2014 (2) TMI 138 - AT - Income Tax

Liability to deduct TDS Payments made to constituent partners Held that - The Assessing officer erred in recasting the P&L of the AOP to bring in the works directly taken up by the constituents - the constituents have offered the income from their portion of the project as their income and offered the same for tax - in the case of a JV/ Consortium formed specifically for the sole purpose of obtaining the contracts and specific portions of the projects are carried out by mutual agreement by specific constituents, the profits from the portion of the projects derived from the individual constituent can be offered by them for tax in their return - Once such income is assessed in their individual hands the Assessing officer cannot again bring to tax the entirety of the receipts in the hands of the Consortium - The credit for the TDS made by the client will be available to the respective constituents who has offered income on which such TDS has been made, even though the certificate issued by the client is in the name of the Consortium - Relying upon CIT v Virgin Creations 2011 (11) TMI 348 - CALCUTTA HIGH COURT - TDS paid before the due date for filing of the Income Return is an allowable deduction and cannot be disallowed u/s 40(a)(ia) - disallowance u/s 40(a)(i) is only to the extent of the amount outstanding as on the last day of the previous year and amounts which have been paid during the previous year cannot be disallowed for non-deduction of TDS. Disallowance made u/s 40a(i) of the Act - Non-deduction of tax on payments made Held that - Earlier the profits of the individual constituents are to be assessed in their individual hands and there is no question of the Assessee deducting tax at source while passing on the payments to the constituents towards their share of work carried out by them, the disallowance being the share of receipts of the Chinese concern towards their share of work carried out in the hands of the Assessee is deleted - it has to be verified whether the Chinese concern has offered this income for tax in India - If the Chinese concern has not filed income Tax return and offered this amount as part of their income in computing their taxable income, the same shall be assessed as income of the assessee, as the person responsible for making the payment to the Non Resident. Addition made - Whether the addition was in the nature of investment or payment for works executed Held that - The matter remitted back to the AO for fresh adjudication Decided partly in favour of Assessee. The AO erred in recasting the P&L of the Assessee, when the individual portions of the project was separately carried out by the individual constituents and the constituents have offered the profits from their share of the project to tax in their return, which has been accepted - Therefore there can be no disallowance in respect of amounts payable to the constituents on the ground that no tax has been deducted at source - the discrepancies if any in the account arising due to the AO recasting the accounts of the Assessee including the entire projects in the hands of the Assessee has to be reviewed Matter remitted back to the AO for fresh adjudication Decided in favour of Revenue.

Summary

Issues Involved:
1. Liability of the appellant (AOP/JV) to deduct tax at source from payments made to constituent partners.
2. Disallowance of certain amounts due to non-deduction or late payment of TDS.
3. Nature of payments amounting to Rs. 11,44,46,927/- and whether they were investments or payments for works executed.

Detailed Analysis:

1. Liability to Deduct Tax at Source:
The main issue is whether the appellant, being an AOP/JV, is liable to deduct tax at source from payments made to its constituent partners. The AO relied on the decision of the ITAT, Hyderabad, which held that the appellant was liable to deduct tax as per section 194C(2) of the IT Act. The CIT(A) also held that the appellant was required to deduct tax at source from the payments made to the JV constituents. However, the ITAT observed that the joint venture was formed only to obtain contracts from government bodies, and the actual work was executed by the individual constituents. The ITAT concluded that the profits from the portion of the projects derived by the individual constituents should be assessed in their hands, and there was no requirement for the AOP to deduct tax at source.

2. Disallowance Due to Non-Deduction or Late Payment of TDS:
The AO disallowed certain amounts on the grounds of non-deduction or late payment of TDS. Specifically, Rs. 2,71,38,750/- was disallowed for payments made to Sino Hydro Corporation, China, due to non-deduction of tax at source. The ITAT held that if the Chinese concern had not offered this income for tax in India, the amount should be assessed as income of the appellant. Additionally, the AO disallowed Rs. 86,39,27,480/- due to late payment of TDS. The ITAT referred to the Calcutta High Court's decision in CIT v. Virgin Creations, which allowed TDS paid before the due date for filing the income return as a deduction.

3. Nature of Payments Amounting to Rs. 11,44,46,927/-:
The dispute was regarding whether the payments were in the nature of investments or payments for works executed. The CIT(A) set aside the matter to the AO for redoing the issue in accordance with the law. The ITAT directed the AO to redo this issue, taking into account their decision and giving reasonable opportunity to the appellant.

Conclusion:
The ITAT concluded that the AO erred in recasting the P&L of the AOP to include works directly taken up by the constituents. The profits from the individual portions of the project should be offered by the respective constituents for tax in their returns. Consequently, there cannot be any disallowance in the hands of the consortium for amounts receivable by the constituents on the ground that the consortium has not deducted tax at source. The appeal of the assessee was partly allowed for statistical purposes, and the revenue's appeal was also allowed for statistical purposes, with directions to the AO to redo the issues in light of the ITAT's conclusions.