2005 (6) TMI 21 - HC - Income Tax

TDS - discount given on sale of stamp by the Treasury to the stamp vendor is outside the scope of TDS provisions under section 194H of the Act. Wherever the Legislature wanted to levy tax on trade discount they specifically provided for the same which is clear from the provisions of section 194H of the Act which provides for deduction of tax on discount paid to lottery dealers in the form of commission. In the circumstances discount paid to the stamp vendors is not intended to be covered by section 194H of the Act. These writ petitions are therefore allowed vacating the impugned instructions issued by the Income-tax Department for deduction of tax at source on discounts paid to stamp vendors with direction to the Treasury Officers to refund the amounts withheld from the petitioners and other stamp vendors under interim orders of this court within three weeks from the date of production of copy of this judgment.

Summary

Issues:
Challenge against Income-tax Department's demand to recover income-tax from discount allowed to stamp vendors.

Analysis:
The judgment involves a challenge by Associations of Stamp Vendors and individual stamp vendors against the Income-tax Department's demand to recover income-tax from the discount provided to stamp vendors on the sale of stamp paper. The petitioners argued that the discount is not "commission" or "brokerage" as per Section 194H of the Income-tax Act. They relied on a Gujarat High Court decision stating that licensed stamp vendors are independent dealers and not agents of the Government, hence not subject to tax deduction at source. The Income-tax Department contended that the Gujarat High Court decision was incorrect and highlighted minor discrepancies between the rules in Gujarat and Kerala regarding the treatment of discounts on repurchase of stamp paper by the Government.

The court analyzed Section 194H of the Income-tax Act, which mandates deduction of income-tax on "commission" or "brokerage." The Gujarat High Court held that stamp vendors are not agents of the Government and discounts provided to them do not constitute "commission" or "brokerage." The court agreed that discounts on stamp paper sales to licensed vendors by the Treasury cannot be considered as "commission" or "brokerage" for tax deduction purposes under Section 194H. The court emphasized that the definition of "commission and brokerage" in the Act covers payments for services rendered in the course of sale, typically by third parties like brokers or agents, not by buyers.

The court rejected the argument that the inclusive definition of commission or brokerage could include discounts, stating that discounts given by sellers to buyers do not qualify as commission or brokerage for tax deduction under Section 194H. The court compared the situation to other regulated markets like medicines and petroleum products, where fixed commissions are paid to dealers, but commission paid in these cases does not attract TDS under Section 194H. The court concluded that discounts provided to stamp vendors are not intended to be covered by Section 194H, allowing the writ petitions and directing the Treasury Officers to refund withheld amounts to the petitioners and other stamp vendors within three weeks.