the AO on the ground the disallowance is on the higher side. In view of this, we uphold the same.

Issues Involved:
1. Applicability of Section 194C and disallowance under Section 40(a)(ia) of the Income Tax Act.
2. Addition of long-term capital gains under Section 50C.
3. Disallowance of payments made to petty contractors under Section 40(a)(ia).
4. Ad-hoc disallowance of expenses (sand and labor charges, petrol expenses, telephone expenses).
5. Addition on account of ESIC and PF payments.

Issue-Wise Detailed Analysis:

1. Applicability of Section 194C and Disallowance under Section 40(a)(ia):
The assessee contended that the provisions of Section 194C, which mandate tax deduction at source (TDS) on payments to contractors and subcontractors, were not applicable. The payments made were not to subcontractors but to various agencies for specific works like centring, tiling, and fabrication. The assessee argued that these agencies did not bear the risk associated with the main contract and were not subcontractors. The Tribunal found that the assessee was prohibited from subcontracting without written permission, which was not obtained. The control and supervision of the work were with the assessee, and the agencies were merely executing the work. Therefore, the payments did not qualify as payments to subcontractors under Section 194C, and the disallowance under Section 40(a)(ia) was deleted.

2. Addition of Long-Term Capital Gains under Section 50C:
The Assessing Officer (AO) added Rs. 2,47,325 to the assessee's income as long-term capital gains, based on the stamp valuation of the property sold. The CIT(A) directed the AO to refer the matter to the District Valuation Officer (DVO), who confirmed the stamp valuation. The Tribunal upheld the CIT(A)'s decision as the assessee did not cooperate with the DVO and failed to provide any contrary evidence. Therefore, the addition was sustained.

3. Disallowance of Payments Made to Petty Contractors under Section 40(a)(ia):
For the assessment year 2006-07, the AO disallowed Rs. 5,78,000 paid to petty contractors, invoking Section 40(a)(ia). The assessee argued that these payments were not covered under the TDS provisions. The Tribunal found that the issue was similar to the one decided in favor of the assessee for the earlier year. Since the payments were not to subcontractors, the disallowance was deleted.

4. Ad-Hoc Disallowance of Expenses:
The AO made ad-hoc disallowances of Rs. 1,00,000 for sand and labor charges, Rs. 50,000 for petrol expenses, and Rs. 20,000 for telephone expenses due to unverifiable bills and potential personal use. The CIT(A) reduced these disallowances by 50%. The Tribunal upheld the CIT(A)'s decision, finding it reasonable given the circumstances.

5. Addition on Account of ESIC and PF Payments:
The AO disallowed Rs. 7,220 for late payment of ESIC and PF contributions. The Tribunal referred to the Supreme Court's decision in CIT v. Alom Extrusions Ltd., which held that payments made before the filing of the return are allowable. The Tribunal directed the AO to delete the addition if the payments were made before the return filing date.

Conclusion:
The Tribunal partly allowed the assessee's appeals, deleting the disallowances under Section 40(a)(ia) for payments not qualifying as subcontractor payments and directing the deletion of the ESIC and PF addition if payments were timely. The addition of long-term capital gains and partial ad-hoc disallowances were upheld.

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