2013 (4) TMI 801 - AT - Income Tax

Addition u/s 40(a)(ia) - Held that - Provisions of Section 40(a) (ia) have been held to be not applicable. See ITO Versus Finian Estates Developers (P) Ltd. 2012 (6) TMI 705 - ITAT, Delhi - Assessee having appointed a consolidator to acquire land who, as per the terms of MOU, agreed to assign its right to purchase the land in favour of the assessee

Summary

Issues Involved:
1. Disallowance under Section 40(a)(ia) of the Income-tax Act, 1961.
2. Applicability of TDS under Sections 194C or 194H of the Income-tax Act, 1961.
3. Impact of disallowance on the appellant's profit and closing stock.

Detailed Analysis:

1. Disallowance under Section 40(a)(ia) of the Income-tax Act, 1961:
The primary issue revolves around the disallowance of Rs. 54,66,051/- under Section 40(a)(ia) of the Income-tax Act, 1961. The Assessing Officer (AO) disallowed this amount, asserting that the payment was made without deducting TDS, thereby contravening the provisions of Section 40(a)(ia). The CIT (A) upheld this disallowance, leading to the assessee's appeal. The assessee contended that the payment to the consolidator was for the transfer of rights and not for any services rendered, thus not attracting the provisions of Section 40(a)(ia).

2. Applicability of TDS under Sections 194C or 194H of the Income-tax Act, 1961:
The CIT (A) held that the consolidator was acting as an agent of the assessee, necessitating TDS deduction under Sections 194C or 194H. The assessee argued that the relationship with the consolidator was on a principal-to-principal basis and not that of principal and agent. They relied on the Tribunal decision in the case of 'Finian Estates Developers (P) Ltd.', where under similar circumstances, it was held that the provisions of Section 40(a)(ia) were not applicable. The Tribunal in 'Finian Estates' had concluded that the consolidator was not rendering any service but was transferring certain rights, and thus, TDS provisions under Sections 194C or 194H did not apply.

3. Impact of Disallowance on the Appellant's Profit and Closing Stock:
The assessee contended that the disallowance of Rs. 54,66,051/- included in purchases during the year had no impact on the appellant's profit liable to tax since the entire purchases were part of the closing stock at the year-end. The Tribunal in 'Finian Estates' had noted that since no sales were made during the year and the purchases were reflected in the closing stock, no disallowance was warranted. This argument was reiterated by the assessee, emphasizing that the payment to the consolidator, being part of the closing stock, did not affect the taxable profits for the year under consideration.

Conclusion:
The Tribunal found the facts of the present case to be in pari materia with those in 'Finian Estates Developers (P) Ltd.' and concluded that the relationship between the assessee and the consolidator was on a principal-to-principal basis. Consequently, the provisions of Sections 194C or 194H were not applicable, and no disallowance under Section 40(a)(ia) was warranted. Moreover, since the purchases were part of the closing stock and no sales were made during the year, the disallowance had no impact on the taxable profits. Thus, the Tribunal accepted the assessee's grievance and allowed both appeals, setting aside the disallowance made by the AO and upheld by the CIT (A).

Order:
Both appeals filed by the assessees were allowed, and the order was pronounced in the open court on 12.04.2013.