Summary: In the present case before us the assessee has deducted tax u/s. 194C(2) of the Act being payments made to sub-contractors and it is not a case of non-deduction of tax or no deduction of tax as is the import of section 40(a)( ia) of the Act. The revenue's contention in the grounds is that in the instant case the provisions of section 194-I for deduction of tax will apply instead of tax deducted by assessee u/s. 194C(2) of the Act. Held that, if there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default u/s. 201 of the Act and no disallowance can be made by invoking the provisions of section 40(a)( ia) of the Act.
IN THE ITAT KOLKATA BENCH 'B'
Deputy Commissioner of Income-tax,
Circle-33, Kolkata
vs.
S.K. Tekriwal*
MAHAVIR SINGH, JUDICIAL MEMBER AND
C.D.RAO, ACCOUNTANT MEMBER
IT APPEAL NO. 1135 (KOL.) OF 2010
[ASSESSMENT YEAR 2007-08]
OCTOBER 21, 2011
ORDER
Mahavir Singh, Judicial Member - This appeal by revenue is arising out of order of
CIT(A)-XX, Kolkata in Appeal No.194/CIT(A)-XX/DC Cir-33/09-10/Kol. dated
12.03.2010. Assessment was framed by DCIT, Circle-33, Kolkata u/s. 143(3) of
the Income Tax Act, 1961 (hereinafter referred to as "the Act") for
Assessment Year 2007-08 vide his order dated 30.12.2009.
2. The only
issue in this appeal of revenue is against the order of CIT(A) deleting the
addition made by Assessing Officer by invoking the provisions of section 40(a)(
ia) of the Act for lower rate of deduction of tax. The revenue's
contention in the grounds is that in the instant case the provisions of section
194-I for deduction of tax will apply instead of tax deducted by assessee u/s.
194C(2) of the Act. For this, revenue has raised following ground:
"Factual
circumstances of the case reveals that in the instant case section 194I is
applicable instead of section 194(2) of the I. T. Act. Hence the A.O has
rightly made addition as section 40(a)(ia ) of the I. T. Act.
Therefore 2nd appeal is suggested."
3. We have
heard rival submissions and gone through facts and circumstances of the case.
The brief facts are that assessee is engaged in the business of construction of
bridges, roads, dams and canals, and heavy earth moving activities in contract
with government and semi-government bodies, such as, BRO, PWD, NTPC etc. Return
of Income was filed on 27.10.2007 showing total income at Rs.45,49,360/-.
During the course of assessment proceedings, A.O noticed that the assessee has debited
total payments of Rs.3,37,37,464/- in the P&L a/c under the head 'machine
hire charges'. The Assessing Officer also found that the assessee has deducted
tax @ 1% on such payments, therefore, he required the assessee as to why tax
u/s. 194-I of the Act was not deducted. It was explained before the Assessing
Officer that payments were made to sub-contractors for completion of specific
work; and therefore, tax was deducted @ 1% as per the provisions of section
194C(2) of the Act. The payments were not made for hiring of machines, but, the
same have been wrongly grouped under the head 'machine hire charges'. Copies of
agreements with the concerned parties were filed at the assessment stage to
show that they were sub-contractors, who were assigned specific work; and that
the payments do not actually relate to hiring of machines. The Assessing
Officer did not accept the explanation. The Assessing Officer observed that it
was clearly mentioned in the agreements that the rate are exclusively for
machine and maintenance, all material will be supplied by us. The Assessing
Officer concluded that the payments were made for hiring of machines, and that
the provisions of section 194-I of the Act are applicable in the case of the
assessee and so, tax should have been deducted @ 10%. The Assessing Officer
then made proportionate disallowance under the provisions of section 40(a)(
ia) of the Act in respect to 'machinery hire charges'. Aggrieved,
assessee preferred appeal before CIT(A).
4. The
CIT(A) deleted the disallowance by holding the 'machinery hire charges'
expenses falling u/s. 194C(2) of the Act, by holding as under:
"7.
I have considered the assessment order and the submission of the appellant. I
have also perused the assessment record. The AO has relied solely on the
accounting entries made in the books of account in as much as the sub-contract
expenses are clubbed under the head 'machine hire charges'. The AO has confined
himself only to a particular line mentioned in the agreement; but, has failed
to properly analyze the agreement in its totality. The nature and particulars
of work that has been assigned to each sub-contractor is clearly specified in
the agreement, which includes back filling, gravel filling, morum/ sand filling
and rubber soiling; excavation with transportation; PCC, RCC and Dewatering;
Pile & Open foundation work; Earthworks in filling from earth-quarry to
works-site with all lift in layers as approved by the Railways, including all
machineries & equipments and manpower regarding earth transportation,
loading & unloading; and, providing RCC M-30 grade in well curb using
concrete mixture and manual means and machinery and completing the job as per
specification and direction of E/I.
In each
of the agreements, the quantity of work is fixed, and, the rate is also fixed
on the basis of such quantity of work. I find substance in the argument that
hire charges depend on the time period for which the machines are used. But, in
the present case, the time consumed by the sub-contractors, or the period for
which the machines are used, is not at all a factor in deciding the payments
made to the sub-contractors; it is only on the basis of the quantity of work
that the payments have been made. The sub-contractors are required to complete
the assigned job by utilizing their machines and equipments, and also, by
employing local labour. But then, the time period for which the machines and
equipments are used has no role in deciding the payments made to the
sub-contractors; moreover, labour charges are paid by the sub-contractors, and,
the sub-contract expenses debited in the books of account of the appellant do
not include labour charges. It was contended before me that the nature of work
assigned to the subcontractors is such that there was actually no requirement
of any material in completion of the work, except for providing RCC M-30, where
the principal employer itself has supplied the required material (iron and
cement) for quality reasons. It was also argued that the payments made to the
sub-contractors have been shown by them as receipts from sub-contract work. The
P & L a/c, Computation of Income, etc., in respect of some sub-contractors
is available in the assessment record, e.g., Archana Shah, Julie Agrawal and
Sweta Agrawal. I find that they have shown the payments made by the appellant
to them as receipts from sub-contract work, and, offered profit @ 8% on such
receipts.
The
decision of the AO is not based on proper findings. The AO has confined himself
only to the accounting entries made in the books of account, and failed to
properly analyze the material on record. The explanations, and also the
evidences, submitted by the appellant seem to have been summarily rejected more
on ground of presumption and assumption than on factual ground. This has led
the AO to a state of affairs where salient evidences have been overlooked. In
view of the above, I am of the opinion that the payments of Rs.3,37,37,464 were
made to the sub-contractors, and, that the provisions of section 194C(2) are
applicable in the case of the appellant. Since the appellant has deducted tax @
1% on such payments, which is in conformity with the provisions of section
194C(2), the provisions of section 40(a)( ia) are not attracted.
The addition is directed to be deleted. The grounds raised by the appellant are
liable to be allowed."
Aggrieved, revenue is in appeal before us.
5. From the
order of CIT(A), we find that CIT(A) has gone into the controversy of assessee
falling under the head 'sub-contractor' or falling under the head 'rent', the
expenses made under the head 'machinery hire charges'. It is also a fact that
the assessee has deducted TDS u/s. 194C(2) of the Act and covered itself under
the head 'sub-contractor'. We find that CIT(A) after verifying records and
explanation submitted by assessee reached to a conclusion that payments are in
the nature of contract payments made to sub-contractors. On merits, we are in
agreement with the findings of CIT(A) and even revenue before us could not
controvert the same. Another facet of this issue is that once the assessee has
deducted TDS u/s. 194C(2) of the Act, whether disallowance can be made by
invoking the provisions of section 40(a)( ia) of the Act. The
relevant provision reads as under:
"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 labour 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:"
In this provision it is provided that where in respect
of any sum, as referred in this section, 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 of the Act, such sum shall be disallowed as a deduction while
computing the income of the assessee for the previous year relevant to AY under
consideration. But in the present case before us, the assessee has deducted
tax, although u/s. 194C(2) of the Act and it is not a case of non-deduction of
tax or no deduction of tax as is the import of section 40(a)(ia )
of the Act. Even otherwise if it is considered that this particular sum falls
under section 194I of the Act, it may be considered as tax deducted at a lower
rate and it cannot be considered a case of non-deduction or no deduction.
Similar view is taken by 'C' Bench of Mumbai ITAT in IT Appeal No. 20 (Mum.)
2010 in the case of Dy. CIT v. Chandabhoy & Jassobhoy dated
8-7-2011, wherein it is held that there is no dispute with reference to the
deduction of tax u/s 192 of the Act with the fact that the alleged consultants,
in their individual assessments declared these payments as salary payments and
accepted by revenue as it is. Further, it is held that the assessee had
deducted tax u/s. 192 of the Act as against the allegation of revenue that the
provisions of section 194J of the Act would be attracted as these consultants
are in the capacity of professionals. The Bench held that the provisions of
section 40(a)( ia) of the Act will not apply as the said
provision can be invoked only in the event of non-deduction of tax but not for
lesser deduction of tax. In that case the assessee has deducted tax u/s. 192 of
the Act as against section 194J of the Act as against the claim of revenue.
6. In the
present case before us the assessee has deducted tax u/s. 194C(2) of the Act
being payments made to sub-contractors and it is not a case of non-deduction of
tax or no deduction of tax as is the import of section 40(a)( ia)
of the Act. But the revenue's contention is that the payments are in the nature
of machinery hire charges falling under the head 'rent' and the previous
provisions of section 194-I of the Act are applicable. According to revenue,
the assessee has deducted tax @ 1% u/s. 194C(2) of the Act as against the actual
deduction to be made at 10% u/s. 194-I of the Act, thereby lesser deduction of
tax. The revenue has made out a case of lesser deduction of tax and that also
under different head and accordingly disallowed the payments proportionately by
invoking the provisions of section 40(a)( ia) of the Act. The Ld.
CIT, DR also argued that there is no word like failure used in section 40(a)(
ia) of the Act and it referred to only non-deduction of tax and
disallowance of such payments. According to him, it does not refer to
genuineness of the payment or otherwise but addition u/s. 40(a)( ia)
can be made even though payments are genuine but tax is not deducted as
required u/s. 40(a)( ia) of the Act. We are of the view that the
conditions laid down u/s. 40(a)( ia) of the Act for making
addition is that tax is deductible at source and such tax has not been
deducted. If both the conditions are satisfied then such payment can be
disallowed u/s. 40(a)( ia) of the Act but where tax is deducted
by the assessee, even under bona fide wrong impression, under wrong
provisions of TDS, the provisions of section 40(a)( ia) of the
Act cannot be invoked. Here in the present case before us, the assessee has
deducted tax u/s. 194C(2) of the Act and not u/s. 194-I of the Act and there is
no allegation that this TDS is not deposited with the Government account. We
are of the view that the provisions of section 40(a)( ia) of the
Act has two limbs, one is where, inter alia, assessee has to deduct tax
and the second where after deducting tax, inter alia, the assessee has
to pay into Government Account. There is nothing in the said section to treat, inter
alia, the assessee as defaulter where there is a shortfall in deduction.
With regard to the shortfall, it cannot be assumed that there is a default as
the deduction is not as required by or under the Act, but the facts is that
this expression, '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'. This section
40(a)( ia) of the Act refers only to the duty to deduct tax and
pay to government account. If there is any shortfall due to any difference of
opinion as to the taxability of any item or the nature of payments falling
under various TDS provisions, the assessee can be declared to be an assessee in
default u/s. 201 of the Act and no disallowance can be made by invoking the
provisions of section 40(a)( ia) of the Act.
Accordingly, we confirm the order of CIT(A) allowing
the claim of assessee and this issue of revenue's appeal is dismissed.
7. In the
result, appeal of the revenue is dismissed.
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