2010 (5) TMI 704 - AT - Income Tax

TDS u/s 194C - payment made by the assessee is under a contract to the contract workers - additions in the remand proceedings - as submitted by the assessee that the assessee sold seeds to farmers by raising invoices and, thereafter purchased the multiplied potatoes against invoice. The agreement was entered into to prevent the farmers from selling the multiplied seeds to other parties. The company was not making any payment in the nature of job work - HELD THAT - The assessee in order to facilitate the proper production had advanced the amount to the farmers by way of seeds and cash in advance. The cost of seed and the amount so advanced have been adjusted against the sale proceeds. The conclusion of the AO that the farmer has to produce the potatoes seeds of desired size, in our considered opinion, is not correct. The growing of potatoes is a natural process. The size of potatoes depends upon the nature of land, the quantity of manures and fertilizers added, the quantity of water and the nature of the beds raised whether they were compact or porous enough to allow the size of potatoes to grow freely. The operations carried out by the farmers are purely agricultural operations. They cannot be by any stretch of imagination be said that they were in the nature of work contract. The assessee had entered into agreement with the farmers to prevent them from selling the seeds so grown in the open market. Therefore, in our considered opinion, the provisions of section 194C are not applicable in the case of the assessee. Accordingly, the CIT (A) was justified in deleting the addition made by the AO u/s 40(a)(ia). Expenditure claimed on labour charges - addition u/s 40(a)(ia) - certain payments were made by the assessee to labour contractors against the supply of labour for harvesting, grading and packing, etc. The assessee-company could not furnish confirmations of labour charges - HELD THAT - AO disallowed the payment on the presumption that the payment was made to the contractors and the assessee had kept the payments below Rs.20,000 deliberately in order to circumvent the provisions of section 194C. If the payment has been made to a contractor, the payer has to deduct tax at source on even amounts less than Rs. 20,000. There is nothing on record to suggest that the payments on account of labour charges were made to contractors. On the contrary the assessee had made payment to labourers directly. Therefore, the provisions of section 194C are not applicable. The AO had made disallowance on ad hoc basis out of total labour charges - Since no material has been brought on record, in our considered opinion the AO was not justified in invoking the provisions of section 40(a)(ia). Accordingly, the CIT (A) was justified in deleting the addition. Appeal filed by the Revenue is dismissed.

Summary

Issues:
1. Deletion of addition under section 40(a)(ia) of the Income-tax Act related to buy-back production cost.
2. Deletion of addition under section 40(a)(ia) of the Income-tax Act concerning labour charges.

Analysis:

Issue 1: Deletion of addition under section 40(a)(ia) related to buy-back production cost:
The case involved an appeal by the Revenue for the assessment year 2006-07 regarding the deletion of an addition of Rs.23,42,054 made by the Assessing Officer under section 40(a)(ia) of the Income-tax Act. The dispute arose from expenses claimed as buy-back production costs, which were considered as contract payments requiring tax deduction at source. The Assessing Officer contended that the expenses were not liable for deduction under section 40(a)(ia) due to the absence of tax deduction at source. The Commissioner of Income-tax (Appeals) disagreed, ruling that the provisions of section 194C were not applicable as the farmers were not working for the company but independently. The Tribunal upheld this decision, emphasizing that the nature of the activities undertaken by the farmers did not constitute a work contract, thus justifying the deletion of the addition.

Issue 2: Deletion of addition under section 40(a)(ia) concerning labour charges:
The second issue involved the deletion of an addition of Rs.4,28,805 under section 40(a)(ia) of the Act related to labour charges. The Assessing Officer disallowed the amount, suspecting deliberate circumvention of tax deduction provisions under section 194C. However, the Commissioner of Income-tax (Appeals) found no justification for the disallowance, as payments were made directly to individual laborers, not contractors. The Tribunal concurred, stating that the Assessing Officer's presumption of deliberate underpayment to avoid tax deduction lacked evidence. As the payments were made to laborers and not contractors, the provisions of section 194C did not apply. Consequently, the addition was deleted, and the appeal by the Revenue was dismissed.

In conclusion, the Tribunal upheld the decisions of the Commissioner of Income-tax (Appeals) in both issues, emphasizing the lack of evidence supporting the Revenue's claims and affirming that the provisions of section 194C were not applicable in the assessed scenarios.