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2016 (2) TMI 748 - ITAT AHMEDABAD

2016 (2) TMI 748 - ITAT AHMEDABAD - TMI - Disallowance u/s 40(a)(ia) - TDS u/s 194C OR 192 - payment to individual workers - Held that:- This is an accepted fact by the assessee that individual workers to whom payment has been made by the assessee are not on the payroll of the employees meaning thereby that the workers were not employees of the company. These individual workers were working for the assessee company on behalf of labour contractor M/s Surgi Pharm Industries. Going through the Tax .....

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see has taken plea that the payment was actually made to individual workers but the actual position at the time of finalization of books of accounts as well as upto the completion of Tax Audit u/s 44AB of the Act was that the payment was made to individual workers was a payment on behalf of labour contractor to whom assessee has been paying the labour contract charges in preceding years and, therefore, the submission of the assessee that the payment to individual workers is covered u/s 192 of th .....

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ng funds are all moving through a common bank account and the application of this fund is for business as well as at sometimes interest free loan & advance use and ld. CIT(A) has rightly applied 3.5% rate of interest on the average balance of interest free loans and advances. We, therefore, uphold the order of CIT(A) and dismiss this ground of assessee. - ITA No.384/Ahd/2012 - Dated:- 21-1-2016 - Shri Kul Bharat, JM, & Manish Borad, AM. For The Assessee : Shri S. N. Soparkar, AR For The Reve .....

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ssee which is a Private Limited Company is engaged in the business of manufacturing & trading of Hospital & Orthopedic products. Income-tax return for Asst. Year 2008-09 was filed on 30th September, 2008 declaring total loss of ₹ 1,07,55,119/-. The case was selected for scrutiny assessment and notice u/s 143(2) was issued on 17/08/2009. Assessment order was framed u/s 143(3) of the Act on 11/12/2010 and the loss of the assessee was assessed at ₹ 85,82,953/- after making addit .....

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passed by learned Assessing Officer, Dy. Commissioner of Income-tax Range-1, u/s 143(3) of the Income-tax Act and the learned Commissioner of Income-tax (Appeals) s confirming the same , are bad in law, illegal and deserves to be modified. 2. The ld. Assessing Officer has erred in law and on the facts and circumstances of the case and the ld. CIT(A) has erred on the facts and circumstances of the case in confirming the making of disallowance u/s 40(A)(ia) of ₹ 6,93,236/- in income. The dis .....

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t reserves the right to add, alter, modify, amend or delete, any of the above ground(s) either before or during the appeal proceedings. 5. Ground No.1 is of general nature, hence needs no adjudication. 6. The Ground No.2 -wherein ld. CIT(A) has confirmed the addition made by Assessing Officer by way of disallowance u/s 40(a)(ia) of the Act at ₹ 6,93,235/-. 7. The ld. AR submitted that the accounts of the assessee company are submitted under Tax Audit u/s 44AB of the Act and in Annexure-11 .....

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u/s 194C of the Act on the payments. However, during the year under appeal there was dispute with the labour contractor due to which payment was not made to the contractor M/s Surgi Pharm Industries and payment was made to the individual workers directly and for this reason TDS was not deducted as the payments to the recipients of the wages were below the limits prescribed under the provisions of section 192. 8. The ld. DR supported the orders of lower authorities. 9. We find that the ld. CIT(A .....

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it made payment of wages directly to the workers since there were disputes between the contractor and workers. However, auditor of the appellant certified the payment by appellant to the contractor. Further these workers were not employed by the appellant and therefore payment to them cannot be covered under section 192. The workers were hired by the contractor and payment was to be made to the contractor only. Therefore the provisions of section 194C is clearly applicable and appellant default .....

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a labour contractor. From examining of the records, we find that assessee has been regularly deducting TDS in the preceding years on the payments made to M/s Surgi Pharm Industries on the payments made for the supply of labourers/workers. During the year under appeal the assessee had a dispute with the labour contractor due to which payment was not made directly to the account of labour contractor. However, assessee made the payment to the individual workers. This is an accepted fact by the asse .....

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workers were actually the payment on behalf of the labour contractor M/s Surgi Pharm Industries and such payment was duly covered within the ambit of the provisions of section 194C of the Act and TDS was required to be deducted by the assessee. It seems that at a later stage (during the course of assessment proceedings) assessee has taken plea that the payment was actually made to individual workers but the actual position at the time of finalization of books of accounts as well as upto the comp .....

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essee. 11. Now we take up ground no.3. During the course of assessment proceedings it was observed by the Assessing Officer that interest bearing funds on which assessee has been paying interest @ 12% to the bank have been diverted towards providing of interest free advances to some of the concerns and, therefore, Assessing Officer applied interest @ 12% on the average of opening and closing balances of three parties and thereby made interest disallowance of ₹ 13,18,277/-. Bifurcation of p .....

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ts of the case, assessment order and appellant s submission. It is not in dispute that appellant has borrowed funds on which interest was paid therefore it cannot be said that appellant had sufficient own funds. The amount outstanding against associate company is in the nature of advance since appellant has not recovered the same. If this was business advance, the same could have been recovered or adjusted by now but the fact that it remain outstanding for many years clearly shows that this is i .....

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ant that disallowance of interest cannot be at the rate of borrowing but it has to be on the average cost of fund for the company. Appellant submitted that average cost of fund is 3.5% at which disallowance of interest can be made if at all disallowance is to be confirmed. Assessing Officer is directed to restrict the disallowance of interest to the average cost of total funds during the year. Appellant ets part relief on this account. 13. Being not satisfied with the order of CIT(A), the assess .....

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disallowance considered in view of these being trade/business advances. Ld. AR further submitted that in the present assessment also, for the said advances applicability of 36(i)(iii) or disallowance is not applicable as these are trade advances and this can be substantiated by the fact that year on year assessee company has transaction of payment towards purchases of material etc.(such purchases of each of prior two years well exceeds the amount of advance). Further as regards, the advance to .....

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been immediately after the year end i.e. w.e.f. 1.4.2008 a scheme of amalgamation of M/s Medtek Asia P. Ltd. into M/s IRM Ltd. and there are identical monies given by M/s IRM Ltd. to the assessee company s holding company which in turn have been flown into the assessee company and thus effectively the advance to medtek gets squared off against identical liability to IRM Ltd. (which since has merged Medtek into itself.). In respect of working capital loans, where interest is spent, these are tak .....

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apital and unsecured loans not having borne interest cost, the interest to banks on working capital loans at appc.12%). Accordingly, if at all there is disallowance the same (without prejudice) will not exceed ₹ 3.92 lacs. 14. The ld. DR relied on the orders of authorities below. 15. We have heard the rival contentions and perused the material on record. The issue before us is to examine as to what should be the quantum of interest disallowance arising on account of diversion of interest b .....

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transactions with Medtek Asia P. Ltd. in past as well as in the year under appeal and therefore, as advances to Medtek Asia P. Ltd. are of business advance nature the same should not be taken at par as interest free advances. 15.1 We also find that ld. AR has further submitted that the interest bearing funds and other funds of the company have been routed through the same bank account and it is also a fact that advance given to M/s Medtek Asia P. Ltd. stood given for whole year and the average .....

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isallowance of interest expenditure by restricting it to 3.5% being average interest cost of total fund given as interest free funds. We are, therefore, of the view that as a total fund of the assessee comprising of own capital, interest free unsecured loans as well as interest bearing funds are all moving through a common bank account and the application of this fund is for business as well as at sometimes interest free loan & advance use and ld. CIT(A) has rightly applied 3.5% rate of inte .....

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cting the AO to allow the employees contribution of PF & ESI, if paid, before the due date of filing the return, without considering the specific provision of 36(1)(va) r.w.s.2(24)(x) of the IT Act for employees contribution of PF & ESI. 2. The ld. CIT(A) erred in holding that the disallowance u/s 36(1)(iii) of the Act should be at average cost of funds 3.5% as against the actual rate at which the funds diverted were borrowed (12%). On the facts and in the circumstances of the case and i .....

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