2010 (4) TMI 852 - AT - Income Tax

Non deduction of TDS u/s 194C - transportation - held that - the learned counsel is mixing up two issues viz., disallowance under sec.40(a)(ia) and demand raised by an order under sec.201(1) of the Act. Where the payee has already paid tax, no demand can be raised against the payer under sec.201(1) of the Act. But, non-deduction of tax where it is statutorily required, will certainly invite all the consequences under the Act irrespective whether tax has been paid by the payee or not. Of course, where the payee has already paid tax and if the same amount is disallowed in the payer s case, it will certainly amount to taxing the same amount twice. However, the legislature has taken care to remedy this situation by providing that the sum disallowed will be allowed as a deduction in the year of payment.

Summary

Issues:
1. Disallowance under sec.40(a)(ia) for non-deduction of tax at source under sec.194C.
2. Interpretation of sec.194C in the context of transportation business.
3. Applicability of Circular No.73 dated 26.9.1972 and subsequent amendments.
4. Treatment of disallowance under sec.40(a)(ia) and demand under sec.201(1) of the Income-tax Act.
5. Consideration of bona fide belief for non-deduction of tax and reliance on legal advice.
6. Retrospective operation of the substituted sec.194C.

Analysis:

1. The appeal concerned the disallowance of Rs.15,98,454 under sec.40(a)(ia) of the Income-tax Act due to non-deduction of tax at source under sec.194C. The assessee, a transport contractor, argued that the hiring of vehicles by a partner's wife was not related to the business of the partnership. However, the Tribunal found that such hiring constituted sub-contracting of work, making the assessee liable for TDS under sec.194C.

2. The Tribunal rejected the contention that there was no contract involved in the hiring arrangement, emphasizing that sec.194C covers oral contracts and includes carriage of goods. The reliance on Circular No.73 dated 26.9.1972 was deemed misplaced as subsequent amendments expanded the scope of sec.194C to include carriage of goods and passengers, making TDS applicable to transport contractors.

3. The Tribunal clarified the distinction between disallowance under sec.40(a)(ia) and demand under sec.201(1) of the Act. While payment receipt and tax payment by the payee may prevent a demand under sec.201(1), non-deduction of tax as required by law attracts consequences under the Act. The Tribunal upheld the CIT(A)'s decision to allow deduction of the disallowed amount in the year of payment.

4. The Tribunal addressed arguments related to bona fide belief for non-deduction of tax, emphasizing the lack of a basis for such belief in the present case. Additionally, reliance on legal advice from the assessee's own legal cell was rejected, as the advice did not provide a valid reason for non-deduction of tax.

5. Lastly, the Tribunal discussed the retrospective operation of the substituted sec.194C, noting that the entire section had been substituted with effect from 1.10.2009. The Tribunal concluded that it was not justifiable to treat a part of the provision as retrospective without specific legislative intent, thereby rejecting the argument for retrospective application.

6. In conclusion, the Tribunal upheld the disallowance under sec.40(a)(ia) and affirmed the CIT(A)'s direction for deduction of the disallowed amount in the relevant year. The appeal of the assessee was dismissed, emphasizing compliance with TDS requirements under sec.194C in the context of transportation business.