2012 (8) TMI 576 - AT - Income Tax

TDS u/s 194H - payment of commission - Diversion by overriding title - tri-party agreement - held that - The relationship between the assessee and franchisee/commission agent is of principal and agent. - Where an amount of fees received by an agent, he receives it for and on behalf of his principal. The terminology used by the assessee that it will be a charge for payment of commission to the franchisee/commission, in our view, is against the principles of law of agency and hence the same is immaterial. The payment of commission amounts to discharge an obligation after such income reaches to the assessee. There is no quarrel with the principles enunciated in the aforesaid decisions but keeping in view the law laid down by the Hon ble Apex Court in the case of Sitaldas Tirathdas (1960 (11) TMI 17 - SUPREME COURT) that the case is one of application of a portion of the income to discharge an obligation, we are of the view that the assessee s case falls outside the rule laid down in Raja Bejoy Singh Dudhuria s case. The payment of commission though mentioned in receipt issued by the franchisee/commission agent does not amount to discharge an obligation by an overriding title rather the said payment amounts to discharge an obligation after such income reaches to the assessee. Since the assessee is liable to deduct TDS on the payment of commission under the provisions of section 194H of the Act and has failed to deduct the same, therefore, the Assessing Officer was justified in disallowing the payment of commission of Rs. 56,30,173 under the provisions of section 40(a)( ia) of the Act

Summary

Issues Involved:
1. Applicability of Section 194H of the Income-tax Act, 1961.
2. Disallowance under Section 40(a)(ia) of the Income-tax Act, 1961.
3. Concept of diversion of income by overriding title versus application of income.

Detailed Analysis:

1. Applicability of Section 194H of the Income-tax Act, 1961:

The core issue revolves around whether the payments made by the assessee to various parties as commission are subject to tax deduction at source (TDS) under Section 194H. The assessee argued that the payments were a diversion of income by overriding title, not an application of income, and thus, TDS provisions were not applicable. The Assessing Officer (AO) contended that the payments were commission under Section 194H, necessitating TDS deduction.

2. Disallowance under Section 40(a)(ia) of the Income-tax Act, 1961:

The AO disallowed the commission payments totaling Rs. 56,30,173 for AY 2005-06 and Rs. 71,90,973 for AY 2006-07 under Section 40(a)(ia) due to non-deduction of TDS. The CIT(A) reversed the AO's decision, holding that the payments were not liable for TDS as they represented a diversion of income by overriding title.

3. Concept of Diversion of Income by Overriding Title versus Application of Income:

The assessee relied on the Supreme Court's decision in CIT v. Sitaldas Tirathdas, arguing that the payments constituted a diversion of income by overriding title. The AO and the Tribunal, however, found that the payments were an application of income after it reached the assessee, thus falling under the purview of Section 194H.

Issue-wise Detailed Analysis:

1. Applicability of Section 194H:

The Tribunal examined the nature of the payments and the relationship between the assessee and the commission agents. It was found that the agents collected fees on behalf of the assessee's principal and were entitled to a 15% commission. The Tribunal held that the payments were indeed commission as defined under Section 194H, which includes any payment received or receivable directly or indirectly by a person acting on behalf of another person for services rendered.

2. Disallowance under Section 40(a)(ia):

Given that the payments were classified as commission under Section 194H, the Tribunal upheld the AO's disallowance under Section 40(a)(ia) due to the assessee's failure to deduct TDS. The Tribunal reversed the CIT(A)'s decision, reinforcing that the assessee was liable to deduct TDS on the commission payments.

3. Diversion of Income by Overriding Title versus Application of Income:

The Tribunal analyzed the agreements and the nature of the payments. It concluded that the commission payments were an application of income after it reached the assessee, not a diversion of income by overriding title. The Tribunal cited several legal precedents, including Sitaldas Tirathdas, to support its view that the payments did not constitute a diversion of income before it reached the assessee.

Conclusion:

The Tribunal found that the payments made by the assessee were commission under Section 194H, necessitating TDS deduction. The failure to deduct TDS warranted disallowance under Section 40(a)(ia). The Tribunal rejected the assessee's argument of diversion of income by overriding title, holding that the payments were an application of income after it reached the assessee. Consequently, the Tribunal allowed the revenue's appeals and restored the AO's disallowance for both assessment years.