No disallowance under s 40(a)(ia) can be made for non-deduction of tax under s 194C in absence of a continuous contract, oral or written

Dy. CIT Vs Niten Hasmukhbhai Shah

ITAT BENCH ‘C’, AHMEDABAD

ITA No. 1982/Ahd/2009

Assessment Year: 2006- 2007

Decided on: 27 May 2011

Order

Per: D K Tyagi, JM:

This is Revenue’s appeal against the order of Commissioner of Income-tax(Appeals)-XX, Ahmedabad in appeal No CIT(A)-XX/118/08- 09 dated 17-03-2009 for the assessment year 2006-07.

2. The Revenue has taken following ground:-

“1. The Ld. CIT(A)-XX, Ahmedabad has erred in law and on facts in deleting the addition of Rs.89,68,871/- made by the AO by invoking the provisions of section 40(a)(ia) of the I.T. Act, without properly appreciating the facts of the case and the material brought on record by the A.O.

1.2 In doing so, the Ld. CIT(A)-XX, Ahmedabad has erred in law and on facts in holding that there was no continuous contract, oral or written, between the assessee and M/s. Rupal Roadways, without properly appreciating the facts of the case as discussed by the AO in detail in the assessment order.

1.3 In doing so, the Ld. CIT(A)-XX, Ahmedabad has erred in law and on facts in not appreciating that the case of the assessee was squarely covered by the provisions of section 194C(3)(i) substituted by the Finance (No.2) Act, 2004 with effect from 01.10.2004, with a view to prevent the practice of splitting of composite contract so as to escape the provisions relating to deduction of tax at source.

1.4 In doing so, the Ld. CIT(A)-XX, Ahmedabad has erred in law and on facts in not appreciating that since the LRs for transportation were issued in the name of M/s. Rupal Roadways, this clearly showed that the assessee had itself not carried out the work of transportation and clearing of lignite directly through the various truck owner/drivers, but the said work was entrusted by the assessee to M/s.Rupal Roadways and since the aggregate of payments to M/s. Rupal Roadways was much in excess of Rs.50,000/-, the assessee was required to deduct tax at source as per the provisions of section 194C(3) of the I.T. Act.

1.5 In doing so, the Ld. CIT(A)-XX, Ahmedabad has erred in law and on facts in not following the ratio of the decision in the case of Shree Chaudhary Transport Co. reported in 119 TTJ (jd) 3, which is clearly applicable to the facts of assessee’s case.”

3. The brief facts of the case are that assessee has paid freight and octroi amounting to Rs.89,68,871/- to various truck-owners/drivers during the year under appeal for transporting lignite to its Ahmedabad based customers from the mines owned by Gujarat Mineral Development Corporation (GMDC for short) situated at Pandhro. The Assessing Officer called  or the detailed ledger account of the freight and octroi expenses and basic vouchers maintained by the assessee. After verification of the details AO issued show-cause notice as to why the sum of Rs.87,68,871/- should not be disallowed u/s 40(a)(ia) of the Act. The assessee made detailed written submission in response to the said showcause notice. It was contended in that reply that none of the payment is in excess of Rs.20,000/- and  none of the aggregate payment to a single truck owner/driver is in excess of Rs.50,000/-. Hence, payments are not hit by the provision of section 194C(3) of the Act consequently the provision of section 40(a)(ia) shall also not apply. However, AO did not accept this explanation and held that as per provision of section 40(a)(ia) the amount of Rs.87,68,871/- is not deductible in computing the income chargeable under the head profit & gains of business and profession. Accordingly, disallowance of Rs.87,68,871/- was made u/s 40(a)(ia) by observing as under:-“The issue emerging on analysis of written submissions filed by the assessee from time to time and on examination of the books of accounts are discussed as under:-

‘3.1 The assessee has disclosed gross profit of Rs.21,36,052/- on total sales of Rs.5,44,29,107/- which works out to 3.92% as against G.P. of 3.95% disclosed in the immediate preceding year. In the year relevant to Asst. Year 2004-05, the assessee has disclosed GP at 7.17%. As regards downfall in the rate of GP as compared to Ast. Year 2004-05, the assessee’s main business was dealing in different kinds of acids and chemicals whereas trading of lignite was very nominal. However, from the year relevant to Asst. Year 2005-06, the assessee has switched over to business of lignite. In this year, the trading in acids and chemicals was very nominal. Thereafter, in the year under consideration, the assessee has exclusively carried out trading business of lignite only. It is also explained that the price of lignite is publicly open. Lignite is sold by GMDC at the disclosed price. So the margin is very low in comparison of acids and chemicals. Considering the explanation and factual position submitted by the assessee and also taking into account the fact that the sales have increased from Rs.1.63 crores in the year relevant to Asst. Year 2005-06 to Rs.5.44 crores in the year under consideration. The book results are therefore accepted.

3.2 On perusal of trading and Profit & Loss A/c, it is noticed that the assessee has claimed freight and octroi expenses at Rs.89,68,871/-. In this regard, a detailed copy of account of freight and octroi expenses was called for which was furnished by the assessee vide written submission dated 5.12.2008 furnished on 10.12.2008. On perusal of the said account, it is found that the assessee has been making payment of freight in cash on daily basis and almost all the entries for payment are found to be in the range of Rs.9,000/- to Rs.9,500- i.e. below Rs.10,000/-. This account was examined with reference to books of accounts and bills and vouchers produced. On examination of the vouchers and bills produced, it is found that each voucher in respect of each entry debited in the account is supported by a L.R. issued by Roopal  roadways, a transport contractor and lignite clearing agent, Station Road,Bhuj. Since it was found that the assessee has not deducted tax at source in respect of the transportation and clearing work got carried out through Roopal Roadways, vide order sheet noting dated 18.12.2008 and vide this office letter No.DCIT(OSD)/R- 12/NHS/2008-09 dated 18.12.2008, the assessee was required to show cause as to why dis allowance u/s.40a(ia) of the I.T. Act should not be made in respect of freight payment of Rs.89,68,871/-. The extract of the noting is reproduced here-under:-‘

‘No. DCIT(OSD)R-12/NHS/2008-09

Date: 18-12-2008

To

Shri Niten Hasmukhbhai Shah

Prop of M/s. jaianm Trading Company

A5-H, Trade Centre, Stadium Navrangpura, Ahmedabad

Sir, Sub: Assessment proceedings for A.Y.2006-07

P.A. No.ADHS8372J

Please refer to the above.

2. You have filed your return of income for A.Y. 2006-07 on 30.12.2006 disclosing total income at Rs.6,28,804/-. The case was selected for scrutiny assessment, accordingly notice u/s.143(2) of the I.T. Act, 1961 was issued 7.11.2007 and served upon you on 17.11.2007 by DCIT, Cir.12, Ahmedabad. Subsequently the case was assigned to the undersigned. Therefore, a formal notice u/s.143(2) and noticed u/s.142(1) along with detailed questionnaire were issued on 5.6.2008. In response thereto, you have filed your written submission and information from time to time. On perusal of the written submission and on examination of books of accounts, following issues are noticed:

i) On perusal of freight and octroi expenses account, it is seen that you have paid freight of Rs.89,68,871/- in cash on various dates. Further, on perusal of bills and vouchers, it is noticed that in majority of the cases, the LRs are from Roopal Roadways and the payment has been made in cash. It is explained that the freight paid is in respect of lignite transported from GMDC to Ahmedabad for which the payment has been made in cash. But for such payments, no TDS has been made. You have not deducted tax at source at the time of payments. Please show case as to why dis allowance u/s.40(a)(ia) of the I.T. Act should not be made in respect of freight payment of Rs.89,68,871/-

ii) … … …

3. You are requested to attend to my office on 22.12.2008 at 2.30 p.m. and furnish your explanation on the issues raised herein above. Please treat this letter as notice u/s.142(1) of the I.T. Act, 1961. Please note that in case of non compliance, it will be presumed that you having nothing to explain in the matter and the issues raised herein above are acceptable to you. Accordingly, the assessment will be finalized in the manner indicated as above.

(S E A L)

Yours faithfully,

(LALIT P JAIN)

Dy. Commissioner of Income-tax,

(OSD)-Range-12, Ahmedabad.’

3.2.1 In response to thereto, the assessee vide his written submissions dated 22.12.2008 has submitted as under:

‘In the course of assessment proceedings, your Honor have asked the assessee to justify its claim of freight and octroi expenses of 89,68,871/- with specific reference to section 40(a)(ia).

The assessee most respectfully submits as under:-

1. The copy of the ledger account of freight and octroi expenses for the previous year relevant to Asst. Year 2006-07 as appearing in the audited books is attached herewith.

2. The close scrutiny of the said account reveals the following facts:

(i) All the payments have been made in cash

(ii) None of the payment is excess of Rs.20,000/-

(iii) None of the aggregate payment is in excess of Rs.50,000/-/

The provisions of section 40(a)(ia) can be invoked only when the payments made are hit by the provisions of Section 194C.

The assessee most respectfully invites your kind attention to Section 194C(3)(i) and its first proviso:

(QUOTE)

(3) No deduction shall be made under sub-section (1) or subsection (2) from (i) the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor or subcontractor, if such sum does not exceed twenty thousand rupees.

Provided that where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the Financial Year exceeds fifty thousand rupees, the person responsible for paying such sums referred to in sub-section (10 or, as the case may be sub-section (2) shall be liable to deduct income-tax (under this section:].”

(UNQUOTE)

Now reverting to the facts of the case, the analysis of the ledger account clearly shown that the payments made on account of freight and octroi expenses are below the limit of Rs.20,000/- qua each payment and Rs.50,000/- qua aggregate payment to one individual i.e. Financial Year and are not hit by the rigour of section 194C(3).

As the payments are not hit by section 194C(3), the provisions of section 40(a)(ia) shall not apply. In view of the facts of the case and relevant law, the assessee most humbly requests your Honour to drop the proposal of making addition of Rs.89,68,871/-“

3.3.2 The assessee’s submission has been carefully considered but the same is not found convincing. On examination of the vouchers for payment, it is found that each entry for payment of freight and octroi is supported by the voucher prepared by the assessee and LR of Roopal Roadways. Further, the assessee with its reply has again given the extract of freight and octroi expenses account from the ledger maintained by it. In the detailed extract, the assessee has given LR number of the transporter as also the truck number against each entry. On examinations of the voucher files, it has been found that almost in all cases the payment has been made against the LR of Roopal Roadways. On perusal of the vouchers and LRs, it is seen that payment of freight has been made in cash on per metric ton rate basis. The actual amount paid therefore has been worked out on the basis of the weight of lignite transported at the prevailing rate of freight. These facts clearly reveal that the assessee had entrusted the work of transportation and clearing and forwarding of lignite to Roopal roadways who is a transport contractor and lignite clearing agent right from April 20005 to March 2006 i.e. for the entire Financial Year. During the course of hearing while examination of the books of accounts and vouchers, photo copies of vouchers prepared by the assessee and LRs of Roopal Roadways have been obtained, on sample basis for all the 12 months. Out of the photo copes so obtained, following vouchers and LRs are made part of the assessment order.

3.2.3 The assessee has argued that none of the payment is in excess of Rs.20,000/- as also none of the aggregate payment is in excess of Rs.50,000/-. Therefore, the payments are not hit by Section 194C(3) of the I.T. Act. It is the fact that the assessee has made truck-wise payment on particular date. Therefore, the amount paid are below Rs.20,00/-. However, its arguments that the payment do not exceed Rs.50,000/- in the aggregate is not correct as in the case of almost all the payments there are LRs of Roopal Roadways which clearly suggest that the assessee had entrusted the work to Roopal Roadways who carried out the work in pursuance of the contract with the assessee. Though the assessee denies to have any written contract for the work assigned/entrusted to Roopal Roadways, but it is seen that Roopal Roadways has carried out the work during the entire Financial Year. Therefore, it is clearly proved that there was an open and continuous contract for the transportation and clearing work of lignite between the assessee and Roopal Roadways. As has been clarified by the CBDT from time to time, there need not to be any written contract for the work to be carried out. An oral understanding between the parties for the work to be carried out is also sufficient to attract the provisions of section 194C of the I.T. Act. Here, in this case, it is not denied by the assessee that no work was entrusted to Roopal Roadways. The main argument of the assessee has been that each payment falls below Rs.20,000/-. However, the evidences in the form of vouchers and LRs maintained by the assessee proves beyond doubt that the assessee had given an open and continuous contract for transportation and clearing of the lignite from Panndro to Ahmedabad to Roopal Roadways. The payment for each truck made at the time of delivery in cash to the truck driver is simply a mode of payment. In this line of business, either payment is made to the transporter on account basis s and when bills are received or on “To Pay” basis. In the latter case, the payments are immediately made to the transporter as soon as delivery of goods is made at the destinations. Therefore, the mode of payment does not affect the nature of contract whereby the work was entrusted to M/s. Roopal Roadways. The payments so received by the truck driver in this case may be an internal arrangement between the truck drivers and M/s. Roopal roadways for which the assessee is least concerned. But the fact is not deniable that M/s. Roopal Roadways had carried out the transportation and clearing of lignite work in pursuance of the work entrusted to it by the assessee. This is evident from the fact that each voucher and challan is supported by the LR of Roopal Roadways. Had there been no involvement of M/s. Roopal Roadways, there would not have been any LR of it. Thus, even in the absence of any written contract, it is proved that the assessee had entrusted the work relating transportation and clearing of lignite to M/s Roopal Roadways. Therefore though the payment made for each truck is below Rs.20,00/-. The aggregate payment made against the LRs of the contractor M/s. Roopal Roadways exceeds Rs.50,000/-. The total payments made to M/.s. Roopal Roadways is Rs.89,68,871/-

3.2.4 Notwithstanding to the above, during the course of assessment proceedings, it has been noticed that the assessee had also entrusted the work relating to transportation and clearing of lignite from Panandhro to various destinations other than Ahmedabad in Gujarat. For such work, there is also no written contract between the assessee and M/s Roopal Roadways. M/s. Roopal Roadways has carried out the contract work to the extent of Rs.1,78,75,959/-. The assessee has duly deducted tax at source while making the payment to M/s. Roopal Roadways. The work carried out by M/s. Roopal Roadways in respect of transportation and clearing of lignite for destinations other than Ahmedabad and for destination at Ahmedabad is similar in all respects. Only difference is the destination and the mode of payment. For the goods delivered for the destinations other than Ahmedabad, the assessee had made payment on account basis through cheques whereas for the work carried out for Ahmedabad destinations, the assessee had made payment in cash for each truck. In both the cases, the nature of work carried out remains same. Also in both the cases, there are no written agreements. Further, M/s. Roopal Roadways has issued its LRs for transportation of lignite from Pannandhro to the destinations other than Ahmedabad as well as in respect of destinations at Ahmedabad. The assessee has tried to differentiate both the work by arguing that the payment made for Ahmedabad destinations is below Rs.20,000/- in each case. However, as mentioned herein above, M/s. Roopal Roadways has carried out the entire contract assigned to it by the as. Even if each payment is below Rs.20,000/-, but all payments are made against the LRs of M/s. Roopal Roadways. Therefore, the aggregate of the payments exceeds much higher than Rs.50,000/- which is Rs.89,68,871/-. The assessee has designed the mode of payment in such a way that each payment is shown separately so that apparently it doesn’t exceed the limit of Rs.20,000/- at a time. Also by mentioning separate truck number, it has wrongly tried to claim that the payment in each claim has been made to a separate contractor/truck driver. Therefore, the aggregate amount paid during the year doesn’t exceed Rs.50,000/-. But in view of the facts discussed herein above, the assessee’s contention is rejected. The assessee has failed to prove that it itself had carried out transportation and clearing of lignite or engaged the trucks for transportation of lignite from Panandhro (GMDC) to Ahmedabad on its own. In fact, it had entrusted this work to M/s. Roopal Roadways. The payment of freight received by the each truck driver individually has in fact, been received by them on behalf of M/s/.Roopal Roadways. Thus, each truck driver had accepted such payments as an agent of M/s. Roopal Roadways. This is as per the prevailing practice that on ‘To Pay’ basis freight the payment is received by the tuck drivers on behalf of the transport contractor. The assessee is least concerned for and about the mutual understanding and agreement between the truck drivers and M/s. Roopal Roadways. The entire payment made therefore is proved to have been made to M/s. Roopal Roadways and the same exceeds the limit of Rs.50,000/-. As per the provisions of section 194-C of the I.T. Act, it was obligatory on the part of the assessee to deduct tax at source at the time of such payment. But it has failed to deduct tax at source and the payments were made in violation of the provisions of Chapter XVII-B of the I.T Act. Therefore, as per the provisions of section 40(a)(ia), the amount of Rs.89,68,871/- is not deductible in computing the income chargeable under the head ’profits and gains of business and profession’.

Accordingly, dis allowance of Rs.89,68,871/- is made u/s.40(a)(ia) of the IT Act.”

4. Aggrieved by this order of Assessing Officer assessee went in appeal before first appellate authority. Before Ld. CIT(A) assessee filed written submissions which were summarized by Ld. CIT(A) as under:-

“The Appellant was to lift the lignite, as per the orders from the customers on hand, from the mines situated at Pandhro and owned by Gujarat Minerals Development Corporation.

The Appellant is based at Ahmedabad. The Appellant is supplying lignite to its customers situated in and around Ahmedabad and also to the customers situated at Vapi as per the orders received from various customers. The goods were transported to Ahmedabad base customers and Vapi based customers as under:-

(a) Supply of lignite customers situated in or around Ahmedabad.

M/s. Rupal Roadways arranged the trucks for the Appellant to pick up the lignite from the mines and deliver it to the customers of Appellant situated in and around Ahmedabad as per the instructions of the Appellant. Under this arrangement the Appellant was to pay freight to the truck owners/drivers directly. No freight was ever paid to M/s. Rupal Roadways.

The Appellant has not deducted tax at source from the payments made to truck owners/drivers directly as the payment did not exceed Rs.20,000/- at once or Rs.50,000/- in a year to a single truck owner/driver. This arrangement was made as the Appellant is based at Ahmedabad and is having its office in Ahmedabad and can arrange for the payment of freight directly to the truck owners/drivers without intervention of the third party. This would mean that the Appellant has cut down the margin of the third party and thereby returned a higher income.

(b) Supply of lignite to customers situated at Vapi

The Appellant is also supplying lignite to its customers situated at Vapi. For timely payment to truck drivers/owners the Appellant had no other alternative but to ask M/s Rupal Roadways to make the payment of freight and bill the same to the Appellant. The Appellant has deducted tax at source at the appropriate rate from the payments made to M/s. Rupal Roadways.

This arrangement was done to cut down the delay in payment of freight and assure the continuous supply of lignite to the customers situated at Vapi. The bills raised by Rupal Roadways for the supply of lignite to customers situated at Vapi have been filed as paper book pages 1 to 7. The basis vouchers for the supply of lignite to Ahmedabad customers have been attached to assessment order as pages 12 to 33.

• The copy of freight & octroi expenses of Rs.89,68,871/- has been once again placed on record vide paper book page: 8 to 75.

• The truck-wise/trip-wise analysis of the freight & octroi expenses has been placed on record vide paper book pages: 76 to 108 to demonstrate that each payment is below Rs.20,000/- addition aggregate payment to a single truck owner/driver in a year is below Rs.50,000/-

• The Appellant heavily relied on Circular 715 dt.8-8-1995 issued by CBDT more particularly answer to Q.6 and Q.9 and stated that each Gr is a separate contract in the absence of any specific contract written or oral with Rupal Roadways as regards quantity period addition rate.

• Also, the Appellant reiterated the complete modus operandi of its business as under:-

(i) Receipt of order for lignite by the Appellant from its Ahmedabad based customer.

(ii) The Appellant will have to take out demand draft in favor of Gujarat Mineral Development Corporation for the required quantity of lignite.

(iii) M/s Rupal Roadways will arrange for the truck so that the lignite can be transported to the customer of the Appellant situated in and around Ahmedabad.

(iv) The Appellant made the payment of freight and octroi directly to the truck owner/driver after arrival of lignite at the godown of the customer.

(v) There is no agreement either oral or written between the Appellant and Rupal Roadways.

(vi) The freight paid by the Appellant directly to the truck owner/driver was as per the prevailing market rate.

(vii) The payment to truck driver/owner qua each trip was less than Rs.20,000/- and also less than Rs.50,000/- qua aggregate payment to one individual truck owner/driver in a financial year.

(viii) Each GR, thus, is a separate contract as envisaged in answer to Q.9 of Circular 715 dt 8-8-1995 issued by the CBDT.

• The certificate issued by Rupal Roadways is placed on record as paper book page 109 wherein it has been confirmed by the proprietor of Rupal Roadways did not received any payment from the Appellant towards freight. Also, it has been confirmed that Rupal Roadways only arranged the trucks for the Appellant so that lignite can be transported to the Ahmedabad based customers of the Appellant.”

The assessee also placed reliance on the following case laws:-

1) CIT v. United Rice Land Ltd. 217 CTR 332 ( P & H)

2) ITO v. Bhoruka Road lines Ltd. 115 TTJ 383 (Mum)

3) City Transport Corporation v. ITO 13 SOT 479 (Mum)

5. After taking into consideration the submission of assessee and the case laws relied by him Ld.CIT(A) deleted this addition by observing as under:-

“The Circular No.715 dt 8-8-1995 issued by the CBDT also states that the at source has to be deducted from the payments made to clearing and forwarding agents for carriage of goods if the payments are made under contract (Ans. To Q6). The said circular also clarifies that each GR can be said to be a separate contract, if the goods are transported at one time. If the goods are transported continuously pursuance of a contract for a specific period or quantity, each GR will not be a separate contract and all GRs relating to that period or quantity will be aggregated for the purposes of TDS (Ans. To Q9). In the instant case, there is no continuous contract, oral or written between the Appellant and Rupal Roadways as regards quantity period and rate. Hence each GR is a separate contract. As clarified by the learned Authorized Representative of the appellant, the payment for each trip is less than Rs.20,000/- and the aggregate payment in a year to a single truck owner/driver is less than Rs.50,000/-. Hence the provisions of section 194C(3) are not applicable in this case.

Consequently, the section 40(a)(ia) will also not come into play. The presumption of the AO that there is an open and continuous contract between he Appellant and Rupal Roadways is contrary to the facts. The case laws relied upon by the Appellant supports the contention of the Appellant. In view of this, I hold that the dis allowance and addition made by the Assessing Officer of Rs.89,68,871/- as freight and octroi expenses is not justified. The same is hereby deleted.

6. Since the finding of Ld. CIT(A) that there was no oral or written contract with the assessee and the Roopal Roadways which is confirmed by the clarificatory certificate issued by Roopal Roadways, was not disputed by the Revenue at the time of hearing before us, we find no infirmity in the order passed by Ld. CIT(A) holding that provision of section 194C(3) of the Act are not applicable in this case and consequently no addition u/s 40(a)(ia) can be made. The order passed by Ld. CIT(A) is therefore hereby upheld. This ground of Revenue’s appeal is dismissed.

7. In the result, Revenue’s appeal is dismissed.