2012 (11) TMI 708 - AT - Income Tax

TDS u/s 194C - Desallowance u/s 40(a) - payment to contractor / sub contractor - held that - The authorities below have not examined the terms and conditions under which the AOP had transferred the amount of Rs.55,24,769/- in the account of one of its member. - From the orders of the Revenue Authorities, it is not evident that whether they have examined the correct nature of the payment and that whether the nature of payment was from a contractor to a sub-contractor. First of all, this preliminary enquiry has to be satisfied so as to arrive at the applicability of the provisions of section 40(a)(ia) r.w.s. 194-C of IT Act. - matter remanded back. Invocation of section 40A(2)(b) Held that - For the purpose of invocation of this section one of the essential ingredient is that where an assessee incurs any expenditure and the AO is the opinion that such an expenditure is excessive, then the unreasonable amount is not to be allowed as a deduction - whether the impugned payment to its member was in the nature of an expenditure; has not been clearly established. To ascertain and determine the nature of payment the clauses of the agreement and the surrounding circumstances of the case are required to be examined by ld.CIT(A) in the light of the facts narrated by the AO - appeal of the Assessee is allowed but for statistical purposes

Summary

Issues Involved:
1. Estimation of profit by invoking Section 40A(2)(b) of the Income Tax Act, 1961.
2. Rejection of book results under Section 145 of the Income Tax Act, 1961.
3. Invocation of Section 40(a)(ia) of the Income Tax Act, 1961.
4. Ignorance of amendments to Section 40(a)(ia) made by Finance Act, 2008 retrospectively w.e.f. 01-04-2005.

Issue-wise Detailed Analysis:

1. Estimation of Profit by Invoking Section 40A(2)(b):
The learned Commissioner of Income Tax (Appeals) upheld the Assessing Officer's (AO) decision to estimate the profit of the appellant at Rs. 2,76,238/- by invoking the provisions of Section 40A(2)(b) of the Income Tax Act, 1961. The AO noted that the assessee, an Association of Persons (AOP) engaged in civil construction, passed the entire receipts from Kandla Port Trust to its two members as sub-contract payments, resulting in NIL income for the AOP. The AO opined that this arrangement was unreasonable and hit by the provisions of Section 40A(2)(b), leading to the rejection of the book results under Section 145 and the estimation of profit at 5% on the total turnover.

2. Rejection of Book Results under Section 145:
The AO rejected the book results under Section 145 of the Income Tax Act, 1961, due to the unreasonable payment to members and improper maintenance of books of accounts. The AO applied Section 44AD to estimate a net profit rate, considering the assessee as a civil contractor. Although Section 44AD envisages a net profit rate of 8% for turnovers less than Rs. 40 lakhs, the AO deemed a 5% profit rate reasonable for the assessee's higher turnover, resulting in an estimated profit of Rs. 2,76,238/-.

3. Invocation of Section 40(a)(ia):
The AO invoked Section 40(a)(ia) due to the belated deposit of tax deducted at source (TDS) on payments to sub-contractors. The assessee deducted TDS of Rs. 61,878/- on the payment of Rs. 55,24,769/- to member-sub-contractors on 31.03.2005 but deposited it on 09.06.2005, beyond the prescribed time. Consequently, the AO disallowed the entire payment, resulting in the assessment of the entire receipts of Rs. 55,24,770/- as income.

4. Ignorance of Amendments to Section 40(a)(ia):
The appellant argued that the CIT(A) ignored the amendments to Section 40(a)(ia) made by the Finance Act, 2008, retrospectively w.e.f. 01-04-2005. The CIT(A) upheld the AO's decision, stating that the appellant's contentions were more of convenience than legal interpretation. The CIT(A) confirmed that the payment was made to sub-contractors and upheld the AO's invocation of Section 40(a)(ia) and the estimation of income at 5% on the total turnover.

Remand and Re-adjudication:
The Tribunal noted that the CIT(A) did not address the first ground of appeal correctly and focused only on the additional ground. The Tribunal directed a re-adjudication by the CIT(A), emphasizing the need to examine the agreements and terms under which the AOP transferred the amount of Rs. 55,24,769/- to its member. The Tribunal highlighted the importance of determining whether the payment was from a contractor to a sub-contractor and the applicability of Section 40(a)(ia) r.w.s. 194-C. The Tribunal also referenced the Hon'ble Jurisdictional High Court's decision in CIT vs. M/s. J.K. Construction Co., which clarified the requirements for TDS deduction and deposit.

Conclusion:
The appeal was allowed for statistical purposes, directing the CIT(A) to re-adjudicate the issues in light of the Tribunal's directions, including examining the agreements, the nature of payments, and the applicability of relevant sections of the Income Tax Act, 1961.