M/s. Siddhi Vinayak, Surat v. The Income tax Officer,Ward-9(4),, Surat

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH AHMEDABAD (BEFORE S/SHRI BHAVNESH SAINI JM AND D. C. AGRAWAL AM) ITA NO.2233/AHD/2009 A. Y.: 2006-07 M/S. SIDDHI VINAYAK C/O. MRS. KAJALBEN N. PATEL A-65 SHARDHA SOCIETY SUMUL DAIRY ROAD SURAT VS THE INCOME TAX OFFICER WARD 9 (4) AYAKAR BHAVAN MAJURA GAT SURAT PA NO. AAUFS 1559 G (APPELLANT) (RESPONDENT) APPELLANT BY SHRI S. N. SOPARKAR AR RESPONDENT BY SHRI DARSI SUMAN RATNAM DR O R D E R PER BHAVNESH SAINI: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LEARNED CIT(A)-V SURAT DATED 31 ST MARCH 2009 FOR ASSESSMENT YEAR 2006-07 ON THE FOLL OWING GROUNDS: 1. LR. A. O. HAS ERRED IN LAW AND ON FACTS TO DISA LLOW 20% OUT OF BONY EXPENSES OF ORS.6 075/- AND MUHURAT EXPENSES OF RS.4 551/-. THESE ARE NECESSARY EXPENSES TO GIVE INCENTIVE TO WORKERS. LR. CIT (APPLS) HAS ERRED IN CONFIRMING SUCH ADDITION. 2. LR. A. O. HAS ERRED IN LAW AND ON FACTS TO TREAT PROCESSING CHARGES PAID TOWARDS WEAVING TWISTING AND WARPING CHARGES TO THE PROCESSORS LIKE GANESH SILK MILLS H. B. TEXTILES OM TWISTERS AND MAHAVIR TEXTILES AS CONTRACT WORK AND FOR NONPAYMENT OF TDS DISALLOWING THE SAME AND ADDING AS INCOME. LR. CIT (APPLS) HAS ALSO ERRED TO CONFIRM A. O.S ITA NO.2233/AHD/2009 M/S. SIDDHI VINAYAK VS ITO W-9(4) SURAT 2 ACTION WITHOUT ANY VALID REASON. OUT SOURCING OF PROCESSING BEING ALSO MANUFACTURING WORK DONE ON PRINCIPAL TO PRINCIPAL BASIS IS WRONGLY TREATED AS CONTRACT WORK BY THE A. O. AND CIT(APPLS). DISALLOWANCES OF EXPENSES OF RS.39 44 068 IS PRAYED TO BE DELETED. 3. ISSUE OF SECTION 40A (IA) BEING CHALLENGED BYWAY OF WRIT PETITION BEFORE HONOURABLE GUJARAT HIGH COURT BY CERTAIN ASSESSEES OF GUJARAT DISPOSAL OF APPEAL MAY BE MADE AFTER GUJARAT HIGH COURTS JUDGMENT. 2. THIS APPEAL WAS EARLIER DISMISSED VIDE ORDER DAT ED 03-02-2010. THE SAME ORDER WAS RECALLED WHILE ALLOWING MISC. AP PLICATION OF THE ASSESSEE. ACCORDINGLY THE APPEAL WAS FIXED FOR HEAR ING ON MERIT. 3. ON GROUND NO.1 THE ASSESSEE CHALLENGED THE DISA LLOWANCE OF BONY AND MUHURAT EXPENSES. THE AO DISALLOWED THE BO NY AND MUHURAT EXPENSES BECAUSE THE ASSESSEE COULD NOT SUP PORT THE SAME THROUGH REQUIRED EVIDENCE AND IT WAS ALSO NOT PROVE D WHETHER THE EXPENSES WERE GENUINE. DESPITE SPECIFIC NOTICE TO T HE ASSESSEE NO SATISFACTORY EXPLANATION WAS FILED. THE LEARNED CIT (A) NOTED THAT BOTH THE EXPENSES ARE IN THE NATURE OF RELIGIOUS EXPENSE S FOR DOING RELIGIOUS RITUALS WHICH HAS BEEN RIGHTLY DISALLOWED . ON CONSIDERATION OF THE ABOVE FACTS WE DO NOT FIND IT TO BE A FIT C ASE FOR INTERFERENCE. THE ASSESSEE COULD NOT FILED REQUIRED EVIDENCES BEF ORE THE AO AND NO SATISFACTORY EXPLANATION WAS FILED AS TO WHY THE ABOVE EXPENSES WERE INCURRED AND WHETHER THE EXPENSES HAVE ANY CON NECTION WITH THE BUSINESS ACTIVITIES OF THE ASSESSEE. IN THE ABS ENCE OF ANY MATERIAL ON RECORD WE DO NOT FIND IT TO BE PROPER TO INTERFERE IN GROUND ITA NO.2233/AHD/2009 M/S. SIDDHI VINAYAK VS ITO W-9(4) SURAT 3 NO.1 OF THE APPEAL OF THE ASSESSEE. THE SAME IS ACC ORDINGLY DISMISSED. 4. ON GROUNDS NO.2 AND 3 THE ASSESSEE CHALLENGED T HE DISALLOWANCE EXPENDITURE OF RS.39 44 068/-. THE AO FOUND DURING THE COURSE OF ASSESSMENT PROCEEDINGS THAT THE ASSESSEE IS A PARTNERSHIP FIRM DERIVING INCOME FROM MANUFACTURING GREY FABRIC S AND IT HAS PAID WEAVING LABOUR EXPENSES OF RS.21 94 836/- TO GANESH SILK MILLS H. B. TEXTILES (HUF) AND OTHERS AND TWISTING AND WARPI NG EXPENSES OF RS.17 49 232/- TO OM TWISTERS MAHAVIR TEXTILES AND OTHERS TOTALING TO RS.39 44 068/- ON WHICH THE ASSESSEE HAS NOT COM PLIED TDS PROVISIONS AND AFTER GIVING OPPORTUNITY TO THE ASSE SSEE HE HAS MADE DISALLOWANCE OF ENTIRE SUM BY INVOKING PROVISIONS O F SECTION 40 (A) (IA) OF THE IT ACT. THE AO POINTED OUT THAT WHEN TH E PAYMENT MADE BY THE ASSESSEE IS SUBJECT TO TDS AND SUCH TAX HAS NOT BEEN DEDUCTED OR AFTER DEDUCTION HAS NOT BEEN PAID DURING THE PRE VIOUS YEAR OR IN SUBSEQUENT YEAR BEFORE EXPIRY OF THE TIME PRESCRIB ED U/S 200 (1) OF THE IT ACT PROVISIONS OF SECTION 40(A) (IA) ARE IN VARIABLY INVOKABLE. IN THIS CASE THE ASSESSEE SUPPLIED MATERIAL TO THE JOB WORKER AND AS PER THE SPECIFICATION THE RAW MATERIALS WERE CONVERTED INTO FINISHED PRODUCTS AND THE SAME WAS TO BE RETURNED TO THE ASS ESSEE. THEREFORE THE JOB WORKER IS A CONTRACTOR. THE AO E MPHASIZED ON THE DEFINITION OF A MANUFACTURER IN FOLLOWING WORDS: IF BY APPLICATION OF LABOR AND SKILL AN OBJECT IS TRANSFORMED TO THE EXTENT THAT IT IS COMMERCIALLY K NOWN DIFFERENTLY IT WILL SUFFICE TO SAY THAT MANUFACTUR E HAS TAKEN PLACE. THE DEGREE OF TRANSFORMATION AND LABOR AND S KILL SPENT ARE IRRELEVANT. IT IS NOT REQUIRED THAT THE G OODS ITA NO.2233/AHD/2009 M/S. SIDDHI VINAYAK VS ITO W-9(4) SURAT 4 WOULD BE MANUFACTURED IN THE SENSE THAT RAW MATERIA L SHOULD BE USED TO TURN OUT SOMETHING ALTOGETHER DIF FERENT. IT SHOULD STILL REQUIRE THAT THESE SHOULD BE PRODUC ED IN THE SENSE THAT SOME HUMAN ACTIVITY AND ENERGY SHOULD BE SUBJECTED IN SOME PROCESS IN ORDER THAT THIS MIGHT BE BROUGHT TO THE STATE IN WHICH THEY MIGHT BECOME FIT FOR CONSUMPTION. THEREFORE TRANSFORMATION OF A PRODUCT TO THE EXTENT THAT IT BECOMES COMMERCIALLY DIFFERENT COMMODITY IS MANUFACTURE. THE MOMENT THERE IS TRANSFORMATION INTO A NEW COMMODITY HAVING ITS OWN CHARACTER USE AND NAME WHETHER IT BE THE NET RESU LT OF ONE PROCESS OR SEVERAL PROCESS MANUFACTURE TAKES PLACE. THE AO RELIED ON THE DECISION OF THE HONBLE GUJAR AT HIGH COURT ION THE CASE OF CIT VS J. B. KHARVAR & SONS REPORTED IN 163 ITR 394 AND HELD THAT IN THE INSTANT CASE JOB WORKERS CANT BE CALLED MANUFACTURER AS THE RAW MATERIAL IS SUPPLIED BY THE ASSESSEE. TH EREFORE HE RULED OUT THE ARGUMENT OF THE ASSESSEE THAT THE JOB WORKE RS ARE MANUFACTURER. THE AO WAS NOT IMPRESSED BY THE ALTE RNATE GROUNDS OF THE ASSESSEE (I) TDS IS NOT REQUIRED TO BE MAD E ON AMOUNT WHOLLY PAID IN THE YEAR ITSELF AS THE WORD PAYABL E ISSUED IN SEC. 40(A) (IA) (II) ALL THE PAYEES ARE ASSESSEES FILIN G THEIR INDIVIDUAL RETURN AND SO THERE IS NO LOSS OF REVENUE TO THE DEPARTMEN T (III) TDS PAYMENT IS IN NATURE OF AN ADVANCE TAX AND WHEN ALL RECIPIENTS ARE ASSESSED TO TAX AND HAD PAID PROPER TAXES ON THEIR OWN INCOME TDS FORMALITIES ARE ONLY TECHNICAL FOR THE ASSESSEE (I V) TAXABILITY OF INCOME IS COVERED BY VARIOUS PROVISIONS OF THE ACT AND LASTLY IF SUCH DISALLOWANCE IS MADE IT INCREASES THE GP EXORBITAN TLY AND THE AO MADE THE ADDITION OF RS.39 44 068/- UNDER THE PROVI SIONS OF SECTION 40 (A) (IA) OF THE IT ACT. ITA NO.2233/AHD/2009 M/S. SIDDHI VINAYAK VS ITO W-9(4) SURAT 5 5. THE ASSESSEE CHALLENGED THE ADDITION BEFORE THE LEARNED CIT(A) AND IT WAS ARGUED THAT ACCORDING TO THE AO ON APPLYING CERTAIN PROCESSES IF THE RAW MATERIAL GETS CONVERTE D INTO COMMERCIALLY DIFFERENT ITEM HAVING ITS OWN CHARACTER USE AND N AME THEN SUCH PROCESS AMOUNTS TO MANUFACTURE AND THE PERSONS WHO ARE ENGAGED IN CARRYING OUT SUCH ACTIVITY ARE CALLED MANUFACTUR ER. IN THEIR CASE DUE TO APPLICATION OF WARPING PROCESS TWISTING PROCESS AND WEAVING PROCESS THE SYNTHETIC YARN GETS CONVERTED TO GREY FABRIC WHICH IS UNDOUBTEDLY A DIFFERENT COMMODITY. THE LEARNED COUN SEL FOR THE ASSESSEE HAS ALSO ARGUED THAT ONE WHO SUPPLIES RAW MATERIAL IS IRRELEVANT AND THAT IN CASE OF J. B. KHARVAR & SONS OF HONBLE GUJARAT HIGH COURT ON WHICH THE AO PLACED RELIANCE THE HO NBLE HIGH COURT HAS HELD DYEING AND PRINTING PROCESS ON CUSTOMERS CLOTH AS MANUFACTURING ACTIVITY. HE FURTHER STATED THAT MANU FACTURING ACTIVITY REQUIRES INDUSTRIAL ACTIVITY BECAUSE PLANT AND MACH INERY WERE INEVITABLE TO CARRY OUT JOB WORK. CONVERSION CHARGE S RECEIVED ON ACCOUNT OF SUCH ACTIVITY ON PRINCIPAL TO PRINCIPAL BASIS AMOUNTS TO MANUFACTURING WORK AND NOT CONTRACT WORK. THE LEARN ED COUNSEL FOR THE ASSESSEE HAS ALSO BOUGHT TO THE NOTICE OF THE L EARNED CIT(A) A PORTION FROM FINANCE BUDGET 2004-05 AND ARGUED THAT IN INTRODUCTION OF PROVISIONS OF SECTION 40 (A) (IA) OF THE IT ACT LEGISLATIVE INTENTION IS ONLY TO AUGMENT COMPLIANCE OF TDS PROVISIONS AND NO T TO CAST UNCONSTITUTIONAL BURDEN OF DOUBLE TAXATION I.E. PA YER OF SUCH EXPENSES WILL HAVE TO BEAR TAX BURDEN AND ON THE OT HER HAND RECIPIENT OF SUCH EXPENSES WILL ALSO PAY TAXES ON I NCOME SO RECEIVED. THE LEARNED COUNSEL FOR THE ASSESSEE HAS RELIED UPO N THE FOLLOWING JUDGMENTS: ITA NO.2233/AHD/2009 M/S. SIDDHI VINAYAK VS ITO W-9(4) SURAT 6 (A) CIT VS J. B. KHARVAR & SONS 163 ITR 394 (B) CIT VS REEBOK INDIA CO. 306 ITR 124 (C) ASSTT. CIT VS BIOTECH MEDICALS (P) LTD. (ITA NO.909/HYD/2006 DATED 28-03-2008) (D) CIT VS GRAPHIC OPERATIONS (P) LTD. AND ANOTHER 205 ITR 276) (E) BULSARA HOME PRODUCTS VS ITO 94 TTJ 270 6. THE LEARNED CIT(A) CONFIRMED THE ADDITION. HIS F INDINGS ARE REPRODUCED AS UNDER: I HAVE CAREFULLY CONSIDERED THE CONTENTION RAISED BY THE AO IN HIS ASSESSMENT ORDER AS WELL AS ARGUMENTS OF AR OF THE APPELLANT BEFORE ME AND THROUGH WRITTEN SUBMISSIONS. I AM OF THE CONSIDERED VIEWS THAT THE APPELLANT FIRM IS NOT HAVING ANY PLANT OR MACHINERY OR ANY KIND OF INFRASTRUCTURE FACILITIES. THE FIRM IS SUPP LYING YARN TO VARIOUS OUTSIDE AGENCIES AND GETTING GRAY CLOTH BEING FINISHED PRODUCT FROM SUCH AGENCIES AND PAYS CONVER SION CHARGES IN CONSIDERATION. THE ACTIVITY SO CARRIED O UT I.E. WARPING TWISTING & WEAVING BY THE OUTSIDE AGENCIES ARE PROCESSING ACTIVITIES. THE APPELLANT IN EFFECT IS G ETTING THE JOB WORK DONE FROM THEM. PAYMENTS MADE TO THEM ARE JOB CHARGES AND COULD HAVE BEEN SUBJECTED TO TDS. WHETHER THE YARN BELONGS TO THE ASSESSEE OR NOT DO ES NOT CHANGE THE PROCESSING ACTIVITY. THE RECIPIENT H AS ALSO SHOWN THE SAME AS JOB WORK CHARGES. THE COMPARISON IS WITH JOB WORKING CONTRACTORS IN DIAMOND MANUFACTURI NG FIELD WHO RECEIVE ROUGH AND CARRY OUT CUTTING POLI SHING AND MANUFACTURING ACTIVITIES AND RETURN THE SAME TO THE PRINCIPAL WHO DEDUCTS TAX ON THE PAYMENTS TO THE CONTRACTORS. IN THE INSTANT CASE ALSO THE YARN IS B EING GIVEN AND THE FINISHED GOODS ARE BEING RECEIVED BAC K AFTER CERTAIN PROCESSES BEING CARRIED OUT BY THE PROCESSORS. THOSE PEOPLE ARE UNDER OBLIGATION TO RE TURN THE PROCESSED GOODS TO THE APPELLANT. THEY RAISE TH E BILL FOR THEIR JOB CHARGES LIKE WARPING TWISTING AND WE AVING TO CONVERT YEARN INTO GRAY CLOTH. HENCE IT BECOMES A TRANSACTION WHICH HAS A NATURE OF A PRINCIPAL TO CO NTRACTOR ITA NO.2233/AHD/2009 M/S. SIDDHI VINAYAK VS ITO W-9(4) SURAT 7 ACTIVITY AS CLEARLY DEFINED IN THE SECTION BEING F OR CARRYING OUT ANY WORK. IN LIGHT OF THIS DISCUSSION AND THE CASE LAW CITED BY THE AO OF THE JURISDICTIONAL HIGH COURT OF GUJARAT I HAVE NO HESITATION TO HOLD ACTIVITIES WARPING TWISTING AND WEAVING AS PROCESSING JOB AND LIABLE TO TDS WHICH I N THIS CASE APPELLANT HAS NOT DONE AND ACCORDINGLY EXPOSED ITSELF TO DISALLOWANCE MADE JUSTIFIABLY BY THE AO. HENCE THE GROUND OF APPEAL RAISED BY THE APPELLANT FAILS AND ACTION OF THE AO IS UPHELD. 7. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSION MADE BEFORE THE AUTHORITIES BELOW AND SU BMITTED THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE PAYMENT MADE WOULD NOT COVER AS FOR WORK U/S 194C OF THE IT ACT AND RELI ED UPON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF EAST INDIA HOTELS LTD. AND ANOTHER VS CBDT AND ANOTHER 320 ITR 526. HE HAS FURTHER SUBMITTED THAT THE PAYMENT MADE IS COVERED U/S 28 OF THE IT ACT. THEREFORE SECTION 40(A) (IA) OF THE IT ACT WO ULD NOT APPLY AND RELIED UPON THE ORDER OF THE ITAT HYDERABAD BENCH I N THE CASE OF TEJA CONSTRUCTION VS ACIT 39 SOT 13. HE HAS FURTHER SUBMITTED THAT IN ANY CASE NO AMOUNT WAS PAYABLE AT THE END OF TH E YEAR SO NO DISALLOWANCE CAN BE MADE U/S 40 (A) (IA) OF THE IT ACT AND AGAIN RELIED UPON THE ORDER OF THE ITAT HYDERABAD BENCH I N THE CASE OF TEJA CONSTRUCTION AS WELL AS ORDER OF THE ITAT JAIP UR BENCH IN THE CASE OF JAIPUR VIDYUT VITARAN NIGAM LTD. VS DCIT 12 3 TTJ 888. HE HAS SUBMITTED THAT THE ASSESSEE SUPPLIED MATERIAL F OR JOB WORK THEREFORE ABOVE PROVISIONS WOULD NOT APPLY TO THE CASE OF THE ASSESSEE AND THAT PAYEE HAS PAID ALL THE TAXES AND IS GENUINE PARTY. THEREFORE DISALLOWANCE IS UNJUSTIFIED. ITA NO.2233/AHD/2009 M/S. SIDDHI VINAYAK VS ITO W-9(4) SURAT 8 8. ON THE OTHER HAND THE LEARNED DR RELIED UPON TH E ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT TDS PROVISIONS ARE INSERTED IN THE ACT TO TAX CERTAIN ITEMS WHICH ARE NOT DISCLOSE D TO THE REVENUE DEPARTMENT AND THAT THE ABOVE PROVISIONS APPLY TO T HE CASE OF THE ASSESSEE AND AS SUCH THE AUTHORITIES BELOW WERE JUS TIFIED IN DISALLOWING THE CLAIM OF THE ASSESSEE BECAUSE THE A SSESSEE DID NOT DEDUCT TDS ON THE SAME. THE LEARNED DR COULD NOT CI TE ANY CONTRARY DECISION. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND THE MATERIAL AVAILABLE ON RECORD. SECTION 40 (A) (IA) OF THE IT ACT PROVIDES AS UNDER: 40. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SECTIONS 30 TO [ 38 ] THE FOLLOWING AMOUNTS SHALL NOT BE DEDUCTED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PRO FITS AND GAINS OF BUSINESS OR PROFESSION ( A ) IN THE CASE OF ANY ASSESSEE ( IA ) ANY INTEREST COMMISSION OR BROKERAGE [RENT ROYALTY ] FEES FOR PROFESSIONAL SERVICES OR FEES FO R TECHNICAL SERVICES PAYABLE TO A RESIDENT OR AMOUNTS PAYABLE TO A CONTRACTOR OR SUB-CONTRACTOR BEING RESIDENT FOR C ARRYING OUT ANY WORK (INCLUDING SUPPLY OF LABOUR FOR CARRYI NG OUT ANY WORK) ON WHICH TAX IS DEDUCTIBLE AT SOURCE UND ER CHAPTER XVII-B AND SUCH TAX HAS NOT BEEN DEDUCTED O R AFTER DEDUCTION HAS NOT BEEN PAID ITA NO.2233/AHD/2009 M/S. SIDDHI VINAYAK VS ITO W-9(4) SURAT 9 ( A ) IN A CASE WHERE THE TAX WAS DEDUCTIBLE AND WAS SO DEDUCTED DURING THE LAST MONTH OF THE PREVIOUS YEAR ON OR BEFORE THE DUE DATE SPECIFIED IN SUB-SECTION (1) OF SECTION 139 ; OR ( B ) IN ANY OTHER CASE ON OR BEFORE THE LAST DAY OF T HE PREVIOUS YEAR:] [ PROVIDED THAT WHERE IN RESPECT OF ANY SUCH SUM TAX HAS BEEN DEDUCTED IN ANY SUBSEQUENT YEAR OR HAS BE EN DEDUCTED ( A ) DURING THE LAST MONTH OF THE PREVIOUS YEAR BUT PA ID AFTER THE SAID DUE DATE; OR ( B ) DURING ANY OTHER MONTH OF THE PREVIOUS YEAR BUT P AID AFTER THE END OF THE SAID PREVIOUS YEAR SUCH SUM SHALL BE ALLOWED AS A DEDUCTION IN COMPUT ING THE INCOME OF THE PREVIOUS YEAR IN WHICH SUCH TAX HAS BEEN PAID.] EXPLANATION. FOR THE PURPOSES OF THIS SUB-CLAUSE (I) COMMISSION OR BROKERAGE SHALL HAVE THE SAME MEANI NG AS IN CLAUSE ( I ) OF THE EXPLANATION TO SECTION 194H ; (II) FEES FOR TECHNICAL SERVICES SHALL HAVE THE SAME MEANING AS IN EXPLANATION 2 TO CLAUSE ( VII ) OF SUB- SECTION (1) OF SECTION 9 ; (III) PROFESSIONAL SERVICES SHALL HAVE THE SAME MEANING AS IN CLAUSE ( A ) OF THE EXPLANATION TO SECTION 194J ; ( IV ) WORK SHALL HAVE THE SAME MEANING AS IN EXPLANATION III TO SECTION 194C ; ITA NO.2233/AHD/2009 M/S. SIDDHI VINAYAK VS ITO W-9(4) SURAT 10 [( V ) RENT SHALL HAVE THE SAME MEANING AS IN CLAUSE ( I ) TO THE EXPLANATION TO SECTION 194-I ; ( VI ) ROYALTY SHALL HAVE THE SAME MEANING AS IN EXPLANATION 2 TO CLAUSE ( VI ) OF SUB-SECTION (1) OF SECTION 9 ;] 9.1 THE DEFINITION OF WORK SHALL HAVE THE SAME MEAN ING AS PROVIDED IN EXPLANATION III TO SECTION 194 C OF THE IT ACT W HICH PROVIDES THAT FOR THE PURPOSE OF THIS SECTION THE EXPRESSION WORK SHALL ALSO INCLUDE: (A) ADVERTISING (B) BROADCASTING AND TELECASTING INCLUDING PRODUCTI ON OF PROGRAMMES FOR SUCH BROADCASTING OR TELECASTING. (C) CARRIAGE OF GOODS AND PASSENGERS BY ANY MODE OF TRANSPORT OTHER THAN BY RAILWAYS (D) CATERING. THE ABOVE DEFINITION OF WORK HAS BEEN ENLARGED BY SUBSTITUTING PROVISIONS OF SECTION 194C OF THE IT ACT BY THE FIN ANCE ACT 2009 WITH EFFECT FROM 01-10-2009. ACCORDING TO THE NEW PROVIS IONS OF SECTION 194C OF THE IT ACT APPLICABLE WITH EFFECT FROM 01-1 0-2009 SUB CLAUSE (E) TO THE DEFINITION OF WORK IN SUB SECTION (IV) TO EXPLANATION TO SECTION 194C OF THE IT ACT HAS BEEN INSERTED WHICH PROVIDES: SECTION 194C EXPLANATION (IV) (E) MANUFACTURING OR SUPPLYING A PRODUCT ACCORDING TO REQUIREMENT OR SPECIFICATION OF A CUSTOMER BY USING MATERIAL PURCHASED FROM SUCH CUSTOMERS BUT DOES N OT INCLUDE MANUFACTURING OR SUPPLYING A PRODUCT ACCORD ING TO REQUIREMENT OR SPECIFICATION OF A CUSTOMER BY USING ITA NO.2233/AHD/2009 M/S. SIDDHI VINAYAK VS ITO W-9(4) SURAT 11 MATERIAL PURCHASED FROM A PERSON OTHER THAN SUCH CUSTOMERS. THE ABOVE AMENDMENT IS APPLICABLE FROM 01-10-2009. HOWEVER THE ASSESSMENT YEAR UNDER APPEAL IS 2006-07. 9.2 THE HONBLE BOMBAY HIGH COURT IN THE CASE OF EA ST INDIA HOTELS LTD. AND ANOTHER VS CBDT AND ANOTHER 320 ITR 526 CONSIDERING THE SAME PROVISIONS HELD AS UNDER: ALL SERVICE CONTRACTS ARE OUTSIDE THE PURVIEW OF SECTION 194C OF THE INCOME-TAX ACT 1961. HOWEVER CIRCULAR NO.681 DATED MARCH 8 1994 STATED THAT SECTION 194C WOULD APPLY TO ALL TYPES OF CONTRACTS INCLUDING TRANSPORT CONTRACTS SERVICE CONTRACTS ADVERTISEMENT CONTRACTS BROADCASTING CONTRACT4S TELECASTING CONTRACTS LABOUR CONTRACTS MATERIAL CONTRACTS AND WORK CONTRACTS. BY INSERTING EXPLANATION III TO SECTION 194 THE WORD WORK IN SECTION 194C HAS BEEN EXPANDED SO AS TO INCLUDE FOUR TYPES OF SERVICE CONTRACTS WITHIN THE PURVIEW OF SECTION 194C. THE WORDS CARRYING OUT ANY WORK IN SECTION 194C ARE LIMITED TO ANY WORK WHICH ON BEING CARRIED OUT CULMINATES IN A PRODUCT OR RESULT. THE WORD WORK IN SECTION 194C HAS TO BE UNDERSTOOD IN A LIMITED SENSE AND WOULD EXTEND ONLY TO THE SERVICE CONTRACTS SPECIFICALLY INCLUDED IN SECTION 194C BY WAY OF EXPLANATION III. SECTION 194C WOULD APPLY TO PAYMENTS FOR CARRYING OUT THE WORK SUCH AS CONSTRUCTING BUILDINGS OR DAMS OR LAYING OF ROADS A ND AIR FIELDS OR RAILWAY LINES OR ERECTION OR INSTALLA TION OF PLANT AND MACHINERY ETC. IN ALL THESE CONTRACTS TH E EXECUTION OF THE CONTRACT BY A CONTRACTOR/SUB- CONTRACTOR RESULTS IN PRODUCTION OF THE DESIRED OBJ ECT OR ACCOMPLISHING THE TASK UNDER THE CONTRACT. ITA NO.2233/AHD/2009 M/S. SIDDHI VINAYAK VS ITO W-9(4) SURAT 12 THE FACILITIES OR AMENITIES MADE AVAILABLE BY A HOTEL TO ITS CUSTOMERS DO NOT CONSTITUTE WORK WIT HIN THE MEANING OF SECTION 194C. CONSEQUENTLY CIRCULAR NO.681 DATED MARCH 8 1994 TO THE EXTENT IT HOLDS THAT THE SERVICES MADE AVAILABLE BY A HOTEL TO ITS CUSTOMERS ARE COVERED UNDER SECTION 194C IS BAD IN LAW AND IS LIABLE TO BE QUASHED. 9.3 THE ITAT HYDERABAD BENCH IN THE CASE OF TEJA CO NSTRUCTION VS ACIT (SUPRA) CONSIDERING THE PROVISIONS OF SECTION 40(A) (IA) OF THE IT ACT HELD AS UNDER: THE BARE PROVISION OF SECTION 40(A) (IA) PROVIDES FOR NON-DEDUCTION OF AMOUNT WHICH REMAINS PAYABLE TO A RESIDENT IN RESPECT OF FEES FOR TECHNI CAL SERVICES ETC. IT IS NOT APPLICABLE WHERE EXPENDITU RE IS PAID. IT IS APPLICABLE ONLY IN CASES WHERE THE PAYMENTS ARE DUE AND OUTSTANDING. THE WORD PAYABLE IS NOT DEFINED THOUGH THE WORD PAID IS DEFINED UNDE R SECTION 43(2) TO MEAN ACTUALLY PAID OR INCURRED. HENCE BY IMPLICATION THE WORD PAYABLE DOES NOT MEAN INCLUDE PAID. THE DIFFERENCE IN THE WORD PAID AND PAYABLE IS ALSO THERE IN THE RULES FOR DEPOSITI NG THE TDS AND ALSO FOR LEVY OF INTEREST UNDER SECTION 234B WHERE INTEREST IS WORKED OUT ON THE BASIS OF T AX ACTUALLY DEDUCTED AT SOURCE AND NOT ON THE BASIS OF TAX DEDUCTIBLE. SECTION 40(A) (IA) OTHERWISE BEING A LEGAL FICTION NEEDS TO BE CONSTRUED STRICTLY. THE C BDT CIRCULAR NO. 5 OF 2005 DATED 15-7-2005 HAS ALSO CLARIFIED THAT THE PROVISION OF THE SECTION 40(A)(I A) IS TO AUGMENT COMPLIANCE OF TDS PROVISION IN THE CASE OF RESIDENTS AND CURB BOGUS PAYMENTS TO THEM IN THE INSTANT CASE THE PAYMENT WAS NOT IN DISPUTE AND ON THE ISSUE WHETHER TAX IS TO BE DEDUCTED AT SOURCE O N SUCH PAYMENT IS NOT FREE FROM DOUBT IN ANY CASE IF THE ASSESSEE HAS PAID THE IMPUGNED AMOUNT AND (THE AMOUNT IS) IS NOT PAYABLE AT THE END OF THE YEAR ON THE DATE OF BALANCE SHEET THEN THE PROVISIONS OF SECTI ON ITA NO.2233/AHD/2009 M/S. SIDDHI VINAYAK VS ITO W-9(4) SURAT 13 40(A) (IA) ARE NOT APPLICABLE. IT IS ONLY APPLICABLE IN RESPECT OF 'PAYABLE AMOUNT' SHOWN IN THE BALANCE SHEET AS OUTSTANDING EXPENSES ON WHICH TDS IS MADE. FURTHER TAX IS DEDUCTIBLE UNDER SECTIONS 193 194A 194C 194H AND EITHER AT THE TIME OF PAYMENT OR AT THE TIME OF GIVING CREDIT TO THE RECIPIENT. HOWE VER SECTION 40(A)(IA) IS APPLICABLE ONLY IN RESPECT OF TDS CAPITAL DEFAULT AMOUNT 'PAYABLE'. IF THE AMOUNT IS ACTUALLY PAID AND TAX IS NOT DEDUCTED THE SECTION 4 0(A) (\A) IS NOT APPLICABLE. THERE IS DIFFERENCE BETWEEN THE WORD 'PAID' OR 'PAYABLE'. THE LEGISLATURE USED THE WORD VERY CAREFULLY IN SECTION 40(A) (IA) AND IN AL L ITS WISDOM AT THE TIME OF INCORPORATING THE SECTION BY WAY OF THE FINANCE (NO. 2) BILL 2004. IT WAS INSER TED IN SECTION 40(A) (IA) THAT THE AMOUNT PAYABLE TO CONTRACTOR OR SUB-CONTRACTOR WOULD BE LIABLE FOR DISALLOWANCE IF TDS IS NOT DEDUCTED. SECTION 40(A) (IA) HAS TO BE SUBJECTED TO STRICT INTERPRETATION. GOING BY THE RULE OF STRICT INTERPRETATION THE DEFAULT WI TH REFERENCE TO ACTUAL 'PAYMENT' OF EXPENDITURE WOULD NOT ENTAIL THIS IS BECAUSE THE LANGUAGE USED IN THE SECTION 40(A) (IA) IS VERY SIMPLE CLEAR AND UNAMBIGUOUS. LITERAL RULE OF INTERPRETATION HAS TO BE APPLIED. THE SPEECH OF THE FINANCE MINISTER OR EVEN OTHER PROVISIONS OF THE ACT CAN BE PRESSED INTO SERVICE IF THERE IS SOME AMBIGUITY ABOUT THE MEANIN G OF THE SECTION. BUT THE SAME WAS NOT THE CASE IN TH E INSTANT CASE. EVEN THE PRINCIPLES OF LIBERAL INTERPRETATION CANNOT BE APPLIED WHERE THE LANGUAGE IS CLEAR SIMPLE AND THE MEANING OF THE WORD IS APPARENT. AS SUCH THE PROVISIONS OF SECTION 40(A) (IA) WERE NOT APPLICABLE TO THE PRESENT FACTS OF THE CAS E. THE DISALLOWANCE IF ANY REQUIRED TO BE MADE SHALL BE RESTRICTED TO THE EXTENT OF AMOUNT PAYABLE SHOWN IN THE BALANCE SHEET AT THE END OF THE YEAR. HOWEVER THIS IS NOT THE CASE IN THE INSTANT CASE BECAUSE O NCE THE ESTIMATION OF INCOME WAS MADE FURTHER DISALLOWANCE WAS UNWARRANTED. ITA NO.2233/AHD/2009 M/S. SIDDHI VINAYAK VS ITO W-9(4) SURAT 14 FURTHER 'NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SECTIONS 30 TO 38' WITH WHICH THE PROVISIONS OF SECTION 40 BEGIN TAKE THE ITEMS OF EXPENSES COVERED BY THE PROVISIONS OF SECTIONS 30 T O 38 ALONE WITHIN THE AMBIT OF SECTION 40 AND ANY IT EM OF EXPENDITURE ALLOWABLE UNDER THE PROVISIONS OF TH E ACT PRECEDING SECTION 30 IS NOT COVERED BY THE SA ID STATUTORY DISALLOWANCES ENVISAGED UNDER SECTION 40. IT MAY ALSO BE OBSERVED THAT IF AN ASSESSEE CLAIMS ANY EXPENDITURE AS NECESSARY TO EARN THE BUSINESS INCOME AND AS SUCH THE SAME IS ALLOWABLE UNDER SECTION 28 AND NOT UNDER SECTION 37 BECAUSE SECTIO N 28 TAXES PROFITS 'OF THE BUSINESS WHICH CAN BE WORK ED OUT ONLY AFTER ALLOWING EXPENDITURE SUCH EXPENDITUR E GOES OUT OF THE CLUTCHES OF THE DISALLOWANCE IN TER MS OF THE PROVISIONS OF SECTION 40. IN THIS VIEW OF TH E MATTER AN ASSESSEE MAY CLAIM ALL HIS EXPENDITURES EXCEPT FOR THOSE WHICH ARE CLEARLY COVERED BY SOME OTHER SECTIONS E.G. SECTION 30 COVERING RENT RATES TAXES INSURANCE ETC. AS ALLOWABLE UNDER SECTION 28. IT MAY FURTHER BE OBSERVED THAT ALL THE EXPENDITURE JUST AS LABOUR CHARGES IN THE INSTANT CASE WHICH REPRESENTS DIRECT COSTS AND THEREFORE ADJUSTABLE AGAINST REVENUE FOR THE PURPOSE OF DETERMINING THE PROFIT UNDER SECTION 28(I) DO NOT COME WITHIN THE PROVISIONS OF SECTION 40(A) (IA). AS SUCH IT MAY B E OBSERVED THAT IT IS ONLY THE DEDUCTIONS REFERRED TO IN SECTIONS 30 TO 38 WHICH WOULD DEFINITELY FALL FOR CONSIDERATION OF DISALLOWANCE UNDER SECTION 40 AND THEY CANNOT BE CLAIMED AS DEDUCTION UNDER SECTION 28. THIS REASONING APPLIES WITH EQUAL FORCE TO THE ANALOGOUS PROVISION OF SECTIONS 43 44AD 44AE 44B 44ABA 44BBB 44C AND 44D AND SO ON WHICH ALL RELATE TO COMPUTATION OF BUSINESS INCOME AND CLEARL Y START WITH A NON OBSTANTE CLAUSE WHICH IS SIMILAR TO THE ONE IN SECTION 40 BUT READING 'NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SECTIONS 28 TO 43C'. IN THIS VIEW OF THE MATTER IT MAY BE OBSERVED THAT THE PROVISIONS OF SECTION 40(A) (IA) ARE APPLICABLE ONL Y TO ITEMS COVERED BY SECTION 30 TO SECTION 38 AND NOT TO ITA NO.2233/AHD/2009 M/S. SIDDHI VINAYAK VS ITO W-9(4) SURAT 15 SECTION 28 AND ALL THE DIRECT COST/EXPENDITURE COVERED BY SECTION 28 ARE BEYOND THE SCOPE OF DISALLOWANCE UNDER SECTION 40(A)(IA). IN VIEW OF THE AFORESAID THE IMPUGNED ORDER PASSED BY THE COMMISSIONER (APPEALS) UPHOLDING THE ACTION OF ASSESSING OFFICER MAKING DISALLOWANCE UNDER SECTION 40 (A) (IA) WAS TO BE SET ASIDE. 9.4 THE ITAT JAIPUR BENCH IN THE CASE OF JAIPUR VID YUT VITRAN NIGAM LTD. VS DCIT 123 TTJ 888 HELD AS UNDER: CONCLUSION: ASSESSEE AN ELECTRICITY DISTRIBUTION COMPANY WAS NOT LIABLE TO DEDUCT TAX AT SOURCE UNDER S. 194J FROM THE PAYMENT OF TRANSMISSION/ SLDC CHARGES TO THE TRANSMISSION COMPANY RVPN AS THE OPERATION AND MAINTENANCE OF TRANSMISSION LINES BY RVPN AND THE USER OF THESE LINES BY THE ASSESSEE FOR TRANSMITTING ENERGY DOES NOT RESULT IN ANY TECHNICAL SERVICES BEING RENDERED TO THE ASSESSEE APART FROM THE FACT THAT THE PAYMENT OF TRANSMISSION/WHEELING/SLDC CHARGES IS REIMBURSEMENT COST AND THEREFORE THE PAYMENTS COULD NOT BE DISALLOWED UNDER S. 40(A) (IA); PROVIS IONS OF S. 40 (A) (IA) ARE NOT APPLICABLE ALSO FOR THE R EASON THAT THEY APPLY ONLY WHEN THE AMOUNT IS PAYABLE I.E . DUE WHEREAS THE ASSESSEE HAS MADE ACTUAL PAYMENT. 10. THE ASSESSEE PLEADED BEFORE THE AO THAT IT HAS MADE PAYMENT OF WEAVING EXPENSES TWISTING EXPENSES AND WARPING EXPENSES TO THE MANUFACTURER IN RESPECT OF MANUFACTURING OF GREY CL OTHS. THE ABOVE EXPENSES ARE JOB WORK AND CLASSIFIED AS MANUFACTURE R. THEREFORE THE ASSESSEE PLEADED THAT IT SHOULD NOT BE CONSIDERED A S PAYMENT MADE TO THE CONTRACTOR. THE ASSESSEE ALSO PLEADED THAT T HE ABOVE PROVISIONS IS MEANT FOR AMOUNTS PAYABLE TO THE CONT RACTOR OR SUB- ITA NO.2233/AHD/2009 M/S. SIDDHI VINAYAK VS ITO W-9(4) SURAT 16 CONTRACTORS UNDER THE SUB SECTION AND IT IS NOT MAD E APPLICABLE WHERE PAYMENT IS MADE DURING THE FINANCIAL YEAR. IT WAS A LSO PLEADED THAT IT WAS A DIRECT COST/EXPENDITURE COVERED BY SECTION 28 OF THE IT ACT. THE AO ADMITTED THAT THE ASSESSEE SUPPLIED MATERIAL TO THE JOB WORKERS FOR PRODUCTION OF MATERIAL AS PER SPECIFICA TION GIVEN BY THE ASSESSEE AND THAT THE MATERIAL HAS TO BE CONSUMED B Y THE JOB WORKERS AND THE FINISHED PRODUCTS HAS TO BE RETURNE D TO THE ASSESSEE. THE AO THEREAFTER DID NOT VERIFY WHETHER THE ASSESSEE HAS IN FACT MADE PAYMENT DURING THE FINANCIAL YEAR ITSE LF OR ANY AMOUNT WAS PAYABLE. THE AO HAS ALSO NOT VERIFIED WHETHER T HE EXPENDITURE WAS TAKEN TO THE DIRECT COST AS IS PLEADED BY THE A SSESSEE. THE AO HAS ALSO FORGOT TO NOTE THAT THE MEANING OF WORK AS ASSIGNED IN SUB CLAUSE (IV) (E) TO EXPLANATION III TO SECTION 194C OF THE ACT WAS ENLARGED BY SUBSTITUTING THE PROVISIONS OF SECTION 194C WITH EFFECT FROM 01-10-2009. THUS THE AO ON WRONG PREMISES PRO CEEDED WITH THE MATTER AND ON IRRELEVANT FACTORS DENIED THE CLA IM OF THE ASSESSEE. THE LEARNED CIT(A) HAS ALSO NOT ADDRESSED TO THE PO INTS RAISED BY THE ASSESSEE. THE DECISIONS CITED BY THE LEARNED CO UNSEL FOR THE ASSESSEE NOW BEFORE THE TRIBUNAL WERE ALSO NOT BEFO RE THE AUTHORITIES BELOW FOR BETTER APPRECIATION AND UNDER STANDING OF THE RELEVANT PROVISIONS OF LAW. CONSIDERING THE ABOVE D ISCUSSIONS WE ARE OF THE VIEW THAT THE MATTER REQUIRES RECONSIDERATIO N AT THE LEVEL OF THE AO. WE ACCORDINGLY SET ASIDE THE ORDERS OF THE AUT HORITIES BELOW AND RESTORE THE ISSUE TO THE FILE OF THE AO WITH DIRECT ION TO RE-DECIDE THE ABOVE ISSUE IN LIGHT OF THE PROVISIONS OF LAW AND T HE DECISIONS CITED BY THE ASSESSEE BEFORE US. THE AO SHALL GIVE REASONABL E SUFFICIENT OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. IN THE RESULT GROUNDS ITA NO.2233/AHD/2009 M/S. SIDDHI VINAYAK VS ITO W-9(4) SURAT 17 NO. 2 AND 3 OF THE APPEAL OF THE ASSESSEE ARE ALLOW ED FOR STATISTICAL PURPOSES. 11. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 18 -02-2011 SD/- SD/- (D. C. AGRAWAL) ACCOUNTANT MEMBER (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 18-02-2011 LAKSHMIKANT/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR ITAT AHMEDABAD 6. GUARD FILE BY ORDER D Y. REGISTRAR ITAT AHMEDABAD