2018 (3) TMI 1569 - AT - Income Tax

Addition made u/s. 43B - interest paid to financial institutions on loans - assessee argued that the company constructed the buildings to the Government of Andhra Pradesh on no profit and no loss basis and disallowance of any expenditure would result into income which the assessee has not derived from carrying on its operations - Held that - In the assessee s case, the entire amount of funds were received from Government of AndhraPradesh as interest free advance which utlised for construction of police housing and after completion of construction, the property is handed over to the Government of AndhraPradesh and the loan / advance interest gets adjusted towards cost of construction. The interest payment has to be received from the Government of Andhra Pradesh. Neither the income is accrued nor the assessee claimed the interest expenditure which remained unpaid. Hence, we hold that Section 43B not is applicable in assessee s case. However it is not clear from the assessment order or the P&L account whether the assessee has claimed the interest due to financial institutions i.e ₹ 2,11,22,788/- in other income. Hence we remit the matter back to the file of the AO to examine whether the impugned expenditure is claimed in other income (other than income of interest from Govt. of AP as per schedule L) or not and decide the issue as per merits. In case the assessee has not claimed the expenditure in other income the same is not to be disallowed u/s 43B. The assessee s appeal on this ground is allowed for statistical purposes. TDS u/s 194C - Disallowance u/s. 40(a)(ia)- Held that - The amount of the amount of ₹ 5,20,88,872/- was the amount of break up of expenditure incurred on contractors and TDS required to be deducted as on 31/03/2009. From page No.73 onwards the assessee has submitted the details of payments made and remittances made to government account before filing the return and balance remained was only ₹ 1,26,25,001/- for non deduction of tax at source. DR did not dispute the fact. Therefore, we do not find any justifiable reason for the enhancement made by the CIT(A). Hence the enhanced addition made by the CIT(A) is unsustainable and accordingly deleted. TDS u/s 194C - payment to contractor - Held that - The assessee has submitted that neither it had made the payment nor credited the amount to the account of the contractor. Assessee also submitted that journal entries have been passed on 31st March only for the sake of showing the true and correct financial affairs and the same was reversed immediately in the beginning of the subsequent year. Further, assessee also in the subsequent year made the payments and the TDS was made on respective payments. Therefore, there is no loss to the Government. Since the assessee has neither made the payment nor credited the contractors account, there is no case for deduction for TDS tax at source u/s. 194C. Consequently, there is no case for deduction of TDS u/s 194C and does not attract the consequent disallowance u/s. 40(a)(ia) of the Act. Hence, the orders of the lower authorities are set a side and the appeal of assessee on this ground is allowed.

Summary

Issues Involved:
1. Addition made under Section 43B of the Income Tax Act.
2. Disallowance under Section 40(a)(ia) of the Income Tax Act for non-deduction of TDS.

Issue-wise Detailed Analysis:

1. Addition under Section 43B of the Income Tax Act:

The assessee, a company established under the Companies Act with the objective of constructing housing schemes for the Police Department of the Government of Andhra Pradesh, filed its return of income for AY 2009-10. The Assessing Officer (AO) noticed that the assessee had debited an amount of ?951.14 Lakhs towards interest paid to financial institutions on loans in its Profit & Loss Account. Out of this, ?2,13,45,293/- remained unpaid before the due date for filing the return of income, leading the AO to disallow this amount under Section 43B of the Income Tax Act.

The assessee argued that it operates on a no-profit-no-loss basis, funded entirely by the Government of Andhra Pradesh, and that the disallowed interest was not actual income but a notional entry to comply with the Companies Act. The assessee contended that the interest expenditure was to be reimbursed by the Government as interest-free loans and thus, no real income was earned or expenditure claimed.

The Tribunal examined the Memorandum of Association and Articles of Association and found that the assessee was indeed established to execute housing schemes for the Police Department, funded by the Government of Andhra Pradesh. It was concluded that the interest expenditure was a contra entry, with no real income accrued or expenditure claimed by the assessee.

The Tribunal relied on precedents, including the Supreme Court decision in CIT Vs. Chamanlal Mangaldas & Co. and the ITAT Ahmedabad decision in Gujarat State Police Housing Corporation Ltd. Vs. ACIT, which supported the notion that hypothetical income not materializing cannot be taxed. Consequently, the Tribunal held that Section 43B was not applicable in this case. However, the matter was remitted back to the AO to verify if the interest expenditure was claimed in other income and decide accordingly. The assessee's appeal on this ground was allowed for statistical purposes.

2. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS:

During the assessment proceedings, the AO found that the assessee had made payments to contractors without deducting TDS as required under Section 194C of the Act, leading to an addition of ?1,26,25,001/- under Section 40(a)(ia). The Commissioner of Income Tax (Appeals) [CIT(A)] enhanced this addition to ?4,62,88,562/- without giving enhancement notice or opportunity to the assessee.

The Tribunal noted that the total expenditure outstanding for non-deduction of TDS was ?5,20,88,872/-, and the correct amount for non-deduction of TDS was ?1,26,25,001/-, not ?4,62,88,562/-. The Tribunal found no justification for the enhancement made by the CIT(A) and deleted the enhanced addition.

Regarding the addition of ?1,26,25,001/-, the assessee argued that it had neither made the payment to the contractor nor credited the amount to the contractor's account, but only made a provision on an estimation basis. The Tribunal referred to Section 194C, which mandates TDS deduction at the time of payment or crediting the amount to the contractor's account. Since the assessee had only passed journal entries for estimation purposes and reversed them in the subsequent year, there was no requirement for TDS deduction. Consequently, the Tribunal set aside the orders of the lower authorities and allowed the appeal on this ground.

Conclusion:

The Stay Application was dismissed, and the appeal of the assessee was partly allowed. The Tribunal directed the AO to re-examine the interest expenditure under Section 43B and deleted the disallowance under Section 40(a)(ia) for non-deduction of TDS. The order was pronounced in the open court on 23rd March 2018.