IN THE ITAT MUMBAI BENCH ‘D’
Deora Trading Co. V/s. ITO
IT Appeal No. 3487 (Mum.) of 2009
[Assessment year 2005-06]
Date of pronouncement -June 8, 2012
Amit Shukla, Judicial Member
The present appeal has been filed by the assessee against the order dated 13-2-2009, passed by the CIT(A)-XX, Mumbai for the quantum of assessment passed under Section 143(3) for the assessment year 2005-2006 on the following grounds of appeal :-
“1. On the facts and in the circumstances of the appellant’s case and in law, the learned Assessing Officer erred in disallowing expenses aggregating a sum of Rs. 64,52,061/-by invoking provisions of Section 40(a)(ia) of the Income Tax Act, 1961, subsequently in appeal to CIT(A) the expense was partly allowed up to the extent of Rs. 1,35,494/-.
2. On the facts and in the circumstances of the appellant’s case and in law, the learned Assessing Officer erred in disallowing expenses aggregating a sum of Rs. 1,88,152/-by invoking provisions of Section 40A(2)(b) of the Income Tax Act, 1961, subsequently in appeal to CIT(A) the expense was partly allowed upto the extent of Rs. 68,152/-.
3. On the facts and in the circumstances of the appellant’s case and in law, the learned Assessing Officer erred in disallowing expenses aggregating a sum of Rs. 3,60,000/-by invoking provisions of Section 68 of the Income Tax Act, 1961, subsequently in appeal to CIT(A) the ground was allowed”
2. The relevant facts for adjudication of ground No.1 are that the assessee is a partnership firm, engaged in the business of wholesale trading of cloths and manufacturing. During the course of the assessment proceedings, while examining the expenses relating to processing charges, packing charges and service charges, the Assessing Officer noted that the assessee has not deducted the TDS on the payments made to the parties rendering such work. The assessee was thus required to furnish complete details of TDS deducted and paid itemwise for the payment made above Rs. 50,000/- in respect of following payments which were made during the year :-
|(1) Processing Charges||1,19,282|
|(2) Packing Charges||1,35,494|
|(3) Weaving Charges||60,14,842|
|(5) Car hiring charges||1,88,152|
|(6) Service Charges||1,83,443|
2.1 Regarding processing charges and packing charges, it was submitted by the assessee that the bills relating to these charges were below Rs. 20,000/-, hence, TDS is not deducted on these payments. Regarding rent, it was submitted that TDS is not deductible as prescribed limit is of Rs. 1,20,000/-. Regarding Service charges also it was submitted that the aggregate sums were below Rs. 50,000/-. However, with regard to weaving charges, it was submitted that amount of payment of Rs. 57,82,726/-, paid to M/s Santogen Silk Mills Limited, the TDS was not deducted because it was a sick unit. Similarly, on amount of Rs. 1,96,736/- paid to Hiren Textiles Private Limited, no TDS was deducted as there was no contract. The Assessing Officer thus invoked the provisions of Section 40(a)(ia) and disallowed the following expenses :-
|(i) Processing Charges||Rs. 1,19,282/-|
|(ii) Packing Charges||Rs. 1,35,494/-|
|(iii) Weaving Charges||Rs. 60,14,842/-|
|(iv) Service Charges||Rs. 1,82,443/-|
3. Before the CIT(A), it was submitted that TDS was not deducted as there was no contract or agreement between the assessee and the parties specifically for payment made on weaving and processing charges. For the other items, it was submitted that the payment made was less than Rs. 20,000/- on each occasion and in any case it was less than Rs. 50,000/- per person for the entire year. Learned CIT(A) did not agree with the contention of the assessee and held that the payments made by the assessee on account of processing charges, packing charges, weaving charges and service charges debited to the profit loss account were contractual in nature as the assessee is getting necessary work done through these parties as per the various terms and conditions which was followed by the parties engaged by the assessee on day-to-day basis. As per the provisions of Indian Contract Act, it is not necessary that the contract should only be in writing, a verbal contract has the same effect. Accordingly, he confirmed the disallowance under Section 40(a)(ia). However, with regard to packing charges for sum of Rs. 1,35,494/-, he found that payment made on each occasion was less than Rs. 20,000/- and less than Rs. 50,000/- in the entire year and accordingly deleted the addition of Rs. 1,35,494/-.
4. Learned AR on behalf of the assessee submitted before us that one of the major payment of Rs. 57,82,726/- on account of weaving charges was paid to M/s Santogen Silk Mills Limited, which was a sister concern and was incurring heavy losses. Due to such huge losses, the said company was under BIFR and once a company is under BIFR, provision of other laws are not applicable as it has to be governed by the provisions contained in BIFR. Hence, TDS provision under Income Tax Act will not apply in payment made to such companies under BIFR. Further, it was submitted by him that there was no contract between the assessee and the recipient party for the work performed by them. He also relied upon a decision of Hon’ble Supreme Court in the case of Hindustan Coca Cola Beverage (P.) Ltd. v. CIT  163 Taxman 355/293 ITR 226, for the proposition that if the tax has already been paid by the recipient of income, the recovery of tax cannot be made once again from the tax deductor. Since in the present case, the recipient was in huge loss, there was no need to deduct tax as there was no tax liability on that company. Another argument which was placed before us was that the Assessing Officer had not mentioned the section under which the TDS is to be deducted.
5. On the other hand, learned CIT DR submitted that the payment made to a company under BIFR will not preclude the assessee for deducting TDS as there is no law that TDS cannot be deducted from such company. He submitted that the assessee was given plenty of opportunities before the Assessing Officer and the CIT(A), but he could not explain the proper reasons as to why the TDS has not been deducted. He reiterated the findings of the CIT(A) and contended that the contract if not written, there is always an oral contract in such kind of service. Regarding no deduction of TDS due to heavy losses by the company, he submitted that in such a case, the recipient company could have obtained the certificate from the Department for non-deduction of tax which has not been done so in this case.
6. We have carefully considered the rival contentions and also perused the material placed on record. The assessee company was engaged in wholesale trading and manufacturing of cloths and has made huge payments on account of weaving and processing charges to various parties. Such an outsourcing of work amounts to work done in pursuance of a contract, even though it may not be written. There has to be some terms and conditions for processing and weaving of the cloths for doing it in a certain manner and also there has to be some kind of understanding for the quality and design. All these things can be oral also and comes within the purview of “work” done in pursuance of a contract. The basic postulate of a contract is that there should be some kind of risk and responsibility for carrying out any work. Once the assessee is making a payment for weaving and processing charges to any person, such a person has to undertake some kind of risk and responsibility for carrying out the work as per the specification and the order placed by the payee. Once the payment has been made for such kind of a work like processing and weaving, the liability to deduct TDS definitely arises under Section 194C(1), which provides that any person, who is responsible for paying any sum to any recipient, that is contractor, for carrying out any work in pursuance of a contract, at the time of credit of such payment, that person is responsible for deducting TDS as per the rates prescribed therein. In this case, there was definitely a liability upon the assessee to deduct TDS on such payment.
7. Coming to the argument of the learned AR that one of the main recipient M/s Santogen Silk Mills Limited was a sick unit and was under BIFR, therefore, the provisions of Income Tax will not apply, is absolutely erroneous. Learned A.R. has not brought to our notice any such law. On the contrary, there is no such provision under the Income Tax Act to give a different treatment to the companies, who are under BIFR. If the recipient company was running into heavy losses and there is no liability to pay taxes, the best recourse should have been that, the recipient company should have obtained certificate from the Income Tax Department for non-deduction of TDS, which admittedly in this case, has not been done so. We, therefore, reject the contention of the assessee that there was no liability for deducting TDS on payment to M/s Santogen Silk Mills Limited. Accordingly, we hold that the assessee had a definite liability in this case for deducting TDS on account of payment made for processing and weaving charges. However, the assessee’s contentions that with regard to the processing charges and service charges that the payments were less than Rs. 20,000/- on each occasion and did not exceed to Rs. 50,000/- in the year, the same needs verification from the Assessing Officer. Accordingly, the matter relating to processing charges and service charges are sent back to the Assessing Officer to verify as to whether the payment on each occasion was less than Rs. 20,000/- and it did not exceed Rs. 50,000/- in that year. In the result, disallowance on account of weaving charges is confirmed in toto and disallowance with regard to processing charges and service charges is remitted back to the Assessing Officer as per the observations given above.
8. In ground No.2, the assessee has challenged the disallowance of Rs. 1,20,000/- under Section 40(a)(ia) with regard to payment made on car hiring charges. The Assessing Officer had observed that a sum of Rs. 1,88,152/- has been claimed towards motor car expenses, out of which Rs. 68,152/- relates to petrol expenses. Balance sum Rs. 1,20,000/-has been paid to Smt. Geetadevi Deora, one of the partners in lieu of hiring of car. The Assessing Officer had invoked the provision of Section 40A(2)(b) and disallowed the entire sum of Rs. 1,88,152/-including the petrol expenses.
9. Learned CIT(A) held that the provisions of Section 40A(2)(b) are though not applicable, however, the sum of Rs. 1,20,000/- is disallowable on the ground that TDS have not been deducted on hire of the car which is in the nature of contractual payment. He, therefore, invoked the provisions of Section 40(a)(ia) and sustained the addition of Rs. 1,20,000/-. Learned AR reiterated the same submission and submitted that there was no such kind of contract with the partner.
10. After carefully considering the finding of the CIT(A) and the contentions put forth by both the parties, we find that payment of Rs. 1,20,000/- paid towards hiring of cars was within the terms of contract which again comes within the purview of “work in pursuance of a contract” as defined under Section 194(C). Since the payment is above Rs. 50,000/-, the assessee was liable to deduct the TDS. In the result, ground No.2 raised by the assessee is dismissed.
11. In ground No.3, the assessee has challenged the addition of Rs. 3,60,000/- made under Section 68. The Assessing Officer had noted that sum of Rs. 13,44,001/- was deposited in the bank account of the assessee by way of cash. It was explained before the Assessing Officer that all the deposits have been made out of cash withdrawn from the cash book. However, the Assessing Officer found that the following cash entries are not reflected in the cash book :
and accordingly, he added the same as unexplained cash credit under Section 68. Learned CIT(A) too has confirmed the said addition.
12. Learned AR submitted that this amount of cash has been shown as withdrawn on 29-5-2004 from the cash book and was deposited on 8-6-2004. The other sum of Rs. 30,000/- was deposited in the bank account on 14-5-2005 by M/s Omkar International directly into the bank account, which is evident from copy the account of the said party, placed in the paper book. Learned DR relied upon the findings of the CIT(A) and the Assessing Officer.
13. We have carefully considered the submissions of the parties and also perused the findings given in the impugned orders. From the perusal of the record, it is seen that Rs. 3,33,000/- has been withdrawn from the cash book on 29-5-2004 and the same has been deposited in the bank account on 18-6-2004. Thus, there is a direct nexus between the withdrawals from the cash book and the deposits made in the bank account. Similarly, sum of Rs. 30,000/- is also verifiable from the account of M/s Omkar International, which was deposited in the bank account directly. Thus, the sums deposited in the bank account and its source thereof are clearly explainable and the addition made u/s.68 are deleted and the findings of the CIT(A) on this score is set aside.
14. In the result, the appeal filed by the assessee is partly allowed.