Disallowance u/s 40(a)(ia) under the head testing charges not justified when such are made by the Government: ITAT

ITAT Ahmedabad: Disallowance under Section 40(a)(ia) under the head testing charges not justified when such are made by the Government and the assessee has only reimbursed the expenses through the mode of deduction

DCIT vs M/s Niyati Construction ; I.T.A No. 3559/Ahd/2016; 25.10.2021; Income Tax Appellate Tribunal, Ahmedabad

The appeal filed by the Revenue for A.Y. 2010-11, arise from order of the CIT(A)–5, Vadodara dated 08.09.2016, in proceedings under Section 143(3) r.w.s. 263 of the Income Tax Act, 1961 against the order of the CIT (Appeals) which deleted the disallowance made under section 40(a)(ia) of the Act and also deleted the disallowance under Section 40(b) of Rs. 11,68,000/- made on the ground that while calculating the allowable remuneration to the partners, the assessee has not excluded the income of Rs. 20,56,185/- earned on account of interest on fixed deposit.

Facts:

• Assessment under Section 143(3) r.w.s 263 of the Act was finalized on 28.12.2015 at Rs. 42,09,980/- after making disallowance under Section 40(a)(ia) of Rs. 12,03,690/- and disallowance under Section 40(b) of Rs. 10,18,000/-.
• The AO has made disallowance of Rs. 12,03,960/- on the ground that assessee has not made any TDS on payment of testing charges of Rs. 12,32,344/-.
• The AO has made disallowance under Section 40(b) of Rs. 11,68,000/- on the ground that while calculating the allowable remuneration to the partners, the assessee has not excluded the income of Rs. 20,56,185/- earned on account of interest on fixed deposit.
• The aggrieved assessee has filed appeal before the Ld. CIT(A) against the aforesaid disallowance made by the AO. The Ld. CIT(A) has allowed the appeal of the assessee on both the issue.
• Hence this Appeal.

Observations and Findings:

• The AO has made disallowance of Rs. 12,03,690/- under Section 40(a)(ia) being the amount of expenses claimed under the head testing charges on the reason that the assessee has not deducted tax on such payment in accordance with the provision of Section 194C of the Act.
• The Ld. CIT(A) in his finding held that the assessee has not awarded any contract to any party for testing charges, in fact, the testing charges were deducted by the Government while making payment to the assessee on running bills raised by the assessee upon the Government. The assessee has not made any payment directly for testing charges to any party.
• The Ld. CIT(A) has also stated in his finding that the Government has awarded a contract to some entity for testing charges and the assessee has only reimbursed the expenses to the Government.
• Assessee placed a copy of contract agreement with terms and conditions for project of SSS.Canal with Government department wherein as per Clause 76 stated that deduction to be made toward testing charges from the running account bill of the contractor.
• In the light of the above facts no infirmity was found in the decision of the Ld. CIT(A) holding that testing charges was made by the Government and the assessee has only reimbursed the expenses through the mode of deduction made by the Government out of running bills of contract.
• Therefore, there is no merit in the ground of appeal of the Revenue and the same stand dismissed.
• Regarding second ground of the Revenue the AO has disallowed Rs. 10,18,000/- under Section 40(b) of the Act on account of remuneration to partner on the ground that remuneration of partner was not allowable on the amount of interest received on Fixed Deposit/SSNL Bonds which was treated as income from other sources. The Ld. CIT(A) has allowed the appeal of the assessee.
• The assessee has claimed that interest on Fixed Deposit, interest on SSNL Fixed Deposit and interest on SSNL Bonds was made out of surplus funds available with the assessee and the interest income was part of the business income. Therefore, the same was correctly included for calculating remuneration of the partners.

The assessee has also placed a copy of decision of the Jurisdictional High Court in the case of CIT vs. J.J. Industries (Supra) wherein it is held that interest from Fixed Deposit on spare funds cannot be excluded from book profit for the purpose of determining allowable deduction of remuneration paid to partners. In view of the said judgment, it was found that there was nt any error in the decision of the Ld. CIT(A),

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