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TMI Blog2020 (11) TMI 903X X X X Extracts X X X X X X X X Extracts X X X X ..... is that if the deductee/payee has paid the tax, no recovery can be made from the person responsible for paying of income from which he failed to deduct tax at source. In a case where the deductee/payee has paid the tax on such income, the person responsible for paying the income is no longer required to deduct or deposit any tax at source. In the similar circumstances, we find that the first proviso to section 40(a)(ia) inserted by the Finance Act, 2010, which has been held to be curative and therefore, retrospective in its operation by CIT v Virgin Creations [ 2011 (11) TMI 348 - CALCUTTA HIGH COURT] provides for allowance of the expenditure in any subsequent year in which tax has been deducted and deposited. The intention of the legislature clearly is not to disallow legitimate business expenditure. The allowance of such expenditure is sought to be made subject to deduction and payment of tax at source. In a case where the deductee/payee has paid tax and as such the person responsible for paying is no longer required to deduct or pay any tax, legitimate business expenditure would stand disallowed since the situation contemplated by the first proviso viz. deduction and paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es below in so far as they are against the appellant are opposed to law, equity, weight of evidence probabilities, facts and circumstances of the appellant's case. 2. The learned CIT[A] is not justified in upholding the disallowance to the extent of ₹ 1,04,44,105/- made u/s.40[a][ia] of the Act for the alleged failure of the appellant to deduct tax at source u/s. 194C of the Act in respect of the hire charges paid to third party vehicle owners under the facts and in the circumstances of the appellant's case. 2.1 The learned CIT[A] ought to have appreciated that the provisions of Section 194C had no application to the aforesaid payments discursively labeled as hire charges in as much as these payments represented the revenue shared by the appellant with third party vehicle owners for providing their vehicles to the appellant to discharge the appellant's contractual obligations with M/s.Orix Infrastructure Pvt. Ltd., under the facts and in the circumstances of the appellant's case. 2.2 The learned CIT[A] ought to have appreciated that there was a contract for transportation of employees between M/s Orix Infrastructure India Pvt. Ltd. and the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and loss account that the appellant had not incurred payment towards drivers. The A.O. therefore held that the appellant was hiring the cars along with the drivers and accordingly, the provisions of section 194C and not section 194I were applicable in the appellant s case. However, as the appellant had not deducted TDS on payments above ₹ 30,000/-, the A.O. disallowed 30% of such payments totaling ₹ 4,22,22,161/-, invoking the provisions of section 40(a)(ia). Accordingly, the A.O. made a disallowance of ₹ 1,26,66,648/- being the vehicle hire charges on which TDS had not been deducted. 4. On appeal, CIT(A) observed that the assessee is liable to deduct TDS u/s 194C of the Income-tax Act,1961 ['the Act' for short] on the vehicle hire charges and the assessee failed to deduct the TDS hire charges the disallowance u/s made by AO u/s 40(a)(ia) of the Act is justified. Against this, the assessee is in appeal before us by way of above grounds. The Ld. A.R. submitted that the appellant firm carries on the business of providing vehicles to M/s. Orix Infrastructure India Pvt. Ltd., [hereinafter for short Orix Company ]. The aforesaid Orix Company is itself in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arty vehicle owners, who are themselves carrying on the business of transport operators. The entire bill is raised in the name of the appellant only since there is no privity of contract between Orix Company and such third party vehicle owners. He submitted that the arrangement between the appellant and such third party vehicle owners is neither in the nature of a sub-contract nor in the nature of hire. It is more a case of a Joint Venture wherein two persons jointly performing a work and share the revenue received between them. Hence, it is submitted that neither the provisions of section 194C nor the provisions of section 194I of the Act would be attracted to the facts of the appellant's case in respect of the payments made by the appellant to such third party vehicle owners since the aforesaid payment have been made by one Joint Venturer to another. Reliance for this proposition is placed on the decision of the Hon'ble 1TAT, Hyderabad in the case of MEIL-SEWMAYTAS BHEL, a copy of which is placed at page 27 of the Paper book. Reliance is also placed on the decision of the Hon'ble ITAT Pune Bench, in the case of MUNICIPAL CORPORATION, a copy of which is placed at page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection shall apply accordingly. (3) Where any sum is paid or credited for carrying out any work mentioned in sub-clause (e) of clause (iv) of the Explanation, tax shall be deducted at source- (i)on the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or (ii) on the whole of the invoice value, if the value of material is not mentioned separately in the invoice. (4) No individual or Hindu undivided family shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family. (5) No deduction shall be made from the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor, if such sum does not exceed 17[thirty] thousand rupees : Provided that where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds [seventy five] thousand rupees, the person responsible for paying such sums referred to in subsection (1) shall be liable to deduct income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting and telecasting including production of programmes for such broadcasting or telecasting; (c) carriage of goods or passengers by any mode of transport other than by railways; (d) catering; (e) manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer, but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer. ] 6.1 A plain reading of this Section makes it clear that any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person is required to deduct tax at source under section from the amounts so paid or payable. There is no doubt that the assessee in this case has made the payments as hire charges to cab owners. The main contention of the assessee is, however, that the payments have not been made in pursuance of a contract between the assessee and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contended that the issue be restored to the file of the Assessing Officer so that the assessee can provide all the details in terms of the second proviso to section 40(a)(ia) . 6.3 We find from first argument made by Ld. counsel for the assessee that the second proviso to section 40(a)(ia) of the Act inserted by the Finance Act, 2012 would apply in the instant case. According to him, the second proviso is curative in nature intended to supply an obvious omission, take care of an unintended consequence and make the section workable. Section 40(a)(ia) without the second proviso resulted in the unintended consequence of disallowance of legitimate business expenditure even in a case where the payee in receipt of the income had paid tax. According to him, it has for long been the legal position that if the payee has paid tax on his income, no recovery of any tax can be made from the person who had failed to deduct the income tax at source from such amount. In Grindlays Bank v CIT, (1992) 193 ITR 457 (Cal) decided on September 5, 1989, it was held by the Hon'ble Calcutta High Court as follows at pages 469-470 of the reports: A point has been made by the assessee that as a resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowed since the situation contemplated by the first proviso viz. deduction and payment of tax in a subsequent year would never come about. Such unintended consequence has been sought to be taken care of by the second proviso inserted in section 40(a)(ia) by the Finance Act, 2012. There can be no doubt that the second proviso was inserted to supply an obvious omission and make the section workable. The insertion of second proviso was explained by Memorandum Explaining The provision in Finance Bill, 2012, reported in 342 ITR (Statutes)234 at 260 261, which reads as under:- E.RATIONALIZATION OF TAX DEDUCTION AT SOURCE (TDS) AND TAX COLLECTION AT SOURCE (TCS) PROVISIONS I. Deemed date of payment of tax by the resident payee. Under the existing provisions of Chapter XVII-B of the Incometax Act, a person is required to deduct tax on certain specified payments at the specified rates if the payment exceeds specified threshold. In case of non-deduction of tax in accordance with the provisions of this Chapter, he is deemed to be an assessee in default under section 201(1) in respect of the amount of such non-deduction. However, section 191 of the Act provides that a person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lessee. These amendments will take effect from 1st July, 2012. II. Disallowance of business expenditure on account of nondeduction of tax on payment to resident payee. A related issue to the above is the disallowance under section 40(a)(ia) of certain business expenditure like interest, commission, brokerage, professional fee, etc. due to nondeduction of tax. It has been provided that in case the tax is deducted in subsequent previous year, the expenditure shall be allowed in that subsequent previous year of deduction. In order to rationalize the provisions of disallowance on account of non-deduction of tax from the payments made to a resident payee, it is proposed to amend section 40(a)(ia) to provide that where an assessee makes payment of the nature specified in the said section to a resident payee without deduction of tax and is not deemed to be an assessee in default under section 201(1) on account of payment of taxes by the payee, the, for the purpose of allowing deduction of such sum, it shall be deemed that the assessee had deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee. These beneficial provisions ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at source on the payments as he had obtained PAN of the persons from whom vehicle was taken on hire and these persons were regular income tax payers. Thus, the fact of existence of a contract with the cab owners was not denied by the assessee but he argued that the provisions of section 194C(6) of the Act are applicable to his case. The learned DR further submitted that the Assessing Officer has not accepted the above argument of the assessee as provisions of section 194C(6) of the Act do not apply to the business of plying passenger vehicles. The learned DR submitted that the claim of the assessee that petrol and diesel expenses were in nature of reimbursement is also not acceptable for the reason that the provisions of TDS get attracted even in the case of reimbursement. The assessee has taken vehicle on hire along with the drivers and the payment made to the cab owners includes that for petrol and diesel. This is not the claim of the assessee that expenses of petrol and diesel are to be borne by him and he is just making payment to the cab owners for filling petrol / diesel in their vehicles. Besides the above argument, the learned DR also relied on the orders of the Income t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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