2016 (3) TMI 651 - HC - Income Tax

Denial of credit for the tax deducted at source by the Government of Andhra Pradesh from their bills - Held that - On being asked how the Revenue could retain the amount representing the tax deducted at source from the petitioners bills, and not pay it either to the petitioner or to the sub-contractor, Sri T.Vinod Kumar, learned Senior Standing Counsel for Income Tax, would submit that, as the income is assessable in the hands of the sub-contractor, it is they, and not the petitioner, who can claim credit and, whenever any such claim is made, the Department would give them credit for the TDS, and refund the amount in accordance with Rule 37BA of the Rules. It is, however, not in dispute that the sub-contractor has not made any claim for being given credit for the tax deducted at source by the Government from the bills of the petitioner herein. It is not as if there were conflicting claims by the petitioner-JV on the one hand, and its constituent sub-contractor on the other, both seeking credit for the tax deducted at source by the Government, necessitating retention of these amounts by the Revenue till resolution of the conflicting claims. As held by the Division Bench of this Court, in Bhooratnam and Co. 2013 (1) TMI 478 - ANDHRA PRADESH HIGH COURT the Revenue cannot be allowed to retain the amounts representing the tax deducted at source without credit being given to anybody. If credit of tax is not allowed to the petitioner-assessee, and the sub-contractor has not made any claim for refund, it would result in credit of the TDS not being taken by anybody and this, as has been rightly pointed out by the Division Bench in Bhooratnam and Co. is not the spirit and the intention of the law. To the limited extent the assessing authority denied credit to the petitioner, for the tax deducted at source from their bills by the Government, the impugned assessment orders/rectification orders are set aside. The assessing authority shall determine the quantum of credit for TDS which the petitioners are entitled to in terms of this order, and refund the amount so computed to the petitioners herein in accordance with law. The entire exercise, culminating in final orders being passed, shall be completed within a period of three month from the date of receipt of a copy of this order. It is made clear that this order shall not preclude the assessing authority, if he so chooses, from reopening the assessments, and in passing orders thereafter in accordance with Sections 147 and 148 of the Act.

Issues Involved:
1. Denial of TDS credit to joint-venture entities.
2. Applicability of Rule 37BA(2)(i) of the Income Tax Rules, 1962.
3. Interpretation of Section 199(1) of the Income Tax Act, 1961.
4. Procedural compliance under Rule 37BA(2)(i) proviso.
5. Retention of TDS amounts by the Revenue without credit to any party.

Issue-wise Detailed Analysis:

1. Denial of TDS Credit to Joint-Venture Entities:
The petitioners, five joint-venture entities, challenged the orders of the Assessing Authority denying them credit for the tax deducted at source (TDS) by the Government of Andhra Pradesh from their bills for the assessment years 2010-11 to 2012-2013. The Assessing Authority held that the joint ventures were merely procedural devices used for submitting bids and transferring contracts to their constituents without executing any work themselves. Consequently, the TDS credit was disallowed based on Rule 37BA(2)(i) of the Income Tax Rules, 1962.

2. Applicability of Rule 37BA(2)(i) of the Income Tax Rules, 1962:
The Assessing Authority relied on Rule 37BA(2)(i) to deny TDS credit, stating that TDS credit must be given to the constituent who actually performed the work. The rule was intended to extend TDS credit to the actual payee in whose hands the income is assessed. The petitioners argued that the income from the amounts received by them from the Government was liable to be taxed only in their hands, and as their income was "Nil," the TDS deducted was liable to be refunded to them alone.

3. Interpretation of Section 199(1) of the Income Tax Act, 1961:
Section 199(1) states that any deduction made in accordance with Chapter XVII and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made. The court noted that the deductions were made by the Government from the amounts paid to the petitioner, and no amount was paid directly to the sub-contractor. Therefore, the TDS credit should be given to the petitioner, not the sub-contractor.

4. Procedural Compliance under Rule 37BA(2)(i) Proviso:
The proviso to Rule 37BA(2)(i) requires the deductee to file a declaration with the deductor, and for the deductor to report the tax deduction in the name of the other person. The court observed that the petitioner had not made any such declaration, and the Government had reported the tax deduction in the name of the petitioner. Therefore, the procedural requirements of the proviso were not met, and TDS credit should be given to the petitioner.

5. Retention of TDS Amounts by the Revenue Without Credit to Any Party:
The court criticized the Revenue for retaining the TDS amounts without credit being given to anybody. It was noted that the sub-contractor had not made any claim for the TDS credit, and there were no conflicting claims necessitating retention of the amounts. The court emphasized that the spirit and intention of the law were not to allow the Revenue to retain TDS amounts without credit being given to any party.

Conclusion:
The court set aside the impugned assessment orders/rectification orders to the extent they denied TDS credit to the petitioner. The assessing authority was directed to determine the quantum of TDS credit the petitioners were entitled to and refund the amount accordingly within three months. The order also allowed the assessing authority to reopen assessments if necessary under Sections 147 and 148 of the Act. All writ petitions were disposed of, with no order as to costs.

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