2013 (12) TMI 67 - AT - Income Tax

Tribunal upholds AO's disallowance under Income Tax Act but remands retrospective proviso issue for review.

The Tribunal upheld the Assessing Officer's disallowance under Section 40(a)(ia) of the Income Tax Act, except for the retrospective application of the ... Non-deduction of tax at source - Polishing charges paid - Held that:- As per the circular No.433 issued by the CBDT dated 25-09-1985 - The provisions of sec. 194C are wide enough to cover oral contracts also - The intention of the appellant as well as the parties who did the job work is not to purchase/sale of material but that of getting job work of anodizing done - Provisions of sec. 194C have been correctly applied - The assessee does not have facilities for polishing, he gets the polishing work done through outsiders - On receipt of materials after polishing, the assessee used to raise the bill for cost of material by including the charges for polishing - Essential ingredients of a contract are very much available in the polishing works entrusted by the assessee - Decided against assessee. As per the second proviso to sec. 40(a)(ia) of the Act, inserted by the Finance Act, 2012 with effect from 1.4.2013 - The benefit of the same should be applied retrospectively - Following Vector Shipping Services [2013 (7) TMI 622 - ALLAHABAD HIGH COURT] - This part of the issue is restored for fresh adjudication. Issues Involved:1. Disallowance under Section 40(a)(ia) of the Income Tax Act.2. Applicability of Section 194C for TDS on polishing charges.3. Existence of oral contracts and their validity under Section 194C.4. Reimbursement of expenses and profit element in polishing charges.5. Applicability of judicial precedents and circulars.6. Retrospective applicability of amendments to Section 40(a)(ia).Issue-wise Detailed Analysis:1. Disallowance under Section 40(a)(ia) of the Income Tax Act:The primary issue pertains to the disallowance of Rs. 93,68,320/- made by the Assessing Officer (AO) under Section 40(a)(ia) due to non-deduction of tax at source on polishing charges. The CIT(A) partially confirmed the disallowance, directing the AO to delete Rs. 71,745/- where individual payments were less than Rs. 20,000/-. The assessee appealed against the balance disallowance.2. Applicability of Section 194C for TDS on Polishing Charges:The AO considered the polishing work as a 'work' under Section 194C, necessitating TDS. The assessee contended that the payments were reimbursements and not subject to TDS. The Tribunal upheld the AO's view, noting that the polishing work had the essential elements of a contract and hence fell under Section 194C.3. Existence of Oral Contracts and Their Validity Under Section 194C:The assessee argued that no written contracts existed with the polishing vendors. However, the Tribunal agreed with the AO that oral contracts are valid under Section 194C, supported by CBDT Circular No. 433. The Tribunal held that repeated transactions implied an understanding of terms, making the absence of written contracts irrelevant.4. Reimbursement of Expenses and Profit Element in Polishing Charges:The assessee claimed to act as a conduit between customers and polishing vendors, with no profit element involved. The Tribunal rejected this argument due to lack of evidence and noted that the assessee included polishing charges in sales invoices, indicating a business transaction rather than mere reimbursement.5. Applicability of Judicial Precedents and Circulars:The Tribunal considered various case laws cited by the assessee but found them inapplicable. The Tribunal noted that the decisions in CIT vs. Bhagwathi Steels and CIT vs. United Rice Land Ltd. were not relevant as they pertained to different facts. The Tribunal also rejected the reliance on the Special Bench decision in Merilyn Shipping & Transports, citing contrary judgments by the Gujarat and Calcutta High Courts.6. Retrospective Applicability of Amendments to Section 40(a)(ia):The Tribunal addressed the assessee's argument regarding the retrospective applicability of the 2010 amendment to Section 40(a)(ia) and the second proviso inserted by the Finance Act, 2012. The Tribunal remanded this issue to the AO for examination, directing the AO to consider whether the second proviso, which provides relief if the payee has paid the tax, applies retrospectively.Conclusion:The Tribunal upheld the AO's disallowance under Section 40(a)(ia) except for the issue regarding the retrospective application of the second proviso, which was remanded for further examination. The appeal was thus partly allowed for statistical purposes.