2015 (7) TMI 519 - AT - Income Tax

Tds deduction - section 194I OR under section 194C - assessee has deducted tax @2% on the payments made to the concerned persons in accordance with section 194C of the Act treating the payments as contract for service but whereas the assessing officer has treated the payment as a lease rental and therefore he opines that the tax to be deducted at source ought to be at 10% in accordance with section 194I - assessee in default - CIT(A) found the assessee has discharged its onus of having fulfilled the conditions laid down in terms of proviso to section 201 of the Act and therefore has to succeed in these appeals - Held that - The income from warehousing is chargeable under the head Business Income and not under the head income from House Property as held by jurisdictional High Court in the case of CIT vs. NDR Warehousing Pvt. Ltd (2014 (12) TMI 189 - MADRAS HIGH COURT ) and also by the Bombay High Court in the case of Nutan Warehousing Company Ltd vs. DCIT 2010 (2) TMI 397 - BOMBAY HIGH COURT . These facts are not controverted by the Department Representative. Being so, this is an admitted fact that once income of the letout of ware housing is treated as business income then tax deduction at source to be made u/s.194C of the Act. Being so, in our opinion the Commissioner of Income Tax (Appeals) is justified in observing that the assessee is liable to deduct tax at source u/s.194C, since the nature of the service rendered by the assessee is not only providing space but also providing warehousing activity and the income derived from such activity is business income and not income from house property . Further, if the tax deducted and the same was deposited in the Government account, the due credit shall be given to that extent. If the recipient has declared income in their return of income, the assessee cannot be liable for payment of TDS once again in view of the judgment of Supreme Court in the case of Hindustan Coca Cola Beverage P. Ltd vs CIT 2007 (8) TMI 12 - SUPREME COURT OF INDIA wherein it has been held that where deductee, recipient of income, has already paid taxes on amount received from deductor, department once again cannot recover tax from deductor on same income by treating deductor to be assessee in default for short fall in its amount of tax deducted at source. However, the department is at liberty to recover the amount of interest, if any, arising out of delayed payments of taxes under the provisions of Section 201(1A) of the Act from assessee. - Decided against revenue.

Issues Involved:
1. Classification of payments as rent or service charges.
2. Applicability of Section 194I vs. Section 194C for tax deduction at source (TDS).
3. Compliance with Section 201 and 201(1A) regarding TDS defaults.
4. Admissibility of fresh evidence and procedural compliance under Rule 46A.
5. Impact of subsequent agreements on the nature of payments.
6. Tax treatment of warehousing income as business income or income from house property.
7. Applicability of Supreme Court and High Court rulings on TDS and income classification.

Detailed Analysis:

1. Classification of Payments as Rent or Service Charges:
The primary issue was whether the payments made by the assessee to certain individuals were for rent or for composite services. The Assessing Officer (AO) treated the payments as rent based on an initial lease agreement dated 20.02.2006, thereby applying Section 194I for TDS at 10%. However, the assessee argued that a subsequent agreement dated 22.02.2006 novated the initial lease, transforming the nature of payments to service charges, thus invoking Section 194C for TDS at 2%.

2. Applicability of Section 194I vs. Section 194C:
The AO's conclusion was based on the initial lease agreement, while the Commissioner of Income Tax (Appeals) [CIT(A)] accepted the subsequent agreement, which indicated that the payments were for composite services, not mere rent. The CIT(A) found that the services provided included logistics support, warehousing, handling, and managing goods, which justified the application of Section 194C.

3. Compliance with Section 201 and 201(1A) Regarding TDS Defaults:
The AO passed an order under Sections 201 and 201(1A) for TDS defaults, demanding additional tax and interest. The CIT(A) observed that the deductees had included the payments in their income returns and paid the due taxes, thereby invoking the proviso to Section 201. Consequently, the CIT(A) concluded that the assessee should not be treated as an assessee in default, although interest under Section 201(1A) was still applicable.

4. Admissibility of Fresh Evidence and Procedural Compliance Under Rule 46A:
The Departmental Representative argued that the CIT(A) admitted fresh evidence (bills and vouchers) without calling for a remand report from the AO, violating Rule 46A. The CIT(A) considered the subsequent agreement and supporting documents, which were not initially presented to the AO, and found them credible.

5. Impact of Subsequent Agreements on the Nature of Payments:
The CIT(A) gave credence to the subsequent agreement dated 22.02.2006, which indicated that the payments were for composite services rather than mere rent. This agreement was considered valid and legally binding, thus altering the nature of the payments and the applicable TDS provisions.

6. Tax Treatment of Warehousing Income as Business Income or Income from House Property:
The CIT(A) and the Tribunal referred to rulings by the jurisdictional High Court and the Bombay High Court, which held that income from warehousing activities should be treated as business income. This classification justified the application of Section 194C for TDS, as the services provided went beyond mere letting out of property.

7. Applicability of Supreme Court and High Court Rulings on TDS and Income Classification:
The CIT(A) relied on several case laws, including the Supreme Court's ruling in Hindustan Coca Cola Beverage P. Ltd vs. CIT, which held that if the deductee has paid taxes on the income, the deductor cannot be treated as an assessee in default for the same amount. The CIT(A) also referred to the Delhi High Court's ruling in CIT vs. Hindustan Lever Ltd, which emphasized that the burden is on the Revenue to prove that payments are for rent to apply Section 194I.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, affirming that the payments were for composite services and not mere rent, thereby applying Section 194C for TDS. The Tribunal also noted that if the deductees had paid the taxes, the assessee could not be held liable for TDS defaults, although interest under Section 201(1A) was still applicable. The appeals of the Revenue were dismissed, and the order was pronounced on 30th June 2015.

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