Case Law Details

Case Name : Commissioner of Income Tax Vs Valibhai Khanbhai Mankad (Gujarat High Court at Ahmedabad)
Appeal Number : Tax Appeal No. 1182 of 2011
Date of Judgement/Order : 01/10/2012
Related Assessment Year :
Courts : All High Courts (4158) Gujarat High Court (351)

In our view, therefore, once the conditions of further proviso of section 194C(3) are satisfied, the liability of the payee to deduct tax at source would cease. The requirement of such payee to furnish details to the income tax authority in the prescribed form within prescribed time would arise later and any infraction in such a requirement would not make the requirement of deduction at source applicable under sub-section (2) of section 1 94C of the Act. In our view, therefore, the Tribunal was perfectly justified in taking the view in the impugned judgment. It may be that failure to comply such requirement by the payee may result into some other adverse consequences if so provided under the Act. However, fulfillment of such requirement cannot be linked to the declaration of tax at source. Any such failure therefore cannot be visualized by adverse consequences provided under section 40(a)(ia) of the Act.

When on the basis of the record it is not disputed that the requirements of further proviso were fulfilled, the assessee was not required to make any deduction at source on the payments made to the sub-contractors. If that be our conclusion, application of section 40(a)(ia) would not arise since, as already noticed, section 40(a)(ia) would apply when there is a requirement of deduction of tax at source and such requirement is either not fulfilled or having deducted tax at source is not deposited within prescribed time.

With respect to the Tribunal’s earlier judgment in case of M/s. Shree Pramukh Transport Co. Ltd., neither side could throw any light whether the Revenue had carried the same in appeal or not. However, we have examined the question independently and come to our own conclusion recorded herein above.

HIGH COURT OF GUJARAT AT AHMEDABAD

TAX APPEAL No. 1182 of 2011

COMMISSIONER OF INCOME TAX

Versus

VALIBHAI KHANBHAI MANKAD

Date : 01/10/2012

ORAL ORDER

(Per : HONOURABLE MR.JUSTICE AKIL KURESHI)

1)     Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal (hereinafter to be referred to as “the Tribunal”) dated 29th April 2011. Following question has been presented for our consideration:-

“Whether the Appellate Tribunal is right in law and on facts in deleting the addition of Rs.7,91,02,011/- made under section 40(a)(ia)?”

2)  For the assessment year 2006-07, above question arises in the following factual background:-

2.1) The respondent-assessee is engaged in the transport business. He also had other source of income, with which, we are not concerned. During the year under consideration, the assessee made payments of Rs. 11,21,09,788/- to sub contractors-transporters. On such payments, the assessee had not deducted tax at source (hereinafter to be referred to as “TDS”) for a sum of Rs.3,27,75,595/- on the ground that such payments were made to individual transporters, which did not exceed Rs.20,000/- at a time and Rs.50,000/- in the aggregate during the year. He had also not deducted tax at source for payment of Rs.7,91,02,01 1/- on the ground that from the transporters, receiving such payments, form No.15I was obtained and, therefore, no TDS was required to be deducted.

2.2) We are concerned with the payment of Rs.7,91,02,01 1/-. The Assessing Officer disallowed such expenditure under section 40(a)(ia) of the Income Tax Act, 1961 (hereinafter to be referred to as “the Act”) on the ground that the assessee had not furnished form No.1 5J before 30th June 2006 as required under Rule 29D of the Income Tax Rules, 1962 (hereinafter to be referred to as “the Rules”).

2.3) The assessee carried the matter in appeal. Before CIT (Appeals), he did produce the requisite form No.1 5J. The Appellate Authority, however, did not accept the assessee’s appeal, upon which, the assessee approached the Tribunal. The Tribunal, by the impugned judgment, reversed the view of the Revenue authorities and held that disallowance under section 40(a)(ia) of the Act was not justified. The Tribunal relied on its earlier decision in the case of M/s. Shree Pramukh Transport Co. Ltd.. The Tribunal also gave its own independent findings and conclusions. The Tribunal was of the view that the requirement of furnishing form No.1 5J was not related to the liability to deduct tax at source. Any infraction of such requirement would not result into disallowance under section 40(a)(ia) of the Act. It is this view of the Tribunal, which the Revenue has challenged before us in the present tax appeal.

3) We have heard the learned counsel for the Revenue as well as for the assessee. Section 1 94C of the Act, as is well known, pertains to payments to contractors. Sub-section (1) of section 194C, as it stood at the relevant time, required that any person responsible for paying any sum to any resident, contractor for carrying out any work in pursuance of a contract between the contractor and the specified entities, shall credit specified sum as income tax on income comprised therein. Likewise, sub-section (2) of section 1 94C required a person responsible for paying any sum to resident-sub-contractor to deduct tax at source under given circumstances. It is not in dispute that ordinarily the assessee was required to make such deduction on the payments made to the sub-contractors, unless he was covered under the exclusion clause contained in sub-section (3) of section 1 94C of the Act. Such provision, as it stood at the relevant time, read as under:-

“Section 194C(3):- No deduction shall be made under sub-section(1) or sub-section (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 sub-contractor, 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 (1) or, as the case may be, sub-section (2) shall be liable to deduct income-tax under this section:

Provided further that no deduction shall be made under sub-section (2), from the amount of any sum credited or paid or likely to be credited or paid during the previous year to the account of the sub-contractor during the course of business of plying, hiring or leasing goods carriages, on production of a declaration to the person concerned paying or crediting such sum, in the prescribed form and verified in the prescribed manner and within such time as may be prescribed, if such sub-contractor is an individual who has not owned more than two goods carriages at any time during the previous year:

Provided also that the person responsible for paying any sum as aforesaid to the sub-contractor referred to in the second proviso shall furnish to the prescribed income-tax authority or the person authorised by it such particulars as may be prescribed in such form and within such time as may be prescribed; or

(ii)any sum credited or paid before the 1st day of June, 1972; or

(iii)any sum credited or paid before the 1st day of June, 1973, in pursuance of a contract between the contractor and a co-operative society or in pursuance of a contract between such contractor and the sub-contractor in relation to any work (including supply of labour for carrying out any work) undertaken by the contractor for the co-operative society.

Explanation-For the purpose of clause(i), “goods carriage” shall have the same meaning as in the Explanation to sub-section (7) of section 44AE.”

4) Section 40(a)(ia) of the Act, in turn, provides that certain amounts shall not be deducted in computing the income chargeable to tax under the head ‘profits and gains of business or profession’, namely, payments made towards interest, commission or brokerage etc., on which tax is deductible at source and such tax has not been deducted or, after deduction, the same has not been paid on or before the due date specified in sub-section (1) of section 139 of the Act. Section 40(a)(ia) of the Act, insofar as it is relevant for our purpose, reads as under:-

Section 40(a)(ia):- Any interest, commission or brokerage, [rent, royalty,] fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labor for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, [has not been paid on or before the due date specified in sub-section (1) of section 139:]”

5)  From the above statutory provisions, it can be seen that under section 40(a)(ia) of the Act, payments made towards interest, commission or brokerage etc. would be excluded for deduction in computing the income chargeable under the head ‘profits and gains of business or profession’, where though tax was required to be deducted at source, is not deducted or where after such deduction, the same has not been paid on or before the due date. Thus for application of section 40(a)(ia) of the Act, the foremost requirement would be of tax deduction at source.

6)  Section 1 94C, as already noticed, makes provision where for certain payments, liability of the payee to deduct tax at source arises. Therefore, if there is any breach of such requirement, question of applicability of section 40(a)(ia) would arise. Despite such circumstances existing, sub-section (3) makes exclusion in cases where such liability would not arise. We are concerned with the further proviso to sub-section (3), which provides that no deduction under sub-section (2) shall be made from the amount of any sum credited or paid or likely to be credited or paid to the sub-contractor during the course of business of plying, hiring or leasing goods carriages, on production of a declaration to the person concerned paying or crediting such sum in the prescribed form and verified it in the prescribed manner within the time as may be prescribed, if such sub-contractor is an individual who has not owned more than two goods carriages at any time during the previous year.

7)  The exclusion provided in sub-section (3) of section 194C from the liability to deduct tax at source under sub-section (2) would thus be complete the moment the requirements contained therein are satisfied. Such requirements, principally, are that the sub-contractor, recipient of the payment produces a necessary declaration in the prescribed format and further that such sub-contractor does not own more than two goods carriages during the entire previous year. The moment, such requirements are fulfilled, the liability of the assessee to deduct tax on the payments made or to be made to such sub-contractors would cease. In fact he would have no authority to make any such deduction.

8)  The later portion of sub-section (3) which follow the further proviso is a requirement which would arise at a much later point of time. Such requirement is that the person responsible for paying such sum to the sub-contractor has to furnish such particulars as prescribed. We may notice that under Rule 29D of the Rules, such declaration has to be made by the end of June of the next accounting year in question.

9) In our view, therefore, once the conditions of further proviso of section 194C(3) are satisfied, the liability of the payee to deduct tax at source would cease. The requirement of such payee to furnish details to the income tax authority in the prescribed form within prescribed time would arise later and any infraction in such a requirement would not make the requirement of deduction at source applicable under sub-section (2) of section 1 94C of the Act. In our view, therefore, the Tribunal was perfectly justified in taking the view in the impugned judgment. It may be that failure to comply such requirement by the payee may result into some other adverse consequences if so provided under the Act. However, fulfillment of such requirement cannot be linked to the declaration of tax at source. Any such failure therefore cannot be visualized by adverse consequences provided under section 40(a)(ia) of the Act.

10)   When on the basis of the record it is not disputed that the requirements of further proviso were fulfilled, the assessee was not required to make any deduction at source on the payments made to the sub-contractors. If that be our conclusion, application of section 40(a)(ia) would not arise since, as already noticed, section 40(a)(ia) would apply when there is a requirement of deduction of tax at source and such requirement is either not fulfilled or having deducted tax at source is not deposited within prescribed time.

11)With respect to the Tribunal’s earlier judgment in case of M/s. Shree Pramukh Transport Co. Ltd., neither side could throw any light whether the Revenue had carried the same in appeal or not. However, we have examined the question independently and come to our own conclusion recorded herein above.

12) In the result, tax appeal is dismissed.

Also Read ITAT Judgment in this case at the link given below :-

Section 40 (a) (ia) applies even in respect of amount paid & not merely payable to contractors

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