TMI Blog2011 (8) TMI 763X X X X Extracts X X X X X X X X Extracts X X X X ..... er neither had any work obligation nor any command, control and possession of the machines after they were temporarily handed over to the assessee on hire basis - it is clear that the said provisions are applicable when the contract is entered into (i) for carrying out any work and (ii) supply of labour to carry out any work - Held that: assessee took the machinery and equipment on hire for carrying out the specific work so the hiring of machinery and equipment did not amount to contract for carrying out any work as contemplated in section 194C of the Act as per the ratio laid down by the Hon'ble Madras High Court in the aforesaid referred to case - Circular No. 681 dated 08/03/94 - the provisions of section 194-I of the Act are also not applicable to the facts of the present case. - Decided in favor of the assessee Regarding prior period expenses - the vendor asked for the payment against the said bill during the year under consideration - the liability was ascertained and crystallised during the year under consideration - Held that: it was allowable for deduction in the year relevant to the assessment year under consideration - Appeal is allowed for statistical purpose - IT A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y case highly excessive. 5. In confirming the aforesaid disallowance, the learned CIT(A) has not given full and proper consideration to the submission of the appellant company. 6. The order of the learned CIT (A) is contrary to facts and law, erroneous and against the principles of natural justice." 3. From the above grounds, it would be clear that in the present case, the only grievance of the assessee relates to the confirmation of disallowance of Rs. 28,09,104 made by the Assessing Officer under section 14A of the IT. Act, 1961 read with Rule 8D of the IT. Rules, 1962. 4. The facts related to this case, in brief, are that the assessee was engaged in the business of Civil Engineering construction, deployment of personnel and transportation work and filed the return of income on 30/11/2006 declaring net income of Rs. 9,45,72,136/-. The case was selected for scrutiny. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had claimed that no expenditure had been incurred regarding exempt income. The Assessing Officer also noticed that the assessee had shown an investment of Rs. 56,18,20,714/- in various shares and received a tax fre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not use any words or expressions without purpose, and that all words and expressions used in an enacted provision must be given full effect. The aforesaid non satisfaction condition incorporated in sub section (2) of section 14A makes it very clear that Rule 8D framed there-under cannot be applied mechanically in every case. Recourse to the prescribed method under the Rule can be had only when the assessing officer having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of expenditure in-relation-to the exempt income. (iii) It follows that the assessing officer before applying Rule 8D must have regard to the accounts of the assessee and state the reasons for non satisfaction with the correctness of his claim. If no reasons are stated, or the reasons stated are not valid, then obviously the application of the Rule is not triggered at all. 5.1 The assessee further submitted before the learned CIT(A), that the Assessing Officer has apparently stated the reasons for non satisfaction with the correctness of the assessee's claim with regard to expenditure in-relation to the dividend income. However, the reasons sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s income from sources other than dividend. It was also submitted that Rule 8D as it stands is contrary to, and overrides, the intent and purpose of sections 10(34) and 14A, hence, the said Rule must be judicially read down, and where having regard to the facts of the case the Rule yields absurd or unsatisfactory result, a best-judgment estimate of expenditure in-relation-to exempt income must be substituted. It was stated that in the assessee's case, the estimate of expenditure in relation to dividend income of Rs. 28 lacs as provided by the Rule is obviously incorrect and untenable. It was accordingly submitted that the expenditure in relation to the dividend income in the assessee's case may be accepted as nil and if that is not acceptable, a reasonable estimate thereof may be substituted for the estimate yielded by Rule 8D. 5.2 The learned CIT(A), after considering the submissions of the assessee, confirmed the action of the Assessing Officer by observing in para 4.3 to 4.3.2 of the impugned order, which read as under: "4.3 I have carefully considered the facts of the case and have gone through the AO's order and the submissions of the appellant. The undisputed facts are tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od to disallowable amount. I see no infirmity in the action of the AO in applying the provisions of section 14A(2) as read with Rule 8D. The disallowance is upheld. This ground is dismissed." Now the assessee is in appeal. 6. The learned Counsel for the assessee reiterated the submissions made before the authorities below. It was further submitted that the subject investments are old and the capital (non borrowed funds) were more than investments, there is no nexus between any expenditure or interest and the income claimed as exempt. It was also submitted that the Ld. C.I.T. (Appeals) has neither discussed the facts nor has given reasons for confirming the ad hoc disallowance made by the Assessing Officer. It was contended that Rule 8D of Income Tax Rules 1962 was inserted by the I.T. (Fifth Amdt.) Rules 2008 with effect from 24.03.2008, hence the same was applicable only from Assessment Year 2008-2009 and not the earlier years. The reliance was placed on the judgment of the Hon'ble Bombay High Court in the case of Godrej Boyace Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203. 7. The Id. D.R., in his rival submissions, supported the impugned order passed by the ld.C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income under the provisions of the I.T. Act has to be disallowed under section 14A. Under Sub-Section (2) of Section 14, the AO is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. In the present case, although the AO has not established the nexus between the expenditure and the exempted income (dividend) to work out the expenditure but for making disallowance invoked the provisions of Rule 8D of the Income-tax Rules, 1962 which are inserted by the Income-tax (Fifth Amendment) Rules, 2008, w.e.f 24.3.2008. However, as per the ratio laid down by the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. (supra), the provisions of Rule 8D are applicable prospectively and not retrospectively. In the said case, their Lordships of the Hon'ble Bombay High Court, while interpreting the provisions of Section 14A of the Act and Rule 8D of the Income-tax Rules, 1962, observed at paras 66 67 of the aforesaid referred to order (Head Note) as under : "The first point to be noted about the provisions of s. 14A and r. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxpayers and the Department on the method of determining such expenditure. It was in view of these disputes that Parliament inserted a new sub-sec. (2) to permit the framing of subordinate legislation to provide a mandatory method for the AO to follow in determining the expenditure incurred in relation to income which does not form part of the total income, if the AO was not satisfied with the correctness of the claim of the assessee. The Memorandum provided that "this amendment will take effect from 1st April, 2007 and will, accordingly apply in relation to the asst. yr. 2007-08 and subsequent years ". A circular was issued by the CBDT on 28th Dec, 2006 once again clarifying the position that the amendment would be applicable "from the asst. yr. 2007-08 onwards". At any rate this construction which has been placed on the amendment both in the Memorandum Explaining the Provisions of the Finance Bill of 2006 and in the circular of the CBDT dt. 28th Dec, 2006 can be regarded as a reasonable interpretation of the provision. The fourth aspect of the matter which would merit emphasis, is the principle of law that in determining as to whether a rule in a piece of subordinate legislation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar under consideration in this case." 9.2 In the present case, since the AO applied the provisions contained in Rule 8D, which are applicable with effect from A.Y. 2008-09, while the assessment year involved in this case is 2006-07, therefore, we are of the view that the ld.CIT(A) was not justified in confirming the action of the AO by considering the ratio laid down by the I.T.A.T., Special Bench in the case of M/s. Daga Capital Management Private Ltd., 312 ITR 1 (S.B.) Mumbai, which is not a good law in view of the judgment of the Hon'ble Bombay High Court in the aforesaid referred to case of Godrej Boyce Mfg. Co. Ltd. (supra), We, therefore, set aside the order of the ld. CIT(A) and remand the issue back to the file of the AO for fresh adjudication by keeping in view the guidelines laid down by the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. (supra) and direct the AO to compute the disallowance, if any, by applying a reasonable method having regard to the facts and circumstances of the case." 9. Since the facts of the present case are similar to the facts involved in the case of Ashok Kumar Pankaj Kumar (supra) in I.T.A. No. 305/Luc/10 for the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... August two thousand five between M/s Jaiprakash Associates Ltd, a company incorporated under the Companies Act, 1956 having its Head Office at J A House, 63, Basant Lok, Vasant Vihar, New Delhi - 110 057 (hereinafter referred to as "the Lender") which expression shall unless excluded by or repugnant to the context include his successors in office and assigns of the one part and M/s Jaiprakash Enterprises Ltd, a company incorporated under the Companies Act, 1956 having its Registered office at 5, Park Road, Hazratganj, Lucknow (UP) (hereinafter referred to as "the Hirer") which expression shall unless excluded by or repugnant to the context include his successors in office and assigns etc. of the other part. WHEREAS the Lender owns various machineries and equipments) available at various sites and WHEREAS the Hirer is executing civil works at different projects sites of the Lender or at other locations and in that connection needs certain machineries and equipments on hire. AND WHEREAS the Hirer has requested the Lender to make available certain machineries and equipment on hire for executing civil works and WHEREAS the Lender has accepted the request of the Hirer and has a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss or damage to the machinery and equipment by accident or otherwise will be made good by the Lender at his own cost. 8. The Hirer will ensure that the hired machinery and equipment is used in a reasonably safe manner avoiding any overloading. However, in case of any accident or injury to the operating staff, all compensation and medical expenses etc shall be borne by the Lender. 9. The Lender shall submit the hire charges bills to the Hirer on a monthly basis payment of which shall be released within 15 days of the submission of the bills. Any advance paid by the Hirer, at the request of the Lender, shall be suitably adjusted in the monthly bills. 10. The Hirer can request the Lender for providing machinery equipment which are not part of annexed schedule, which it may require from time to time. The hire charges for additional machinery equipment shall be as discussed and agreed mutually. 11. This agreement shall be valid for a period of three years starting from 1st August, 2005 and can be extended on mutually agreed terms and conditions. However either party can terminate this agreement by giving one-month notice. 12. All payments to Lender shall be subjec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r KM, whichever is higher 16. Jeep Monthly basis 20,000/- per month upto 3000 kms and thereafter 10/-per km. 17. Pick-up Monthly basis 20,000/- per month upto 3000 kms and thereafter 10/-per km. 12.1 In the present case, for executing the work the assessee hired from M/s Jaiprakash Associates Ltd. certain construction machinery and equipment such as Dozers, Excavators, Loaders, Dumpers and Vivratory Compactors including some trucks, jeeps, buses and pick-ups. The aforesaid hiring was done as per written agreement with effect from 01/08/2005 for a period of three years on mutual agreed terms and conditions as stated in the aforesaid agreement and as per usage based rates specified in the schedule of machinery and equipment annexed thereto. As per the terms and conditions of the agreement the Lender M/s Jai Prakash Associates Limited, undertook to bear operating and maintenance cost of machinery and equipment given on hire including salary wages of driver/operator/helper, the cost of fuel and lubricants, repair maintenance and the road tax insurance etc. The Assessing Officer asked the assessee to produce var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 194-I because it was found that rent/lease agreement were being split up to reduce/avoid liability of TDS. As regards to the contention of the assessee that hiring or renting of equipments was not covered by section 194-C, the Assessing Officer observed that none of the articles given on hire as per the list could be classified as equipment and that there were many articles such as trucks, bus, pick up van, Jeep etc. which were covered by the inclusive definition of work as per Explanation-III to section 194-C of the Act. The Assessing Officer was of the view that as per clause-12 of the agreement, all payments of the assessee were subject to Deduction of Tax and that the assessee itself deducted tax in respect of payments made at Tehri site. The Assessing Officer held that the assessee was liable for deduction of tax at source under section 194-C of the Act and since it had failed to do so, the addition was warranted under section 40(a)(ia) of the Act. The Assessing Officer made the addition of Rs. 13,32,39,725/- by observing as under: "(i) TEHRI SITE In respect of Tehri site, total payment made is Rs. 13,87,70,330/-The tax was required to be deducted @ 2.24% whereas the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ork. Therefore, to come within the meaning of limb (a) of section 194C, a contract must involve the carrying out of any work, whether tangible or intangible and that in the case of a contract for carrying out intangible work (service contract) with the help of any machinery, the test is that there is, firstly, an obligation to carry out a specified work, and secondly, the command, control and possession of the machinery remain with the contractor. On the other hand, in a machinery hire contract, there will be no obligation of the lender to carry out any specific work, and secondly, the control, command and possession of the machinery will temporarily pass to the hirer. The reliance was placed on the judgment of Hon'ble Madras High Court in the case of CIT v. Pompuhar Shipping Corpn. Ltd. [2006] 282 ITR 3/153 Taxman 486 (Mad). It was stated that in assessee's case the contract under reference was not for carrying out any specified work, tangible or intangible, with or without the help of machinery, the contract was for taking temporary possession of manned maintained machines to be used by the assessee in its business at its discretion and the command, control and possession of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing construction, limestone mines and real estate, executing civil works as a sub contractor for M/s Jaiprakash Associates Ltd. and for executing the aforesaid works, the assessee hired from M/s Jaiprakash Associates Ltd., certain construction machinery equipment as per the written agreement with effect from 01/08/2005 on mutually agreed terms and conditions and as per usage based rates specified in the Schedule of Machineries Equipments annexed thereto. He further observed that as per the terms of the hiring agreement, M/s Jaiprakash Associates Ltd. (the lender) undertook to bear the operating maintenance cost of each machine given on hire, including salaries wages of the operators and the helpers, the cost of fuel, lubricants, spares repairs, and the road tax insurance etc. and that the said operating maintenance costs were factored into the agreed usage based hire charges. Thus, the hiring was of fully maintained machines along with operating personnel and fuel. The learned CIT(A) pointed out that the assessee paid to M/s Jaiprakash Associates Ltd. a total amount of Rs. 20,26,24,8907 during the relevant financial year. The learned CIT(A) observed that the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntangible work (service contract) with the help of any machinery, the test is that there is, firstly, an obligation to carry out a specified work, and secondly, the command, control and possession of the machinery remain with the contractor, on the other hand, in a machinery hire contract, there will be no obligation of the lender to carry out any specific work and secondly, the control, command and possession of the machinery will temporarily pass to the hirer. The learned CIT(A) categorically stated that the contract under reference was not for carrying out any special work tangible or intangible, with or without the help of machinery, the contract was for taking temporary possession of manned maintained machines to be used by the assessee in its business at its discretion and the command, control and possession of the machines during the period of the hire passed to the assessee and further the payments under the contract accrued with reference to the time length of usage of the machines and not with reference to the quantum of any work done. Therefore, the work under reference was a machinery hire contract, and not a contract for carrying out any work within the meaning of li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, therefore, it was a case of hiring of the instruments/equipments and not the case of work contract. It was further stated that since the assessee did not enter into a contact involving the carrying out of any work whether tangible or intangible and neither supplied the labour, therefore, the provisions of section 194C of the Act were not applicable to the assessee's case because the assessee simply hired the machinery and equipments for specific work viz. Civil Engineering construction, limestone mining etc. and there was no contract for carrying out any work involving supply of labour. Therefore, the provisions of section 194C of the Act were not applicable at all because it was a case of hire and to execute work and supplying the labour. It was stated that the Assessing Officer made the disallowance arbitrarily and the learned CIT(A) after appreciating the facts in right perspective, was fully justified in deleting the impugned disallowance. The reliance was placed on the following case laws: (i) CIT v. Poompuhar Shipping Corpn. Ltd. (supra). (ii) CIT v. D. Rathinam [2011] 197 Taxman 486/9 taxmann.com 239 (Mad.) (iii) Calcutta Goods Transport Association v. Union of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... achinery and equipment. Therefore, as per the provisions contained in the agreement dated 01/08/2005, the contract entered into was purely a contract for the hiring of the machinery and equipment. However, the Assessing Officer invoked the provisions of section 194C of the Act and was of the view that the tax was deductible under the said section from the payments made by the assessee to the lender i.e. M/s Jaiprakash Associates Ltd. While doing so the Assessing Officer observed that the said agreement was not a pure and simple machinery hire agreement and the lender besides giving machines also supplied labour by way of drivers, operators and helpers for carrying out the work and bore the running cost and maintenance of the machines. Now we have to see as to whether the provision of section 194C of the Act were applicable to the facts of the present case. The relevant provisions contained in the said section i.e. 194C of the Act read as under: "194C. (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a contract is entered into for carrying out any work in pursuance of a contract between the contractor and the entities mentioned in sub-section (1) of section 194C. The term "hire" is not defined in the Income-tax Act. So, we have to take the normal meaning of the word "hire". Normal hire is a contract by which one gives to another temporary possession and use of property other than money for payment of compensation and the latter agrees to return the property after the expiry of the agreed period." 16.3 It has further been held as under: "The hiring of ships for the purpose of using them in the assessee's business did not amount to a contract for carrying out any work as contemplated in section 194C." 16.4 In the instant case also the assessee took the machinery and equipment on hire for carrying out the specific work so the hiring of machinery and equipment did not amount to contract for carrying out any work as contemplated in section 194C of the Act as per the ratio laid down by the Hon'ble Madras High Court in the aforesaid referred to case. 16.5 Furthermore, the CBDT vide Circular No. 681 dated 08/03/94 vide clause 7(iii) clarified that the provisions of section 194C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as prior period expenses. He asked the assessee to show cause why the same should be allowed when the assessee was following mercantile system of accounting. In response, the assessee submitted the details vide reply dated 03/12/2008. From the said details, the Assessing Officer noticed that there was one bill of Rs. 10,42,895/- for cost of steel pipes of M/s Punjab Distributors, New Delhi which pertained to financial year 2002-2003. On being asked, it was explained that this bill was lost in transit and hence not debited in the books and when the party approached for payment, the duplicate bill was taken and claimed in this financial year. The Assessing Officer observed that at this stage, it could not be ascertained what would have been the impact on the income of the assessee in financial year 2002-2003 by not claiming this bill i.e. whether income of the financial year 2002-2003 stood enhanced by this amount or not. The Assessing Officer made the disallowance of Rs. 10,42,895/-. 19. The assessee carried the matter to the learned CIT(A) and submitted that in the mercantile system of accounting the liability for an expense is booked when it accrues and the liability for an expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see in the financial year under consideration, the liability in respect of the same was rightly booked in that year as per the mercantile system of accounting. He accordingly deleted the disallowance made by the Assessing Officer by observing in para 5.3.1 5.3.2 of the impugned order as under: "5.3.1 The appellant's case finds support from the decision in CIT v. Swadeshi Cotton and Flour Mills (P.) Ltd. 53 ITR 134 (SC), wherein it was ruled that the employer who follows the mercantile system of accounting incurs a liability towards profit bonus only when the claim is settled amicably or by industrial adjudication. This view was followed in 59 ITR 388 (All) and 65 ITR 237 (All). In CIT v. Ashok Iron and Steel Rolling Mill, 199 ITR 815 (All), the Court observed that in the mercantile system, deduction can be made only in the year in which the liability to pay accrues, and that happens only when the liability crystallizes or becomes ascertained. In 307 ITR 150 (Del), the Hon'ble High Court observed that Accounting Standard (AS-5) stipulates that prior period items are incomes or expenses which arise "in the current period" as a result of errors or omissions in the preparation of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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