Is Cost of the Construction to be Deemed as a Contract? : No 194C Held Bombay High Court

Facts of the case

• Assessee being a construction company, enters into two agreements (dated on 01.03.2003 and 13.11.1991) with the owners of land for construction of a complex and allotment of some area in the said complex.
• Assessee enters into another agreement with M/s Prabhu Construction (another construction company), assigning all his rights in favour of him.
• Assessing officer (AO) considering the said agreements as contracts, invoked the provisions of section 194C r.w.s. 40(a)(ia) of Income Tax Act, 1961.

Contention of the department

• AO contended that, assessee could not transfer or assign any better right or title in favour of M/s Prabhu Construction as he enters into the contract to construct a complex. So, it is obvious that agreement was also a contract where other construction company was engaged by the assessee. Accordingly, the provisions of Section 194C r.w.s. 40(a)(ia) of the Income-tax Act, 1961 were very clearly attracted and the Assessee was obliged to effect tax deduction at source.

Contention of the assessee

• Assessee on the basis of agreement contended that he agreed to undertake the projects of construction of complex and the term of the agreements does not indicate that he was appointed as merely a contractor, rather, he was allotted area in the said projects.
• Assessee further contended that, he was given full liberty to sell, transfer and convey these areas in favour of third party hence, it is neither correct to say that his original status was that of contractor nor he was incapable of assigning all his rights.

Decision held & our Conclusion

• The tribunal in pursuance of the essence of the agreements held that, assessee assigned the rights in favour of M/s. Prabhu construction and hence was sale of area in the two projects and this was not a case where the assessee had merely engaged other construction company as its contractor. Accordingly, the provisions of Section 194C r.w.s 40(a)(ia) of the Income Tax Act were not attracted.
• Thus, it can be concluded that, where a construction company assign its rights to sell, transfer and convey (in an ongoing project) in favour of another construction company, it would not be considered as a contract of construction and the provision of section 194C shall not be applicable.

Source: [2020] 116 taxmann.com 125 (Bombay High Court)