2010 (10) TMI 903 - AT - Income Tax

Issues Involved:
1. Disallowance under Section 40(a)(ia) for non-deduction of TDS on tanning expenses.
2. Disallowance under Section 40(a)(ia) for non-deduction of TDS on measurement charges.
3. Disallowance under Section 40A(3) for cash payments exceeding the prescribed limit.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(ia) for non-deduction of TDS on tanning expenses:

The assessee, engaged in trading sheep and goat skins, made payments totaling Rs. 40,40,679 to various tanners for tanning services without deducting tax at source as specified under Section 194C of the Income-tax Act, 1961. The Assessing Officer disallowed the claim under Section 40(a)(ia) on the grounds that the nature of the job required the use of material and labor, and thus, TDS was mandatory. The assessee contended that only 30% of the payment was for tanning services, while 70% was for materials used, relying on Circular No. 13/2006. However, the CIT(A) confirmed the disallowance, noting that the payments were made under composite contracts and the assessee's conduct indicated no segregation of expenses.

Upon appeal, the ITAT observed that the original bills from the tanners were composite and no split-up bills were presented before the authorities. The Tribunal concluded that the contracts were composite in nature and the assessee's attempt to bifurcate the payments was an afterthought to avoid the rigors of Section 40(a)(ia). Therefore, the CIT(A)'s decision to confirm the disallowance was upheld, dismissing the assessee's ground.

2. Disallowance under Section 40(a)(ia) for non-deduction of TDS on measurement charges:

The assessee paid Rs. 1,43,178 to Usman Sheriff for measuring charges using measurement machines without deducting tax under Section 194C. The Assessing Officer disallowed the payment under Section 40(a)(ia). The CIT(A) upheld the disallowance, noting that the payment was for the use of machinery, which fell under Section 194(i) effective from 13-7-2006. The CIT(A) aggregated the payments for the entire year to determine the applicability of TDS.

The ITAT, however, noted that the amendment to Section 194(i) widening the scope to include machinery was effective from 13-7-2006. Payments made after this date amounted to Rs. 1,08,000, which was below the threshold of Rs. 1,20,000, exempting the assessee from TDS obligations. Consequently, the disallowance of Rs. 1,43,178 was deleted, allowing the assessee's ground.

3. Disallowance under Section 40A(3) for cash payments exceeding the prescribed limit:

The assessee made cash payments of Rs. 2,50,000 to three parties for the purchase of raw hides and skins. The Assessing Officer disallowed 20% of the payment, amounting to Rs. 50,000, under Section 40A(3) as the payments exceeded the prescribed limit. The CIT(A) upheld the disallowance, stating that the plea of exemption under Rule 6DD(e)(ii) was not raised before the Assessing Officer.

The ITAT observed that the payments were for the purchase of raw hides and skins, which fell under the exemption provided by Rule 6DD(e)(ii) of the Income-tax Rules, applicable before its substitution on 9-11-2006. The Tribunal noted that the CIT(A) failed to consider this aspect despite having plenary powers. Therefore, the disallowance under Section 40A(3) was deleted, allowing the assessee's ground.

Conclusion:
The appeal was partly allowed, with the ITAT upholding the disallowance under Section 40(a)(ia) for tanning expenses but deleting the disallowances under Sections 40(a)(ia) and 40A(3) for measurement charges and cash payments, respectively.

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