1991 (4) TMI 171 - AT - Income Tax

Issues Involved:
1. Demand of tax not deducted at source.
2. Penalty levied for not deducting tax at source under Section 201(1) read with Section 221 of the Income Tax Act, 1961.
3. Applicability of Section 194C regarding deduction of tax at source from payments to contractors and sub-contractors.

Issue-wise Detailed Analysis:

1. Demand of Tax Not Deducted at Source:
The Assessing Officer (AO) held that the appellant company failed to deduct tax at source amounting to Rs. 2,11,397 for the assessment year 1986-87, Rs. 2,85,431 for the assessment year 1987-88, and Rs. 1,52,050 for another period. The AO considered the appellant company as a deemed assessee in default under Section 201(1) of the Income Tax Act, 1961, for not deducting the tax at source.

2. Penalty Levied for Not Deducting Tax at Source Under Section 201(1) read with Section 221:
The AO levied penalties of Rs. 1,05,700, Rs. 1,42,720, and Rs. 76,030 respectively for the aforementioned periods. The penalty under Section 221 is subject to the satisfaction of the AO if good and sufficient reasons are shown for failing to deduct and pay the tax at source. The penalty is in the nature of simple interest at 15% per annum on the amount of tax either not deducted at source or deducted but not deposited from the date it was deductible to the date it is actually paid.

3. Applicability of Section 194C Regarding Deduction of Tax at Source from Payments to Contractors and Sub-Contractors:
Section 194C(3) specifies that no deduction shall be made under sub-sections (1) or (2) from any sum credited or paid in pursuance of any contract where the consideration does not exceed Rs. 10,000. The appellant argued that each payment made to M/s General Fibre Dealers Pvt. Ltd. for processing green tea leaves was below Rs. 10,000, and thus, the provisions of Section 194C were not applicable. The agreement dated 12th April 1984 and the letter dated 25th April 1984 between the appellant and M/s General Fibre indicated multiple contracts for processing tea, each below the Rs. 10,000 threshold.

Detailed Analysis:

Demand of Tax Not Deducted at Source:
The appellant company was deemed an assessee in default under Section 201(1) for not deducting the tax at source. The AO's decision was based on cumulative payments made under several contracts exceeding Rs. 10,000, thus necessitating tax deduction at source. However, the appellant contended that each individual contract for processing green tea leaves was below Rs. 10,000, and therefore, no tax deduction was required.

Penalty Levied for Not Deducting Tax at Source:
The penalty under Section 221 was challenged on the grounds that the appellant had a bona fide belief that tax deduction at source was not applicable due to each contract amount being below Rs. 10,000. The AO's imposition of penalty was based on the cumulative effect of payments, which the appellant argued was incorrect as each contract was separate and below the threshold.

Applicability of Section 194C:
The appellant relied on CBDT Circular No. 93 dated 26th September 1972, which clarified that no tax deduction is required if individual contract payments do not exceed Rs. 10,000. The Tribunal examined the agreement and the intention of the parties, concluding that multiple contracts existed, each with payments below Rs. 10,000. The Tribunal found that the AO's cumulative approach was incorrect and that the appellant's interpretation was reasonable and supported by the CBDT circular.

Conclusion:
The Tribunal concluded that the provisions of Section 194C were not applicable as each contract payment was below Rs. 10,000. Consequently, the appellant was not required to deduct tax at source, and the penalties under Section 201(1) read with Section 221 were not justified. The appeals were allowed, and the demand and penalties were set aside.

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