My joint venture bid for and won the contract, the whole of it was back-to-backed to a constituent member, and the government deducted TDS from the JV's bills. The Assessing Officer refuses the JV credit under Rule 37BA(2)(i), saying credit belongs to the member who did the work. Who gets it?
The joint venture does. Rule 37BA(2)(i) displaces credit from the deductee to another person only where some provision of the Act makes the income assessable in that other person's hands, and only where the proviso's machinery has been followed - the deductee files a declaration with the deductor and the deductor reports the deduction in the other person's name. Neither condition was met, and the Court set aside the assessment orders to the extent they denied the JV credit.
Decided by the High Court (Ramesh Ranganathan J and M. Satyanarayana Murthy J) on 2016-02-29, reported as Writ Petition No. 31680 of 2015 and connected writ petitions. It bears on section 199, section 199(1), section 199(3), section 194C, section 60, section 37BA, section 147, section 148 of the Income Tax Act 1961, in TDS Defaults, Refunds, Interest & Condonation and How Tax Law Is Read matters.
This is the most careful High Court reading of Rule 37BA(2) there is, and it cuts both ways. It confirms that where the conditions ARE satisfied the word 'shall' obliges the officer to give credit to the other person and he cannot refuse it merely because the deduction was made from the deductee's bills. But it also holds the department to the rule's own machinery: an officer cannot invoke sub-rule (2)(i) to strand the credit with nobody. Two independent contracts, no privity between the principal and the sub-contractor, means the receipts under the first contract are the JV's and the credit follows them. Watch the trap the Court itself flagged: this JV had argued the opposite before the Tribunal for an earlier year, and the Court declined to reopen that but noted the contradiction.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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Five joint ventures had contracts with the Irrigation Department of the Government of Andhra Pradesh and had sub-contracted the work back to one of their own constituents on a back-to-back basis without margin. The Government deducted tax at source under s.194C at 1 or 2 per cent from the JVs' bills; the JVs in turn deducted tax at the same rates from the sub-contractor's bills. For AYs 2010-11 to 2012-13 the JVs filed returns showing nil income - the gross receipts having been passed on in full - and claimed refund of the tax deducted from their bills. In the sample assessment order for AY 2012-13 the officer accepted the nil income but refused the refund, holding that the JV was a procedural device, that no income had accrued to it, and that under Rule 37BA(2)(i) credit had to go to the constituent that actually executed the work. The sub-contractor had claimed and been given credit only for the tax the JV had deducted from its bills, and had made no claim to the tax deducted by the Government from the JV's bills. The JVs first appealed to the CIT(A), then withdrew those appeals and amended the writ petitions to challenge the assessment orders.
The assessment and rectification orders were set aside to the limited extent that they denied the JVs credit for the tax deducted at source by the Government from their bills, with a direction to determine and refund the credit within three months, the order not precluding reopening under ss.147 and 148. Credit for the tax deducted from the JV's bills was required to be given to the JV alone, because the income from the contract between the JV and the Government was assessable only in the JV's hands.
Rule 37BA(2)(i) is made under s.199(3) and must be read in conformity with s.199(1) and s.194C; a rule that goes beyond or conflicts with the section must yield to the statute. Under s.199(1) the deduction is a payment of tax on behalf of 'the person from whose income the deduction was made', and here the Government deducted from the amounts paid to the JV and paid nothing directly to the sub-contractor, so s.199(1) refers to the JV alone. The word 'shall' in sub-rule (2)(i) obliges the officer to give credit to the person in whose hands the income is assessable and he cannot refuse credit to that other person merely because the deduction was made from the deductee's payments. But there were two distinct contracts with no privity between the Government and the sub-contractor: the contractual receipts under the first contract were the JV's, and the income from it was assessable only in the JV's hands, the sub-contractor being assessable on what it earned under the second contract. The proviso restricts the sub-rule, and only where its procedure is followed - declaration by the deductee, reporting by the deductor in the other person's name - is credit required to be given to the other person; here no declaration had been filed and the Government had reported the deduction in the JV's name. On the amended sub-rule, which opens with 'Where under any provisions of the Act', the Revenue could point to no provision of the Act making the income assessable in the sub-contractor's hands, and s.60 (transfer of income without transfer of the asset) had no application. Following the Division Bench in CIT v. Bhooratnam and Co., the Revenue cannot be allowed to retain the tax deducted at source without credit being available to anybody.
Likewise credit for the tax deducted at source, from the bills of the petitioner, was required to be given to the petitioner alone as the income, from the contract entered into between them and the Government of Andhra Pradesh, was assessable only in their hands, and not in the hands of the sub-contractor.
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Handle my notice → Ask a CA on WhatsAppThe joint venture does. Rule 37BA(2)(i) displaces credit from the deductee to another person only where some provision of the Act makes the income assessable in that other person's hands, and only where the proviso's machinery has been followed - the deductee files a declaration with the deductor and the deductor reports the deduction in the other person's name. Neither condition was met, and the Court set aside the assessment orders to the extent they denied the JV credit. This was decided by the High Court (Ramesh Ranganathan J and M. Satyanarayana Murthy J) and bears on section 199, section 199(1), section 199(3), section 194C, section 60, section 37BA, section 147, section 148 of the Income Tax Act 1961. It is reported as Writ Petition No. 31680 of 2015 and connected writ petitions. This is the most careful High Court reading of Rule 37BA(2) there is, and it cuts both ways. It confirms that where the conditions ARE satisfied the word 'shall' obliges the officer to give credit to the other person and he cannot refuse it merely because the deduction was made from the deductee's bills. But it also holds the department to the rule's own machinery: an officer cannot invoke sub-rule (2)(i) to strand the credit with nobody. Two independent contracts, no privity between the principal and the sub-contractor, means the receipts under the first contract are the JV's and the credit follows them. Watch the trap the Court itself flagged: this JV had argued the opposite before the Tribunal for an earlier year, and the Court declined to reopen that but noted the contradiction. If it applies to you, the first step is this: Identify the provision of the Act that is said to make the income assessable in the other person's hands; if the officer cannot name one, sub-rule (2)(i) as it now stands does not apply at all.
Five joint ventures had contracts with the Irrigation Department of the Government of Andhra Pradesh and had sub-contracted the work back to one of their own constituents on a back-to-back basis without margin. The Government deducted tax at source under s.194C at 1 or 2 per cent from the JVs' bills; the JVs in turn deducted tax at the same rates from the sub-contractor's bills. For AYs 2010-11 to 2012-13 the JVs filed returns showing nil income - the gross receipts having been passed on in full - and claimed refund of the tax deducted from their bills. In the sample assessment order for AY 2012-13 the officer accepted the nil income but refused the refund, holding that the JV was a procedural device, that no income had accrued to it, and that under Rule 37BA(2)(i) credit had to go to the constituent that actually executed the work. The sub-contractor had claimed and been given credit only for the tax the JV had deducted from its bills, and had made no claim to the tax deducted by the Government from the JV's bills. The JVs first appealed to the CIT(A), then withdrew those appeals and amended the writ petitions to challenge the assessment orders. The matter was decided on 2016-02-29 by the High Court (Ramesh Ranganathan J and M. Satyanarayana Murthy J). On those facts the High Court held as follows. The assessment and rectification orders were set aside to the limited extent that they denied the JVs credit for the tax deducted at source by the Government from their bills, with a direction to determine and refund the credit within three months, the order not precluding reopening under ss.147 and 148. Credit for the tax deducted from the JV's bills was required to be given to the JV alone, because the income from the contract between the JV and the Government was assessable only in the JV's hands.
Rule 37BA(2)(i) is made under s.199(3) and must be read in conformity with s.199(1) and s.194C; a rule that goes beyond or conflicts with the section must yield to the statute. Under s.199(1) the deduction is a payment of tax on behalf of 'the person from whose income the deduction was made', and here the Government deducted from the amounts paid to the JV and paid nothing directly to the sub-contractor, so s.199(1) refers to the JV alone. The word 'shall' in sub-rule (2)(i) obliges the officer to give credit to the person in whose hands the income is assessable and he cannot refuse credit to that other person merely because the deduction was made from the deductee's payments. But there were two distinct contracts with no privity between the Government and the sub-contractor: the contractual receipts under the first contract were the JV's, and the income from it was assessable only in the JV's hands, the sub-contractor being assessable on what it earned under the second contract. The proviso restricts the sub-rule, and only where its procedure is followed - declaration by the deductee, reporting by the deductor in the other person's name - is credit required to be given to the other person; here no declaration had been filed and the Government had reported the deduction in the JV's name. On the amended sub-rule, which opens with 'Where under any provisions of the Act', the Revenue could point to no provision of the Act making the income assessable in the sub-contractor's hands, and s.60 (transfer of income without transfer of the asset) had no application. Following the Division Bench in CIT v. Bhooratnam and Co., the Revenue cannot be allowed to retain the tax deducted at source without credit being available to anybody. In the words reproduced by the source cited on this page: "Likewise credit for the tax deducted at source, from the bills of the petitioner, was required to be given to the petitioner alone as the income, from the contract entered into between them and the Government of Andhra Pradesh, was assessable only in their hands, and not in the hands of the sub-contractor." The decision followed or applied CIT v. Bhooratnam and Co. (2013) 357 ITR 196 (AP) - followed, including on Rule 37BA being procedural and therefore applicable to pending proceedings.
It was decided by the High Court on 2016-02-29 and is reported as Writ Petition No. 31680 of 2015 and connected writ petitions. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 199, section 199(1), section 199(3), section 194C, section 60, section 37BA, section 147, section 148, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The assessment and rectification orders were set aside to the limited extent that they denied the JVs credit for the tax deducted at source by the Government from their bills, with a direction to determine and refund the credit within three months, the order not precluding reopening under ss.147 and 148. Credit for the tax deducted from the JV's bills was required to be given to the JV alone, because the income from the contract between the JV and the Government was assessable only in the JV's hands. It arises in TDS Defaults, Refunds, Interest & Condonation and How Tax Law Is Read matters, on section 199, section 199(1), section 199(3), section 194C, section 60, section 37BA, section 147, section 148 of the Income Tax Act 1961, and was decided by Ramesh Ranganathan J and M. Satyanarayana Murthy J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check the proviso: was a declaration filed by the deductee with the deductor, and did the deductor report the deduction in the other person's name in its TDS statement? If not, credit stays with the deductee. Point to the two contracts and the absence of privity between the principal and the sub-contractor; produce both agreements and the TDS the JV itself deducted from the sub-contractor's bills. Say expressly that no rival claim to the same credit exists, and that the sub-contractor has not asked for it - the Court relied on that to reject any suggestion of conflicting claims. Argue that a rule made under s.199(3) must be read in conformity with s.199(1) and cannot enlarge or restrict the section; that is the Court's route and it is transferable to other Rule 37BA disputes. Do not run inconsistent cases on who is assessable and who gets credit in different years - the Court noticed exactly that here.
Still good law. The construction of Rule 37BA(2)(i) turns on the post-1 November 2011 text, which remains the text published by the department today, so the decision is not affected by any later amendment of the sub-rule. Whether it has been followed or doubted elsewhere was NOT checked; no citator search was run. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The print header of the judgment carries only the judges' names and the writ petition number, not the name of the court; indiankanoon files it under the pre-bifurcation Andhra Pradesh High Court and the judgment is that of the common High Court of Judicature at Hyderabad. The header shows W.P. No. 31680 of 2015 while the body proceeds on the assessment order in W.P. No. 31748 of 2015, the parties having agreed that one order would do for the batch. The judgment usefully reproduces Rule 37BA(2)(i) both as it stood before, and as substituted with effect from 1 November 2011 by the Income-tax (Eighth Amendment) Rules 2011; the post-2011 text it sets out matches the text currently published by the department. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The assessment and rectification orders were set aside to the limited extent that they denied the JVs credit for the tax deducted at source by the Government from their bills, with a direction to determine and refund the credit within three months, the order not precluding reopening under ss.147 and 148. Credit for the tax deducted from the JV's bills was required to be given to the JV alone, because the income from the contract between the JV and the Government was assessable only in the JV's hands.
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