2015 (7) TMI 916 - HC - Income Tax

Liability to deduct tax at source - whether Tribunal is correct in holding that no contract has existed between assessee AOP and its members and there was no liability on the part of the assessee to deduct tax at source on payment to it members? - Held that - The work was carried out and the same was handed over to the members to enable them to execute the contract. The association has neither kept any commission of its own nor any profit. The association comprising of these two members/ partners joined together for the purposes of executing the project. It is in such circumstances, that no interference of any sub-contractorship can be drawn. It is not correct to say that the Tribunal insisted on any written contract evidencing such relationship. The Tribunal noted the admitted facts and found that there is no sub-contract or relationship of a sub-contractor emerging from this undisputed factual position. It is in these circumstances, that it held that section 194C(2) of the Income Tax Act has no application to the facts of the assessee s case. See SMC Ambika case 2015 (7) TMI 931 - BOMBAY HIGH COURT - Decided in favour of assessee.

Summary

Issues:
Interpretation of provisions of the Income Tax Act regarding liability to deduct tax at source on payments made by an Association of Persons (AOP) to its members.

Analysis:
The case involved an appeal challenging the order of the Income Tax Appellate Tribunal for the Assessment Year 2008-09. The main issue was whether the AOP had the liability to deduct tax at source on payments made to its members. The Revenue contended that the AOP had failed to deduct tax at source on payments made to its members, treating them as subcontractors. However, the CIT(A) and the Tribunal held that the members of the AOP were not subcontractors, and therefore, there was no requirement to deduct tax at source under Section 40(a)(ia) of the Income Tax Act.

The Respondent-Assessee, an AOP, had filed a return of income declaring 'Nil' income for the subject assessment year. The Assessing Officer noted the failure of the AOP to deduct tax at source on payments made to its members, considering them as subcontractors. This decision was based on a previous case involving similar facts. The CIT(A) later ruled that the members of the AOP were not subcontractors, leading to no obligation to deduct tax at source. The Tribunal upheld this decision, emphasizing that the payments made by the AOP to its members did not fall under the subcontractor category, thus dismissing the Revenue's appeal.

In a related case, the High Court had previously refused to entertain an appeal by the Revenue against a similar Tribunal decision. The High Court observed that the AOP, comprising two entities, was formed for bidding and executing a project, with no sub-contractor relationship involved. The Court highlighted that the Tribunal found no evidence of sub-contracting based on the admitted facts. Drawing parallels, the Court in the present case concluded that the facts were identical, and the Revenue failed to present any distinguishing features justifying a different outcome. Consequently, the Court dismissed the appeal, stating that no substantial question of law arose for consideration.

In summary, the judgment revolved around the interpretation of the Income Tax Act provisions concerning the liability of an AOP to deduct tax at source on payments to its members. The decision reaffirmed that in cases where members of an AOP are not subcontractors, there is no obligation to deduct tax at source under the relevant sections of the Act. The Court's ruling aligned with previous findings, emphasizing the importance of factual circumstances in determining tax liability and dismissing the Revenue's appeal.