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

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 40(a)(ia) did not apply for disallowing expenditure. The court ruled in favor of the Assessee, dismissing the appeal with no order as to costs.

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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.

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