2011 (6) TMI 818 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of 15% out of payments made to vendors u/s 40A(2)(b) of the Income Tax Act.
2. Disallowance u/s 40(a)(ia) of the Income Tax Act in conjunction with section 194C.

Summary:

Issue 1: Disallowance of 15% out of payments made to vendors u/s 40A(2)(b)

ITA No.1644/M/2010 is an appeal by the assessee against the order dated 22/1/2010 of CIT(A) XXXIII, Mumbai relating to assessment year 2006-07. The assessee, a joint venture between Hindustan Construction Company Ltd. and Larsen & Toubro Limited, challenged the disallowance of 15% out of payments made to vendors covered by the provisions of section 40A(2)(b) of the Income Tax Act. The Assessing Officer had disallowed 15% of the hire charges paid to related parties, following the precedent set in A.Y 2005-06. The CIT(A) confirmed this disallowance. However, the Tribunal noted that in A.Y. 2005-06, the identical issue was remanded to the Assessing Officer for fresh consideration. Consequently, the Tribunal set aside the order of the CIT(A) for the present assessment year and remanded the issue to the Assessing Officer for reconsideration in light of the decision for A.Y. 2005-06.

Issue 2: Disallowance u/s 40(a)(ia) in conjunction with section 194C

The assessee also contested the disallowance u/s 40(a)(ia) of the Income Tax Act for not deducting tax at source on payments made to sub-sub-contractors. The Assessing Officer and CIT(A) held that the assessee should have deducted tax at source on these payments. The assessee argued that the provisions of section 194C did not require deduction of TDS on payments made by a sub-contractor to a sub-sub-contractor, as the law prior to the amendment by Finance Act No.2, 2009 w.e.f. 1/10/2009 did not cover such payments. The Tribunal accepted the assessee's contention, noting that the provisions of section 194C(2) applied only to payments made by a contractor to a sub-contractor and not to payments made by a sub-contractor to a sub-sub-contractor. Therefore, the Tribunal directed the deletion of the disallowance made u/s 40(a)(ia).

ITA NO.3041/MUM/2010:

This appeal, relating to assessment year 2007-08, involved identical grounds as those in ITA No.1644/M/2010. The Tribunal set aside the order of CIT(A) regarding the disallowance u/s 40A(2)(b) and remanded the issue to the Assessing Officer for fresh consideration. The disallowance u/s 40(a)(ia) was decided in favor of the assessee.

In conclusion, both appeals by the assessee were partly allowed.

Order pronounced in the open court on the 24th day of June, 2011.