2013 (1) TMI 424 - AT - Income Tax

Non deduction of TDS on distributed chit dividends to subscribers - assessee company is engaged in the business of running chit funds - CIT(A) deleted the order of default u/s 201 & 201(1A) - Held that - As decided in Delhi High Court in the case of Sahib Chits(Delhi)(P)ltd. 2009 (7) TMI 75 - DELHI HIGH COURT , and CIT V/s. Bilahari Investment Pvt. Ltd.(2006 (6) TMI 59 - MADRAS HIGH COURT) as affirmed by the Apex Court 2008 (2) TMI 23 - SUPREME COURT held that the payment of dividend to the subscribers of a chit towards dividend does not partake the character of interest and accordingly, the assessee is not liable to deduct TDS under S.194A and not liable to interest u/s. 201(1) and 201(1A) - against revenue. Following the consistent view taken by the decision in similar matters by the ratio of the decision of the Madras High Court in the case of CIT V/s. L.G.Ramamurthy and Others 1976 (10) TMI 18 - MADRAS HIGH COURT the provisions of S.40(a)(ia) of the Act are not attracted, and accordingly the CIT(A) was justified in deleting the addition made by the assessing officer by resorting to disallowance in terms of S.40(a)(ia). Expenditure incurred on purchase of various items - whether partake the character of payments under the works contract and tax was deductible u/s 194C which was not deducted - Held that - Relying on decision in the case of CIT Vs. Glenmark Pharmaceuticals Ltd. (2010 (3) TMI 289 - BOMBAY HIGH COURT) wherein the Bombay High Court took note of the amendment to sec. 194C (w.e.f. 01/10/2009 and held that work does not include manufacture and supply of products according to specification of customers by using materials purchased from third parties. Expenditure towards advertisement charges - demand raised by the AO u/s 201(1) - the CIT(A) deleted the same, however sustained the interest u/s 201(1A) - Held that - CIT(A) relying on the decision of Hindustan Coca Cola Beverage (P) Ld. Vs. CIT (2007 (8) TMI 12 - SUPREME COURT OF INDIA)referring to the CBDT Circular No. 275/201/95-IT(B), dated 29/01/1997 wherein held that where deductee, recipient of income, has already paid taxes on amount received from deductor, department once again cannot recover tax from deductor on same income by treating deductor to be assessee-in-default for shortfall in its amount of tax deducted at source. The Apex Court also . However, this will not alter the liability to charge interest, therefore, confirm the order of the CIT(A) for charging of interest till the date of payment of tax by the assessee - against revenue.

Summary

Issues Involved:
1. TDS on chit dividends under Section 194A.
2. TDS on payments for printing and stationery under Section 194C.
3. TDS on advertisement charges under Section 194C.

Detailed Analysis:

1. TDS on Chit Dividends under Section 194A:

The primary issue was whether the chit dividends distributed by the assessee company to its subscribers were subject to TDS under Section 194A of the Income Tax Act. The Assessing Officer (AO) had determined that the assessee failed to deduct TDS on these dividends, treating them as interest payments. The assessee contended that the dividends did not constitute interest as defined under Section 2(28A) of the Act, arguing that there was no creditor-debtor relationship between the foreman and the subscribers in a chit fund scheme. The CIT(A) agreed with the assessee, referencing decisions from the Delhi High Court in Sahib Chits and ITAT Visakhapatnam in Daspalla Chits & Investments Ltd., which held that chit dividends do not partake the character of interest. The ITAT upheld the CIT(A)'s decision, noting that consistent judicial precedents, including those in the assessee's own case for previous years, had established that chit dividends do not constitute interest, and thus, TDS under Section 194A was not applicable.

2. TDS on Payments for Printing and Stationery under Section 194C:

The AO also identified TDS defaults on payments made for printing stationery, visiting cards, calendars, etc., under Section 194C. The assessee argued that these were straightforward purchases and did not involve any works contract, thus not attracting TDS under Section 194C. The CIT(A) accepted this argument, noting that the items purchased were not works contracts but rather purchases of goods with the assessee's logo, on which sales tax was paid. The CIT(A) referenced the Bombay High Court decision in CIT vs. Glenmark Pharmaceuticals Ltd., which clarified that manufacturing and supplying products as per customer specifications using third-party materials does not constitute a works contract. The ITAT affirmed this view, holding that the expenditure on these items did not attract TDS under Section 194C.

3. TDS on Advertisement Charges under Section 194C:

The final issue concerned TDS on advertisement charges paid to Ushodaya Enterprises Ltd. The assessee admitted the liability to deduct TDS but argued that since the deductee had already paid the taxes, the demand for TDS should be waived. The CIT(A) deleted the demand under Section 201(1) but upheld the interest under Section 201(1A). The ITAT upheld the CIT(A)'s decision, relying on the Supreme Court's ruling in Hindustan Coca Cola Beverage Pvt. Ltd. vs. CIT, which stated that if the deductee has paid the taxes, the deductor cannot be treated as an assessee-in-default for the same income, although interest liability remains.

Conclusion:

The ITAT dismissed the revenue's appeal, confirming the CIT(A)'s orders on all grounds. The tribunal upheld that chit dividends do not constitute interest and thus are not subject to TDS under Section 194A. It also held that the purchase of printed materials did not involve works contracts and thus did not attract TDS under Section 194C. Finally, it confirmed that while the demand for TDS on advertisement charges was deleted, the interest liability under Section 201(1A) was upheld.