2015 (2) TMI 321 - AT - Income Tax

Tribunal rules against disallowance under Section 40(a)(ia) due to incorrect application of Section 194C(2)

The Tribunal allowed the appeal, ruling that the disallowance under Section 40(a)(ia) was unwarranted as the provisions of Section 194C(2) did not apply. ... Liability to deduct TDS - payment made to Partner for use of his trucks - disallowance made in respect of payment made to Partner of ₹ 11,07,400/- u/s. 40(a)(ia) of the Act on ground that TDS was not deducted on it - Held that:- Since the payee had already deposited the tax by filing his return, therefore, there was no responsibility of the assessee to again deduct the tax as held in the case by Hindustan Coco Cola Beverages (2007 (8) TMI 12 - SUPREME COURT OF INDIA ).We hereby hold that the provisions of section 194C r.w.s. 40(a)(ia) were not applicable on the assessee hence the disallowance of expenditure was not warranted. Therefore, we hereby direct to delete the same. - Decided in favour of assessee. Issues Involved:1. Applicability of Section 194C(2) of the Income Tax Act.2. Disallowance under Section 40(a)(ia) for non-deduction of TDS.3. Relationship between the partner and the firm regarding the use of trucks.4. Validity of the argument that the partner had already paid the tax.Issue-wise Detailed Analysis:1. Applicability of Section 194C(2) of the Income Tax Act:The primary issue was whether the payment made to a partner for the use of his trucks was covered under Section 194C(2) of the Income Tax Act, thereby necessitating the deduction of TDS. The Assessing Officer (AO) contended that the payments were made to a sub-contractor and thus fell under Section 194C(2), which mandates TDS deduction. The CIT(A) upheld this view, stating that the partner acted in his individual capacity and had a contractor-sub-contractor relationship with the firm. The CIT(A) emphasized that the trucks were registered in the partner's name and the income was declared in his individual tax returns, thereby necessitating TDS deduction under Section 194C(2).2. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS:The AO disallowed the claimed expenditure of Rs. 11,07,400 under Section 40(a)(ia) because TDS was not deducted on the payments made to the partner. The CIT(A) supported this disallowance, stating that the partner and the firm should be considered separate entities. Since the provisions of Section 194C(2) were violated, the expenditure was rightly held inadmissible under Section 40(a)(ia). The CIT(A) also referenced judgments from the Madras High Court and the Punjab and Haryana High Court, which upheld the validity of Section 40(a)(ia).3. Relationship Between the Partner and the Firm Regarding the Use of Trucks:The assessee argued that the partner was not a sub-contractor but provided his trucks for the firm's business, receiving a fixed rent per trip. The firm incurred all running expenses of the trucks. The assessee contended that this was a rent payment and not a contract payment, thus Section 194I could be applicable but not for the year under consideration. The CIT(A) dismissed this argument, stating that the partner acted in his individual capacity, and the relationship was that of a contractor and sub-contractor, making Section 194C(2) applicable.4. Validity of the Argument that the Partner Had Already Paid the Tax:The assessee argued that since the partner had already filed his income tax return and paid tax on the income from the trucks, there was no obligation for the firm to deduct TDS again. The assessee relied on the Supreme Court's judgment in Hindustan Coco Cola Beverages Ltd vs. CIT, which held that if the payee had already paid the tax, the payer was not required to deduct TDS. The CIT(A) rejected this reliance, stating it was misplaced as it pertained to the applicability of Section 201, not relevant to the present case.Tribunal's Findings:The Tribunal considered various precedents and the peculiar facts of the case. It noted that the assessee-firm was in the business of hiring trucks and used the partner's trucks without deducting TDS. The Tribunal found that the relationship between the firm and the partner was not that of a contractor and sub-contractor but rather a principal-to-principal arrangement. The Tribunal referenced several ITAT decisions, including Prashant H. Shah vs. ACIT and Datta Digmbar Sahakari Kamgar Sanstha Ltd vs. ACIT, which supported the view that there was no sub-contract and thus no requirement for TDS deduction under Section 194C(2).The Tribunal concluded that the provisions of Section 194C r.w.s. 40(a)(ia) were not applicable to the assessee. Consequently, the disallowance of expenditure was not warranted, and the Tribunal directed the deletion of the disallowance.Conclusion:The Tribunal allowed the appeal, holding that the disallowance under Section 40(a)(ia) was not justified as the provisions of Section 194C(2) were not applicable. The relationship between the firm and the partner was not that of a contractor and sub-contractor, and the partner had already paid the tax on the income, negating the need for TDS deduction by the firm. The appeal was allowed, and the disallowance was directed to be deleted.