2017 (6) TMI 246 - AT - Income Tax

TDS u/s 194C - disallowance u/s. 40(a)(ia) - hire charges payment - whether the second proviso is prospective or retrospective in nature? - Held that - The second proviso to section 40(a)(ia) has retrospective effect from 01.04.2005 and in case the recipients of the amount have taken into account for computation of their income offered to tax in the return of income then no disallowance can be made u/s. 40(a)(ia). Hence we set aside this issue to the record of the AO for limited purpose of verification of the facts whether the recipients have considered the amount in question for computation of their income offered to tax. Whether this payment is sharing of the revenue at source and therefore the provisions of section 194C are not applicable? - Held that - It is pertinent to note that this is more of a question of fact than law as to whether the payment in question are sharing of revenue or are in the nature of hire charges. We find that though the assessee filed the affidavits of the recipients in support of the claim however neither the AO nor the CIT(A) have conducted a proper enquiry to verify this fact rather the evidence produced by the assessee was rejected at threshold. Even the decisions relied upon by the assessee before us were also not considered by the authorities below. Therefore we have already set aside the issue of non-applicable of provisions of section 40(a)(ia) by virtue of second proviso to said section we deem fit and proper that this issue of nature of payment also requires a proper verification and examination at the level of the AO. Accordingly, we set aside this issue to the record of the Assessing Officer for proper examination - Appeal of the assessee allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance under section 40(a)(ia) for non-deduction of tax at source on hire charges exceeding a certain amount.
2. Applicability of the second proviso to section 40(a)(ia) regarding retrospective or prospective effect.
3. Nature of payments made by the assessee - whether sharing of revenue or hire charges.

Detailed Analysis:

Issue 1: Disallowance under section 40(a)(ia)
The assessee, a tour and travel operator providing vehicles on hire, faced disallowance of hire charges exceeding a specified amount due to non-deduction of tax at source as per section 40(a)(ia). The AO contended that these payments were hire charges and not revenue sharing, leading to the disallowance. The CIT(A) upheld this decision, stating that the alleged cab sharing arrangement lacked evidence. The assessee argued that the payments were revenue sharing and not hire charges, supported by affidavits from recipients confirming the nature of the arrangement. The Tribunal considered the applicability of the second proviso to section 40(a)(ia) and the retrospective nature of its effect, ultimately setting aside the issue for verification of whether recipients had included the amounts in their income for tax purposes.

Issue 2: Applicability of the second proviso to section 40(a)(ia)
The assessee relied on the second proviso to section 40(a)(ia) to argue against disallowance, citing decisions supporting the retrospective nature of this provision. The Tribunal referred to judgments by the Hon’ble Delhi High Court, emphasizing that if recipients had already accounted for the payments in their income tax returns, no disallowance could be made under section 40(a)(ia). The Tribunal held that the second proviso had retrospective effect from 01.04.2005, directing the AO to verify if recipients had considered the amounts for tax computation before making a disallowance.

Issue 3: Nature of Payments
The primary contention revolved around whether the payments were sharing of revenue or hire charges. The assessee maintained that it was revenue sharing under a cab sharing arrangement, not subject to section 194C. The AO and CIT(A) viewed the payments as hire charges, dismissing the evidence provided by the assessee. The Tribunal noted that this issue required a factual examination to determine the nature of the payments accurately. Given the lack of thorough inquiry by the tax authorities and the relevance of the decisions cited by the assessee, the Tribunal set aside this issue for the AO to conduct a proper verification and decide based on the evidence presented.

In conclusion, the Tribunal allowed the appeal of the assessee for statistical purposes, emphasizing the need for a detailed examination of the nature of payments and verification of recipient tax treatment before making any disallowance under section 40(a)(ia).