Tribunal allows appeals, deletes disallowances, clarifies water supply payments not subject to TDS.

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.

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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.

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