2016 (6) TMI 849 - HC - Income Tax

TDS u/s 194C - non deduction of tds on payment to contractors - Held that - The persons engaged by the four mentioned persons were not sub-agents but they were working for the principal namely the assessee in this case. The payment made to those persons through the hands of the aforesaid four persons is a payment made directly by the assessee to those persons because well settled principles of law is that when one acts through another he acts himself. Except for the four letters there was no other evidence available. On the basis of the aforesaid four letters it was not possible to hold that the aforesaid four persons were sub-contractors nor was it possible to hold that the assessee had assigned the work entrusted with him to those four contractors. Unless these two facts were proved the question of Section 194C(2) becoming applicable to the assessee could not arise. - Decided in favour of assessee

Summary

Issues:
Interpretation of Section 194C(2) and Section 40(a)(ia) of the Income Tax Act for disallowing expenditure and deducting tax at source.

Analysis:
The judgment pertains to an appeal against a decision by the Income Tax Appellate Tribunal concerning the assessment year 2006-07. The main issue revolves around the application of Section 194C(2) and Section 40(a)(ia) of the Income Tax Act. The core question raised was whether the Tribunal was justified in reversing the decision of the Commissioner of Income-Tax (Appeal) and upholding the addition of a specific sum made by the Assessing Officer. The crux of the matter was whether the four individuals who received payments acted as sub-contractors of the assessee. The appellant's representative argued that the real controversy was the nature of the relationship between the assessee and the recipients of the payments.

The provisions of Section 194C(2) were invoked to disallow an expenditure of a certain amount paid by the assessee to the four individuals on the grounds of non-deduction of tax at source. The appellant contended that for Section 194C(2) to apply, it must be established that the assessee entered into a contract with the recipients for carrying out the work. The evidence presented included letters from the individuals stating they received payments for wages and distributed them to laborers. The letters indicated that the individuals acted as agents of the assessee, getting the work done on behalf of the assessee without any formal assignment of work.

The Commissioner of Income Tax (Appeal) opined that there was no evidence to prove the individuals were sub-contractors, and therefore, the payments made were allowable as labor charges. The Tribunal was expected to demonstrate the incorrectness of the Commissioner's decision before intervening. However, the Tribunal failed to provide reasoning to show the Commissioner's decision was wrong. The Court emphasized that for Section 194C(2) to be applicable, it must be proven that the individuals were sub-contractors and that the work was assigned to them, which was not established in this case. Consequently, the Court found the Tribunal's decision to be perverse and allowed the appeal, directing each party to bear their own costs.

In conclusion, the judgment clarifies the application of tax deduction provisions under the Income Tax Act and highlights the importance of establishing a contractual relationship for the deduction of tax at source. The decision underscores the necessity of concrete evidence to support claims and the requirement for appellate bodies to provide sound reasoning when overturning lower authorities' decisions.