2018 (4) TMI 251 - AT - Income Tax

TDS u/s 194C - tds on water charges paid - Held that - Why there is difference between the amount received by the assessee from the clients and the amount paid to M/s Gangothri Water Supply was explained by the ld counsel for the assessee as an excess payment received which the clients did not claim from the assessee. In assessment year 2014-15, there is no such excess and the debit and credit in the water charges account tally. This proves the case of the assessee and there is no markup in procuring and supplying water by the assessee to his clients and, therefore, the contention put forth by the assessee that the water charges paid to M/s Gangothri Water Supply was never claimed by the assessee as a deduction in the profit and loss account and, therefore, the same cannot be subject matter of addition u/s 40a(ia) has to be accepted - Therefore of the view that the addition made in both the assessment years cannot be sustained and the same is directed to be deleted. Section 194C Explanation (iv) which defines work for the sec. 194C of the Act specifically excludes supply of a product according to the requirements of the customers by using material purchased from a person other than such customers. Water in the present case was purchased by the assessee not from the customers but from a 3rd party and supplied to its clients. Therefore, the price paid for purchase of water in my view cannot be construed as a payment for payment to a contractor for carrying out any work. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of water charges under section 40(a)(ia) of the Income Tax Act, 1961.
2. Applicability of section 194C of the Act to payments made for water supply.
3. Non-consideration of current year losses and depreciation allowance for carry forward.

Detailed Analysis:

1. Disallowance of Water Charges under Section 40(a)(ia):
The primary issue was whether the payments made by the assessee to M/s Gangothri Water Supply were liable to be disallowed under section 40(a)(ia) of the Income Tax Act, 1961 due to non-deduction of tax at source. The assessee argued that these payments were not claimed as deductions in computing business income, as they were reimbursed by clients. The CIT(A) upheld the AO's decision, stating that the assessee impliedly claimed water charges as deductions since excess amounts collected from clients were shown as income. However, the Tribunal found that the assessee only recovered actual costs from clients without any markup, thus the water charges were not claimed as deductions. Consequently, the Tribunal directed the deletion of the disallowance for both assessment years.

2. Applicability of Section 194C:
The Tribunal also examined whether the payments to M/s Gangothri Water Supply fell under section 194C, which pertains to payments to contractors for carrying out work. The assessee contended that the payments were for the supply of goods (water) and not for any work contract, referencing CBDT Circular No. 13/2006. The Tribunal agreed, noting that water was purchased from a third party and supplied to clients, thus it was a transaction of sale and not a work contract. Therefore, section 194C was not applicable, and the disallowance under section 40(a)(ia) could not be sustained on this ground as well.

3. Non-Consideration of Current Year Losses and Depreciation Allowance:
The assessee raised an additional ground regarding the non-consideration of current year losses and depreciation allowance for carry forward. The Tribunal admitted this ground, noting that the AO should have considered the return of loss filed by the assessee. Since the disallowance under section 40(a)(ia) was deleted, the Tribunal directed the AO to determine and allow the carry forward of the loss in accordance with the law.

Conclusion:
The Tribunal allowed the appeals for both assessment years, directing the deletion of disallowances under section 40(a)(ia) and the proper consideration of losses for carry forward. The judgment emphasized that the payments for water supply were transactions of sale, not work contracts, and thus not subject to TDS under section 194C.