Section 194C TDS not applies on materials purchased for installation work: ITAT Kolkata

Aircon India Incorporated Vs DCIT (ITAT Kolkata)

The appeal before the Income Tax Appellate Tribunal (ITAT), Kolkata, concerned the disallowance of ₹4,81,79,887 under Section 40(a)(ia) of the Income Tax Act for alleged failure to deduct tax at source (TDS) under Section 194C for Assessment Year 2010-11.

The assessee, a partnership firm engaged in the sale and servicing of air conditioners, filed its return declaring income of ₹81,06,497. During scrutiny assessment, the Assessing Officer (AO) observed that the assessee had incurred installation and labour-related expenses aggregating to ₹4,81,79,887. This amount consisted of labour charges of ₹1,84,43,781.61 and installation service costs including VAT of ₹2,97,36,105.58.

The AO sought details of the installation and labour charges. After examining the records, the AO held that the purchase of materials used for installation could not be verified because the assessee had allegedly not produced its books of account. The AO further treated the installation and labour payments as contractual payments covered under Section 194C and concluded that TDS should have been deducted on the entire contract value of ₹4,81,79,887. Consequently, the entire amount was disallowed under Section 40(a)(ia).

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the disallowance. The CIT(A) rejected the assessee’s contention that the expenditure consisted of separate material and service components and held that the contract was a composite installation contract. The CIT(A) also rejected the argument that Section 40(a)(ia) applied only to amounts payable at year-end and not to amounts already paid, relying on the Supreme Court’s decision in Palam Gas Service. Accordingly, the disallowance of ₹4,81,79,887 was confirmed.

Before the Tribunal, the assessee contended that it had purchased materials for installation and incurred labour expenses separately. The Tribunal examined the books of account and found that the accounts had been audited and that the assessee had furnished various details before the AO, including written submissions, TDS records, Form 26, Form 16A, details of materials purchased for installation, and details of labour payments.

The Tribunal noted that materials worth ₹2,97,36,105.58 had been purchased during the year for installation purposes. It held that no TDS was required to be deducted by the assessee on the purchase of such materials. According to the Tribunal, in respect of these material purchases, the assessee was not liable to deduct tax at source under Section 194C, and therefore Section 40(a)(ia) could not be invoked on that portion.

Regarding service charges of ₹1,84,43,781, the Tribunal found that the assessee had deducted TDS at 2% on labour payments amounting to ₹1,21,73,900. It further noted that payments of ₹2,28,555 were made to individual labourers where the amount credited or paid to each person did not exceed ₹20,000 during the financial year, and therefore no TDS was required. The Tribunal also found that payments of ₹3,68,605 made to subcontractors did not exceed ₹50,000 in aggregate per individual during the year and were covered by the first proviso to Section 194C(5), making TDS inapplicable.

After excluding these amounts, the Tribunal determined that the amount on which TDS was required to be deducted but had not been deducted was only ₹56,72,721.

The Tribunal held that even on this amount, the AO could have disallowed only 30% of the expenditure. Relying on a coordinate bench decision in Dipak Arui, which treated the amendment restricting disallowance under Section 40(a)(ia) to 30% as retrospective and curative in nature, the Tribunal concluded that the disallowance should be restricted to 30% of ₹56,72,721.

Accordingly, the Tribunal set aside the order of the CIT(A) on this issue and directed the AO to restrict the disallowance to ₹17,01,816 instead of ₹4,81,79,887. The appeal was partly allowed.

FULL TEXT OF THE ORDER OF ITAT KOLKATA

This is an appeal preferred by the assessee against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 29.12.2025 for the AY 2010-11.

2. The only issue raised by the assessee in the ground no.1 is against the order of ld. CIT (A) upholding the order of the ld. AO, wherein the disallowances of ₹4,81,79,887/-, was confirmed as made by the ld. AO u/s 40(a)(ia) of the Act for failure to deduct TDS on the entire contract value u/s 194C of the Act.

3. The facts in brief are that the assessee is a partnership concern and is engaged in the business of sales and services of Air Conditioners. The assessee filed the return of income during the year declaring income of ₹81,06,497/-. The case of the assessee was selected for scrutiny and statutory notices along with questionnaire were issued and the ld. AO observed from the details filed by the assessee that assessee has executed contracts in respect of installation and labor charges, aggregating to ₹4,81,79,877/-. These Labour charges were ₹1,84,43,781.61/- and installation services cost with Vat was ₹2,97,36,105.58. Accordingly, the assessee was asked to furnish the details of installation and labour charges which were accordingly filed by the assessee before the AO. Thereafter, the ld. AO observed that the purchase of materials for installation could not be verified as assessee has not produced the books of account and hence, the claim of materials was not accepted. Similarly, the installation and labour charges were contractual payments and are covered by the provisions of section 194C of the Act. Therefore, the same is liable for TDS on the contract payment of ₹4,81,79,887/- done during the year. Consequently, the ld. AO disallowed the entire sum of ₹4,81,79,887/- u/s 40(a)(ia) of the Act and added to the income of the assessee besides, making other petty additions.

4. In the appellate proceedings, the ld. CIT (A) dismissed the appeal of the assessee by observing and holding as under:-

“4.6. Disallowance of Installation &Labour Charges u/s 40(a)(ia) (Rs. 4,81,79,887):

The appellant claims the expense is bifurcated into Material Cost (Rs. 2.97 Cr) and Service Charges (Rs. 1.84 Cr). They argue that no TDS is liable on material purchases. Further, they rely on the Tribunal decision in Jitendra Mansukhlal Shah vs DCIT to argue that Section 40(a)(ia) applies only to amounts “payable” at year-end and not amounts already “paid”. The AO observed that the work is a composite contract for installation. The appellant failed to produce invoices before the AO to prove the independent sale of materials. Segregating a composite contract into material and labour artificially to avoid TDS provisions is not permissible under the law. The appellant’s reliance on the argument that section 40(a)(ia) applies only to amounts “payable” (and not “paid”) is legally untenable. The Hon’ble Supreme Court in the case of Palam Gas Service vs. CIT has settled this issue, holding that the provisions of Section 40(a)(ia) apply to both amounts which remain payable and amounts already paid. Since the appellant failed to deduct TDS on the entire contract value as required u/s 1940, the disallowance was correctly invoked. The disallowance of Rs. 4,81,79,887/- is upheld and the Ground related to issue is hereby dismissed.”

5. After hearing the rival contentions and perusing the materials available on record, we find that the assessee is engaged in the business of installation of carrier make air conditioners, for which the assessee purchased materials and also incurred labour expenses. In other words, the assessee was awarded work contracts. We note that the ld. AO made the addition on the ground that the necessary verification could not be made as the assessee did not produce books of accounts and as the said payments are liable for tax deduction at source u/s 194C of the Act, accordingly, the AO disallowed the same u/s 40(a)(ia) of the Act. The ld. CIT(A) confirmed the order of the ld. Assessing Officer. We have examined the books of account and find that the books of accounts of the assessee are audited by the tax auditor and assessee has furnished /produced before the ld. AO the written submissions on 08.06.2023, details of commission paid to staff, paid to wholesale customers, TDS statement, form 26 along with 16A, details of materials purchased for installation, details of labour paid for installation charges, etc. We note that during the year the assessee has purchased the total material for installation amounting to ₹2,97,36,105.58 and therefore no TDS was required to be deducted by the assessee on the same material whereas as a matter of fact , the TDS was required to be deducted from the contracts by the person who awarded the contracts to the assessee so far as the purchases of material is concerned for the installation purposes. Therefore in our opinion , the assessee is not liable/supposed to deduct tax at source u/s 194C of the Act. Therefore, provisions of Section 40a(ia) of the Act are not applicable.

6. With respect to service charges incurred on the installation amounting to ₹1,84,43,781/-, we note that the assessee has fully accounted for the expenses. We note that the assessee has deducted tax on the labour paid amounting to ₹1,21,73,900/- at the rate of 2%. On ₹2,28,555/- which also represented service charges ,on which no tax was to be deducted as the payment credited or paid to the individual person did not exceed ₹20,000/- during the financial year. The details are available at page no.58 of the Paper Book, which clearly established that payments during the year were below 20,000/- to each party (labour). So far as the sub-contractors are concerned , the assessee made payments of ₹3,68,605/- to whom the aggregate payment credited and paid during the year did not exceed ₹50,000/- individually and therefore, in terms of first proviso to sub section 5 of section 194C of the Act, no tax is required to be deducted. Therefore, as per the table below the amount on which the TDS is required to deducted but not deducted is only ₹56,72,721/-.

7. At the most the ld. AO should have disallowed the payment at the rate of 30% of the balance amount as calculated above which is 56,72,721/- which comes to ₹ 17, 01,816/-. The disallowance at the rate of 30% is by virtue of the decision of the co-ordinate bench decision in the case of Dipak Arui in ITA No. 767/KOL/2016 for A.Y. 2011-12, wherein the co-ordinate bench has held as under:-

“5. Latter issue before us is that of correctness of section 40 (a)(ia) disallowance of Rs.1.79,800/- out of assessee’s total claim of Rs.,3,05,364/-. His only argument before us is that section 40(a)(ia) as amended by Finance Act 2014 w.e.f. 01.04.2015 prescribing such disallowance to be restricted to 30% only than the entire amount of Rs.1,79,800/-; applies with retrospective effect. Learned Departmental Representative vehemently opposes this legal plea. He pleads that the said proviso does not carry any retrospective effect. We find no force in Revenue’s instant arguments as a coordinate bench of this tribunal in Shri Rajendra Yadav in ITA No.895/JP/2012 decided on 29.01.2016 already concludes the above amendment w.e.f. 01.04.2015 to be retrospective effect being curative in nature. We therefore direct the Assessing Officer to restrict the impugned disallowance to 30% only to be followed by necessary computation as per law. This latter substantive ground is treated as partly accepted in above terms.”

8. We therefore, respectfully following the decision of the co-ordinate Bench set aside the order of ld. CIT (A) on this issue and direct the ld. AO to restrict the disallowance to ₹17,01,816/-. The appeal is partly allowed.

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

Order pronounced in the open court on 20.05.2026.