Section 40a(ia) vis a vis section 194C and 194I- disallowance not called for when tax was deducted u/s 194C, even if it could be contended that tax was deductible u/s 194 I.

[C.A. DEV KUMAR KOTHARI]

Relevant links:

Deputy Commissioner of Income-tax Vs.  M/s. S. K. Tekriwal (2011 -TMI - 206414 - ITAT, KOLKATA)

Sections  40(a) (ia), 194C  and , 194I of Income-tax Act,1961.

Circulars u/s 194C and 194I.

Section 40 (a) (ia) provides that in some circumstances, where the person paying relevant specified sums is required to deduct and deposit tax at source will not be entitled to get deduction of the entire sum, from which tax was deductible unless he has deducted and deposited tax so deducted within specified period. In case the sum is not so deposited, the entire sum from which tax was deductible will be disallowed. The same can however, be claimed in the year in which TDS is deposited.

Various types of TDS:

We find that there are various classes of payments from which tax is deductible at sources. This may depend on several factors including  nature of person paying the sum, nature of payment and nature of payee, relevant provision and certain exemptions etc. the provisions are complex and not free from ambiguities. Therefore, we find different views, opinions and hence litigation on such matters.

Case before Calcutta ITAT:

In DCIT vs. M/s. S. K. Tekriwal (ITAT Kolkata) the assessee has deducted tax u/s. 194C(2) of the Act considering payments made as payments made to sub-contractors. The revenue took view that tax should be deducted u/s 194 I, Thus there was tax deduction  and it is not a case of non-deduction of tax or no deduction of tax  at all.

It was contended that once tax is deducted and deposited, section 40a(ia) of the Act will not be attracted. Due to differences, the revenue contented that the payments are in the nature of machinery hire charges falling under the head ‘rent’ and the provisions of section 194I of the Act are applicable , the assessee has deducted tax @ 1% u/s. 194C(2) of the Act  instead of @ 10% u/s. 194I of the Act, resulting into lower  deduction of tax at source. Accordingly the sum from which tax was deducted u/s 194C instead of u/s 194I were  disallowed in proportionate manner  by invoking the provisions of section 40(a)(ia) of the Act.

The order of CIT(A):
The CIT(A) deleted disallowance. He held that the ‘machinery hire charges’ expenses fell  u/s. 194C(2) of the Act,  for the following reasoning:

1. a.    He considered the assessment order and the submission of the appellant and  the assessment record.
2. b.     The AO has relied solely on the accounting entries made in the books of account wherein  subcontract expenses are clubbed under the head ‘machine hire charges’.
3. c.    The AO  did not consider entire agreement but  confined himself only to a particular line mentioned in the agreement and he has failed to properly analyze the agreement in its totality.
4. d.     The nature and particulars of work that has been assigned to each sub-contractor is clearly specified in the agreement, which includes back filling, gravel filling, morum/ sand filling and rubber soiling; excavation with transportation; PCC, RCC and Dewatering; Pile & Open foundation work; Earthworks in filling from earth-quarry to works-site with all lift in layers as approved by the Railways, including all machineries & equipments and manpower regarding earth transportation, loading & unloading; and, providing RCC M-30 grade in well curb using concrete mixture and manual means and machinery and completing the job as per specification and direction of E/I.
5. e.      The AO ignored that in each of the agreements, the quantity of work is fixed, and, the rate is also fixed on the basis of such quantity of work.
6. f.     He found substance in the argument of the AO that hire charges depend on the time period for which the machines are used.
7. g.    However, he found that  in the present case, the time consumed by the sub-contractors, or the period for which the machines are used, is not at all a factor in deciding the payments made to the sub-contractors; it is only on the basis of the quantity of work that the payments have been made.
8. h.    The sub-contractors were required to complete the assigned job by utilizing their machines and equipments, and also, by employing local labour.
9. i.      The time period for which the machines and equipments are used has no role in deciding the payments made to the sub-contractors; moreover, labour charges are paid by the sub-contractors, and, the sub-contract expenses debited in the books of account of the appellant do not include labour charges.
10. j.       The nature of work assigned to the subcontractors was such that there was actually no requirement of any material in completion of the work, except for providing RCC M-30, where the principal employer itself has supplied the required material (iron and cement) for quality reasons.
11. k.    The payments made to the sub-contractors have been shown by them as receipts from sub-contract work as seen from the P & L a/c, Computation of Income, etc., in respect of some sub-contractors which are  available in the assessment record in case of Archana Shah, Julie Agrawal and Sweta Agrawal , for example.
12. l.      CIT(A) found that the payees  have shown the payments made by the appellant to them as receipts from sub­contract work, and, offered profit © 8% on such receipts.
13. m.    Thus,  the learned CITA() considered that  the decision of the AO is not based on proper findings.
14. n.     The AO has confined himself only to the accounting entries made in the books of account, and failed to properly analyze the material on record.
15. o.    The explanations, and also the evidences, submitted by the appellant seem to have been summarily rejected more on ground of presumption and assumption than on factual ground.
16. p.     This has led the AO to a state of affairs where salient evidences have been overlooked.
17. q.    In view of the above,  learned CIT(A) held as follows:

  “ I am of the opinion that the payments of Rs.3,37,37,464 were made to the sub-contractors, and, that the provisions of section 194C(2) are applicable in the case of the appellant. Since the appellant has deducted tax © 1 % on such payments, which is in conformity with the provisions of section 194C(2), the provisions of section 40(a)(ia) are not attracted. The addition is directed to be deleted. The grounds raised by the appellant are liable to he allowed.”

Thus, the learned CIT(A) held that on facts and as per law section 194C was applicable and not S. 194I. Tax was rightly deducted and as the same was deposited, any disallowance u/s 40a (ia) was not called for.

Appeal before Tribunal:

Revenue preferred appeal before ITAT. For this, revenue has raised following ground:

“Factual circumstances of the case reveals that in the instant case section 194I is applicable instead of section 194(2) of the I. T. Act. Hence the A. O has rightly made addition as section 40a(ia) of the I. T. Act. Therefore 2^nd appeal is suggested.”

( per author :It seems that due to carelessness, the comments of authorities suggesting second appeal has been incorporated in the above ground without suitable modification.)

Findings of Tribunal:

1. that CIT(A) has gone into the controversy of assessee falling under the head ‘sub contractor’ or falling under the head ‘rent’, the expenses made under the head ‘machinery hire charges’.
2. It is also a fact that the assessee has deducted TDS u/s. 194C(2) of the Act and covered itself under the head ‘sub contractor’.
3. Tribunal found that CIT(A) after verifying records and explanation submitted by assessee reached to a conclusion that payments are in the nature of contract payments made to sub contractors.
4. On merits, also Tribunal agreed  with the findings of CIT(A) furthermore  even revenue could not controvert the finding of CIT(A).
5. Tribunal also considered another aspect in the matter that is when  once the assessee has deducted TDS u/s. 194C(2) of the Act, whether disallowance can be made by invoking the provisions of section 40a(ia) of the Act.
6. Referring to the provisions of section 40a(ia) Tribunal noticed that in the provision it is provided that where in respect of any sum, as referred in this section, tax has not been deducted or after deduction has not been paid on or before the due date specified in sub-section (1) of section 139 of the Act, such sum shall be disallowed as a deduction while computing the income of the assessee for the previous year relevant to assessment year under consideration.
7. Tribunal noted that in the  case before it , the assessee has deducted tax, although u/s. 194C(2) of the Act and it is not a case of non-deduction of tax or no deduction of tax as is the import of section 40a(ia) of the Act.
8.  Even otherwise if it is considered that this particular sum falls under section 194I of the Act, it may be considered as tax deducted at a lower rate and it cannot be considered a case of non-deduction or no deduction.
9. Precedence followed:

      Tribunal also referred to earlier decisions by ‘C’ Bench of Mumbai ITAT in ITA No. 20/Mum/2010 in the case of DCIT v M/s Chandabhoy & Jassobhoy dated 08.07.2011, in that case assessee deducted tax u/s 192 (as salary) but revenue contended that it should be u/s 194J (as professional fees). The payees have declared salary income and that was accepted by revenue in their cases.

The Tribunal in that case considered that that there is no dispute with reference to the deduction of tax u/s 192 of the Act with the fact that the alleged consultants, in their individual assessments declared these payments as salary payments and accepted by revenue as it is.

Tribunal further,  held that the assessee had deducted tax u/s. 192 of the Act as against the allegation of revenue that the provisions of section 194J of the Act would be attracted as these consultants are in the capacity of professionals. The Bench held that the provisions of section 40(a)(ia) of the Act will not apply as the said provision can be invoked only in the event of non-deduction of tax but not for lesser deduction of tax. In that case the assessee has deducted tax u/s. 192 of the Act as against section 194J of the Act as against the claim of revenue.

J. Conclusion and order of Tribunal:

 The assessee has deducted tax u/s. 194C(2) of the Act being payments made to sub-contractors and it is not a case of non-deduction of tax or no deduction of tax as is the import of section 40a(ia) of the Act. Therefore S. 40(a)(ia) is not applicable. Tribunal also agreed with the CIT(A) that on facts tax was deductible u/s 194C and not u/s 194I as contended by the revenue.

Accordingly, Tribunal confirmed the order of CIT(A) allowing the claim of assessee and on this issue of revenue’s appeal was dismissed.