2012 (8) TMI 152 - HC - Income Tax

Reopening of assessment - non deduction of TDS on the labour charges paid - assessee stated that he was covered under Section 44AB - Held that - An individual or HUF should deduct tax at source under sub-section (2) of Section 194C on payments made to a sub-contractor and must establish that in the financial year immediately preceding the financial year in which such sum is paid or credited, total sales, gross receipts or turnover of such individual or HUF from profession or business exceeded the limits provided in Section 44AB and the accounts were thus compulsorily auditable. The assessee as an individual or HUF may be required to make the payments to a sub-contractor on the first date of the financial year or at any rate in the early part of the financial year when obviously assessee will not be in position to foresee whether total sales, gross receipts or turnover would exceed statutory limits and his accounts would be therefore required to be audited under Section 44AB, thus in such a situation, the assessee could not be expected to deduct tax at source - It is precisely for this reason that the liability of an individual or HUF to deduct tax at source upon the payments being made to the sub-contractor, is made relatable to financial year immediately preceding the year when such payment is made or credited - AO s reason to believe that the income chargeable to tax has escaped assessment is without any foundation and lacks validity - in favour of assessee.

Summary

Issues Involved:
1. Validity of the notice for reopening the assessment.
2. Applicability of Section 194C and Section 40(a)(ia) of the Income Tax Act.
3. Interpretation of the proviso to Section 194C(2) regarding tax deduction at source (TDS) requirements.

Issue-Wise Detailed Analysis:

1. Validity of the Notice for Reopening the Assessment:
The petitioner challenged the notice dated 05.03.2009, issued by the Assessment Officer to reopen the assessment for the assessment year 2005-06. The petitioner argued that the sole reason recorded by the Assessing Officer to reopen the assessment lacked validity, making the reopening notice without jurisdiction. The court noted that the notice for reopening was issued within four years from the end of the relevant assessment year and that the Assessing Officer had not examined the question of the petitioner's liability for deduction of tax at source under Section 194C during the original assessment. However, the court emphasized that the existence of reasons for reopening the assessment can always be examined by the court to determine if the Assessing Officer had a valid reason to believe that income chargeable to tax had escaped assessment.

2. Applicability of Section 194C and Section 40(a)(ia) of the Income Tax Act:
The Assessing Officer issued the notice under Section 148 of the Act, believing that the petitioner had not deducted TDS on labour charges payment of Rs. 3,07,59,872/- as required under Section 194C. Consequently, the Assessing Officer opined that the petitioner became a defaulter, and the entire amount should not be deducted in computing the income chargeable under the head "profit and gains of business or profession" as per Section 40(a)(ia). The petitioner contended that he was required to deduct TDS only if, in the financial year immediately preceding the financial year in which such payments were made, he was covered under Section 44AB. Since the financial year relevant to the A.Y. 2005-06 was the first year of the petitioner's business, Section 194C was wrongly applied.

3. Interpretation of the Proviso to Section 194C(2) Regarding TDS Requirements:
The court examined the relevant statutory provisions, particularly the proviso to Section 194C(2), which states that an individual or HUF whose total sales, gross receipts, or turnover from the business or profession exceed the monetary limits specified under Section 44AB during the financial year immediately preceding the financial year in which such sum is credited or paid, shall be liable to deduct income-tax. The court found that the petitioner did not fall under this proviso in the preceding financial year. The court rejected the Assessing Officer's interpretation that the liability to deduct TDS would arise even if the case of the assessee fell under clauses (a) or (b) of Section 44AB in the current financial year. The court noted that the statutory provisions clearly refer to the financial year immediately preceding the financial year in which the sum is credited or paid, and this interpretation avoids anomalous situations where the assessee could not foresee whether total sales, gross receipts, or turnover would exceed statutory limits.

Conclusion:
The court concluded that the Assessing Officer's reason to believe that the income chargeable to tax had escaped assessment was without foundation and lacked validity. Consequently, the notice for reopening the assessment was rendered invalid and quashed. The rule was made absolute, with no costs awarded.