2014 (11) TMI 400 - AT - Income Tax

Labour/Carting Charges disallowed u/s 40(a)(ia) Failure to deduct TDS u/s 194C Held that - Out of the total amount, Assessee had deposited the TDS on 23.04.2007 which though was beyond the prescribed date but was before the filing of return of income - in the case of Commissioner of Income Tax-I Versus Royal Builders 2014 (1) TMI 136 - GUJARAT HIGH COURT it has been held that when Assessee has deducted tax at source on or before due dates specified in Section 139(1), provisions of Section 40(a)(ia) would not apply - the issue where the Assessee has not deducted TDS but the payee has paid the taxes needs to be re-examined by the AO thus, the matter is remitted back to the AO for Examination Decided partly in favour of assessee. JCB rent disallowed Held that - Section 40(a)(ia) cannot be seen as intended to be a penal provision to punish the lapses of non deduction of tax at source from payments for expenditure- particularly when the recipients have taken into account income embedded in the payments, paid due taxes and filed income tax returns in accordance with the law - assessee has not placed any material on record to demonstrate that the payee has offered the amounts received from Assessee as its income and has paid taxes on the same thus, the matter is remitted back to the AO for fresh adjudication Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of Rs. 21,47,621 under Section 40(a)(ia) for failure to deduct tax at source under Section 194C.
2. Disallowance of Rs. 4,34,719 as JCB rent under Section 40(a)(ia) for failure to deduct tax at source under Section 194I.
3. Timeliness of TDS deposit and its impact on disallowance under Section 40(a)(ia).
4. Applicability of Section 194C to a sub-contractor.
5. Classification of labor charges under Section 28 versus Sections 30 to 38.

Detailed Analysis:

1. Disallowance of Rs. 21,47,621 under Section 40(a)(ia):
During the assessment proceedings, the Assessing Officer (A.O.) noted that the Assessee had paid Rs. 21,43,621 on various dates up to February 2007 but deposited the TDS beyond the prescribed date. Consequently, the A.O. disallowed the amount under Section 40(a)(ia). The CIT(A) upheld this disallowance, noting that TDS for payments to four parties (New Varinath Transport Service, Rameshbhai G. Vanjara, Mukthar Foundation, and Dwarkesh Infrastructure Pvt. Ltd.) was deposited late. Additionally, the CIT(A) confirmed the disallowance for payments to Amrishbhai G. Pancholi and Geo Dynamic, where TDS was not deposited at all.

The Assessee argued that TDS was deposited before the due date of filing the return of income, citing the Gujarat High Court's decision in Royal Builders. For payments where TDS was not deducted, the Assessee relied on the Agra Tribunal's decision in Rajiv Kr. Agarwal, which held that no disallowance should be made if the payee has paid the tax.

The Tribunal found that Rs. 20,66,194 of the total amount was deposited before the filing of the return of income and directed its deletion. For payments to Amrishbhai Pancholi and Geo Dynamic, the Tribunal remitted the issue to the A.O. to verify if the payees had paid the tax, in line with the Agra Tribunal's decision.

2. Disallowance of Rs. 4,34,719 as JCB Rent:
The A.O. observed that the Assessee paid machinery rent to Akshar Earth Movers but deducted tax at 1% instead of the required 10% under Section 194I. Consequently, the A.O. disallowed Rs. 2,73,578 under Section 40(a)(ia). The CIT(A) confirmed this, noting that the payments should attract TDS under Section 194I and not Section 194C.

The Assessee contended that the payments were for labor charges and should not attract TDS under Section 194I. The Tribunal, however, found that the Assessee had not demonstrated that the payee had paid taxes on the amounts received. The matter was remitted to the A.O. to re-examine the issue in light of the Agra Tribunal's decision.

3. Timeliness of TDS Deposit:
The Assessee argued that TDS was deposited before the due date of filing the return of income, which should prevent disallowance under Section 40(a)(ia). The Tribunal agreed, referencing the Gujarat High Court's decision in Royal Builders, and directed the deletion of the disallowance for amounts where TDS was belatedly deposited but before the return filing date.

4. Applicability of Section 194C to a Sub-contractor:
The Assessee claimed that as a sub-contractor, it was not liable to deduct tax at source under Section 194C. However, this issue was not specifically addressed in the Tribunal's decision.

5. Classification of Labor Charges:
The Assessee argued that labor charges fall under Section 28 and should not be disallowed under Section 40(a)(ia). This issue was also not specifically addressed in the Tribunal's decision.

Conclusion:
The Tribunal partly allowed the Assessee's appeal for statistical purposes, directing the deletion of disallowance for amounts where TDS was deposited before the return filing date and remitting other issues to the A.O. for re-examination. The appeal was thus partly allowed for statistical purposes.