No disallowance u/s. 40(a)(ia) where payments made were apparently less than Rs. 20,000 each and to each party less than Rs. 50,000 per year, as per t

Court :Mumbai Bench of the Income-tax Appellate Tribunal

Citation :Vikas Road Carriers Ltd. Vs. ITO [2010-TIOL-417-ITAT-MUM]

Brief :In the case of Vikas Road Carriers Ltd. v. ITO [2010-TIOL-417-ITAT-MUM] the Mumbai Bench of the Income-tax Appellate Tribunal (“the Tribunal”), ruled that, in light of the very typical facts of the case, no dis allowance could be made under section 40(a)(ia) of the Income Tax Act, 1961 (“the Act”), for non-withholding of tax since the payments to the transporters were less than Rs. 20,000 each, and less than Rs. 50,000 in a year to any party and hence did not attract the withholding tax provisions of section 194C of the Act.

The Tribunal relied very heavily on the fact that while the assessee had given details of expenses incurred, the revenue authorities were unable to dispute the assessee’s statement that the expenses in question did not exceed the limit of Rs. 20,000 per payment, and Rs. 50,000 per payee per year.

Facts of the case

• The assessee was engaged in the business of transportation and had paid freight during the year. Tax was not deducted from these payments. The assessee claimed that there were no contracts for transportation of goods, and payments made to each party (except in three cases), were less than the prescribed limits and hence did not attract the provisions of section 194C of the Act; and that, accordingly, the provisions of section 40(a)(ia) were not attracted.
• During assessment, the Assessing Officer (“AO”) observed that the assessee had only mentioned the drivers’ names along with the vehicle numbers, instead of the name of the party and that no separate registers were maintained in respect of the parties to whom freight was paid.
• The assessee contended that the freight paid for each transaction was less than Rs. 20,000 each and each party wise payment was also less than Rs. 50,000 per year.
• The AO however disallowed the freight paid under the provisions of section 40(a)(ia) of the Act, holding that no tax was deducted as required under the provisions of section 194C of the Act.
• The Commissioner of Income-tax (Appeals) (“CIT(A)”) upheld the decision of the AO.

Issue:-Whether the dis allowance under section 40(a)(ia) could be made considering the facts of the case viz. the assessee’s statement and details provided that the payments made were less than Rs 20,000 each and also less than Rs. 50,000 per year per party ?

Revenue’s contentions

• The assessee’s claim should not be upheld, since the details of payment made were not sufficient to justify non-applicability of section 194C of the Act.
• The drivers’ names were used only for the purpose of avoiding the withholding tax liability.
• The CIT(A) had stated that the assessee was camouflaging its payments so as to avoid verification of deduction of tax.

Tribunal Ruling

The Tribunal noted as follows:

• The assessee had explained that there were no agreements or contracts between the assessee and the transporters, and the amounts were either paid on a day-to-day basis or, per-trip basis. Payments were also essentially less than Rs. 20,000 each.
• The details filed by the assessee indicated that the assessee had not engaged the same driver repeatedly or changed the name of the driver, as alleged by the CIT(A), so as not to get covered under the provisions of section 194C of the Act.
• No evidence had been produced or verification done by the AO to challenge or disprove the details furnished by the assessee or to prove that the assessee was covered by section 194C of the Act.
• On a cursory verification of the details filed by the assessee, its contentions seemed correct barring three payments, which were agreed to be covered by section 194C of the Act. No such dis allowance had been made in the assessee’s own case in two subsequent years.

Hence, the Tribunal held that the freight expenses incurred by the assessee, being apparently less than Rs. 20,000 each, and less than Rs. 50,000 per party per year, were allowable.

This was only subject to a limited verification by the AO of whether any amount in excess of Rs. 50,000 had been paid to a particular party, and if so, whether the provisions of section 194C would be applicable to the same.

Conclusion– This decision emphasizes the fact that the payments made to parties of small amounts would not be liable to tax withholding requirements under the provisions of section 194C of the Act. This would be subject to the payments being within the limit of Rs. 20,0000 per payment and Rs. 50,000 per party per year.

NF