2015 (6) TMI 475 - AT - Income Tax

Non deduction of TDS u/s 194C - Payment in pursuance of legal obligation, whether in the nature of contract - Payments to Punjab Water Supply and Sewerage Board - Held that - Such payments are out of legal obligations rather than contractual arrangements, and it is only when payments are made in pursuance of a contract that the provisions of section 194C come into play. The contract may be oral or written, express or implied but there must be a contract nevertheless. In the present case, however, the payment is on account of legal obligation under section 24(1) of the Punjab Water Supply and Sewerage Board Act 1976. - Decided in favour of assessee.

Summary

Issues:
Appeals against tax withholding demand under section 201(1) and 201(1A) r.w.s. 194C for assessment years 2007-08, 2008-09, 2009-10, and 2010-11.

Analysis:
1. Legal Obligation vs. Contractual Arrangement (A.Y. 2007-08): The appellant, a public trust, made payments to Punjab Water Supply and Sewerage Board for statutory obligations. The CIT(A) upheld the demand for tax withholding under section 194C. However, the appellant argued that the payments were not contractual but statutory, hence not liable for tax deduction. The Tribunal agreed, citing the Punjab Water Supply and Sewerage Board Act 1976, which mandates cost recovery from local authorities. As no contract existed, section 194C did not apply, leading to the quashing of demands under section 201(1) and 201(1A) r.w.s. 194C.

2. Common Grievances (A.Y. 2008-09, 2009-10, 2010-11): The appellant's appeals for these years raised similar issues regarding tax withholding demands. The Tribunal noted that during a TDS survey, it was found that the appellant failed to deduct tax at source for payments to Punjab Water Supply and Sewerage Board. The CIT(A) partially upheld the demands, linking them to the principal liability of the recipient. However, the Tribunal held that without a contractual obligation, as per section 194C, the demands lacked legal merit. Consequently, the demands under section 201(1) and 201(1A) r.w.s. 194C were dismissed for these assessment years as well.

3. Final Decision: The Tribunal ruled in favor of the appellant, emphasizing the absence of a contractual relationship in the payments made to the Punjab Water Supply and Sewerage Board. As the statutory obligations did not fall under section 194C, the demands for tax withholding were deemed unsustainable. The Tribunal allowed the appeals, quashing the demands raised under section 201(1) and 201(1A) r.w.s. 194C for all the assessment years. The judgment highlighted the importance of contractual obligations in determining the applicability of tax deduction provisions.