2017 (7) TMI 536 - AT - Income Tax

TDS u/s 194C - Deduction u/s 40(a)(ia) - expenditure incurred by the assessee under the head freight charges - Held that - As the assessee neither entered into any oral or written agreement with the assessee nor taken vehicles on regular contract basis. The assessee has taken vehicles on mere hire basis to be deployed in the places where he has undertaken transport contract with M/s. ITC Limited. The risk associated with the goods till transportation to the destination is rest with the assessee. The lorry owners/drivers had not undertaken any responsibility of risk in the goods. Therefore, we are of the view that the payments made to lorry owners are not liable for TDS as per the provisions of section 194C of the Act, consequently, the expenditure incurred under the head freight charges are not liable for disallowance u/s 40(a)(ia) of the Act. The CIT(A) after considering relevant submissions of the assessee has rightly deleted additions made by the A.O. - Decided in favour of assessee. Computation of capital gain on sale of land - assessable under the head income from business or under the head income from capital gains - application of the provisions of section 50C - Held that - The income from sale of land is assessable under the head income from business , but not under the head income from capital gains . We further observed that the assessee has filed necessary evidences to prove, he had converted his capital asset into stock-in-trade, developed the said land before it was sold. The assessee has computed resultant profit from sale of the land by applying the provisions of section 45(2) of the Act. When the income is computed under the head income from business , the provisions of section 50C of the Act has no application for determination of full value of consideration for the purpose of computation of capital gain. The CIT(A) after considering the relevant provisions of the Act and also submissions of the assessee rightly directed the A.O. to delete additions made towards computation of capital gains. - Decided in favour of assessee.

Issues Involved:
1. Disallowance of freight charges under Section 40(a)(ia) of the Income Tax Act, 1961, for failure to deduct tax at source under Section 194C.
2. Computation of capital gain on the sale of land and the applicability of Section 50C of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Freight Charges under Section 40(a)(ia) for Failure to Deduct Tax at Source under Section 194C:

The assessee, engaged in the transport business, incurred freight charges without deducting tax at source as mandated by Section 194C of the Income Tax Act, 1961. The Assessing Officer (A.O.) disallowed these charges, asserting that the payments to lorry owners constituted payments to sub-contractors, thereby necessitating TDS deduction under Section 194C(2). The A.O. based this on the lorry receipts (L/Rs) which indicated that the lorry owners/drivers were responsible for the goods' safety and any associated risks until delivery.

The assessee contended that there was no written or oral contract with the lorry owners and that the vehicles were hired on an as-needed basis. The assessee bore the risk of goods during transportation, and the lorry owners did not assume any responsibility beyond safe delivery.

The CIT(A) sided with the assessee, noting the absence of a contract and the fact that the lorry owners were hired on a need basis without a formal agreement. The CIT(A) concluded that the provisions of Section 194C were not applicable, and thus, the disallowance under Section 40(a)(ia) was unwarranted.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the payments for hiring vehicles did not fall under the ambit of Section 194C as there was no contract between the assessee and the lorry owners. The Tribunal referenced the ITAT Visakhapatnam decision in Kranti Road Transport Private Limited vs. ACIT and the Punjab & Haryana High Court decision in CIT(TDS) vs. United Rice Land Limited, which supported the view that in the absence of a contract, TDS under Section 194C was not required.

2. Computation of Capital Gain on Sale of Land and Applicability of Section 50C:

The assessee sold land and computed the resultant profit under the head 'income from business' and 'income from capital gains' as per Section 45(2) of the Act, claiming to have converted the land from a capital asset to stock-in-trade. The A.O. disputed this, arguing that the conversion was not substantiated by entries in the financial statements or the tax audit report, and thus, the profit should be assessed under 'capital gains' using the provisions of Section 50C.

The CIT(A) found that the assessee had indeed converted the land into stock-in-trade, developed it into plots, and sold them, indicating an intention to commercially exploit the land. The CIT(A) held that the provisions of Section 45(2) were applicable, and the income should be computed accordingly. Consequently, the provisions of Section 50C did not apply as the income was assessable under 'business income.'

The Tribunal affirmed the CIT(A)'s decision, noting that the assessee's actions demonstrated an adventure in the nature of trade. The Tribunal referenced the Andhra Pradesh High Court decision in CIT vs. M. Krishna Rao and the Rajasthan High Court decision in CIT vs. Govind Gruha Nirman Sahakar Samiti Limited, which supported the view that developing and selling land as plots constituted a business activity. Therefore, the income was rightly computed under 'business income,' and Section 50C was inapplicable.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s order on both issues. The freight charges were not disallowed under Section 40(a)(ia) due to the inapplicability of Section 194C, and the profit from the sale of land was correctly computed under 'business income,' excluding the application of Section 50C.

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