S.194C is applicable in case of “Connectivity charges” & “Gas transportation charges” and not S.194I:

Assessee is engaged in the business of laying and operating natural gas transmission network. During the year under consideration, assesse had paid “Connectivity charges” and “Gas transportation charges” and had deducted tax at source u/s 194C. AO was of the view that the assessee ought to have deducted tax u/s 194I and hence, he passed and order u/s 201(1), making huge addition on that count. The Hon’ble ITAT observed that pursuant to contract with the customers, the assessee charged them based on the quantity of gas supplied through pipelines not owned by the assessee. “Connectivity charges” were paid by the assessee against the agreement for using the pipeline connection for transportation of gas and “Gas transportation charges” were paid for transportation of such gas. Such pipelines were owned by someone else and it was open for such owner to provide services to its other clients. Moreover, such owner had complete control over such pipelines. Thus, the said transportation was “Work” as per S.194C. In light of the above, it was held that S.194C is applicable and not S.194I. Accordingly, the addition in respect of the same was deleted. 

“Builders” who build immovable properties for sale to customers are not bound to follow “Percentage Completion method” as prescribed under AS-7:

Assessee, an individual engaged in the construction business, followed “Project completion method” for accounting income from such construction business. AO was of the view that income from such business must be offered by following “Percentage completion method”. Hence, he worked out assessee’s income on the basis of “Percentage completion method” and made an addition in respect of the same. On appeal, Ld. CIT(A) observed that the assessee had disclosed profits on the concerned projects in subsequent Asst. Year on the basis of “Project completion method”. Moreover, such system of accounting was followed consistently by the assessee and was also accepted by the Dept. in the earlier Asst. Year vide order u/s 143(3). Ld. CIT(A) held that AS-7 applies in case of “Construction Contracts” wherein a “Contractor” carries out construction work on behalf of the other person who has awarded such contract to him. However, in case of “Builders” (as in the present case), they build immovable properties for sale to customers. Hence, there is no construction contract and the assessee is not bound to follow “Percentage completion method” as per AS-7. The addition was deleted accordingly. On Revenue’s appeal, the Hon’ble ITAT confirmed the Ld. CIT(A)’s order.

S.194C is applicable in case of “Vehicle hiring charges” and not S.194I:

Assesse had paid “Vehicle hiring charges” during the year under consideration and had deducted tax at source u/s 194C. AO was of the view that the assessee ought to have deducted tax u/s 194I and hence, he passed and order u/s 201(1), making huge addition on that count. The Hon’ble ITAT observed that S.194C categorically covers “Transportation”. The contractor was obliged to provide particular type of vehicle but not the same vehicle. Such contractor was to bear the cost of running and maintenance, repair and insurance, etc. and was obliged to provide another similar vehicle in case of break down. Even the assessee was to make payment on the basis of kms travelled and not any fixed amount. Such vehicles were, at all times, under the supervision and control of the said contractor. Hence, such contract was for carrying out specific work for the assessee and it cannot be said that a vehicle has been taken on hire. Further, vehicle hiring charges are not covered vide S.194I. Hence, it was held that S.194C is applicable and not S.194I. Accordingly, the addition in respect of the same was deleted.

[ACIT VS. GUJARAT STATE PETRONET LTD. – ITA NO.3371/Ahd 2010 & CO 17/Ahd/2011]

Expenditure incurred on renovation so as to generate more profit by attracting more customers is revenue expenditure:

AO disallowed expenditure incurred by the assessee on renovation of her hospital by treating the same to be capital in nature. The Hon’ble ITAT observed that the assessee was a doctor by profession and was having a hospital in rented premises. Certain expenditure was incurred on renovation of the hospital for attracting more customers and to remain in competition in the field of medical profession. Such expenditure included colour, painting, repairs to terrace, splitting the existing rooms, making attached bathrooms, replacement of aluminium doors/windows for proper ventilation, etc. No new asset was created by incurring such expenditure. Rather, it was a necessity for assessee’s business to generate more profit by attracting more customers. Further, such expenditure was also recurring in nature. It was held that any expenditure which facilitated the assessee’s trading operations or enabling him to manage and conduct his business more efficiently and profitably must be considered as revenue expenditure. Accordingly, the impugned addition was deleted.

[DR. PARUL ASHWIN SHAH Vs. ACIT – ITA 2072/Ahd/2012]

“Liquated damages” paid in accordance with contractual arrangements are allowable as business expenditure:

AO disallowed claim of an expenditure by treating the same to be penal in nature. The Hon’ble ITAT observed that the assessee was engaged in the business of public work construction on contract basis. As per the contractual arrangements, if it failed to complete the work within the stipulated time, then it was liable to pay certain liquidated damages at certain specified percentage which came to be called “Time limit deduction”. This expenditure was disallowed by AO. The Hon’ble ITAT found that the said amount was not in the nature of penalty on account of disobedience or infraction of any law. Rather, it was in the nature of liquated damages. It was thus held that the said expenditure allowable as business expenditure.

[DCIT Vs. M/S. GAYATRI CONSTRUCTION CO. – ITA NO.736/Ahd/2010]

A company can claim depreciation on cars used for its business purposes even if the same is registered in the name of its director:

AO disallowed assessee’s claim of depreciation on cars on the count that the cars were registered in the name of a director of the assessee-company. He was of the view that the assessee-company had no dominion on such car and further, there was no material to show that the use of such car was for the purpose of the assessee-company’s business. The Hon’ble ITAT observed that the said car was purchased out of the funds of the assessee-company and the same was reflected in the Balance-sheet of the assessee-company. It was held that requirement of S.32 is that the vehicle must be owned by the assessee and not that the vehicle must be a “Registered owner” of the same under The Motors Vehicles Act. Accordingly, the assessee-company was eligible for depreciation on such car.

[SWATI AUTOLINK PVT. LTD. Vs. ITO – ITA NOS.1471/Ahd/2010]

Interest @ 15% paid by assessee-HUF to its coparceners on loans advanced by them can’t be said to be excessive for the purpose of making addition u/s 40A(2)(b):

AO found that the assessee-HUF had paid interest @ 15% p.a. to its two Coparceners on loans advance by such coparceners to the assessee-HUF as against interest @ 12% p.a. to other parties. Hence, AO made an addition to the extent of differential interest @ 3% u/s 40A(2)(b) of the Act. Hon’ble ITAT was of the view that in light of the prevailing rate of interest during the relevant assessment year, 15% rate of interest was not found to be excessive. Further, the loans raised from such coparceners can be safely relied upon by the assessee-HUF since such coparceners may not demand the amount of loan back in the near future and the level of confidentiality was obviously more with respect to such coparceners. In light of the aforesaid facts, it was held that interest at the rate of 15% can’t be said to be excessive and the provisions of S.40A(2)(b) were wrongly invoked. Hence, the said addition was deleted.

[SHRI HITESH NARENDRABHAI SHAH (HUF) Vs. ITO – ITA No.2370/Ahd/2010]