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2011 (8) TMI 747 - AT - Income TaxDisallowance - violating traffic rules by entering town on no entry times one way traffic violations and the assessee claimed it to be incurred wholly and exclusively for the purpose of business - Since the assessee is engaged in the transport business the violation of traffic rules are quite normal for which it has to pay some penalties/fines - Since the payments were made for infraction of law it is hit by explanation to section 37 of the Act and therefore the penalty or fine cannot be considered to be the business expenditure u/s 37 of the Act - Decided against the assessee Regarding disallowance of Rs. 1, 16, 14, 599/- u/s 40a(ia) - Hire charges - Whether TDS u/s 194C is applicable or not - Held that TDS as per section 194C is required to be deducted when the payments are made to the contractor for carrying out the work i.e. carriage of goods and passengers by any mode of transport other than by railways subject to other conditions prescribed u/s 194C of the Act but whenever the lorries and trucks are hired by the assessee for its own use in any manner under its own control and supervision the TDS is not required to be deducted on payment made by the contractor to the lorry/truck owners - Decided in favor of the assessee
Issues Involved:
1. Disallowance of expenditure of Rs. 80,860/- under Section 37(1) of the Income-tax Act. 2. Disallowance of Rs. 1,16,14,599/- under Section 40a(ia) of the Income-tax Act due to non-deduction of TDS. Issue-wise Detailed Analysis: 1. Disallowance of Expenditure under Section 37(1): The first issue pertains to the disallowance of Rs. 80,860/- under Section 37(1) of the Income-tax Act. The expenditure was incurred due to violations of traffic rules, such as entering town during no-entry times and one-way traffic violations. The assessee claimed these expenses as business expenditures, arguing they were incurred wholly and exclusively for business purposes. However, the Assessing Officer (A.O.) rejected the claim, stating that expenses incurred for purposes prohibited by law cannot be deemed as business expenditures under Section 37(1). The assessee appealed to the CIT(A), who upheld the A.O.'s decision. The assessee then brought the matter before the Tribunal, arguing that such penalties are compensatory in nature and should be allowed as revenue expenditures. The Departmental Representative (D.R.) countered that fines imposed for traffic violations cannot be allowed as revenue expenditures under Section 37(1). Upon reviewing the submissions and relevant provisions, the Tribunal found that since the payments were made for infractions of the law, they fall under the explanation to Section 37(1) and cannot be considered business expenditures. Thus, the Tribunal confirmed the CIT(A)'s order, finding no infirmity in it. 2. Disallowance under Section 40a(ia) for Non-Deduction of TDS: The second issue involves the disallowance of Rs. 1,16,14,599/- under Section 40a(ia) due to non-deduction of TDS. The assessee had engaged/hired vehicles from several persons, including the Managing Director, Director, and their family members, and paid hire charges without deducting TDS. The A.O. quantified the hire charges exceeding Rs. 50,000/- and disallowed the payment under Section 40a(ia), stating that the provisions of Section 194C apply to such hire charges. The assessee contended before the CIT(A) that the hire charges are not covered under the term "work" in Section 194C and cited judgments from the Madras High Court and Kerala High Court to support their claim. However, the CIT(A) was not convinced and confirmed the disallowance. Before the Tribunal, the assessee reiterated their contentions, relying on previous Tribunal decisions that payments for hiring vehicles for transporting goods under the assessee's supervision do not attract Section 194C. The D.R. argued that the provisions of Section 194C are clear and that hiring vehicles for transportation falls under the definition of "work." The Tribunal examined the provisions of Section 194C, noting that TDS is required when payments are made to a contractor for carrying out any work, including the carriage of goods. However, in this case, the assessee hired vehicles for transporting consignments under their own control and supervision, without assigning any work to the vehicle owners. The Tribunal referred to previous decisions, concluding that payments for hired vehicles do not constitute sub-contract payments liable for TDS under Section 194C. Thus, the Tribunal found no merit in the CIT(A)'s order and directed the A.O. to allow the payment claimed by the assessee, setting aside the disallowance under Section 40a(ia). Conclusion: The Tribunal upheld the disallowance of Rs. 80,860/- under Section 37(1) but allowed the appeal regarding the disallowance of Rs. 1,16,14,599/- under Section 40a(ia), directing the A.O. to allow the payment claimed by the assessee.
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