When the assessee-society acts as an intermediate between the company and the members of the society, and the fact that there is no relationship between the assessee and its members as contractor and contractee, section 194C does not get attracted and no disallowance could be made u/s 40(a)(ia)
ITO, Bharuch Vs The Ankleshwar Taluka ONGC (ITAT Ahmedabad)- When the assessee-society acts as an intermediate between the company and the members of the society, and the fact that there is no relationship between the assessee and its members as contractor and contractee, section 194C does not get attracted and no disallowance could be made u/s 40(a)(ia).
ITO Vs. The Ankleshwar Taluka ONGC
ITA No.2303/Ahd/2008 [Asstt. Year : 2005-2006]
O R D E R
PER T.K. SHARMA, JUDICIAL MEMBER : This appeal of the assessee is directed against the order of the Commissioner of Income Tax(Appeals)-VI, Baroda dated 15.04.2008 arising out of the order of the Assessing Officer passed under Section 143(3) of the Income Tax Act, 1961.
2. The only ground raised in this appeal reads as under:“1 On the facts and in the circumstances of the case the CIT(A) has erred in the law in deleting the addition of rs.2,57,36,353/- made u/s.40(a)(ia) of the Act being amounts paid to Subcontractors without deducting the tax at source as required under section 194C(2) of the IT Act, 1961.”
3. The facts in brief relating to controversy involved in the aforesaid matter are that the assessee is a co-operative society. For the assessment year under appeal, it has declared total income at NIL. The AO framed assessment under Section 143(3) of the Act on 29-10-2007 wherein he disallowed a sum of Rs.2,57,36,253/- by invoking the provisions of section 40a(ia) of the Act of the IT Act, 1961. The AO gave the following reasons for disallowance:i) The ONGC has deducted “TDS on payment to contractor” and periodically payment were made to the assessee only and ONGC has not stated that these payment has made to the society on behalf of its members;
ii) As per section 199 of the IT Act, credit shall be given to the assessee for the TDS for AY for which such income is assessable. The assessee has claimed the credit for the entire TDS and therefore the entire income is assessable in the hands of the assessee. In view of this, the stand taken by the assessee that the society is only distributing income does not have any merit;
iii) The assessee is a person as per section 2(31) and the status of the assessee is AOP. Assessee is carrying on the business of Traveling Agency as per the tax audit report. Annual accounts of the assessee are audited.
iv) The assessee itself has stated that the service tax paid is allowable as per section 43B of the Act and has claimed credit for TDS as per section 199 of the IT Act. The assessee cannot take a stand that only those sections which suit the assessee are applicable to the assessee and those sections which do not suit the assessee are not applicable.
4. On appeal before the CIT(A), it was contended that main object of the society was that when ONGC acquired the land of various farmers, in compensation, the farmers could not get any job or services as promised. So it was decided that each land looser who could not be provided job would buy a vehicle and rent out to ONGC. Over the years, the ONGC was not able to maintain the accounts of each farmers. So it was decided to form a co-operative society of such land loosing farmers. Such society was to manage on behalf of the members, the payment from ONGC and after deducting administrative expenses, the remaining amount was to be distributed amongst the members of the society as per the vehicle rented out during the period. It was also stated before the AO there was no intention to earn profit from such activity but only to help such illiterate farmers by maintaining accounts of each member of his vehicle and then distribute amount after deduction of expenses etc. The assessee also furnished complete details of such farmers viz. name and address of the members, details of month-wise hiring income distribution etc. It is submitted that there is no parallel to the concept of contractor and subcontractor. It was submitted that the member of the society owning a vehicle and giving out to the society to carry out the work. The society is a whole a unit consisting of its members. The hiring of the work of the society cannot be split up into parts and cannot be separated or identified because the society is media or collective body. The society’s identity is with its members without which there is no existence of the society. There is no concept of contractor-contractee or contractor and subcontractor exist in the present case. Therefore, provisions of section 194C(2) and section 40A(3) of the Act were not applicable to the present case. Considering all these, the CIT(A) deleted the disallowance with the following findings:
“4.3. I have deeply pondered over the provisions of the Act, the assessment order as well as the contentions of the appellant. The undisputed fact is that on discovery of oil in Ankleshwar, Hansol and nearby talukas of Bharuch the ONGC acquired the land of large number of farmers and as part of the compensation mechanism some of the eligible farmers were given job or services as per their qualifications and many other illiterate farmers were provided one jeep each (transport vehicle) which was in turn rented out to ONGC so that means of livelihood In terms of jeep rentals accrued to the farmers. ONGC had entered into an agreement with these individual farmers. This arrangement continued for a few years. However subsequently ONGC round it difficult to deal with each of the individual farmers and it was decided that a cooperative society be formed which can maintain the individual account of each of the farmers and would be one stop entity coordinating all matters with ONGC Limited on behalf of farmers. The cooperative society was formed on 29.8.1 988. The society is o non profit making organization maintaining vehicle-wise accounts comprising of details of expenses and receipts. All these vehicles were hired by ONGC and the lumpsum receipt was paid by ONGC after deducting the TDS to the society who thereafter allocated the amount to respective members after deducting the administrative expenses depending on actual usage. The vehicles are In the name of the individual farmers. During the year under consideration the society received Rs.2,57,62,253/- and the entire amount was distributed to the farmers.
4.3.1. The Assessing Officer was of the view that the society is functioning as a sub-contractor and that It ought to have deducted IDS on payments made to each of the farmers as per provisions of section 40((la) and section 194C. According to Assessing Officer operations of the society are in the nature of hiring of jeeps amounting to work contract attracting provisions of section 194C. T11 society has contractor and sub contractor relationship with ONGC and also there is no written contract between ONGC and the society. The manner in which the operations have continued suggests an oral contract between ONGC and appellant. Furthermore, according to Assessing Officer the appellant’s operations are akin to rent a car scheme as it is engaged in the activity of renting of jeeps on continuous basis. Ii is hiring the cabs from farmers and renting it out to ONGC. The Assessing Officer relied on the decision in the case of Secy. Federn. Of Bus Operators Association of T.N. vs. Union of India -134 ELT 618(Mad) wherein while holding the constitutional validity of service tax on ‘tour operators’ or renting a cab scheme operator it is held that the tax on service is levied on a person if he is on the business of engaging taxies for his customers and even giving services without owning the vehicle. The Assessing Officer has further stated that the appellant is a person in terms of section 2(31) in the status of AOP and against jeep rental income of Rs.2,57,36,253/- various expenses including service taxes were debited in the profit and loss account. Since in respect of jeep rental expenditure of Rs.2,57,62,253/- no TDS was deducted under section 40(a)(ia) the entire expenditure is not allowable. In addition as the entire amount of Rs.2,57,36,253/- was paid to the farmers in cash 20% of the expenditure amounting to Rs.51,47,250/- was also added to the income under section 40A(3).
4.3.2. In the given circumstances, I am of the humble opinion that the functions performed by the society have no profit motive and it is more of a welfare activity performed by the society. The context in which the society was formed was essentially to facilitate receipts and distribution of income and accounting for the expenses. It acted as an inter face between farmers and ONGC for the limited purpose of receiving the jeep rental income on behalf of the illiterate farmers. This mechanism helps both ONGC and the farmers as it precludes the Individual interaction and smoothens the entire operation. The society prepares the Individual logbook for the farmers and on the basis of such log books the ONGC releases the payment which is distributed to the’ farmers. The original agreement always remained between the ONGC and the individual farmers. The ONGC is mandated to pay the hire charges even If any vehicle is not utilized. Further the society is debarred from hiring the vehicles of the farmers to other clients. The society as an Intermediary did the liaison job without undertaking risks or responsibility. Had it been a subcontractor some risk and responsibility would have passed on to the society for which it should have been compensated. But the fact remains that there was no such transfer of risk & responsibility and the activity of the society is merely a pass-through and to facilitate the distribution of the income to the members. The society did not hire vehicles from outside other than from land losing farmers or hire out these vehicles to any other agency other than ONGC, neither did it perform any other business activity. The farmers received the entire Income as per their eligibility determined by the log book maintained by the society. I am therefore in agreement with the appellant that the amount of receipts from ONGC i.e. Rs.2,57,36,253/ is not in the nature of expenditure but was distribution of the income as it was not the expenditure of the society. There is no element of work contract in terms of provisions of section 194C discernible in the activities performed by the society.
4.3.3. The Assessing Officer has relied on the decision of Madras High Court in the case of Secy. Federn. Of Bus Operators Association of vs. Union of India – 134 CLT 618(Mad) wherein it was held that vice taxes leviable on lour operators and rent a cab scheme operators and that the appellant has also deducted service tax and paid it to the Central Excise Department. In my view the Assessing Officer has inappropriately quoted the decision of the Hon’ble Madras High Court. The appellant has not performed the service of tour operator, if at all, any service is provided, it is provided to the members of the society.
4.3.4. Reliance on the decision in the case of Datta Digamber Saakari Kamgar Sanstha Ltd. Vs. A CIT – 83 ITD 148 (Pune) by the appellant is more relevant and identical tot he facts at hand.
4.3.5. In view of above the disallowance of. Rs.2,57,62,253/- under section 40(a)(i) is directed to be deleted. Further, there is no case for disallowance under section 40A(3) as no expenditure is incurred by the society in distributing the rentals to the farmers. The Assessing Officer is also directed to allow the statutory deduction under section 80P(c)(ii) of the Income Tax Act.”
9. Having heard both the parties, we have carefully gone through the orders of the authorities below. It is pertinent to note that in the assessment order, the AO disallowed the entire payment made to the farmers amounting to Rs.2,57,62,253/- by invoking the provisions of section 40(a)(i) of he IT Act. Apart from this, the AO disallowed Rs. 51,47,250/- under Section 40A(3) of the Act. Thus, the disallowance of Rs.51,47,250/- was made twice i.e. once under Section 40A(3) and then invoking section 40(a)(ia). After carefully considering the reasons which lead to formation of the society, we are convinced that the assessee has no profit motive and more of a welfare activity performed by the assessee. It was acted as an interface between farmers and the ONGC for the limited purpose of receiving the jeep rental income on behalf of the illiterate farmers. The main purpose of this mechanism is to help both ONGC and the farmers as it precluded the individual interaction and smoothen the entire operation. The Society was also debarred from hiring the vehicles of the farmers to other clients whose land is acquired by the ONGC. In these circumstances, the learned CIT(A) is factually and legally correct in holding that the assessee has not performed the service of tour operators. It was providing services to the members of the society only. In these circumstances, the decision of the ITAT, Pune Bench in the case of Datta Digamber Saha. Kamgar Sanstha Ltd. (supra) relied upon by the learned CIT(A) in the impugned order is more relevant and identical to the facts before us. In view of this, we decline to interfere with the order of the learned CIT(A).
10. Before parting with, with regard to alternate plea of the learned DR, we may pointed out that in the absence of any ground of appeal, we are unable to adjudicate this plea, which is rejected.
11. In result, the appeal of the Revenue is dismissed.
Order pronounced in Open Court on 20th May, 2011