WRITTEN CONTRACT IS NOT A PRECEDENT FOR DEDUCTION OF TAX AT SOURCE.

[Mr. M. GOVINDARAJAN]

                        In ‘Smt. J. Rama V. Commissioner of Income Tax and another’ – 2012 (6) TMI 645 (HC) the assessee is an individual deriving income from hiring of vehicles.  The assessee is providing vehicles to M/s Mahindra Transport Solutions Group under an agreement.   Clause 5 of the said written agreement entered into between them stipulates that the provision of services would involve providing vehicles owned by the assessee or associates of the assessee or agents, for transportation of the employees of Thomson Corporation (International) Private Limited.  The assessee owns a fleet of vehicles which is not sufficient to meet their obligations.  The assessee, therefore, hired vehicles from the owners of the vehicles for which there is no written agreement between them.  It is those vehicles hired in the aforesaid manner which are utilized for performing the contract entered into between the assessee and various customers.

                        The assessee filed a return for the assessment year 2005-06 declaring an income of Rs.8,27,740/-.   The return was processed and a refund of Rs.34,619/- was given to the assessee.   Thereafter, the case was selected for scrutiny under CASS.   Notice was issued to the assessee for which the assessee produced the books of accounts and other details.  The Revenue found from the said books and from the income and expenditure statement, the assessee has debited a sum of Rs.88,12,432/- as vehicle running expenses.  The said accounts disclosed that the assessee had not disclosed the tax deducted at source as per the provisions of Section 194C of the Income Tax Act, 1961.  The assessee did not produce the particulars of TDS in spite of sufficient opportunity was granted to her.  She contended the following:

• The assessee is not liable to deduct tax at source as there is no written or oral contract ;
• The assessee is not liable under Section 194C as individual charges for private service vehicle will not exceed Rs.20,000/-;
• As per Circular No.93, dated 26.09.2002 the liability of TDS would not arise.

Considering the arguments of the assessee the Assessing Officer held the following:

• The alleged circular was superseded by a clarification issued by the Board which made it obligatory to deduct tax;
• The contract entered into between the assessee and the persons who supplied the vehicle is a transport contract and not hiring of machinery and legally bound to deduct tax;
• Since the deduction of tax was not made, section 40(a)(ia) is attracted;
• Therefore a sum of Rs.79,45,225 representing the payment made is brought under tax net;

Aggrieved against this order the assessee filed an appeal before the Commissioner of Income Tax (Appeals) confirmed the demand of the Assessing Authority.  He held that the assessee is the owner of the hired vehicle.   It was a transport contract.  Section 194C mandates TDS and therefore, the disallowance by the Assessing Authority is proper                    

                        In the appeal filed before the Tribunal, the Tribunal held that hiring of vehicles by the assessee is definitely in the nature of transport contract and hence the disallowance under Section 40(a) (ia) on vehicle maintenance claim of Rs.79,45,225/- on which of now the payment of tax also had not been deducted and paid before the expiry of the prescribed time as per Section 200(1) was to be disallowed.

                        Aggrieved against the order of the Tribunal the assessee filed the present appeal before the High Court.  The assessee contended that she had entered into a contract to supply vehicles to M/s Mahindra and many other companies under written contracts on various dates.   It is only to perform the obligations under the said contracts, after she hired vehicles from sub contractors under a written contract, the liability to deduct tax arises under Section 194C (2) of the Act.  In her case such material is not available and therefore the authorities were not justified in disallowing the deductions claimed by the assessee.   The Revenue contended that the material on record clearly shows that the vehicles are hired by the assessee from various owners of vehicles to discharge their obligations under the contract between the assessee and other customers.  In that view the authorities were justified in disallowing the deduction.

                        The High Court found that out of the transportation charges received under the written contract a substantial portion has been paid to the various owners of the vehicles towards transportation charges.   The assessee has claimed that she is not liable to deduct tax at source since such payment is not in excess of Rs.20,000/-.   The material on record shows that the total amount paid towards transportation charge is approximately Rs.79,45,225/-  The High Court held that in the absence of any particulars it cannot be said that there was no liability to deduct tax on that score.  The law does not stipulate the existence of a written contract as a condition precedent for payment of TDS.   The contract may be in writing or it may be oral but the liability to pay tax arises when the recipient of the said amount receives payment in excess of Rs.20,000/-  Proviso (2) to Section 194C which is attracted to the facts makes it clear that when an individual or a Hindu undivided family whose total sales from the business or profession carried on by him in excess of the monetary limit specified under Section 44AB(a) or (b)  during the financial year immediately preceding the financial year in which such sum is paid or credited  or paid to the account of the sub contractor shall be liable to deduct income tax under the sub section.   In this case there is no dispute that the turnover of the assessee exceeds the monetary limit specified in Section 44AB.   Therefore the liability to deduct arises under the said proviso to the sub contractor from whom the vehicles are hired and the amount payable to the sub contractor exceeds Rs.20,000/-.  The High Court held that the claim for deduction under Section 40(a)(ia) is not attracted and the authorities below were justified in disallowing the said deduction and treating the said amount as the income of the assessee and claiming tax on that amount.