Mythri Transport Vs. ACIT (ITAT Visakhapatnam)

Whether the vehicles hired by the assessee in execution of the transport contract can be termed as a “Sub-contract” and consequently the assessee is liable to deduct tax from the payment made for such vehicles u/s 194C (2) of the Act the assessee is not liable to deduct tax at source, as per the provisions of section 194C(2), on the payments made to the lorry owners for lorry hire. Consequently, the provisions of section 40(a)(ia) shall not apply to such payments.

IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM

BEFORE: SHRI D. MANMOHAN, VICE PRESIDENT

AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER

I.T.A. No. 183/Vizag/2008
Assessment Year: 2005- 2006

Appellant By: Shri C. Subrahmanyam
Respondent By: Shri V. Naga Prasad

Date of Judgment: 9^th January, 2009

O   R   D   E   R

Per Shri D.MANMOHAN, VICE PRESIDENT:

This appeal, filed at the instance of the assessee firm, is directed against the order date 6.2.2008 passed by the Commissioner of Income Tax (Appeals)- I, Visakhapatnam, and it pertains to the assessment year 2005- 2006.

2. Applicability of provisions of Section 40(a)(ia) r.w.s. 194C(2) of the. Income Tax Act, 1961 on payments made to persons from whom vehicles were hired, is the subject-matter of dispute in this appeal.

3. The assessee is a transport contractor. It entered into an agreement with parties whereby the assessee undertook to transport bitumen from the principals to various points as per their directions. For carrying out the contract business so obtained, the assessee claims to have not maintained sufficient number of tank lorries and therefore engaged the lorries belonging to various people apart from using their own tank lorries. The bills raised by the assessee with the principals contained details such as lorry number, tonnage of the product transported, the distance covered and the rate per tonne per running kilometre. According to the assessee, the amount received from the principals referable to the transport made on its own lorries falls within the category of gross receipts and the amount received on the bills raised by the assessee in connection with the lorries engaged by the assessee by hiring it from outsiders cannot be treated as its receipt since the assessee is entitled to only commission from such receipts. The assessee, therefore, prepared the trading and profit and loss account wherein it has shown the amount received on the lorries owned by the assessee and the commission received from the truck-owners whose lorries were hired by the assessee. In the profit and loss account filed along with the return, the assessee credited a sum of Rs.32,31,509/- towards freight receipt which comprises of receipts pertaining to own lorries, i.e., Rs.17,14,696/- and commission of Rs.15,16,813/-. During the course of scrutiny proceedings, the Assessing Officer noticed from the Tax audit report in Form 3CD that the gross turnover of the assessee on account of freight receipts was Rs.1,38,41,187/-. Since there is variation between the turnover declared in the profit and loss account and the gross turnover reported in Tax audit report, the assessee was called upon to explain the reasons as to why the entire gross receipts have not been credited to the profit and loss account. The case of the assessee was that it had engaged lorries belonging to other persons as an agent, apart from using its own lorries and on the hired lorries the assessee raised bills of Rs. 1,21,52,612/- which was earned by other parties, the assessee was entitled to only commission and the same having been declared in-the profit and loss account, there is no need for claiming any deduction separately in the profit and loss account towards payment made to the third parties and the method followed by the assessee is not contrary to the standard method of accounting.

4. The Assessing officer noticed that the principals have deducted tax at source on the bills raised by the assessee for the freight charges including the freight charges relatable to the hired Lorries. Hence the Assessing Officer was of the view that the assessee having raised the bills against the supplies to the principals and received the amount after deducting tax at source, it is for the assessee to declare the entire gross turnover in its books of account and any payment made to the third parties has to be treated as payment made to sub-contractors and such payment has to be debited to the profit and loss account In which event, the profit and loss account requires to be recast-ed and in the event of non-deduction of tax at source on the payment made to those sub-contractors as per the provisions of section 194C(2), provisions of Section 40(a)(ia) of the Act comes into play whereby the payments made to sub-contractors cannot be allowed as deduction. Accordingly, the assessing officer determined the amount that attracts dis allowance u/s 40(a)(ia) at Rs.92,32,174/- and disallowed the same.

5. Aggrieved, the assessee contended before the learned CIT(A) that the observations of the Assessing Officer that the assessee should have shown its entire contract receipts in the profit and loss account and debit the payments made to various lorry owners from whom lorries were hired by the appellant as expenses is totally unwarranted as there is no specific mandatory requirement to draw the profit & loss account in a specified manner. It was further submitted that there is a subtle difference in the interest of the assessee between the plying receipts attributable to its own vehicles and the plying receipts attributable to the vehicles belonging to others; it has no interest in the profit or loss in respect of the plying receipts belonging to the others’ vehicles, inasmuch as its interest terminates with the incidental commission. The assessee relied upon various case-law in support of its contention that in such cases only commission has to be treated as the turnover and the Assessing Officer is not entitled to recast the profit and loss account by including the receipts on behalf of the hired lorries and then to assume that the payments made to hired lorries ought to have been debited to the profit and loss account which in turn would be hit by Section 40 of the Act in the event of deduction of tax at source.

5.1 Ld CIT(A), by placing his reliance on the decision of Honourable Supreme Court in the case of CIT V British Paints India Ltd. (188 ITR 44), held that it is the duty of the assessing officer to consider whether or not the books of account disclose true state of accounts and correct income. In the instant case, since the assessee has not routed through the profit and loss account, the entire freight receipts as well as the payment made for vehicles hired, the assessing officer is justified in recasting the profit and loss account of the assessee by crediting the entire contract receipts and correspondingly debiting the payments made to vehicle owners from whom vehicles were hired.

5.2. The assessee also contended before Ld CIT(A) that the provisions of section 40 would be attracted only if an expenditure is debited to the Profit and Loss account and in the instant case, the payments made for hired lorries have since not been debited to the profit and loss account, section 40 would not apply. Ld CIT(A) rejected this contention of the assessee by placing reliance on the decision of Honourable Apex court in the case of Chowringhee Sales Bureau Pvt. Ltd. Vs CIT reported in 87 ITR 542, wherein it was held that the mode of book entries cannot change the nature of a receipt. Accordingly Ld CIT(A) rejected this contention of the assessee.

5.3 The assessee also contended before Ld CIT(A) that u/s 199(1) only the income is required to be disclosed and not the gross receipts and since it has disclosed the income component, viz., commission income, from out of the contract receipts received on lorries hired, there is no contravention of any of the provisions of the Act. This contention was also rejected by Ld CIT(A) on the ground that the TDS u/s 194C has to be deducted on the sub-contract payments.

5.4 The assessee also contended before Ld CIT(A) that the provisions of section 40(a)(ia) would be attracted only to those amounts which remain “payable” at the year end and therefore the amount already paid is outside the scope of section 40(a)(la). This was also rejected by Ld CIT(A) on the ground that section 40(a)(ia) has to be read along with section 194C of the Act.

5.5 The last contention of the assessee before ld C!T(A) was that the payments made for hired lorries cannot be said to be contractual payments and hence section 194C will not apply to such payments. It was also rejected by Ld CIT(A). While arriving at the decision, Ld CIT(A) noticed the decision of Honourable Himachal Pradesh High court in the case of ITO V Rama Nand & Co (163 ITR 702) wherein Honourable High Court has understood the meaning of the word ‘sub-contractor’ as under:-

“A ‘sub-contractor’ would mean any person who enters into a contract with the contractor for carrying out or for the supply of labour for carrying out the whole or part of the work undertaken by the contractor under a contract with any of the authorities named above or for the supply in terms of his contract with any of the aforesaid authorities”.

Finally Ld CIT(A) dismissed the appeal of the assessee with following observations:-

“Against the above back ground if the appellant’s case is examined, it is noticed that no doubt the appellant participated in the tender process and negotiated in order to get the transportation contracts from different contractees. However, for executing the said contract works within the stipulated time limits the appellant didn’t have adequate numbers of tank lorries. Consequently, the appellant approached some of the other tank lorry owners for hiring their tank lorries for the purposes of the execution of the contract. The tank lorries taken on hire were utilised for the purposes of the business of the execution of the contract during the entire contract period. The tank lorry owners from whom they were hired were paid the amounts after the receipt of the bills from the contractees by the appellant after retaining his share of profit which is termed as commission. Therefore, these tank lorry owners enabled the appellant to execute the contract work. Hence, the same is clearly in the nature of a sub-contract within the meaning of the said work as stated earlier and any payment made to such tank lorry owners comes within the purview of section 194C. By not deducting tax on such payments made to the tank lorry owners the appellant violated the provisions contained in section 40(a)(ia).”

6. The Ld counsel for the assessee advanced his arguments before us on the following lines, viz.,

a) The tanker lorries used for the purpose of transportation of Bitumen are specially designed lorries with heating arrangements. The assessee is under obligation to deploy sufficient number of lorries to ensure uninterrupted supply. Hence it has to engage lorries on hire to meet its requirements.

b) The provisions of section 194C(2) are attracted only if any payment is made to a subcontractor in pursuance of a contract with him for carrying out the whole or any part of the work undertaken by the contractor, In the instant case, the assessee has only hired the vehicles from other persons who have simply left the vehicles at the disposal of the assessee. The assessee alone has carried out the entire contract work. None of the vehicle owners have involved themselves in execution of the contract and in any case, the assessee has not entered into any contract with them to carry out any part of the contract work undertaken by it. Reliance was placed in this connection upon the decision of Pune bench of Honourable ITAT in the case of Datta Digamber Sahakari Kamgar Sastha Ltd V ACIT reported in (2002) 83 ITO 148. In that case, the tanker owners had entrusted their tankers to the assessee- society and it was the assessee society which undertook all the work relating to the execution of the transport contract. On consideration of these facts, the Honourable tribunal held that there was no subcontract between the assessee society and the tanker owners.

c) In so far as the Lorries hired by the assessee are concerned, the assessee has acted only as an agent. Hence the freight receipts pertaining to these lorries cannot be taken as the income of the assessee, as it is a case of diversion of income by over riding title. The assessee is entitled to a commission from the lorry owners and such commission income has been duly accounted for. In view of the above, there is no liability to deduct tax on the payments made for hired Lorries. Also there is no necessity that the receipts pertaining to these hired lorries have to be routed through the Profit and Loss account. Reliance was placed on the following decisions:

i) Paras Transport Co. Vs ITO 92 TTJ (Agra) 607

ii) ITO v Bindra Bank Bansilal (2001) 78 ITO 228 (Amristsar)

d) Section 40(a)(ia) uses the word “payable” in contrast to the words “credited or paid” which were originally available in the relevant Finance Bill. Hence section 40(a)(ia), if applicable, is attracted only to that amount which remains payable at the year end. In the instant case, the outstanding amount at the year end is only Rs. 16.63 lakhs. The dictionary meaning of the work “Payable” is ‘Must be paid’. The Honourable Bombay High Court in the case of Abdulgafar A Nadiadwala V ACIT(2004) 267 ITR 488 has held that in the absence of there being anything contrary to the context, the language of a statute should be interpreted according to the plain dictionary meaning of the terms used therein. While interpreting the taxing statutes, there is no scope for importing into the statute words which are not there as held by Honourable Apex court in the case of Smt. Tarulata Shyam & Ors. V CIT(1977) 108 TTR 345. In any case, it is a well settled principle that if two alternate views are possible, the view in favour of the assessee has to be adopted.

e) All the vehicle owners, except one, have already filed their respective income tax returns. The Honourable Supreme Court in the case of Hindustan Coca Cola Beverage (P) Ltd. V CIT (2007) 293 ITR 226 has held that if the tax has already been paid by recipient of income, the tax could not be recovered once again from the deductor-assessee. The department has not initiated any proceeding u{s 201 or 221 of the Act in the hands of the assessee.

f) TDS is only one mode of recovery of the tax due. According to section 191 of the Act, if in any case income tax has not been deducted in accordance with the provisions of chapter XVII, income tax shall be payable by the assessee direct.

g) According to CBDT circular no. 715 dated 08-08-19951 each ‘Goods Receipt’ has to be treated as a separate contract. Applicability of this instruction has not been considered during assessment proceedings.

7. The submissions of Ld DR are that:

(a) Most of the Lorries engaged by the assessee on hire are owned by the family members of the partners of the firm and substantial amount was diverted to these persons.

(b) The principal company has deducted TDS on the Gross contract amount paid to the assessee, i.e. including the amount pertaining to the hired Lorries. Hence the payment made for hired Lorries can partake the character of sub-contract payment only and hence such payments are liable for deduction of tax at source u/s 194C(2).

(c) There is no agreement to suggest that the assessee has hired the Lorries on commission basis. There is no consistent rate with regard to the commission retained by the assessee. The commission on the iorries hired from outsiders works out to 29%, whereas the commission retained from the vehicles pertaining to the family members of the partners is very less, which only suggests that the authority to decide the percentage of commission vests with the assessee. Hence it is a case of application of income and not diversion of income by overriding title as claimed by the assessee.

(d) In order to bypass the provisions of tax deduction at source, the assessee has not routed the receipts pertaining to the hired lorries and the corresponding payments through the Profit and loss account.

(e) The usage of word ‘payable’ in the section does not make any difference since the word is akin to the word ‘credited’ which was available in the Finance bill. There is no basis to assume that the word ‘payable’ would mean the amount outstanding at the year end.

(f) If the payment made for hired lorries cannot be taken as sub-contract paymentsl such payments are liable for tax deduction at source u/s 194- I of the Act.

8. We have heard the rival contentions and perused the record. The issue before us may be decided if we answer following question.

“Whether the vehicles hired by the assessee in execution of the transport contract can be termed as a “Sub-contract” and consequently the assessee is liable to deduct tax from the payment made for such vehicles u/s 194C(2) of the Act?”

In the instant easel the assessing officer has invoked the provisions of section 40(a)(ia) to disallow the payments made for hired lorries as according to him’ such payments represent payment to ‘sub-contractors’ liable for tax deduction at source u/s 194C(2) of the Act and the assessee has failed to deduct TDS 194C(2). Section 194C(2) of the Act’ which is relevant in this context’ reads as under:

“Any person (being a contractor and not being an individual or a Hindu Undivided family) responsible for paying any sum to any resident (hereafter in the section referred to as the sub-contractor] in pursuance of a contract with the sub-contractor for carrying out” or for the supply of labour for carrying out’ the whole or any part of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor has undertaken to supply shall, at the time of credit of such sum to the account of the sub-contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income tax on income comprised therein.”

8.1 According to our understanding, Section 194C(2) is attracted if all the following conditions are satisfied.

a) The assessee should be a contractor.

b) The assessee, in his capacity as a contractor, should enter into a contract with a sub contractor for carrying out the whole or any part of the work undertaken by the contractor.

c) The sub- contractor should carry out the whole or any part of the work; undertaken by the contractor.

d) Payment should be made for carrying out the whole or any part of the

 8.2 As stated earlierl the assessee herein is a transport contractor and has entered into an agreement with parties whereby the assessee undertook to transport bitumen to various points as per their directions. According to the assessee, the Lorries used for the said purpose are specially designed with proper heating arrangements. The claim of the assessee is that since it did not have required number of Lorries, it had to hire Lorries from others who simply placed the vehicles at the disposal of the assessee. The assessee alone, under its control and supervision, has executed whole of the contract. According to the assessee, the individual lorry owners have not carried out any part of the work undertaken by the assessee.

8.3.(1) The following are the basis of the assessing officer to come to the conclusion that the payment made for hired lorries is a sub-contract payment, liable for tax deduction at source u/s 194C(2) of the Act.

(a) The assessee has entered into a contract with the parties and all payments are made to the assessee only.

(b) The assessee is claiming the total TDS credit for the gross receipt where TDS was deducted.

(c) The lorry owners are in no way connected with the party who gives work to the assessee. As the assessee could not manage the work with its own lorries, it took on hire lorries belonging to others on subcontract, to carry out its contract work, for which payment is made by the assessee. There is no contact or relationship of any kind between the client (principal company) and the subcontractor.

(II) Ld CIT(A) has confirmed the order of the Assessing officer with following reasoning.

(a)  The tanker Lorries taken on hire were utilized for the purposes of the business of the execution of the contract during the entire contract period.

(b) The tanker lorry owners were paid only after receipt of the bills from the contractees, after retaining the commission.

(c)        The tanker lorry owners enabled the appellant to execute the contract work.

8.4 The assessee has placed a copy of work order dated 12th February, 2005 issued by a company named “RBM-Pati Joint Venture”. We have gone through the said work order and notice the following points.

(a) The scope of work includes loading of Bitumen 60/70 at Vizag, transportation and delivering at RBMP camp site at km 56 and km 35 on NH6. As such three types of work are included in the scope of work.

(b) Tanker lorry shall have proper heating arrangement. The company reserves the right to arrange any other means of transportation in case of non-placement/delay in placement of lorry. Any extra payment made for execution of such work will be recovered from the assessee.

(c) The assessee shall not engage and/or allow its personnel in any fraudulent activity in performing the work order. The company is at liberty to deduct any reasonable amount, if any fraud or cheating is discovered.

(d) The assessee, in any circumstance, should not divulge or make public, in any way, any of the business transactions to other parties.

(e) In the event of any unreasonable delay or if the consignment is not delivered, the company shall be entitled to deduct any sum and/ or the value of consignment from the outstanding bills of the assessee. No claim whatsoever due to idling of labour, equipment, vehicles and any others shall be entertained by the company under any circumstance.

(f) The assessee shall comply with all existing acts, rules, regulations etc. relating to labour, traffic and transport. In case of any liability arising to the company as principal employer due to failure, negligence or/and accident by transporter, the same shall be recoverable from the assessee.

The above stringent clauses suggest that the assessee is solely responsible for all the acts and defaults committed by the assessee and/ or its employees.

8.5 It is not established by the revenue that other lorry owners, from whom the vehicles were hired, have also been fastened with any of the above said liabilities. In a sub-contract, a prudent contractor would include all the liability clauses in the agreement entered into by him with the subcontractor. The assessee has also claimed before the tax authorities that the responsibility in the whole process lies with it only. Though the passing of liability is not the only criteria to decide about the existence of sub-contract, yet this contention of the assessee read with the liability clauses of the work order cited above, supports its submission that the individual vehicle owners are simple hirers of the vehicles.

8.6 As per the provisions of section 194C(2), as explained in para 8.1 supra, the sub-contractor should carry out the whole or any part of the work undertaken by the assessee. The dictionary meaning of the words “Carry out” is ‘to carry into practice’; ‘to execute’; ‘to accomplish’. It signifies a positive involvement in the execution of the whole or any part of the main work by spending his time, money, energy etc and further taking the risks in carrying on the said activity. In the instant case, there is no material to suggest that the other lorry owners involved themselves in carrying out any part of the work undertaken by the assessee by spending their time, energy and by taking the risks associated with the main contract work. In the absence of the above said characteristics attached to a sub-contract in the instant case, the payment made to the lorry owners stands at par with the payments made towards salaries, rent etc. Hence the reasoning of the tax authorities, which is stated in para 8.3 supra, to hold that the payment made for hired vehicles is a subcontract payment, in our opinion, is not correct and not based on relevant considerations. Hence, in our considered opinion, it cannot be said that the payments made for hired vehicles would fall in the category of payment towards a sub-contract with the lorry owners. In that case the assessee is not liable to deduct tax at source, as per the provisions of section 194C(2), on the payments made to the lorry owners for lorry hire. Consequently, the provisions of section 40(a)(ia) shall not apply to such payments.

8.7 As we have decided the issue in favour of the assessee for the reasons stated above, in our opinion, consideration of other contentions of the assessee as well as the revenue is not necessary.

9. In the result, the appeal of the assessee is allowed.

Pronounced accordingly on 9-1-2009.

NF