2015 (11) TMI 1870 - AT - Income Tax

Revision u/s 263 - TDS u/s 194C - Non deduction of TDS on contract work undertaken - penalty proceedings under section 271C initiated by AO - HELD THAT - On perusal of the replies, we find that all these payees have confirmed that the payment to them have been made for supply of earth, mitti and stones etc. Since payment for supply of material is not exigible to TDS, there was no need for the assessee to deduct such tax at source and resultantly the provisions of section 40(a)(ia) do not come into play. In this way, there was no need for the Assessing Officer to make disallowance of these expenses. Since these letters are a part of assessment records, we are of the view that the Assessing Officer did not invoke the provisions of section 40(a)(ia) and did not make disallowance, getting convinced by the fact that the payments were made for supply of material. The fact that the AO in his order did not mention these investigations made by him does not itself make his action illegal. He may not have referred to these documents may be because he was convinced that no disallowance is called for. Therefore, in such a scenario, on the facts and circumstances of the case, we do not find any error in the order of the Assessing Officer. In this case, Commissioner of Income Tax had tried to read too much from the mind of the Assessing Officer. Once, we reach to a conclusion that provisions of section 40(a)(ia) of the Act are not applicable on the facts and circumstances of this case, whatever was going through in the mind of the Assessing Officer at that time, it is a fact that he has reached to a correct conclusion. The order of the Assessing Officer cannot be said to contain any error on this count. The fact that the payments were made for supply of material also got strengthen by the fact that the assessee was engaged in such kind of project from Sahara India Commercial Corporation Ltd. during the year. The issue of nomenclature commission given to the said payments also got clarified during the assessment proceedings. Therefore, there is no question of invoking the provisions of section 194H of the Act. Further, there being no contract or son-contract, the provisions of section 194C are also not applicable. The nature of payments is quite clear from the replies sent by the supplier to the Assessing Officer directly. The fact that the Assessing Officer has initiated proceedings under section 271C, may have weighed too much in the mind of the Commissioner of Income Tax, while holding the order to be erroneous. But in our view, initiating penalty proceedings under section 271C of the Act by the Assessing Officer is not a relevant factor to decide whether the disallowance under section 40(a)(ia) was called for or not. Since as already held by us, the payments were not prone to invoking the provisions under section 40(a)(ia) of the Act, the disallowance, in any case, was not called for. Thus there being no error in the order of the Assessing Officer, the jurisdiction assumed by the Commissioner of Income Tax under section 263 of the Act is not as per law. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the assessment order was erroneous and prejudicial to the interest of the Revenue.
2. Whether the provisions of Section 40(a)(ia) of the Income Tax Act, 1961 were applicable.
3. Whether the Commissioner of Income Tax (CIT) was justified in invoking Section 263 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Whether the assessment order was erroneous and prejudicial to the interest of the Revenue:

The Commissioner of Income Tax (CIT) examined the assessment records and formed a prima facie view that the assessment made was erroneous and prejudicial to the interest of the Revenue. The CIT issued a show cause notice to the assessee, highlighting that the assessee had claimed 'Expenses incurred in connection with commission' amounting to Rs. 5,91,40,500/- without deducting TDS as required under Chapter XVII-B of the Income Tax Act, 1961. The CIT argued that the assessment order dated 21.12.2011 was erroneous as it failed to disallow the expenses under Section 40(a)(ia) of the Act due to non-deduction of TDS.

2. Whether the provisions of Section 40(a)(ia) of the Income Tax Act, 1961 were applicable:

The assessee contended that the payments were for the supply of material and not for commission or subcontract work, thus not liable for TDS under Section 194C or 194H. The assessee provided evidence that the payments were made for the procurement of raw material for a project with Sahara India Commercial Corporation Ltd., and no TDS was required. The CIT, however, held that TDS was required to be deducted either under Section 194C or 194H, and the failure to do so warranted disallowance under Section 40(a)(ia).

3. Whether the Commissioner of Income Tax (CIT) was justified in invoking Section 263 of the Income Tax Act, 1961:

The Tribunal examined whether the CIT's invocation of Section 263 was justified. The Tribunal noted that the Assessing Officer (AO) had made specific inquiries regarding the expenses and non-deduction of TDS during the assessment proceedings. The AO had accepted the assessee's explanation that the payments were for the supply of material, which did not attract TDS. The Tribunal emphasized that the AO had conducted independent inquiries, and the suppliers confirmed that the payments were for the supply of material. The Tribunal held that the AO's decision not to disallow the expenses under Section 40(a)(ia) was based on a plausible view and adequate inquiry.

The Tribunal concluded that the CIT could not impose his view under Section 263 when the AO had taken one of the possible views after due inquiry. The Tribunal found no error in the AO's order, as the payments were for the supply of material and not liable for TDS. Consequently, the Tribunal held that the jurisdiction assumed by the CIT under Section 263 was not as per law.

Conclusion:

The Tribunal allowed the appeal of the assessee, holding that the assessment order was neither erroneous nor prejudicial to the interest of the Revenue. The Tribunal found that the AO had conducted adequate inquiries and taken a plausible view, and the CIT's invocation of Section 263 was not justified. The order of the CIT under Section 263 was set aside, and the AO's assessment order was upheld.