HYDERABAD, JAN 03, 2014: THE issues before the Bench are - Whether the provisions of section 194A are applicable to interest paid to a company whose shares are held by either Central or State Government; Whether in case interest on mobilisation advance is recovered by the contractee from running bills before releasing the contract charges to the assessee, it can be said that assessee has credited the interest paid or payable to the account of the assessee and Whether in such case it can be said that there is a violation of provisions of section 194A of the Act. And the verdict favours the assessee.
Facts of the case
Assessee, a JV assessed in the status of AOP, was engaged in the business of execution of civil contract works. It had entered into an agreement with Konkan Railway Corporation Ltd., a government of India undertaking for executing BG Single Line Tunnels works under the Udhampur – Srinagar-Barmulla Rail Link Project by M/s. Konkan Railway Corporation Ltd. For the concerned AY, assessee had filed its return of income declaring a loss of Rs.19,90,292/-. Initially, the return was processed u/s 143(1). Subsequently, AO having reason to believe that there was escapement of income on account of excess deduction granted to the assessee u/s 80IA, reopened the assessment by issuing a notice u/s 148. During reassessment, AO apart from holding that the assessee was not entitled to deduction claimed u/s 80IA made further disallowance on various counts one of them being disallowance of interest u/s 40(a)(ia) amounting to Rs.1,56,72,913. It was noticed by AO during assessment, that the assessee had paid an amount of Rs.1,56,72,913/- as interest to M/s Konkan Railway Corporation Ltd., on mobilisation advance. AO noticing that the assessee had not deducted TDS on such interest payment, proposed to disallow he same by applying the provisions of section 40(a)(ia). The assessee however contended that the provisions of section 40(a)(ia) was not applicable as the interest on mobilisation advance was recovered by Konkan Railway Corporation Ltd., from the running bill and was not paid by the assessee. The AO though accepted the position that there was factual difficulty on the part of assessee in making TDS on interest payment as interest was recovered by the contractee Konkan Railway Corporation Ltd., while making payment of contract charges but AO nevertheless held that the assessee was obliged under law to deduct tax at source and accordingly disallowed the interest payment of Rs.1,56,72,913 u/s 40(a)(ia). On appeal, CIT(A) concluded that no disallowance can be made u/s 40(a)(ia) of the Act and observed that in the agreement relating to charging of interest on the mobilization advance granted earlier to the appellant and the mode of payment of the same to Konkan Railway Corporation Ltd., as per the agreement, it was seen that the appellant was not required to actually make payment of such amount to the contractee during the previous year. As per the said agreement, the contractee had to recover the amount pertaining to interest on such mobilization advances, by way of adjustment from the running bills submitted by the appellant. Thus, it was clear that the appellant was not required to actually make payment of the said sum to the contractee during the previous year. Under this circumstance and when no such amount had been credited towards interest to the account of the contractee in its books, CIT(A) agreed that it was not possible in their case to deduct tax on such amount as per the provisions of sec.194A. Even though interest of Rs.1,56,72,913/- had been charged by Konkan Railway Corporation Ltd. in this case, since the appellant was not required to make actual payment of the said amount to the contractee and moreover, such amount has been recovered by the contractee from the running bills of the appellant, on ground of non-deduction of tax (TDS) on that amount, in my considered view, provisions of sec. 40(a)(ia), were not applicable to such amount. Therefore, the said disallowance made by AO applying provisions of sec. 40(a)(ia), was not sustainable.
Before Tribunal, DR had submitted that when the assessee was paying interest then he had to comply with the TDS provisions. When admittedly the assessee had not deducted TDS interest payment, the expenditure could not be allowed as a deduction in view of the mandatory provisions of section 40(a)(ia). On the other hand, assessee had submitted that the assessment order makes it very clear that the assessee had not paid any interest amount to the contractee M/s. Konkan Railway Corporation Ltd., but the amount was recovered from the running bills of the assessee. Therefore, it cannot be said that interest was paid by the assessee to attract the provisions contained u/s 194A. It was further submitted that AO does not dispute the fact that M/s Konkan Railway Corporation was a government undertaking. Hence when all the shares of the company were held by the Central Government or State Government, then provisions of section 194A were not applicable in view of the Notification No. SO No.3489 dated 22-10-1970. It was further submitted that even assuming that the assessee had paid interest amount to the contractee still then the provisions of section 40(a)(ia) will not be applicable in view of the Income-tax Appellate Tribunal, Visakhapatnam Special Bench in case of Merlin Shipping and Transports Vs. Addl. (2012-TIOL-184-ITAT-VIZAG-SB) .
Held that,
++ as can be seen from the finding of the Assessing Officer, he has not disputed the fact that the interest on mobilisation advance was recovered by the contractee M/s Konkan Railway Corporation Ltd., from running bills of the assessee and the Assessing Officer also accepts that it is difficult on the part of the assessee for making TDS as interest was recovered by the contractee M/s Konkan Railway Corporation Ltd., while making the payment of contract charges. Therefore, in real sense it cannot be said that the assessee has credited the interest to the account of the contractee in terms of section 194A. As observed by the CIT (A) in his order the terms of the contract entered into between the parties authorises the contractee to recover interest on the mobilisation advances and also prescribes the mode and manner of calculation of interest. Therefore, when the interest on mobilisation advance was recovered by the contractee from the running bills before releasing the contract charges to the assessee, it cannot be said that the assessee has credited the interest paid or payable to the account of the assessee. In fact, the CIT (A) has also noted that the assessee has not credited any such amount towards payment of interest to the account of the contractee in its books of accounts. In the aforesaid factual situation, it cannot be said that there is any violation of provisions of section 194A of the Act. A liability cannot be fastened on the assessee or a default cannot be attributed to the assessee for not discharging an obligation which is impossible on its part to perform. The decision of the Madras High Court in case of Viswapriya Financial Services and Securities Ltd., vs. CIT is also not applicable to the facts of the present case as in that case the assessee actually made the payment but did not treat it as interest. In aforesaid view of the matter, we do not find any infirmity in the order of the CIT (A);
++ even otherwise also, the assessee has a valid point in contending that the provisions of section 194A is not applicable even assuming that the assessee has paid interest to M/s Konkan Railway Corporation Ltd., because of the fact that it is a company whose shares are held by Central and State Governments. A perusal of the Notification Number SO No.3489 dated 22-10-1970 makes it clear that the provisions of section 194A of the Act are not applicable to interest paid to a company whose shares are held by either Central or State Government. In the present case, it is apparent from the assessment order itself that the Assessing Officer has admitted the fact that the contractee M/s Konkan Railway Corporation Ltd., is a government company as defined u/s 617 of the Companies Act, 1956. It is also a fact that the entire paid up share capital of M/s Konkan Railway Corporation Ltd., is held by the Central Government and four other State Governments. In that view of the matter, the provisions of section 194A of the Act will not apply to the said company in view of the Notification in S O No.3489 dated 22-10-1970. Therefore, the interest payment to such company is outside the purview of section 194A and consequently no disallowance can be made by applying the provisions of section 40(a)(ia) of the Act. In aforesaid view of the matter, we find no justification to interfere with the order passed by the CIT (A) on this issue which is accordingly upheld. Hence, the grounds raised by the department being devoid of merit, are hereby dismissed.
Regards
Prarthana Jalan
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