2009 (4) TMI 536 - AT - Income Tax

TDS u/s 194C - Business disallowance - payments made for disbursement of labour charges to Labour Sardars - Whether section 40(a)(ia) can be read in isolation or to the exclusion of section 194C? - assessee submitted that the provision of section 194C(2) is not applicable to the case of the assessee as there is no contract between the assessee and the Labour Sardars. HELD THAT - Section 40(a)(ia) requires that unless tax is deducted according to section 194C on payment to contractors or sub-contractors, which includes supplier of labourers for carrying out any work, will attract disallowance as expenditure. We find that the Hon ble Supreme Court in Birla Cement Works case 2001 (2) TMI 8 - SUPREME COURT had laid down the conditions precedent for attracting the provision of section 194C; namely, (i) there must be a contract between the person responsible for making payment to contractor, (ii) the contract must be for carrying out of any work, (iii) the work is to be carried through the contractor, (iv) the consideration for the contract should exceed Rs. 10,000, i.e., the amount fixed by section 194C and ( v ) that the payment is made to the contractor for the work carried out by him. We therefore find that section 40(a)( ia) cannot be read in isolation or to the exclusion of section 194C. We, find force in the argument of the ld. Counsel of the assessee that the Labour Sardars in the instant case cannot be said to be Labour Contractors within the meaning of the provision of section 194C(2). In the circumstances, there is no requirement in law to deduct tax at source by the assessee under the provisions of section 194C(2). This view of ours is also supported by the decision of the Punjab Haryana High Court in Ess Kay Construction Co. s case 2003 (8) TMI 22 - PUNJAB AND HARYANA HIGH COURT wherein it was held that once a finding has been recorded that there was no sub-contract of work, there could not be any applicability of section 194C(2). Therefore the ratio laid down in the aforesaid judgment is squarely applicable to the facts of this case. We further find that the assessee has made payments to individual labourers, which is evident from the muster-roll enclosed in the paper book. We also find from the muster roll that the person signing as Labour Sardar is also included in the serial of the labourers. admittedly, the Labour Sardars in the present case has no locus standi as Labour Contractor as a Labour Sardar and a Labour Contractor are as different as chalk and cheese. We find that there was no contract between the assessee and the Labour Sardars for supply of labourers and without which there cannot be any application of section 194C and as such the invocation of provision of section 40(a)( ia) is outside the scope and ambit of such enactment. In view of the matter, we are of the considered opinion that section 194C(2) being not applicable in this case, the disallowance made by AO by invoking section 40(a)( ia) and sustained by CIT(A) is hereby deleted. This ground of the assessee is allowed. Expenses incurred on the accounting charges - AO disallowed, as payment of professional fees for carrying on the profession of accountancy upon which tax is liable to be deducted at source as required u/s 194J - HELD THAT - We find that the assessee had paid the said sum to the accountants for accounting charges and not to a Chartered Accountant. In view of the above, we are of the considered opinion that as the said sum was incurred towards salary of accountants, the same cannot attract the provisions of section 194J. Hence, the addition made by AO and sustained by the ld. CIT(A) is hereby deleted. This ground of the assessee is allowed. The appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Applicability of Section 40(a)(ia) of the Income-tax Act, 1961.
2. Disallowance of labour charges under Section 40(a)(ia) for failure to deduct tax at source under Section 194C.
3. Disallowance of salary paid to accountants under Section 40(a)(ia) for failure to deduct tax at source under Section 194J.

Detailed Analysis:

1. Applicability of Section 40(a)(ia) of the Income-tax Act, 1961:

The assessee argued that the provisions of Section 40(a)(ia) were misread by the CIT(A) and were not applicable for the assessment year in question. The assessee contended that the provision, introduced by the Finance Act No. 2 dated 10th September 2004, was effective from 1-4-2005 and relevant for the assessment year 2006-07. Therefore, it was not applicable for the assessment year 2005-06. The Tribunal, however, focused on the specific grounds of disallowance under Sections 194C and 194J rather than the general applicability of Section 40(a)(ia).

2. Disallowance of Labour Charges under Section 40(a)(ia) for Failure to Deduct Tax at Source under Section 194C:

The assessee contended that there was no contract between the assessee and the Labour Sardars, and thus, Section 194C was not applicable. The Labour Sardars were merely leaders chosen by the labourers for identification and payment purposes, and there was no contractual obligation. The Tribunal referred to the Supreme Court's decision in Birla Cement Works v. CBDT and other relevant case laws, concluding that the essential condition for Section 194C was the existence of a contract, which was absent in this case. Therefore, the disallowance of Rs. 74,33,210 for labour charges was deemed unlawful, and the Tribunal deleted this disallowance.

3. Disallowance of Salary Paid to Accountants under Section 40(a)(ia) for Failure to Deduct Tax at Source under Section 194J:

The assessee argued that the salary paid to accountants did not constitute professional fees for accountancy services as envisaged under Section 194J. The Tribunal agreed, noting that the payments were for accounting charges and not to a Chartered Accountant. Therefore, the provisions of Section 194J were not applicable. Consequently, the disallowance of Rs. 24,000 was deleted.

Conclusion:

The Tribunal allowed the appeal of the assessee in part, specifically deleting the disallowances made under Sections 194C and 194J, thereby providing relief on the grounds of labour charges and salary to accountants.