2014 (12) TMI 514 - AT - Income Tax

Disallowance of amount spent on packing materials u/s 40(a)(ia) Applicability of TDS under section 194C Works contract or contract to sale - Held that - CIT(A) rightly held that the manufacturers were manufacturing the printed material at their premises and they were not captive units of the appellant - Merely because the printing was done as per the requirement/specifications of the assessee, it cannot be said that any work was carried out on behalf of the assessee - there is nothing on record to show that ancillary materials were supplied by the assessee to the manufacturer firms - supply of printed tobacco packing material was a sale and could not be considered as a works contract and tax was not required to be deducted u/s 194C - the basic requirement of applicability of section 194C is that the transaction should come under work contract and not as a contract to sale assessee s case is covered as contract to sale, the provisions of section 194C are not applicable at all - Therefore, there was no requirement of deduction of tax at source and for that matter the provisions of Section 40 a (ia) of the Act are not applicable at all - the manufacturer on his owner has purchased material and manufactured the products as per specification of the assessee, which it sold, to the assessee - the CIT(A) has rightly held the addition made by the AO as untenable Decided against revenue. Expenses relating to advertisement and publicity Applicability of section 194C Payments made exceeded the statutory limit for deduction of tax Held that - CIT(A) rightly was of the view that no material was supplied to the seller and the entire material was purchased on his own by the seller - the transaction constitutes a sale within the rules giving rise to such a warranty - The supply has been made by M/s Micron India of printed packing labels as per requirement/specifications of the assessee - there is no material to show that ancillary materials like labels, ink, papers, screen-printing, screens etc. were supplied by appellant to the aforesaid company - assessee has also paid VAT on the sales and has furnished copies of bills in support of its contention - supply of printed labels was a sale and could not be considered as a works contract and thus tax was not required to be deducted u/s 194C - it was not a work contract but contract for sale - Thus the CIT(A) has rightly concluded that supply of printed labels was a sale and could not considered as a work contract and thus tax was not required to be deducted u/s 194C of the Act Decided against revenue. Addition of ₹ 50,00 upheld out of claimed expenses Held that - The AO has made addition of ₹ 50,000/- by making disallowance out of the claimed expenses on the basis that the assessee could not prejudice some of the vouchers and also from the perusal of other vouchers, it was found that these are petty and cash payments for which proper verification is not possible - CIT(A) was not justified him sustaining the addition made on ad-hoc basic without proper justification thus, the order of the CIT(A) is to be set aside and the AO is directed to delete the addition Decided in favour of assessee.

Issues Involved:
1. Deletion of disallowance of Rs. 92,73,027/- under Section 40(a)(ia) of the IT Act, 1961 for packing material.
2. Deletion of disallowance of Rs. 1,24,700/- under Section 40(a)(ia) of the IT Act, 1961 for advertisement and publicity expenses.
3. Addition of Rs. 50,000/- out of claimed expenses by the AO.

Issue-Wise Detailed Analysis:

Issue 1: Deletion of disallowance of Rs. 92,73,027/- under Section 40(a)(ia) of the IT Act, 1961 for packing material

The Revenue contested the CIT(A)'s deletion of disallowance of Rs. 92,73,027/- made by the AO under Section 40(a)(ia) of the IT Act, 1961. The AO had determined that the assessee, engaged in the business of manufacturing and selling tobacco, procured printed packing material as per its specifications, including statutory warnings mandated by the Government of India. The AO concluded that these transactions were contracts requiring TDS under Section 194C, based on CBDT Circulars No. 715 and 13/2006.

The CIT(A), however, observed that the transactions were sales, not contracts for work, as the manufacturers independently produced the packing materials and sold them to the assessee. The CIT(A) cited various judicial precedents, including the Supreme Court's ruling in the case of State of Himachal Pradesh Vs. Associated Hotels of India Ltd., which distinguished between contracts of sale and contracts of work and labor. The CIT(A) concluded that the transactions were sales, and thus, Section 194C did not apply.

The ITAT upheld the CIT(A)'s decision, agreeing that the transactions were sales, not works contracts, and therefore, TDS under Section 194C was not required. The ITAT confirmed that the addition of Rs. 92,76,026/- made by the AO was untenable and rightly deleted by the CIT(A).

Issue 2: Deletion of disallowance of Rs. 1,24,700/- under Section 40(a)(ia) of the IT Act, 1961 for advertisement and publicity expenses

The AO disallowed Rs. 1,24,700/- under Section 40(a)(ia) for payments made to M/s Micron India for publicity and advertisement expenses, asserting that TDS was not deducted as required under Section 194C. The CIT(A) found that the payments were for the purchase of printed packaging materials, which constituted a sale rather than a works contract. The CIT(A) noted that the materials were independently produced by M/s Micron India and sold to the assessee, with VAT paid on these transactions.

The ITAT upheld the CIT(A)'s decision, agreeing that the transactions were sales and not works contracts, and thus, TDS under Section 194C was not applicable. The ITAT confirmed the deletion of the addition of Rs. 1,24,700/-.

Issue 3: Addition of Rs. 50,000/- out of claimed expenses by the AO

The assessee objected to the CIT(A)'s upholding of the AO's addition of Rs. 50,000/- out of claimed expenses, arguing that no specific defects in the vouchers were identified. The AO had made the disallowance based on some unproduced vouchers and the difficulty in verifying petty cash payments.

The ITAT found that the AO's disallowance was based on an estimation without proper justification and specific defects. The ITAT concluded that the CIT(A) was not justified in sustaining the ad-hoc addition and directed the AO to delete the addition of Rs. 50,000/-.

Conclusion:

The ITAT dismissed the Revenue's appeal and allowed the assessee's cross-objection, confirming the CIT(A)'s decisions on all issues. The order was pronounced in the open court on 31st March 2014.

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