2014 (1) TMI 302 - AT - Income Tax

Disallowance of expenditure on hiring trucks u/s 40(a)(ia) r.w section 194C of the Act Failed to discharge tax Held that - The assessee is mainly engaged in the business of transporting of goods, and, in a situation in which the assessee is doing the business of transport of goods - in the course of carrying out such business, he takes the trucks on hire for transportation of goods, the truck hire is an independent and standalone contract which, though essentially an integral part of the business of transportation, cannot be said to be a sub contract - the assessee may not have any tax withholding obligation in respect of truck hire payments in the pre-amendment period - everything hinges on the findings as to whether the trucks were hired for the purpose of hiring out simplictor of trucks, or for the purpose of use of these trucks in the course of transportation of goods by the assessee. The assessee has used the hired truck in the course of carrying out his business of transportation of goods, and not that of hiring out trucks, the payments for truck hire cannot be treated as payments to sub-contractor, and, accordingly, the provisions of Section 194C(2), thus, the provisions of Section 40(a)(ia) cannot come into play - The disallowance will have to be deleted if it is found that trucks were hired by the assessee for back to back hiring out of trucks by the assessee, it will indeed be a case of sub-contracting the work, and, to that extent, provisions of Section 194 C(2) will indeed come into play Matter remitted back Decided in favour of Assessee.

Summary

Issues:
1. Correctness of CIT(A)'s order regarding the disallowance of expenditure on hiring of trucks due to failure to discharge tax withholding obligations.

Analysis:
The appellant challenged the correctness of the CIT(A)'s order sustaining the disallowance of expenditure on hiring trucks, amounting to Rs 6,50,000, for the assessment year 2007-08 under section 143(3) of the Income Tax Act, 1961. The Assessing Officer disallowed the amount under section 40(a)(ia) r.w.s. 194C, as the appellant did not deduct tax at source from the truck hire charges. The appellant argued that the payments were not under a subcontract but a standalone contract, hence Section 194C did not apply. However, the Assessing Officer viewed the appellant as a contractor paying for subcontract work, leading to the disallowance. The CIT(A) upheld this decision, prompting the appellant's further appeal.

The crux of the matter lies in the interpretation of Section 194C(2) to determine tax withholding obligations. Before June 2008, tax withholding requirements did not extend to individuals. Section 194C(2) mandates deduction when a contractor pays a sub-contractor for carrying out work undertaken by the contractor. In this case, the appellant's truck hire charges were not for transportation of goods but standalone truck hire. If the trucks were hired for transportation in the course of the appellant's business, not for hiring out trucks, then Section 194C(2) does not apply. Thus, the disallowance would be unwarranted.

Upon considering the legal position, the Tribunal directed the matter to be reconsidered by the Assessing Officer. If the trucks were used in the appellant's transportation business, the disallowance should be revoked as it does not fall under subcontracting. However, if the trucks were hired for back-to-back truck hiring, then Section 194C(2) would apply. The appellant was granted the liberty to raise other legal issues as needed. The Assessing Officer was instructed to provide a fair hearing, issue a speaking order, and decide the matter objectively, ensuring due process.

In conclusion, the appeal was allowed for statistical purposes based on the above directions, emphasizing the importance of a thorough reconsideration of the tax withholding obligations concerning the hiring of trucks in the appellant's business.