2014 (4) TMI 110 - AT - Income Tax

Disallowance u/s 40(a)(ia) Non deduction of Tax at Source (TDS) u/s 194A on interest paid to M/s Konkan Railway Corporation Ltd., on mobilisation advance - Held that - When interest on mobilisation advance was recovered by contractee from running bills before releasing contract charges to assessee, cannot be said that assessee has credited interest paid or payable to account of assessee - Cannot be said that there is any violation of provisions of section 194A of Act - Liability cannot be fastened on assessee or a default cannot be attributed to assessee for not discharging an obligation which is impossible on its part to perform. Decision of High Court in case of Viswapriya Financial Services and Securities Ltd., vs. CIT 2002 (10) TMI 88 - MADRAS High Court is also not applicable to facts of present case as in that case assessee actually made payment but did not treat it as interest - Do not find any infirmity in order of CIT(A). Further, perusal of Notification Number SO No.3489 dated 22-10-1970 makes it clear that provisions of section 194A of Act are not applicable to interest paid to company whose shares are held by either Central or State Government - Provisions of section 194A of Act will not apply to said company in view of Notification in S O No.3489 dated 22-10-1970 - Interest payment to such company is outside purview of section 194A and consequently no disallowance can be made by applying provisions of section 40(a)(ia) of Act - Decided against Revenue.

Summary

Issues:
CIT (A) deleting the addition under section 40(a)(ia) for non-deduction of tax at source.

Analysis:
The appeal concerned the department's challenge against the CIT (A)'s order regarding the deletion of an addition made by the Assessing Officer under section 40(a)(ia) for failure to deduct tax at source. The assessee, a joint venture engaged in civil contract works, had entered into an agreement with a government undertaking for a project. The Assessing Officer reopened the assessment due to income escapement concerns. During reassessment, the Assessing Officer disallowed an interest payment of Rs.1,56,72,913 for not deducting tax at source under section 40(a)(ia). The assessee argued that as per the agreement, the interest amount was recovered by the contractee from running bills, and thus, no actual payment was made by the assessee to attract TDS provisions.

The CIT (A) analyzed the agreement terms and statutory provisions, concluding that no disallowance could be made under section 40(a)(ia) as the assessee was not required to make actual payments and the interest was recovered by the contractee from running bills. The revenue appealed, contending that TDS provisions must be complied with when paying interest. The authorized representative for the assessee argued that no interest amount was paid to the contractee directly, and even if paid, certain exemptions applied.

The Tribunal found that the interest on mobilization advance was recovered by the contractee from running bills, making it impossible for the assessee to credit the interest to the contractee's account as per section 194A. Additionally, it was noted that the contractee was a government company, exempting the interest payment from section 194A as per a relevant notification. Therefore, the Tribunal upheld the CIT (A)'s decision, dismissing the revenue's appeal as the grounds lacked merit.

In conclusion, the Tribunal dismissed the revenue's appeal, affirming the CIT (A)'s decision regarding the deletion of the addition under section 40(a)(ia) for non-deduction of tax at source.