2024 (12) TMI 1106 - AT - Income Tax

TDS u/s 194C - disallowing Crew Wages Expenses made u/s.40(a)(ia) - view of the AO was that on payment of crew wages expense , the assessee being a sub-contractor was required to deduct the tax at source as prescribed under sub-section (2) of section 194C. On the other hand, the assessee s contention is that the assessee has not acted as a sub-contractor but only as a contractor. As per assessee s contention it was a principal to principal arrangement for providing crew to carry out scrapping activity, so not covered by any of the said contracts. HELD THAT - Board s Circular No. 715 dated 8-8-1995 215 ITR (Statute 12) issued by the CBDT, if we examine the issue in hand, then in terms of the provisions of section 194C(2) of the Act conditions to be satisfied are (i) that the assessee should be a contractor, (ii) that the assessee should enter into a contract with a sub-contractor, (iii) that the sub-contractor should carry out any part of the work undertaken by the contractor and (iv) that the payment should be made for the work done. In a case, when a contract is assigned, generally the clauses are stringent that the contractor is to be responsible for all the acts and defaults committed. In the present case as well, when M/s. Western Oversea Ohio INChad granted sub-contract to assessee then the assessee was to deploy his own resources in terms of manpower. Further the assessee was responsible of any legal or financial liability. Assessee was made solely responsible for the execution of the job. These terms, therefore, suggested that the assessee was wholly and exclusively responsible for the acts as also for the defaults, if committed. The catalogue of criterion must include certain other clauses as well, yet in this case this criterion can be determinative considering the nature of work assigned by the assessee to workers. It is not the case of the A.O. that he happened to be in possession of some material to allege that there existed a specific contract between the assessee and the crew wage workers. Whether the manpower were supplied in pursuance of any sub-contract so as to apply the provisions of section 194C(2)? Nothing has been brought on record. We, therefore, conclude that in the absence of transfer or pass-over of any contractual responsibility to crew wage worker as a sub-contractor, the assessee being an individual was not responsible for the deduction of tax at source as prescribed u/s. 194C of the IT Act. Consequence thereupon the provisions of section 40(a)(ia) of the Act were incorrectly invoked, hence the view taken by the authorities below are hereby reversed. Reliance has also been placed before us on the decision of Prashant H. Shah 2012 (6) TMI 535 - ITAT AHMEDABAD wherein on similar fact, the tribunal held that section 40(a)(ia) has been incorrectly imposed. Thus, the Ground raised by the assessee is allowed.

Summary

Issues Involved:
1. Whether the assessee was liable to deduct TDS on crew wages expenses under section 194C of the Income Tax Act.
2. Applicability of section 40(a)(ia) regarding the disallowance of expenses for non-deduction of TDS.

Issue-wise Detailed Analysis:

1. Liability to Deduct TDS on Crew Wages Expenses:

The core issue revolves around whether the assessee, engaged in providing manpower to shipping companies, was obligated to deduct Tax Deducted at Source (TDS) on crew wages expenses amounting to Rs. 58,76,717 under section 194C of the Income Tax Act. The Assessing Officer (AO) contended that the assessee, acting as a contractor, was required to deduct TDS on the payments made, as these were deemed contractual payments under an implied contract. Consequently, the AO disallowed the expenses under section 40(a)(ia) for non-compliance with TDS provisions.

The assessee argued that the payments were wages to employees, not contractual payments, and thus outside the purview of section 194C. It was further contended that section 194C(1) as applicable for the assessment year 2006-07 did not impose a TDS obligation on individuals unless their total sales exceeded the monetary limits prescribed under section 44AB. The assessee emphasized that the provisions applicable from 1st June 2007, which included individuals under section 194C(1)(k), were not applicable for the assessment year in question.

The Tribunal analyzed the provisions of section 194C, noting that the amendments effective from 1st June 2007, which included individuals under the TDS obligation, were not applicable to the assessment year 2006-07. Therefore, the Tribunal concluded that the assessee, being an individual, was not liable to deduct TDS on the crew wages for the year under consideration.

2. Applicability of Section 40(a)(ia):

The Tribunal examined whether the disallowance under section 40(a)(ia) was justified given the non-deduction of TDS. The AO had invoked this section due to the alleged non-compliance with section 194C. However, the Tribunal found that the assessee did not act as a sub-contractor but rather as a contractor in a principal-to-principal arrangement. The Tribunal emphasized the absence of a specific contract with the crew wage workers that would necessitate TDS deduction under section 194C(2).

The Tribunal further noted that the AO did not present any evidence of a sub-contractual relationship between the assessee and the crew wage workers. It was concluded that the contractual responsibility was not transferred to the workers as sub-contractors, thus negating the applicability of section 194C(2). Consequently, the provisions of section 40(a)(ia) were incorrectly invoked, leading to the reversal of the authorities' decision.

The Tribunal referenced a similar decision in Prashant H. Shah Vs Assistant Commissioner of Income-tax, where section 40(a)(ia) was deemed incorrectly imposed under analogous circumstances.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, concluding that the assessee was not responsible for TDS deduction under section 194C for the assessment year 2006-07. Accordingly, the disallowance under section 40(a)(ia) was reversed, and the assessee's ground was upheld. The judgment was pronounced on 18th December 2024.