2014 (9) TMI 548 - HC - Income Tax

Assessee in default u/s 201 and 201(1A) Liability to deduct u/s 194I - Whether the assessee was liable to deduct tax as the assessee was not paying any rent to M/s Usha Udyog Ltd. in respect of land and building including the factory but the assessee was paying hiring charges of plant and machinery only - Held that - The agreement indicated that the assessee was required to carry on re-rolling work in the factory of M/s Usha Udyog Ltd. for which a rate was fixed @ ₹ 200/- per metric ton on the raw material produced by them and that the agreement indicated that the assessee would not utilize the building along with plant and machinery - the agreement is related to the use of plant and machinery and not to the use of land and building - the assessee on the basis of the agreement was not found paying rent in respect of use of land and machinery including factory building but was making payment for use of plant and machinery on monthly production basis - the assessee was not liable to deposit tax at source u/s 194-I of the Act on the amount paid by the assessee towards hiring charges on plant and machinery - no case for payment of penalty could be made out against the assessee Decided against revenue.

Summary

Issues:
1. Whether the assessee was liable to deduct tax under Section 194-I of the Income Tax Act on the amount paid as rent for the use of factory premises.
2. Whether the assessee was paying rent for the use of only plant and machinery, excluding the factory land and building.

Analysis:
Issue 1:
The assessee, engaged in re-rolling of M.S. Structurals, debited a sum under "manufacturing and other expenses" as equipment hire charges, which was actually paid as rent for using factory premises owned by another entity. The Assessing Officer held the assessee liable under Section 194-I for not deducting tax at source, leading to a demand for income tax and interest. The Tribunal, on appeal, found that the agreement between the parties specified payment for plant and machinery use only, not for land and building. The High Court examined Section 194-I, defining "rent" and concluded that the agreement pertained to plant and machinery use, not land and building. As the payment was for machinery hire only, the assessee was not liable to deduct tax under Section 194-I.

Issue 2:
The crux of this issue lies in determining whether the rent paid by the assessee was solely for plant and machinery use or included the factory land and building as well. The agreement highlighted that the assessee was to carry out re-rolling work in the factory without utilizing the building. The Tribunal's finding emphasized that the payment was specifically for plant and machinery use based on monthly production, excluding any rent for land and building. The High Court concurred with this interpretation, stating that the assessee's obligation to deduct tax under Section 194-I did not extend to the amount paid for hiring charges of plant and machinery only. Consequently, the High Court ruled in favor of the assessee, dismissing the appeal filed by the Department.

In conclusion, the High Court's judgment clarified that the assessee was not liable to deduct tax at source under Section 194-I for the amount paid as hiring charges on plant and machinery, as the agreement distinctly pertained to machinery use and excluded payment for land and building. The decision favored the assessee, leading to the dismissal of the appeal by the Department.