2019 (12) TMI 378 - HC - Income Tax

Court rules Section 194C not applicable, disallows Section 40(a)(ia) expenditure. Assessee wins appeal.

The Assistant Commissioner of Income Tax, Circle-2 (1), Panaji, Goa. Versus M/s. Alfran Construction Pvt. Ltd,

The court held that Section 194C was not applicable as the Assessee did not act as a contractor but sold areas to another entity. Consequently, Section ... TDS u/s 194C - deduct tax at source on the cost of the construction incurred by M/s Prabhu Construction deeming it as a contract - HELD THAT:- CIT(Appeals) as well as ITAT upon consideration of the clauses of the agreements concluded that the Asseesee assigned the rights in favour of M/s. Prabhu Construction. They have concurrently held that this was sale of area in the two projects and this was not a case where the Assessee had merely engaged M/s. Prabhu Construction as its contractor. These findings of fact, concurrently recorded cannot be said to be vitiated by any perversity or misreading of the documents on record. The two authorities have basically taken a plausible view on the basis of the interpretation of the agreements which forms part of the record. In the absence of any use of perversity being made out, it would not be proper for us to interfere in such finding of fact in exercise of the jurisdiction under Section 260 A of the IT Act. Once the finding of facts are to be sustained, it is obvious that the provisions of Section 194 C cannot be said to be attracted. Section 194 C deals with deduction of tax at source when it comes to payment to contractors. In the present case, since neither the Assessee nor M/s. Prabhu Construction can be styled as contractors, it is obvious that the provisions of Section 194 C of the IT Act were not attracted as held by both the Commissioner (Appeals) and the ITAT. Section 194-C refers to any person responsible for paying 'any sum' to any resident referred to as contractor in the said section for carrying out any work in pursuance of a contract. The expression 'sum', in the context, would mean sum of cash money as was held by the Hon'ble Supreme Court in the case of H.H. Sri Rama Verma vs. Commissioner of Income Tax, Ernakulam [1990 (9) TMI 4 - SUPREME COURT] though in the context of the provisions of Section 80- G as then stood. The Hon'ble Apex Court has held that when the language of the provision is plain and clear, the Courts cannot enlarge the scope of the provision by adopting an interpretative process. - Decided in favour of the Assessee Addition u/s 40(a)(ia) - disallowing of expenditure in computing his income from business and profession - HELD THAT:- Since the provisions of Section 194-C were not applicable, the consequent provisions of Section 40(a)(ia), will also not apply for making disallowance of the expenditure in computing the income under the head 'income from business or profession'. The ITAT, in such circumstances, was quite justified in holding that the CIT was not right in taking the view as the costs incurred in construction is a capital cost for computation of income under Section 48 of the IT Act. Accordingly, even the second substantial question of law is required to be answered against the Revenue and in favour of the Assessee. Issues:1. Whether Section 194 C could be invoked for tax deduction on construction costRs.2. Whether Section 40(a)(ia) applies for disallowing expenditureRs.Analysis:1. The appellant argued that the Assessee was obliged to deduct tax at source under Section 194C of the Income Tax Act as the Assessee assigned rights to M/s. Prabhu Construction, deeming them a contractor. The agreements indicated the Assessee was not merely a contractor but had the liberty to sell areas in the projects. The CIT(A) and ITAT found that the Assessee sold areas to M/s. Prabhu Construction, not just engaged them as a contractor. These findings were upheld as there was no misreading of the agreements. Consequently, Section 194C was not applicable as neither the Assessee nor M/s. Prabhu Construction were contractors.2. The second issue was whether Section 40(a)(ia) applied for disallowing expenditure. The ITAT held that since Section 194C was not applicable, Section 40(a)(ia) would not apply for disallowing expenditure in computing income under 'income from business or profession.' The costs incurred in construction were considered capital costs for income computation under Section 48 of the IT Act. Therefore, both substantial questions of law were answered against the Revenue and in favor of the Assessee. The appeal was dismissed with no order as to costs.