2015 (7) TMI 700 - AT - Income Tax

Disallowance u/s 40(a)(ia) - Non deduction of TDS - payments made by assessee to third parties for supply of vehicles the assessees - Commissioner of Income Tax (Appeals) after holding that the assessees are contractors for supplying vehicles to the contractee companies has held that the assessees entered into sub-contract with third parties/owner of vehicles for supply of vehicles on behalf of the assessees to contractee companies. However, in coming to such a conclusion no document has been brought on record to show that the assessees have passed on the strings of responsibility and liability to vehicle owners from whom vehicles are hired. The Revenue has not brought on record any document to show that the assessees have entered into a sub-contract with the vehicle owners for providing such service. The assessees simply hired the vehicles on payment of hire charges and provided the same to the contractee companies in pursuance of contract agreement. For invoking the provisions of section 194C(2), the essential condition is that there should be a sub-contract for carrying out the whole or any part of the work undertaken by the contractor and the payment should be made for carrying out the whole or any part of such work. It is a well accepted principle of law that the contract can either be oral or written. In the present case, the Revenue has not been able to establish the existence of any contract between the assessees and the individual vehicle owners. Therefore, in the facts of the case we hold that the assessees have not entered into any subcontract with individual vehicle owners for supplying vehicles to the contractee companies. Since, the first question has been answered in negative, the payments made by the assessees to the third parties/individual vehicle owners do not fall within the ambit of section 194C. Thus, we hold that the payments made by the assessees are not subject to TDS provisions. Hence, the assessees have not violated the provisions of section 194C. - Decided in favour of assessee. Disallowance on vehicle expenses - CIT(A)restricted addition - Held that - Ad-hoc disallowance of ₹ 17,930/- @ 20% of total vehicles expenses. The Commissioner of Income Tax (Appeals) has restricted the same to ₹ 10,000/-. In the absence of any cogent material, we find no reason to disturb this finding of the Commissioner of Income Tax (Appeals)- Decided against revenue. Addition on account of fall in net profit - CIT(A) deleted addition - Held that - The Assessing Officer has made addition of ₹ 50,453/- merely on ground that there has been fall in net profit in the current assessment year as compared to previous assessment year. The Assessing Officer in an arbitrary manner increased the net profit by 0.25% on gross receipts. The Commissioner of Income Tax (Appeals) correctly deleted the same as AO has made the addition on adhoc basis (increased NP by 0.25%) without going into merits of the case. He has failed to bring any material on record which could warrant increase in NP by 0.25%. AO was not justified in disturbing the book results without assigning any specific defect - Decided against revenue.

Issues Involved:
1. Classification of the assessees as contractors or commission agents.
2. Applicability of TDS provisions under section 194C/194I on payments made by the assessees.
3. Disallowance under section 40(a)(ia) of the Act.
4. Disallowance of vehicle expenses.
5. Addition on account of decrease in net profit.

Issue-wise Detailed Analysis:

1. Classification of the Assessees as Contractors or Commission Agents:
The assessees claimed to be commission agents providing vehicles to companies. However, the Commissioner of Income Tax (Appeals) and the Tribunal concluded that the assessees are contractors, not commission agents. The Tribunal examined the contract terms with Idea Cellular Ltd., which indicated that the assessees were responsible for providing vehicles in good condition, maintaining compliance, and ensuring availability, thereby establishing a contractor relationship.

2. Applicability of TDS Provisions under Section 194C/194I:
The Assessing Officer and the Commissioner of Income Tax (Appeals) held that the assessees were liable to deduct TDS on payments to vehicle owners as these were considered sub-contracts. However, the Tribunal found no evidence of a sub-contract or transfer of responsibility to vehicle owners. The Tribunal held that the assessees merely hired vehicles and did not enter into sub-contracts, thus not attracting TDS provisions under section 194C.

3. Disallowance under Section 40(a)(ia) of the Act:
The Assessing Officer disallowed payments under section 40(a)(ia) due to non-deduction of TDS. The Commissioner of Income Tax (Appeals) restricted the disallowance to amounts payable, based on the Special Bench decision in M/s. Merilyn Shipping & Transport Co. The Tribunal, however, ruled that since there was no sub-contract, the payments were not subject to TDS, and hence, no disallowance under section 40(a)(ia) was warranted.

4. Disallowance of Vehicle Expenses:
The Assessing Officer made an ad-hoc disallowance of Rs. 17,930 for vehicle expenses due to lack of proper bills and vouchers. The Commissioner of Income Tax (Appeals) reduced this to Rs. 10,000. The Tribunal upheld the Commissioner's decision, finding no reason to disturb the reduced disallowance.

5. Addition on Account of Decrease in Net Profit:
The Assessing Officer added Rs. 50,453 due to a fall in net profit compared to the previous year. The Commissioner of Income Tax (Appeals) deleted this addition, noting that it was made arbitrarily without any material evidence or defects in the books of accounts. The Tribunal agreed with this deletion, finding no justification for the addition.

Conclusion:
The Tribunal dismissed the Revenue's appeals and allowed the assessees' appeals. It held that the assessees were contractors, not commission agents, but there was no sub-contract with vehicle owners, thus no TDS was required under section 194C. Consequently, disallowances under section 40(a)(ia) were not applicable. The Tribunal also upheld the reduced disallowance of vehicle expenses and deletion of the addition for the fall in net profit.

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