2009 (1) TMI 337 - AT - Income Tax

Disallowance u/s 40 (a)(ia) - payments for hired vehicles - failure to deduct TDS u/s 194C has on the sub-contract payments - Whether the vehicles hired by the assessee in execution of the transport contract can be termed as a 'sub-contract' and consequently the assessee is liable to deduct tax from the payment made for such vehicles u/s.194C(2)? - Assessee is a transport contractor and has entered into an agreement with parties whereby the assessee undertook to transport bitumen to various points as per their directions - contention of the assessee before ld CIT(A) was that the payments made for hired lorries cannot be said to be contractual payments and hence s. 194C will not apply to such payments. HELD THAT - In the decision of High Court in the case of ITO vs. Rama Nand Co. 1984 (3) TMI 6 - HIMACHAL PRADESH HIGH COURT held the meaning of the words 'sub-contractor' as under A 'sub-contractor' would mean any person who enters into a contract with the contractor for carrying out or for the supply of labour for carrying out the whole or part of the work undertaken by the contractor under a contract with any of the authorities named above or for the supply in terms of his contract with any of the aforesaid authorities. As per the provisions of s. 194C(2), the sub-contractor should carry out the whole or any part of the work undertaken by the assessee. The dictionary meaning of the words carry out is to 'carry into practice'; 'to execute'; 'to accomplish' . It signifies a positive involvement in the execution of the whole or any part of the main work by spending his time, money, energy, etc. and further taking the risks in carrying on the said activity. In the instant case, there is no material to suggest that the other lorry owners involved themselves in carrying out any part of the work undertaken by the assessee by spending their time, energy and by taking the risks associated with the main contract work. In the absence of the abovesaid characteristics attached to a sub-contract in the instant case, the payment made to the lorry owners stands at par with the payments made towards salaries, rent, etc. Hence the reasoning of the tax authorities, to hold that the payment made for hired vehicles is a sub-contract payment, in our opinion, is not correct and not based on relevant considerations. Hence, in our considered opinion, it cannot be said that the payments made for hired vehicles would fall in the category of payment towards a sub-contract with the lorry owners. In that case the assessee is not liable to deduct tax at source, as per the provisions of s. 194C(2), on the payments made to the lorry owners for lorry hire. Consequently, the provisions of s. 40(a)(ia) shall not apply to such payments. Decided the issue in favour of the assessee. In the result, the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Applicability of provisions of Section 40(a)(ia) read with Section 194C(2) of the Income Tax Act, 1961, on payments made to persons from whom vehicles were hired.

Detailed Analysis:

Issue 1: Applicability of Provisions of Section 40(a)(ia) read with Section 194C(2) on Payments Made to Persons from Whom Vehicles Were Hired

Background:
The assessee, a transport contractor, engaged lorries from various people to fulfill its contract obligations. The assessee claimed that only the commission from these hired lorries should be considered for tax purposes, not the entire freight receipts.

Assessment Officer (AO) Findings:
- The AO noted that the principal companies deducted tax at source on the entire freight charges, including those related to hired lorries.
- The AO determined that the entire gross turnover should be declared in the books, and payments to third parties should be treated as payments to sub-contractors. Consequently, these payments should be debited in the Profit & Loss (P&L) account.
- The AO disallowed an amount of Rs. 92,32,174 under Section 40(a)(ia) due to non-deduction of tax on payments made to sub-contractors as required under Section 194C(2).

CIT(A) Findings:
- The CIT(A) upheld the AO's decision, stating that the assessee should have shown the entire contract receipts in the P&L account and debited the payments made to lorry owners.
- The CIT(A) rejected the assessee's contention that only commission income should be treated as turnover, citing the Supreme Court's decision in CIT vs. British Paints India Ltd. and Chowringhee Sales Bureau (P) Ltd. vs. CIT.
- The CIT(A) also rejected the argument that Section 40(a)(ia) applies only to amounts payable at the year-end, stating that the section should be read along with Section 194C.

Assessee's Arguments:
- The assessee argued that it hired lorries merely as an agent and did not enter into any sub-contracts with the lorry owners.
- It was contended that the payments made for hired lorries should not be considered as sub-contract payments and thus not subject to TDS under Section 194C(2).
- The assessee cited various case laws, including Datta Digamber Sahakari Kamgar Sanstha Ltd. vs. Asstt. CIT and Paras Transport Co. vs. ITO, to support its position.
- The assessee also argued that the term "payable" in Section 40(a)(ia) should be interpreted as amounts outstanding at the year-end.

Tribunal's Analysis:
- The Tribunal examined whether the payments made for hired lorries could be termed as sub-contract payments under Section 194C(2).
- It noted that the assessee was solely responsible for the execution of the contract and that the lorry owners did not involve themselves in the contract work.
- The Tribunal concluded that the payments to lorry owners were not sub-contract payments but were akin to payments for salaries or rent.
- It was held that the assessee was not liable to deduct tax at source on these payments, and thus, the provisions of Section 40(a)(ia) did not apply.

Conclusion:
- The Tribunal allowed the appeal of the assessee, ruling that the payments made for hired lorries did not constitute sub-contract payments under Section 194C(2) and were not subject to disallowance under Section 40(a)(ia).

Final Judgment:
The appeal of the assessee is allowed.