2016 (11) TMI 604 - AT - Income Tax

TDS u/s 194C - non deduction of tds on machine hire charges and transport charges - Held that - We find that the Amendment has come into effect with retrospective date and as per the amended provision if the payee has included the receipt in its books of account and has offered for taxes then the disallowance on account of non-deduction of TDS will not arise. In this view of the matter, we concur with the view of the Ld. CIT(A) where it was held that the assessee is not default for non-deduction of TDS. Addition u/s 40(A3)- Held that - Violation of provisions of Sec. 40(A3) of the Act with regard to the payment of machine hiring charges. In this connection, we are inclined to restore the matter back to the file of AO for fresh adjudication as per law with a direction to check whether the payment to the party concerned has been made in contravention to the provision of Sec. 40A(3) of the Act after providing reasonable opportunity of being heard to assessee.

Summary

Issues:
1. Whether hire charges can be treated as rent for the purpose of Section 40(a)(ia) of the Income Tax Act.
2. Whether rent and payments to contractors are hit by the provision of Section 40(a)(ia) of the Income Tax Act.
3. Whether non-deduction of Tax Deducted at Source (TDS) under Section 40(a)(ia) of the Act for machine hire charges and transport charges is justified.

Analysis:
1. The appeal by the Revenue challenged the order of the Commissioner of Income Tax (Appeals) regarding the treatment of hire charges as rent for Section 40(a)(ia) purposes. The Revenue contended that the CIT(A) erred in holding that hire charges cannot be treated as rent, despite the assessee treating them as such in their income tax return. The CIT(A) found that the AO hastily concluded that the hiring charges were contractual without proper investigation. The CIT(A) agreed with the appellant's argument that the hire charges were part of the trading account, not the P&L account, and thus not subject to Section 40(a)(ia). The CIT(A) deleted the addition made by the AO, stating that the AO failed to prove that Section 194I was applicable. The Tribunal concurred with the CIT(A)'s decision, emphasizing that the hire charges did not fall under Sections 30 to 37 of the Act, and the recipients had already included these payments in their accounts. The Tribunal allowed the appeal for the appellant on this issue.

2. The second issue involved the non-deduction of TDS under Section 40(a)(ia) for machine hire charges and transport charges. The AO disallowed the expenses due to failure to deduct TDS and made additional disallowances under Section 40A(3) for cash payments exceeding a specified limit. The CIT(A) deleted the addition made by the AO, stating that the hire charges were not subject to Section 40(a)(ia) and that the AO's assumptions lacked conclusive proof. The Tribunal upheld the CIT(A)'s decision, citing the retrospective effect of the Amendment in Section 201(1) and the need for fresh adjudication by the AO. The Tribunal directed the AO to verify related payments and compliance with tax regulations. The Tribunal allowed the Revenue's appeal for statistical purposes on this issue.

3. The Tribunal's decision highlighted the importance of proper verification and adherence to tax regulations in determining the applicability of TDS provisions. The retrospective effect of the Amendment in Section 201(1) was crucial in assessing the default for non-deduction of TDS. The Tribunal emphasized the need for thorough verification by the AO to ensure compliance with tax laws, especially regarding payments subject to TDS provisions. The Tribunal's decision to allow the appeal for statistical purposes underscored the importance of procedural compliance and verification in tax assessments.