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2017 (7) TMI 536 - ITAT VISAKHAPATNAM

2017 (7) TMI 536 - ITAT VISAKHAPATNAM - Tmi - TDS u/s 194C - Deduction u/s 40(a)(ia) - expenditure incurred by the assessee under the head ‘freight charges’- Held that:- As the assessee neither entered into any oral or written agreement with the assessee nor taken vehicles on regular contract basis. The assessee has taken vehicles on mere hire basis to be deployed in the places where he has undertaken transport contract with M/s. ITC Limited. The risk associated with the goods till transportatio .....

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made by the A.O. - Decided in favour of assessee. - Computation of capital gain on sale of land - assessable under the head ‘income from business’ or under the head ‘ income from capital gains - application of the provisions of section 50C - Held that:- The income from sale of land is assessable under the head ‘income from business’, but not under the head ‘income from capital gains’. We further observed that the assessee has filed necessary evidences to prove, he had converted his capital .....

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of the assessee rightly directed the A.O. to delete additions made towards computation of capital gains. - Decided in favour of assessee. - I.T.A.No.45/Vizag/2013 - Dated:- 9-6-2017 - SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER For The Appellant : Shri T.S.N. Murthy, DR For The Respondent : Shri S. Rama Rao, AR ORDER PER Shri G. Manjunatha, Accountant Member: This appeal filed by the revenue is directed against order of the CIT(A), Vijayawada dated 9.11.2012 and .....

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Income Tax Act, 1961 (hereinafter called as 'the Act') on 13.3.2009. The case was selected for scrutiny as per clause 9 of CBDT guidelines and notices u/s 143(2) & 142(1) of the Act were issued. In response to notices, the authorized representative of the assessee appeared from time to time and furnished the books of accounts and information/documents as called for. 3. During the course of assessment proceedings, the A.O. noticed that the assessee has incurred freight charges of 4,43 .....

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transport of goods from its manufacturing facilities to various places of customers. The assessee further submitted that to execute contract, he has hired lorries from various parties to be deployed to M/s. ITC Limited for transportation of goods. The assessee further submitted that the trucks will be hired directly from owners/drivers as and when it is required. There is no written or oral contract with the suppliers and the lorries were hired based on the requirement from various places and th .....

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ponse to show cause notice, the assessee submitted that he had purchased an agricultural land admeasuring 2 acres 95 cents situated in survey no.215/1, Ayyappa Nagar in the year 1980. The assessee further submitted that the said land has been converted into stock-in-trade as on 31.3.2006 for the purpose of formation of lay out. The assessee further submitted that he had converted its capital asset into stock-in-trade, formed layout and sold and accordingly computed profit arising out of sale of .....

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f goods which is evident from the fact that the lorry receipts issued by the assessee stipulates a condition that the risk associated with goods is on the drivers till the goods are delivered at the specified places. The A.O. further observed that the assessee is also liable for constructive or actual damages, goods being lost in transit or goods being damaged or deteriorated. The terms and conditions as appeared in the L/R specifies that the driver or owner of the truck or his agents will be to .....

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of the assessee by the lorry owner/driver. The A.O. further observed that the L/R is the basis for payment of freight, hence, the payment cannot be a hire payment as claimed by the assessee. Therefore, opined that the freight charges paid by the assessee need to be treated as payment to sub contractors as defined u/s 194C(2) of the Act. Since, the assessee failed to deduct tax at source u/s 194C of the Act, the total expenditure incurred towards freight charges cannot be allowed as deduction u/ .....

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e assessee for the financial year 2005-06, it is observed that the assessee has not incorporated conversion of capital asset into stock-in-trade by passing necessary entries in the books of accounts. The A.O. further observed that the tax audit report issued by the auditor u/s 44AB of the Act, clearly specified that during the financial year relevant to assessment year there is no conversion of any capital asset into stock-in-trade. Therefore, opined that the assessee has failed to file necessar .....

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zation of investment only. Hence, the purchase of agricultural land and holding it as capital asset till 31.3.2006 and sale of the same by marking into plots and receipt of sale consideration should be treated as income from capital gains. With these observations, and also by following certain judicial precedents, the A.O. held that the sale proceeds from sale of land should be assessed under the head income from capital gains but not under the head income from business. In so far as considerati .....

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l before the CIT(A). Before the CIT(A), the assessee has filed elaborate written submissions. As regards disallowance of freight charges for failure to deduct TDS u/s 194C of the Act, the assessee submitted that there is no written or oral contract with the lorry owners and hence, the question of deduction of tax at source u/s 194C of the Act does not arise. The assessee further contended that he had hired lorries in the open market as and when required for the purpose of transportation of goods .....

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provisions of section 194C of the Act would apply, only when there is a contract between the parties for execution of work including transportation of goods. He had neither entered into any contract nor taken vehicles on regular basis, therefore, the payments made to lorry owners cannot be considered as payment made towards execution of works contract as defined u/s 194C of the Act. The assessee further submitted that the payments were directly made to the drivers or who so ever was incharge of .....

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esponsibility of the goods. The lorry owners does not take any responsibility, therefore, the question of application of the provisions of section194C of the Act is unwarranted. 8. In so far as computation of long term capital gain on sale of land, the assessee submitted that he had converted his capital asset into stock-in-trade and formed plots and computed resultant profit under the provisions of section 45(2) of the Act. The A.O. ignored the provisions of section 45(2) of the Act, and re-com .....

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ots were sold immediately after development and all these factors clearly indicate the intention is to convert the land into stock-in-trade to commercially exploit. The A.O. failed to consider the intention of the assessee to commercially exploit the land on the sole reason that the assessee has not carried out any business activity in the past. But, the fact remains that even a single transaction may constitute adventure in the nature of trade or commerce and series of transactions are not nece .....

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are rest with the assessee. The A.O. treated the freight payments as payment made to sub contractors merely on the ground that the lorry receipts clearly indicates that the driver/lorry owners have undertaken the risk associated with the goods. The CIT (A) further observed that it is seen that the lorries are placed at the disposal of the ITC Limited for transport of the goods. The goods are loaded and transported at the responsibility of the assessee. The assessee makes advance payment to the l .....

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e additions made towards disallowance of freight charges. 10. In so far as computation of capital gain, the CIT(A) observed that it transpires from the record that the assessee has converted his capital asset into stock-in-trade, formed plots and thereafter sold. The assessee has computed both income from capital gain and income from business on conversion of capital asset into stock-in-trade as per the provisions of section 45(2) of the Act. But, the assessing officer is of the view that there .....

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of ITAT, Mumbai bench in ACIT Vs. Jahangir reported in 20 SOT 512, held that the A.O. is incorrect to doubt the genuineness of such conversion and also compute the income under the head income from capital gains. In so far as application of the provisions of section 50C of the Act, the CIT(A) observed that when income is computed under the head income from business the provisions of section 50C of the Act has no application. Accordingly, directed the A.O. to determine the income based on the act .....

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duct TDS as per the provisions of section 194C of the Act. The A.O. further was of the opinion that the lorry receipts issued by the assessee clearly indicates that there exist a contract between the assessee and the lorry owners. The A.O. further observed that there is no need for written agreement, even an oral agreement is sufficient to attract the provisions of section 194C of the Act. According to the A.O., the transactions between the assessee and the lorry owners are comes within the ambi .....

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of risk. Any damages to the goods while in the transportation is fully on the assessee. Therefore, the payments made to the lorry owners cannot be considered as payment made to sub contractors as defined u/s 194C(2) of the Act. 12. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The A.O. disallowed freight charges for failure to deduct tax at source u/s 194C of the Act. According to the A.O., the expenditure incurred .....

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eading of section 194C(iii) of the Act, would clearly indicate that there should be a contract between the parties for carrying out any work. If there is no contract and the amounts were paid directly for engaging the vehicles temporarily for delivering the goods, it would not fall within the provisions of section 194C of the Act. 13. In this case, on perusal of the facts available on record, we find that the assessee is entered into a transport contract with M/s. ITC Limited for transportation .....

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merely deploy the vehicle at the disposal of the assessee and the assessee has to hire the vehicles and make payment directly to the drivers or the lorry owner. We further observed that the A.O. has treated the said payments as payment made to sub contractors, merely on the ground that the L/Rs issued by the assessee clearly establishes that the assessee is entered into a sub contract with the lorry owners for transportation of goods. The A.O. further referring to the L/Rs observed that the dri .....

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conditions mentioned in the L/Rs indicates that the lorry owners or drivers will undertake responsibility of safe movement of goods. The L/Rs further indicate that in the event of any damages to the goods, on account of negligence of the truck/lorry owners or drivers, then the lorry owners are liable to bear the cost of goods. The A.O. without appreciating the proper facts, simply came to the conclusion that the L/Rs issued by the assessee indicates that there exist a contract between the assess .....

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rivate Limited Vs. ACIT, (2012) 50 SOT 15. The coordinate bench of this Tribunal, under similar circumstances, observed that whenever the lorries and trucks are hired by the assessee to be used in his business under its own supervision and control, then TDS is not required to be deducted on payment made to the lorries/truck owners. The relevant portion of the order is extracted below: In the provisions of section 194C, the word 'work' has been used and the said word 'work' has be .....

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e is a transporter and books the consignment of different parties for its transportation. Sometimes, the assessee hires the trucks and lorries of others for the transportation of the consignment booked by it. The assessee has made out a case that he has simply hired the lorries and trucks to transport its consignment under its own control and supervision. The movement of trucks and lorries are governed by the assessee itself and not the truck owners. Truck owners simply hire out their trucks for .....

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amined in the case of M. Sitaramaiah v. ACIT [I T Appeal No. 355 of2008], in the light of finding in the case of Mythri Transport Corporation v. Asstt. CIT [2010] 24 lTD 40 (Visakhapatnam) and in that case it was concluded that the payments made to tanker owner would not fall in the category of sub-contractor for carrying out the whole or part of contract liable for deduction of tax at source under section 194C [Para 12] TDS as per section 194C is required to be deducted when the payments are ma .....

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g of the consignment booked by it under its own supervision and control with all responsibility and liabilities. Therefore, the hiring of truck and lorries cannot be called to be the work as per definition given in Explanation 3 of section 194C and consequent thereto, the assessee is not liable for deduction of TDS on payment to lorry/truck owners as per section 194C Therefore, there was no merit in the order of Commissioner (Appeals) and it was to be set aside. [Para 13] 15. The assessee relied .....

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sessee liable for deduction of tax only on the assumption that it was having agreement with the parties through whom trucks were arranged for transportation of goods. However, the Commissioner (Appeals) had recorded a finding of fact that there was neither any oral or written agreement between the assessee and the transporters for carriage of goods, nor had it been proved that any sum of money regarding freight charges was paid to them in pursuance of a contract for a specific period, quantity o .....

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parties for carriage of the goods. In view of that, no interference was called for with the finding of fact recorded by the Tribunal. The appeal, being without merit, was to be dismissed. 16. In this view of the matter and also considering the ratios of the case laws discussed above, we are of the view that the expenditure incurred by the assessee under the head freight charges is not coming within the ambit of provisions of section 194C of the Act, as the assessee neither entered into any oral .....

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for TDS as per the provisions of section 194C of the Act, consequently, the expenditure incurred under the head freight charges are not liable for disallowance u/s 40(a)(ia) of the Act. The CIT(A) after considering relevant submissions of the assessee has rightly deleted additions made by the A.O. We do not find any error in the order of the CIT(A). Hence, we are inclined to uphold the CIT(A) order and dismiss the ground raised by the revenue. 17. The next issue that came up for our considerati .....

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essary evidences. The A.O. further observed that the fact clearly indicates that the assessee has sold his capital asset. According to the A.O., the assessee failed to prove conversion of capital asset therefore, the resultant profit from sale of land would be assessable under the head income from capital gains . The A.O. has given various reasons to come to the conclusion that the impugned land is sold as a capital asset, but not as stock-in-trade. The A.O. further observed that though assessee .....

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r had involved in any business activity of real estate development. The A.O. further was of the opinion that the activity undertaken by the assessee is not in the nature of adventure in the nature of trade or commerce. 18. It is the contention of the assessee that he had converted his capital asset into stock-in-trade as on 31.3.2006, developed said lands into plots before it was sold and computed resultant profit by applying the provisions of section 45(2) of the Act. The assessee further conte .....

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of capital asset into stock-in-trade in clause 12 of the tax audit report. Merely, the auditor did not mention the conversion of capital asset into stock-in-trade, it cannot be considered that conversion has not been taken place. In support of his arguments, relied upon the decision of Hon ble A.P. High Court, in the case of CIT Vs. M. Krishna Rao reported in 120 ITR 101 and also the decision of the Rajasthan High Court in the case of CIT Vs. Govind Gruha Nirman Sahakar Samiti Limited reported i .....

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the assessee never involved in the business of trading in lands. The A.O. further observed that the assessee failed to prove conversion of capital asset into stock-in-trade with necessary evidences. According to the A.O., the documents furnished by the assessee and his financial statements for the financial year 2005-06 and tax audit report issued by the auditor clearly indicates that there is no conversion of capital asset into stock-in-trade during the relevant financial year. 20. The only qu .....

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equent events and the assessee s conduct are also important factors and the facts to be considered are firstly whether the transaction was in the line of the assessee s business and secondly whether it was a isolated transaction or there was a series of similar transactions. It is not necessary that in order to constitute trade, there should be a series of transactions, both of purchase and of sale. Even a single and isolated transaction can be held to be capable of falling within the definition .....

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s in the nature of realization of investment by sale of capital asset has to be decided based on the facts and circumstances of each case. 21. In this case, on perusal of the facts available on record, we find that the assessee has purchased an agricultural land in the year 1980. The assessee has sold the impugned land in the financial year relevant to assessment years 2007-08. The assessee claims to have converted his investment into stock-in-trade as on 31.3.2006, developed the said land into .....

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into stock-in-trade. The assessee claims to have converted its capital asset into stock-in-trade as on 31.3.2006. Since, the said land was shown as investment in the balance sheet before it was converted, the assessee has not prepared financial statement for the real estate business separately. In the profit & loss account prepared for its other business, the assessee has not disclosed the said conversion of capital asset into stock-in-trade. The assessee further claims that merely because t .....

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iness of real estate which is evident from the fact that the assessee has computed resultant profit from sale of impugned land by applying the provisions of section 45(2) of the Act. Once the assessee has proved the conversion of capital asset into stock-in-trade, the provisions of section 45(2) of the Act come into play and the income is to be determined in accordance with the said section. In this case, the assessee has applied the provisions of section 45(2) of the Act and computed capital ga .....

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the A.O. has adopted full value of consideration received as per the provisions of section 50C of the Act to determine the capital gain on the ground that the activity carried out by the assessee is not in the nature of adventure in the nature of trade or commerce and it is the realization of sale of capital asset. Since, we hold that the activity carried out by the assessee is in the nature of adventure in the nature of trade or commerce and the resultant profit is assessable under the head in .....

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ots and sold the plots within the period established, then the intention of the assessee was to carry on the adventure in the nature of trade. The relevant portion of the order is extracted below: The assessee had not sold the property as he bought it, but had parceled it. He could not have realized the said amounts if there was no layout and he had not plotted out the land for building sites. Even a single venture might be regarded as in the nature of trade and business. From the facts, it was .....

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