2013 (10) TMI 595 - AT - Income Tax

TDS u/s 194J or 194C - disallowance u/s 40(1)(ia) - Specialized works involving computer job work marking of landmarks & door to door collection of information - Works contract or professional / technical services services - Held that - The bare perusal of section 194C would reveal that in case payment is being made with regard to a contract entered for the purpose of dealing with and satisfying the need for housing accommodation for the purpose of planning development or improvement of cities towns and villages then such payment would come within the ambit of section 194C. On the other hand explanation appended to section 194J suggest that professional service would be constituted all those services which are rendered by a person in the course of carrying on legal medical engineering or architectural profession etc. The jobs availed by the assessee from the persons did not fall within the ambit of this explanation rather they are ancillary jobs connected with main performed by the assessee which falls within the ambit of clause F & I of Explanation-1 to section 194C - Decided against Revenue. In case there is a difference of opinion regarding rate of deduction under various provisions of Chapter-XVII-B there are separate TDS provisions under the Income Tax Act and matter can be separately examined by ITO(TDS). But that legal debate cannot be made a basis for applying section 40(a)(ia). Section 40(a)(ia) has no role to play in such circumstances when the assessee under bonafide belief complied the provisions of Chapter-XVII-B & deposited the tax in time. - Decided against the revenue.

Summary

Issues Involved:
1. Whether the payments made by the assessee fall under Section 194C or Section 194J of the Income Tax Act.
2. Whether the short deduction of tax can lead to disallowance under Section 40(a)(ia) of the Income Tax Act.
3. Whether the proportionate disallowance of expenses is justified under Section 40(a)(ia).

Issue-wise Detailed Analysis:

1. Applicability of Section 194C vs. Section 194J:
The primary issue was whether the payments made by the assessee for various services should be subjected to TDS under Section 194C (which pertains to payments for work contracts) or Section 194J (which pertains to payments for professional or technical services). The Assessing Officer (AO) contended that the payments required deduction under Section 194J due to the specialized nature of the services. However, the assessee argued that the services provided were non-professional and did not require specialized skills, thus falling under Section 194C. The CIT(A) agreed with the assessee, stating that the nature of work outsourced (e.g., computer job work, marking landmarks, door-to-door information collection) did not require professional or technical skills. The Tribunal upheld this view, noting that the activities were predominantly physical and did not involve intellectual or professional services as defined under Section 194J.

2. Disallowance under Section 40(a)(ia) for Short Deduction of Tax:
The AO made a proportionate disallowance under Section 40(a)(ia) due to the short deduction of tax. The assessee argued that Section 40(a)(ia) applies only when the amount is payable and not when it has already been paid. The CIT(A) held that Section 40(a)(ia) requires tax to be deducted and deposited under Chapter XVII-B, and since the assessee had deducted and deposited the tax under Section 194C, no disallowance was warranted. The Tribunal cited previous judgments, including the ITAT Calcutta decision, which stated that short deduction due to a wrong provision does not attract disallowance under Section 40(a)(ia) if the tax has been deducted and deposited in time.

3. Proportionate Disallowance of Expenses:
The AO's decision to disallow proportionate expenses was also challenged. The CIT(A) and the Tribunal both found that Section 40(a)(ia) does not provide for proportionate disallowance. The section only disallows expenses if tax has not been deducted or deposited as required. Since the assessee had complied with the TDS provisions under a bona fide belief, no disallowance was justified. The Tribunal emphasized that Section 40(a)(ia) is intended to ensure compliance with TDS provisions and curb bogus payments, not to penalize genuine deductions made under a different section.

Conclusion:
The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s decision that the payments fell under Section 194C and that no disallowance under Section 40(a)(ia) was warranted for short deduction of tax. The Tribunal also clarified that proportionate disallowance is not supported by the provisions of Section 40(a)(ia). The judgment underscored the importance of the nature of services and the bona fide belief of the assessee in determining the applicability of TDS provisions.