2020 (6) TMI 152 - AT - Income Tax

Disallowance u/s 40(a)(ia) - non-deduction of tax at source from the payment made towards Harvesting charges - HELD THAT - Sugarcane purchase agreement makes it clear that the responsibility of harvesting sugarcane and transporting them to the factory of the assessee is placed upon the farmers. It is further stated that the assessee can also arrange harvesting and transportation on behalf of the farmers on the request of the farmers and in such case, the costs incurred in that connection shall be adjusted against the Cane bill. This clause makes it clear that the assessee shall be acting on behalf of the farmers and hence the payment of harvesting charges is also made on behalf of the farmers only, which shall be adjusted against the Sugarcane bill. Hence there is merit in the submission of the assessee that the harvesting charges do not constitute its own expenditure. Following the decision rendered by the co-ordinate bench in the case of M/s NSL Sugars Ltd 2019 (11) TMI 595 - ITAT BANGALORE we hold that the assessee is not liable to deduct tax at source from the harvesting charges paid by it on behalf of the farmers in both the years. Accordingly, we set aside the orders passed by Ld CIT(A) in both the years and direct the AO to delete the impugned additions in both the years. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(ia) of the Income Tax Act for non-deduction of tax at source from Harvesting charges.
2. Legal grounds related to the orders being passed in the name of a non-existing entity due to merger.

Detailed Analysis:

1. Disallowance under Section 40(a)(ia) of the Income Tax Act for Non-Deduction of Tax at Source from Harvesting Charges:
The primary issue in the appeals was the disallowance made under Section 40(a)(ia) of the Income Tax Act due to the assessee's failure to deduct tax at source from payments made towards Harvesting charges. The assessee contended that these charges were paid on behalf of the farmers and not as its own expenditure. The payments were adjusted against the Fair Remunerative Price (FRP) of sugarcane, thus forming part of the purchase price of sugarcane.

The Assessing Officer (AO) disallowed the harvesting charges, relying on the Karnataka High Court decision in Ryatar Sahakari Sakkare Kharkhane Niyamit vs. ACIT, which mandated tax deduction under Section 194C. The CIT(A) upheld this disallowance.

Before the Tribunal, the assessee reiterated that the harvesting charges were not claimed as its expenditure but were paid on behalf of the farmers, who are not liable to deduct tax. The Tribunal examined the Sugarcane purchase agreement, which confirmed that the responsibility for harvesting and transporting sugarcane rested with the farmers, and the assessee acted merely as an agent.

The Tribunal referred to a similar case, M/s NSL Sugars Ltd, where it was held that such payments should be regarded as part of the purchase price of sugarcane and not as payments to contractors under Section 194C. The Tribunal also cited decisions from other High Courts, including Gujarat and Bombay, which supported this view.

The Tribunal concluded that the payments made for harvesting and transportation should be considered as part of the purchase price of sugarcane when the price is determined at the factory gate. Consequently, the provisions of Section 194C were not applicable, and the assessee was not liable to deduct tax at source. The Tribunal directed the AO to delete the disallowances for both assessment years.

2. Legal Grounds Related to Orders Being Passed in the Name of a Non-Existing Entity Due to Merger:
The assessee raised a legal ground that the orders passed by the tax authorities were non-est as they were issued in the name of a non-existing entity, M/s Parry Sugar Industries Ltd, which had merged with M/s EID Parry India Limited. However, the assessee's representative could not confirm whether the fact of the merger was communicated to the tax authorities during the assessment or appellate proceedings. Due to the absence of complete facts, the Tribunal declined to admit this legal ground.

Conclusion:
The Tribunal allowed the appeals on the merits, holding that the assessee was not liable to deduct tax at source from the harvesting charges paid on behalf of the farmers. The legal ground regarding the orders being passed in the name of a non-existing entity was not admitted due to insufficient information. Consequently, the disallowances made under Section 40(a)(ia) were directed to be deleted.