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2014 (1) TMI 343 - AT - Income TaxDisallowance u/s 40(a)(ia) - Held that:- The modus of obtaining the Government contracts, the sequence and frequency of execution of the contracts clearly show that the assessee as a partnership firm secured contracts and given to its partners with a collective responsibilities and liabilities jointly and severally liable towards the owners for the execution of the contracts in accordance with the contract of the business as per clause (g) of the partnership deed - They have demarcated the nature of the contracts into principal contracts and sub-contracts for the purpose of identifying the work handled by the partners and for the purpose of accounting contract receipts and payments. In order to establish a relationship of contractor and sub- contractor, it is necessary to show that the parties have acted in such a manner conducive to uphold a contractor-sub contractor relationship when there is a strong case of interlacing of finance and funds, interdependence of responsibilities, interconnection of activities - There is no basis for coming to a conclusion that there existed a relationship of contractor vis-a-vis sub-contractor – As per section 20 of the Indian Contract Act of 1872 - Where both parties to an agreement are under a mistake as to a matter of fact, essentially to the agreement, the agreement is void - The formats of the agreement entered into with the partners and the styling of accounts prepared by them are products of mistakes of fact, and therefore, the agreement is not to be relied on to hold that the assessee is acting in the status of contractors vis-a- vis sub-contractors. The question of TDS in the present case cannot be considered only on the basis of the agreements entered into between the assessee and its partners - The liability u/s 194C(2) is cast on the assessees only when they are in fact and in substance acting in the relationship of contractors and sub contractors - When the said provision relating to deduction of tax at source is not applicable for the assessee for the reasons stated above, violation u/s 40(a)(ia) does not arise - Payments made under the nomenclature of "sub- contractors" are not liable to be disallowed. There is no sub-contract between JV and the constituents and since the JV has been formed only to procure contract works from the Government and the contract is being executed by the constituent partners in their sharing ratio 60:40 as per the terms of JV, it cannot be said that the JV is a contractor and its constituents are sub- contractors - Decided in favour of assessee.
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