Roy Mitra Enterprise Vs. ACIT (ITAT Kolkata), ITA No. 1703 (Kol) of 2009, Date of Pronouncement- 24.2.2012.
On perusal of the assessment order we find that the ld. A.O. considered sum of Rs.1,44,91,357/- on the basis of the bill issued by M/s. Bharat Earth Movers as contractual and, accordingly, invoked provisions of Sec.40(a)(ia)/194C of the Act. Section 194C of the Act speaks of payments to contractors and sub-contractors.
According to this section, any person responsible for paying any sum to any resident, e. contractor, for carrying out any work including supply of labour for carrying out any work, in pursuance of a contract between the contractor and any firm etc., shall, at the time of credit of such sum to the account of the 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 in case of advertising and in any other case two per cent, of such sum as income-tax on income comprised therein. Now we have to examine contractor and sub-contractor with reference to the job, nature of job, etc., because before taking a decision on the applicability of TDS u/s. 194C of the Act on a contract, it is required to be examined whether the contract is a ‘contract for work’ or a ‘contract for sale’. TDS shall be applicable only where it is a ‘contract for work’ as per the principles laid down in para 7(vi)(a) of Circular No. 681, dated 8-3-1994 and Circular No. 13/2006, dated 13-12-2006. Clause (a) of para 7(vi) of the above circular is reproduced below :
“(a) Since contracts for the construction, repaid, renovation or alteration of buildings or dams or laying of roads or airfields or railway lines or erection or installation of plant and machinery are in the nature of contracts for work and labor, income-tax will have to be deducted from payments made in respect of such contracts. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.”
The aforesaid guidelines have further been clarified in Circular No. 13/2006 dated 13/12/2006, the relevant portion of which is reproduced below :-
“3. It is, therefore, clarified that the provisions of section 194C would apply in respect of a contract for supply of any article or thing as per prescribed specifications only if it is a contract for work and not a contract for sale as per the principles in this regard laid down in para 7(vi) of Circular No.681 dated 8th March, 1994.”
Further as per Circular No. 558, dated 28th March 1990, the applicability of the provisions of section 194C will have to be examined with reference to the terms and conditions of each contract.
Now we look into the meaning of ‘contractor’ and ‘sub-contractor’. From a perusal of section 194C of the Act, it is obvious that a ‘contractor’ for the purpose of the provisions of this section would be any person who enters into a contract with the Central or any State Government, any local authority and corporation established by or under a Central, State or Provincial Act, any company or any co-operative society for carrying out any work including the supply of labour for carrying out any work and 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 supply whether wholly or partly any labour which the contractor has undertaken to supply in terms of his contract with any of the aforesaid authorities. Hon’ble Himachal Pradesh High Court had the occasion to deal with the meaning of ‘contractor’ and ‘sub-contractor’ in terms of Sec. 194C in the case of ITO v. Rama Nand & Co., [163 ITR 702, 704 (HP)]. In that case, the respondent-firm purchased from the Government certain quantity of scents of timber. It was held that the respondent-firm was not a ‘contractor’ within the meaning of section 194C as it had not entered into any contract for carrying out any work or for supply of labour for carrying out any work with any Government, local authority, corporation, company or co-operative society. Therefore, the payments made by the respondent-firm to any person could not be treated as payments made by a ‘contractor’ to a ‘sub-contractor’ so as to attract the provision 194C(2). The relevant portion of the observation of their Lordships of Hon’ble Himachal Pradesh High Court at page 704 of the Report is, to quote, as under :-
“It is obvious from the above extracted provisions that a “contractor” for the purpose of these provisions would be any person who enters into a contract with the Central or any State Government, any local authority, any corporation established by or under a Central, State or Provincial Act, any company or any co-operative society for carrying out any work including the supply of labor for carrying out any work and a “sub-contractor” would mean any person who enters into a contract with the contractor carrying out, or for the supply of labor 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 supply whether wholly or partly any labout which the contractor has undertaken to supply in terms of his contract with any of the aforesaid authorities. Now, in the instant cases, admittedly, the respondent firm had not entered into any contract for carrying out any work or for supply of labour for carrying out any work with any Government, local authority, corporation, company or co-operative society. The respondent thus not being a contractor, the payments made by this firm to any person cannot be treated as payments made by a contractor to a sub-contractor so as to attract the provisions of section 194C(2) of the Act.” [Emphasis supplied]
It is pertinent to mention here that the Department filed S.L.P. before the Hon’ble Supreme Court in the above case and their Lordships of Hon’ble Supreme Court upheld the decision of Hon’ble Himachal Pradesh High Court and thus dismissed the S.L.P. [157 ITR (ST) 31]. From the above, therefore, it is clear that there should be a relation as contractor and sub-contractor to carry out any work or for supply of labor for carrying out any work.
It is an admitted position that the assessee would be liable for deduction of tax on payments made by him under a valid contract. In the case of the assessee, as per report of the Inspector, there was no written contract between the assessee and M/s. Bharat Earth Movers, although one of the partners in his statement has stated that there was verbal agreement. The assessee filed a certificate issued by M/s. Bharat Earth Movers under the signature of the Manager stating that the payment was on account of hire charges to M/s. Bharat Earth Movers on measurement basis for excavation of earth and rock and not for any contractual work relating to construction of boarder fencing . The same person of M/s. Bharat Earth Movers issued the impugned bill, basing upon which the department treated the transaction as contractual and not on account of hire of machinery on measurement basis. Therefore, there is no written agreement and assumption of the ld. A.O. of having an oral agreement is not corroborated with any evidences on record. On the other hand, the assessee is able to establish that it worked on peace-meal basis on hiring of earth moving machineries etc. for which the assessee has submitted a certificate issued by M/s. Bharat Earth Movers. In such circumstances, the assessee was not liable to deduct tax in terms of Sec. 194C of the Act. The Hon’ble Punjab & Haryana High Court in the case of CIT vs. United Rice Land Ltd.(supra) under similar circumstances held as under :-
“The AO had held the assessee liable for deduction of tax only on the assumption that assessee was having agreement with the parties through whom trucks were arranged for transportation of goods. However, the CIT(A) has recorded a finding of fact that there was neither any oral or written agreement between the assessee and transporters for carriage of goods nor it has been proved that any sum of money regarding freight charges was paid to them in pursuance of a contract for specific period, quantity or price. This finding of fact was recorded by the CIT(A) after considering the certificate furnished by the transporters. The Tribunal has also recorded a finding of fact that the Department has not controverted the said finding of the CIT (A) even before the Tribunal. While recording this finding of fact, the Tribunal has clearly stated that nothing has been brought on record by the AO to prove that there was written or oral agreement between the alleged parties for carriage of the goods. In view of the above, the finding of fact recorded by the Tribunal is not to be interfered with.” [Emphasis supplied]
On the above facts and circumstances of the case, we are of the considered view that the transactions of the assessee will fall under the provisions of Sec. 194-I of the Act, which is effective from 13/7/2006. Since the assessment year involved in this appeal of the assessee is 2006-07, which is prior to the amendment made by the Taxation Laws (Amendment) Act, 2006 w.e.f. 13/7/2006, we find no justification on the part of the revenue authorities to treat the said transactions under the provisions of sec. 194C to attract provisions of sec. 40(a)(ia) of the Act. It is further pertinent to mention here that the learned counsel during course of argument submitted that in the immediately succeeding assessment year 2007-08, there is no dis allowance u/s. 40(a)(ia) of the Act since the assessee has deducted TDS as applicable under the amended provisions of sec. 194-I of the Act, which has snot been controverted dby the ld. Departmental Representative. We, therefore, set aside the orders of the authorities below and hold that the assessee was not liable to deduct TDS u/s. 194C on the payments of Rs. 1,44,91,357/- to M/s. Bharat Earth Movers and, therefore, the addition u/s. 40(a)(ia) made by the A.O. and sustained by the C.I.T.(A) was unwarranted. The same is, therefore, directed to be deleted.