2011 (5) TMI 666 - AT - Income Tax

Addition made u/s.40(a)(ia) of the Act being amounts paid to Sub contractors without deducting the tax at source as required under section 194C(2) of the IT Act, 1961 - held that - AO disallowed the entire payment made to the farmers amounting to Rs.2,57,62,253/- by invoking the provisions of section 40(a)(i) of he IT Act. Apart from this, the AO disallowed Rs. 51,47,250/- under Section 40A(3) of the Act. Thus, the disallowance of Rs.51,47,250/- was made twice i.e. once under Section 40A(3) and then invoking section 40(a)(ia). After carefully considering the reasons which lead to formation of the society, we are convinced that the assessee has no profit motive and more of a welfare activity performed by the assessee. It was acted as an interface between farmers and the ONGC for the limited purpose of receiving the jeep rental income on behalf of the illiterate farmers. The main purpose of this mechanism is to help both ONGC and the farmers as it precluded the individual interaction and smoothen the entire operation. The Society was also debarred from hiring the vehicles of the farmers to other clients whose land is acquired by the ONGC. In these circumstances, the learned CIT (A) is factually and legally correct in holding that the assessee has not performed the service of tour operators. It was providing services to the members of the society only. In these circumstances, the decision of the ITAT, Pune Bench in the case of Datta Digambar Saaakari Kamgar Sanstha Ltd. (2000 -TMI - 71629 - ITAT PUNE) relied upon by the learned CIT (A) in the impugned order is more relevant and identical to the facts before us.

Summary

Issues Involved:
1. Applicability of Section 40(a)(ia) and Section 194C(2) of the Income Tax Act, 1961.
2. Applicability of Section 40A(3) of the Income Tax Act, 1961.
3. Eligibility for statutory deduction under Section 80P(c)(ii) of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Applicability of Section 40(a)(ia) and Section 194C(2) of the Income Tax Act, 1961:
The core issue was whether the assessee, a co-operative society, should have deducted tax at source under Section 194C(2) on payments made to its members (farmers) and whether the disallowance under Section 40(a)(ia) was justified. The AO disallowed Rs. 2,57,36,253/- on the grounds that the society functioned as a sub-contractor to ONGC and was required to deduct TDS on payments to farmers. The CIT(A) reversed this disallowance, stating that the society was formed to facilitate the distribution of income from ONGC to the farmers, who were land losers compensated with vehicle rentals. The society acted as an intermediary without profit motive, merely distributing income and not incurring expenditure. The Tribunal upheld CIT(A)'s decision, agreeing that the society's activities did not constitute a contractor-subcontractor relationship and thus, Section 194C(2) was not applicable.

2. Applicability of Section 40A(3) of the Income Tax Act, 1961:
The AO also invoked Section 40A(3), disallowing 20% of the expenditure amounting to Rs. 51,47,250/- on the basis that payments were made in cash. The CIT(A) deleted this disallowance, reasoning that the society did not incur any expenditure in distributing rentals to farmers; it merely acted as a conduit for income distribution. The Tribunal agreed with CIT(A), noting that the disallowance was made twice (once under Section 40A(3) and again under Section 40(a)(ia)), and upheld the deletion of the disallowance under Section 40A(3).

3. Eligibility for statutory deduction under Section 80P(c)(ii) of the Income Tax Act, 1961:
The CIT(A) directed the AO to allow the statutory deduction under Section 80P(c)(ii), recognizing the society's role in facilitating income distribution without profit motive. The Tribunal did not find any reason to interfere with this direction, thereby upholding the CIT(A)'s decision.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s findings that the society's activities did not attract the provisions of Section 194C(2) and Section 40A(3) of the Income Tax Act, 1961. The society was deemed to be performing a welfare activity without profit motive, merely distributing income from ONGC to its members. The statutory deduction under Section 80P(c)(ii) was also upheld. The Tribunal concluded that the society's operations did not constitute a contractor-subcontractor relationship and thus, the disallowances made by the AO were not justified.