Appeal partly allowed with specific directions on verification and segregation. Disallowance upheld under Section 40(a)(ia).

The appeal was partly allowed with specific directions for verification and segregation of bought out items and amounts payable. The Tribunal upheld the disallowance under Section 40(a)(ia) due to non-deduction of TDS on payments made to JR & Co. The disallowance of Rs.50,000 on telephone and vehicle expenses was deleted, and the income enhancement of Rs.289.65 lakhs was upheld. The Tribunal directed the Assessing Officer to restrict disallowance to amounts payable as of the last date of the balance sheet, emphasizing no diversion of income at source occurred.

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Issues Involved:
1. Addition of income from partnership firm under Section 10(2A) and disallowance under Section 14A read with Rule 8D.
2. Disallowance on account of telephone and vehicle expenses.
3. Enhancement of income by Rs.289.65 lakhs due to non-deduction of TDS under Section 194C and consequent disallowance under Section 40(a)(ia).

Issue-wise Analysis:

1. Addition of income from partnership firm under Section 10(2A) and disallowance under Section 14A read with Rule 8D:
- These grounds were not pressed by the appellant and thus treated as dismissed.

2. Disallowance on account of telephone and vehicle expenses:
- The Assessing Officer disallowed Rs.1,00,000/- out of telephone and vehicle expenses on an ad hoc basis, assuming it to be personal in nature.
- The assessee argued that personal expenditure of Rs.4,02,902/- on telephone and vehicle usage was not claimed as business expenditure.
- The CIT(A) restricted the disallowance to Rs.50,000/-.
- The Tribunal found no merit in the disallowance since the assessee had already shown personal expenditure separately. Thus, the disallowance of Rs.50,000/- was deleted, and this ground was allowed.

3. Enhancement of income by Rs.289.65 lakhs due to non-deduction of TDS under Section 194C and consequent disallowance under Section 40(a)(ia):
- The CIT(A) enhanced the income by Rs.289.65 lakhs, invoking Section 40(a)(ia) due to non-deduction of TDS on payments made to JR & Co.
- The assessee contended that the relationship between NIBM and the assessee was that of principal and agent, and the payments to JR & Co. were reimbursements.
- The CIT(A) held that the assessee was the contractor and JR & Co. was the sub-contractor, and thus the entire receipts were treated as income due to non-deduction of TDS.

Detailed Analysis:

1st Issue - Jurisdiction of CIT(A) for enhancement:
- The Tribunal held that the CIT(A) did not discover a new source of income but examined the issue of credit of TDS, which was before the Assessing Officer. The CIT(A) was justified in enhancing the income as the subject matter was already under scrutiny.

2nd Issue - Nature of work and applicability of Section 194C:
- The Tribunal analyzed the agreement between NIBM and the assessee, concluding that the assessee was responsible for carrying out the work and JR & Co. acted as a sub-contractor.
- The entire payment received by the assessee was treated as receipts, and the assessee was liable to deduct TDS on payments made to JR & Co.

3rd Issue - Disallowance under Section 40(a)(ia):
- Since the assessee did not deduct TDS while making payments to JR & Co., the disallowance under Section 40(a)(ia) was upheld.

4th Issue - Applicability of Section 194C on bought out items:
- The Tribunal held that disallowance under Section 40(a)(ia) cannot be made on purchases of materials as there was no liability to deduct TDS. The Assessing Officer was directed to verify and segregate such payments.

5th Issue - Reasonable cause for non-deduction of TDS:
- The Tribunal found no reasonable cause for non-deduction of TDS as the assessee claimed the entire TDS amount as income. The ratio of the Kotak Securities case was not applicable.

6th Issue - Disallowance confined to amounts payable:
- Following the Special Bench decision in Merilyn Shipping, the Tribunal directed the Assessing Officer to restrict disallowance to amounts payable as on the last date of the balance sheet.

Last Issue - Diversion of income at source:
- The Tribunal held that there was no diversion of income at source as the entire payment received by the assessee was as per the terms of the agreement, and JR & Co. had no overriding title.

Conclusion:
- The appeal was partly allowed, with specific directions for verification and segregation of bought out items and amounts payable.

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