Prashant H. Shah
Assistant Commissioner of Income-tax
IT APPEAL NO. 17 (AHD.) OF 2011 – ASSESSMENT YEAR 2007-08
Date of Pronouncement – JULY 8, 2011
Mukul Kr. Shrawat, Judicial Member –
This is an appeal at the behest of the Assessee which has emanated from the order of the Learned CIT(Appeals)-II, Surat dated 19/10/2010 passed for Assessment Year 2007-08. Grounds raised are hereby decided as follows:
2. Ground No. 1 reads as under:
1. On the facts and in circumstances of the case as well as law on the subject, the learned Commissioner of Income-tax (Appeals) has erred in confirming the action of Assessing Officer in making disallowance of Rs. 2,86,357/- being 10% out of wages, labour and salary expenses.
2.1. In respect of this ground, ld.AR, Mr.Sapnesh Sheth has expressed not to press this ground, hence dismissed being not pressed.
3. Ground No.2 reads as under:
2. On the facts and in circumstances of the case as well as law on the subject, the learned Commissioner of Income-tax (Appeals) has erred in confirming the action of Assessing Officer in making disallowance of expenditure of Rs. 71,00,339/- u/s. 40(a)(ia) of the I.T. Act.
3.1. Facts in brief as emerged from the corresponding assessment order passed u/s. 143(3) of the IT Act dated 29/12/2009 were that the assessee in his individual capacity is stated to be in the business of civil work as a Proprietor of M/s. Sakhi Construction. About this issue, the AO has found that the assessee has claimed “transportation expenses” of Rs. 71,00,339/-. It was also noted by the AO that on that payment no tax was deducted at source. As per AO, the assessee was required to deduct the TDS as applicable u/s. 194C of the IT Act. According to AO, the assessee himself being a contractor, therefore, got the work done by those parties under an implied contract. Held, the payment was made in contravention of provision of section 40(a)(ia) of the Act, therefore, the amount claimed was disallowed by the AO. The matter was carried before the first appellate authority.
4. Before the first appellate authority, explanation of the assessee was as under:
“2. In the course of appellate proceedings, it is submitted that the assessing officer has erred in making disallowance of transportation expenses under section 40(a)(ia) of the I.T. Act. The assessee is engaged in the construction work of peripheral and approach roads at LNG terminal, Dahej. The assessee has carried on above work pursuant to contract with M/s. ANS Construction Ltd. It is also relevant to mention here that M/s. ANS Construction Ltd. has entered into a contract with M/s. Petronet LNG Ltd., New Delhi for carrying on the above work. It may therefore kindly be appreciated that the work to be carried out by the assessee pertains to construction of peripherals and approach roads. For carrying out the above work the assessee has to make purchases of various construction materials viz. sand, gravels etc. and all these items are required to be brought to the construction site at Dahej. In order to bring the above construction materials to the construction site, the assessee has availed services of various transporters and in respect of such services provided by the transporters the assessee has made payment of transport charges. In respect of the above payment made by the assessee, the provisions of sub-section (2) of section 194C cannot be applied because the payments made by the assessee to various transporters are in the nature of contract work and not in the nature of sub-contract. This is so because in this case assessee is the principal and the transporters are contractors & thus, provision of section 194C(1) of the Act is required to be applied & not section 194C(2) which provides for making deduction of tax from payments made to sub-contractors. Under sub-section (1) of section 194C, individuals are not supposed to make TDS from payments made to contractors till 1-6-2007 & this is also explained in succeeding paras.
3. The assessing officer has rejected the contention of assessee on the ground that assessee himself is a contractor and has got works/services/part of works done from other parties, pursuant to express on implied contract. It therefore appears that assessing officer has made disallowance on the ground that assessee has not made TDS under section 194C(2) from the payment made to transporters by treating them as sub-contractors. However, as explained above the transporters cannot be treated as sub-contractors of assessee and this is more so because the assessee has not sub-contracted the entire construction work of peripherals and approach roads which is supposed to be carried out by him pursuant to contact with M/s. ANS Construction Ltd. In other words, if entire construction work is carried out by engaging other parties in that case the liability of assessee for making TDS under section 194C(2) could arise. However, same is not at all the case as for carrying out the subject work various activities are required to be performed by the assessee and as explained above various construction materials will have to be brought at the construction site for carrying out the subject work and in order to bring said materials, the services of transporters has been availed by assessee. It is worthwhile to mention here that assessee has not entered into any transportation contract with M/s. ANS Ltd. and therefore, payment of transport charges made to various parties does not fall under the head of sub-contract expenses. In view of the same, the provisions of section 194C(2) which provides for making TDS from sub-contract expenses, are not applicable and consequently, the question of making disallowance under section 40(a)(ia) for non-deduction of tax does not arise.
4. Without prejudice to the above, it is further submitted that under section 194C(2), only contractors are required to make TDS from payment made to sub-contractors. In other words, the sub-contractors are not liable to make TDS under section 194C(2) from the payments made by them to the other parties. The word ‘contractor’ is specifically used in sub-section (2) and as such there is no scope of making any other interpretation. Now in the instant case, it is very much clear that assessee is acting as a sub-contractor for carrying out his subject work as the main contractor is M/s. ANS Construction Ltd. who has entered into direct contract with M/s. Petronet LNG Ltd. The assessing officer has also not disputed assessee’s contention that he is acting as a sub-contractor only. Hence, even otherwise also the liability for making TDS under section 194C(2) in case of assessee does not arise. TDS is required to be made only under the authority given by the statute & when no such authority is given by statute to sub-contractors, assessee cannot be held liable to make TDS u/s. 194C(2) of the Act. If the above argument of assessee is not accepted on the ground that assessee becomes the principal by availing services of transporters and payment made to transporters are in the nature of contract, in that case provisions of section 194C(1) are applicable & as per the said provisions applicable for the year under consideration, individuals are not liable to make TDS from payments made to contractors as explained in succeeding para.”
4.1. The ld. CIT(A) was not convinced by the aforementioned explanation. According to ld. CIT(A), the main question was whether the appellant’s case was within section 194C(2) of the Act or not. He has mentioned that sub-section (2) of section 194C applies in a situation where a contractor, i.e. the person executing the work, had entered into a contract with the principle and in pursuance of that contract further enters into a contract with a sub-contractor for carrying out the whole or any part of the work undertaken by him, then he shall make deduction of an amount equal to 1% of such sum at the time of payment in cash. According to him, sub-section applies to individuals, if their sales or turnover exceeds the monitory limit prescribed u/s.44AB of the Act. He has observed that the appellant had entered into a contract with M/s. A.N.S. Construction Ltd. The appellant therefore is a contractor and M/s. A.N.S. Construction Ltd. was the contractee. According to him, M/s. A.N.S. Contruction Ltd. was the sub-contractor of M/s. Petronet LNG Ltd. The ground was dismissed as per the following discussion, relevant portion extracted below.
“5.1……. The Assessing Officer has held that section 194C is applicable. As far as section 194C(1) is concerned, the same is applicable when payment is made from the contractee to the contractor and the appellant being an individual, sub-section (1) of section 194C is not applicable in the A.Y. 2007-08. The question, therefore, is whether in the appellant’s case section 194C(2) is applicable or not. Sub-section (2) of above section applies in a situation where a contractor, i.e., the person executing the work who has entered into a contract with the principal, in pursuance of that contract enters into a contract with a sub-contractor for carrying out or supplying of labour for carrying out, of the whole or any part of the work undertaken by him (contractor), he shall make deduction of an amount equal to 1% of such sum at the time of payment in cash or cheque or draft or any other mode, whichever is earlier. The said sub-section also applies to individuals, when their total sales/gross receipts or turnover from the work of contract which has been sub-contracted exceeds monetary limit prescribed u/s. 44AB of the Act. The Proviso to the above sub-section also makes it clear that where the amount has been credited or paid to the account of sub-contractor then also, the contractor shall be liable to deduct income-tax. Explanation (1) to the above sub-section also defines the word ‘contractor’. The appellant’s submission is that sub-section (2) of section 194C is not applicable to him as only contractors are required to make TDS from payments made to sub-contractors and the sub-contractors are not liable to make TDS u/s. 194C(2) from the payments made by them to the other parties and he is only sub-contractor for carrying out the work of the main contractor, i.e. M/s. ANS Construction Ltd. As seen above, the appellant has entered into contract with M/s. ANS Construction Ltd. Therefore, as far as the appellant is concerned, M/s. ANS Construction Ltd. is the contractee and he is the contractor for M/s. ANS Construction Ltd. and a sub-contractor for M/s. Petronet LNG Ltd., and following the same chain when the appellant has contracted out work he has to execute for M/s. ANS Construction Ltd., he becomes the contractee for the persons to whom he has sub-contracted the work and those people who have carried out work for on behalf of the appellant become the sub-contractor from M/s. ANS Construction Ltd. and sub-sub-contractor for M/s. Petronet LNG Ltd. Section 194C(2) does not stop at the first step of the sub-contractor. On the contrary, it is like a chain reaction and applies to the last sub-contracts of the main contract. Insofar as Explanation (1) defining the expression “contractor” is concerned, it is an inclusive explanation and cannot be interpreted the way appellant has interpreted. Further, it is not in dispute that the appellant’s gross receipts or turnover from the contract exceeds the monetary limit prescribed u/s. 44AB of the Act, and it is also not disputed that the amount of sum credited or paid to the sub-contractor of the appellant does not exceed Rs. 20,000/-. I, therefore, hold that sub-section (2) of section 194C of the Act, is applicable to the facts of the appellant’s case and uphold the addition u/s. 40(a)(ia) of the Act. This ground of appeal is, therefore, dismissed.”
5. From the side of the assessee, ld. AR Mr. Sapnesh Sheth appeared and primarily argued that the provisions of section 194C(1) are applicable only in respect of a contractor and the provisions of section 194C(2) are applicable in respect of sub-contractor. Further he has mentioned that the provisions of section 194C(1), as stood for the year under consideration, did not apply on “individual”. The assessee being an individual was not responsible for deduction of tax at source. Ld. AR has also placed on record the amended provisions of section 194C of the IT Act, which were applicable from 1st June, 2007. He has pleaded that earlier, as per the law applicable for the year consideration of section 194C, there was no liability of an individual to deduct the tax. Later on, by an amendment an individual has also been responsible for TDS if his total sales has exceeded the monitory limits prescribed u/s. 44AB of the I.T. Act. He has referred an agreement executed between M/s. A.N.S. Construction Ltd. and the assessee as a Proprietor of M/s. Sakhi Constructions. In terms of the said agreement dated 30th day of January, 2006 though the assessee is termed as a sub-contractor but by that agreement he was made solely responsible for the job. As per the terms, the assessee was required to execute the job work by deploying his own resources in terms of manpower and machinery. On the basis of above agreement, he has argued that the assessee had not entered into a ‘transportation contract’ with M/s. A.N.S. Construction Ltd. The payment of transport charges to various parties did not fall under the head of “sub-contract expenses”. He has argued that section 194C(2) of the Act are therefore not applicable. In support, he has cited Mythri Transport Corporation v. Asstt. CIT  124 ITD 40 (Visakha), Kavita Chug v. ITO  44 SOT 95 (Kol.) (URO), Chandrakant Thackar v. Asstt. CIT  129 TTJ 1 (Ctk)(URO), CIT v. United Rice Land Ltd.  322 ITR 594/ 174 Taxman 286 (Punj. & Har.) and of R.R. Carrying Corporation v. Asstt. CIT  126 TTJ 240 (Ctk).
6. From the side of the Revenue, Mr. G.S. Souryavanshi appeared and placed reliance on the orders of the authorities below. He has argued that as per the provisions of section 194C(2) any person being a contractor responsible for paying any sum to a sub-contractor in pursuance of a contract with the sub-contractor for carrying out any part of the work undertaking by the contractor is required to deduct an amount equal to 1% as TDS. The assessee has not deducted the tax, therefore, the AO has rightly disallowed the claim. Ld. DR has also argued that the main contract was granted to M/s. Petronet LNG Ltd. and part of which was sub-contracted to M/s. A.N.S. Construction Ltd. and that was further sub-contracted to the assessee. Due to this reason, the question of non-deduction of tax, therefore, fall within the ambits of section 194C(2) of the IT Act, ld. DR has pleaded.
7. We have heard both the sides at some length. We have also perused the material placed before us in the light of the provisions of the Act as also the case law cited. Before we proceed further, we may like to point out that the provisions of section 194C of the Act had undergone certain vital changes in the recent past. The main purpose of introduction of this section in the Act is to make provisions for deduction of tax at source from payments made to contractors and sub-contractors in certain cases. Income tax is deductible at source from income comprised in payments made by the persons specified in this section. As per the original section 194C(1) any person responsible for paying any sum to any contractor for carrying out any work in pursuance of a contract is required to deduct 2% TDS. However, as per section 194C(2), any person being a contractor responsible for paying any sum to any sub-contractor in pursuance of a contract with the sub-contractor for carrying out any work is required to deduct tax @ 1% at the time of payment. Sub-section (2) has later on made a provision according to which an individual or HUF, whose total sales exceeds the monitory limit prescribes u/s.44AB shall be liable to deduct income tax at the time of payment to a sub-contractor. It is further important to mention that vide an amendment with effect from 1-6-2007 an individual or HUF have also been inducted vide sub-clause (k) in section 194C(1) of the IT Act. At this juncture, it is worth to hold that as far as the AY in hand is concerned, i.e. AY 2007-08, this latest amendment of section 194C(1)(k) of the Act being introduced with effect from 1-6-2007 has no applicability. We therefore hold that if the Revenue Department had made an endeavour to invoke the provisions of section 40(a)(ia) for the infringement of the provisions of section 194C of the Act by holding that the assessee being an individual got covered by sub-section (1), then according to us, it was an incorrect application of law. We therefore hold that for the Asstt. Year under consideration 2007-08 the provisions of sub-clause (k) of 194C (1) are not applicable being introduced w.e.f. 1-6-2007 and the assessee being an individual is consequently out of the clutches of this clause.
7.1. On account of the above discussion, the issue confines to the residual sub-section i.e. the applicability of provisions of sub-section (2) of section 194C of the Act. The peculiarity of this case is that a contract was awarded to M/s. Petronet LNG Ltd. New Delhi for construction work of peripheral and approach roads at LNG terminal Dahej. Thereafter, the said contractor had entered into a sub-contract with M/s. A.N.S. Construction Ltd., who in turn, had entered into an another sub-contract with the assessee. The work to be carried out by the assessee, therefore pertained to construction of peripheral approach roads. To carry out the above work, the assessee had to purchase construction material, viz. Sand, gravels, etc. In order to bring the construction material at the construction site at Dahej, the assessee has availed the services of several transporters. The assessee had made payment under the head “transport charges”. The view of the AO was that on payment of “transport charges”, the assessee being a sub-contractor was required to deduct the tax at source as prescribed under sub-section (2) of section 194C of the Act. On the other hand, the assessee’s contention is that although the assessee could be a sub-contractor M/s. A.N.S. Construction Ltd., but vis-à-vis transporters the assessee has not acted as a sub-contractor but only as a contractor. As per assessee’s contention it was a principal to principal arrangement of transportation of goods, so not covered by any of the said contracts. In support of this submission, the assessee has placed reliance on a Board’s Circular No. 715 dated 8-8-1995 [215 ITR (Statute 12)] wherein the changes introduced in the provisions regarding tax deduction at source have been clarified and therein one of the questions was about the payment to transports and the clarification was as under:-
“Question 9: In case of payments to transports, can each GR be said to be a separate contract, even though payments for several GRs are made under one bill?
Answer : Normally, each GR can be said to be a separate contract, if the goods are transported at one time. But if the goods are transported continuously in pursuance of a contract for a specific period of quantity, each GR will not be a separate contract and all GRs relating to that period or quantity will be aggregated for the purpose of the TDS.”
8. In the context of above clarification issued by the CBDT, if we examine the issue in hand, then in terms of the provisions of section 194C(2) of the Act conditions to be satisfied are (i) that the assessee should be a contractor, (ii) that the assessee should enter into a contract with a sub-contractor, (iii) that the sub-contractor should carry out any part of the work undertaken by the contractor and (iv) that the payment should be made for the work done. In a case, when a “contract” is assigned, generally the clauses are stringent that the contractor is to be responsible for all the acts and defaults committed. In the present case as well, when the M/s. A.N.S. Construction Ltd. had granted sub-contract dated 30-1-2006 to M/s. Sakhi Construction,( prop. Appellant) then vide clause (1) the assessee was to deploy his own resources in terms of manpower & machinery. Further vide clause (2) assessee had undertaken the responsibility of any legal or financial liability. The assessee has indemnified the first party, i.e. M/s. A.N.S. Construction Ltd. against any legal or financial liability if arise in future pertaining to the said contract. Assessee was made solely responsible for the execution of the job. These clauses, therefore, suggested that the assessee was wholly and exclusively responsible for the acts as also for the defaults, if committed. On the other hand, the lorry owners or the transporters who had been given “transportation charges” have not been fastened with any of the above liabilities, meaning thereby the transporters were not the part of the said agreement and the assessee had an independent arrangement with them. In other words, peculiarity of this case is that the sub-contract which was assigned to this assessee was not further sub-contracted to the lorry owners. In a sub-contract, a prudent contractor generally include the clauses of liability which were undertaken by him while accepting the execution of the work from the main contractor. We may like to clarify that a condition of passing of the liability cannot exhaustive and cannot be said to be the only criteria to decide whether there was an existence of contract or sub-contract. The catalog of criterion must include certain other clauses as well, yet in this case this criteria can be determinative considering the nature of work assigned by the assessee to transporters. It is not the case of the A.O. that he happened to be in possession of some material to allege that there existed a specific contract between the assessee and the transporters. Whether the goods were transported in pursuance of any sub-contract so as to apply the provisions of section 194C(2)? Nothing has been brought on record. So it was not established that the lorry owners have undertaken any part of the impugned sub-contract which was found to be risk associated videlicet this assessee. We, therefore, conclude that in the absence of transfer or pass-over of any contractual responsibility to transporters as a sub-contractor, the assessee being an individual was not responsible for the deduction of tax at source as prescribed u/s. 194C(2) of the IT Act. Consequence thereupon the provisions of section 40(a)(ia) of the Act were incorrectly invoked, hence the view taken by the authorities below are hereby reversed. Ground is allowed.
9. Ground No. 3 reads as under:
3. On the facts and in circumstances of the case as well as law on the subject, the learned Commissioner of Income-tax (Appeals) has erred in confirming the action of Assessing Officer in making disallowance of Rs. 45,275/- being 20% of telephone expenses and 10% of other expenses.
9.1. It was noticed by the AO that under the head “miscellaneous expenses”, staff welfare expenses, telephone expenses, travelling expenses, etc. a total sum of Rs. 3,87,801/- was debited out of which the AO has made disallowance at 20% amounting to Rs. 77,560/-. When it was contested before the ld. CIT(A), the disallowance in respect of telephone expenses @ 20% was upheld. However, the disallowance in respect of other heads it was restricted to 10%. On hearing the submissions of both the sides and considering the nature of business as also the size of the business, we hereby hold that only 5% disallowance should suffice to cover up the expenditure alleged to be made towards personal use by the assessee. We hold accordingly and direct to give the part relief. This ground is partly allowed.
10. In the result, appeal of the assessee is partly allowed.