2014 (2) TMI 738 - AT - Income Tax

Tribunal upholds Revenue's appeal, disallowing deduction due to failure in TDS compliance for transport contractor.

The Tribunal allowed the Revenue's appeal, vacating the CIT(A)'s order and restoring the AO's decision to disallow Rs. 80,41,529/- under Section 40(a)(ia) ... Disallowance u/s 40(a)(ia) of the Act – TDS not deducted u/s 194C of the Act – Held that:- Section 40(a)(ia) provides that in case of any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor for carrying out any work on which tax is deductible at source and such tax has not been deducted or after deduction has not been paid before the due date, such amounts shall not be deducted in computing the income chargeable under the head 'Profits and Gains of Business or Profession' irrespective of the provisions contained in Sections 30 to 38 of the Act - the disallowance under section 40(a)(ia) is attracted in respect of amounts out of which tax is deductible at source and such tax is either not deducted or after deduction is not paid before the specified date - the disallowance u/s 40(a)(ia) can be made irrespective of the provisions contained in sections 30-38 of the Income-tax Act - The scope of disallowance contemplated by section 40 covers all those expenses which are specifically enumerated - The expenses claimed by the assessee as deduction are specified in section 40(a)(ia) and therefore they are well within the scope of disallowance contemplated by section 40(a)(ia) irrespective of their eligibility for deduction under sections 30 to 38. The case of the assessee is fully covered by the provisions of section 194C(2) - The goods received by the assessee from consignors for their carriage were sent through truck owners hired by the assessee - There was no privity of direct contract between the truck owners hired by the assessee and the consignors - It was the assessee's responsibility to transport the goods received from them for which purpose the assessee hired the services of the truck owners, obviously as sub-contractors - The assessee was required to deduct tax at source out of payments made by him to such truck owners/drivers in terms of section 194C(2) but he did not do so and hence the provisions of section 40(a)(ia) were rightly invoked by the AO for making the impugned disallowance – relying upon Shree Choudhary Transport Co. v. ITO [2009 (5) TMI 865 - RAJASTHAN HIGH COURT] – thus, the order passed by the CIT(A) is not sustainable in law – Decided in favour of Revenue. Issues Involved:1. Deletion of disallowance under Section 40(a)(ia) of the Income Tax Act.2. Determination of the nature of the assessee's business (transport contractor vs. commission agent).3. Applicability of TDS provisions under Section 194C.Issue-wise Detailed Analysis:1. Deletion of Disallowance under Section 40(a)(ia):The Revenue's appeal contested the deletion of Rs. 80,41,529/- disallowed by the Assessing Officer (AO) under Section 40(a)(ia) due to non-deduction of TDS on truck rent expenses. The Tribunal initially dismissed the Revenue's appeal, relying on the Special Bench decision in Merilyn Shipping & Transport, which stated no disallowance if no amount was outstanding as payable on the balance sheet date. However, the High Court set aside this order, directing fresh consideration of the issues regarding disallowance under Section 40(a)(ia).2. Nature of the Assessee's Business:The assessee claimed to be a transport commission agent, arguing that he was not required to deduct TDS on payments to truck owners/drivers. The AO contended that the assessee was a transport contractor, not a commission agent, as he received direct payments from consignors and made payments to truck owners without deducting TDS. The CIT(A) sided with the assessee, stating the assessee was a commission agent and thus not liable for TDS deduction under Section 194C. This decision was challenged by the Revenue.3. Applicability of TDS Provisions under Section 194C:The Tribunal examined whether the assessee was required to deduct TDS under Section 194C. The Tribunal observed that the assessee engaged in the business of transport contracts, not merely as a commission agent. The Tribunal noted that the assessee received payments from consignors and paid truck owners for transporting goods, establishing a contractor-subcontractor relationship. The Tribunal concluded that the assessee was required to deduct TDS on payments to truck owners/drivers under Section 194C(2). The Tribunal rejected the argument that the disallowance under Section 40(a)(ia) was limited to expenses under Sections 30-38, affirming that it covered all specified expenses, including those under Section 28.Conclusion:The Tribunal vacated the CIT(A)'s order, restoring the AO's decision to disallow Rs. 80,41,529/- under Section 40(a)(ia) due to the assessee's failure to deduct TDS on payments to truck owners/drivers. The Tribunal held that the assessee was a transport contractor, not a commission agent, and was thus liable to deduct TDS under Section 194C(2). The appeal filed by the Revenue was allowed.