2015 (6) TMI 181 - HC - Income Tax

High Court clarifies tax deduction rules for sub-contractors under Income Tax Act

The Karnataka High Court upheld the ITAT's decision in a case involving the interpretation of Section 40(a)(ia) of the Income Tax Act for Assessment Year ... TDS u/s 194C- non-filing of Form No.15-I/J within the prescribed time - payments made to sub-contractors towards freight charges - Default of provisions of Section 40(a)(ia) - Held that:- Once, the declaration forms are filed by the sub- contractor, the liability of the assessee to deduct tax on the payments made to the sub-contractor would not arise . As we have examined, the sub-contractors have filed Form No.15I before the assessee. Such being the case, the assessee is not required to deduct tax under Section 194C(3) of the Act and to file Form No.15J. It is only a technical defect as pointed out by the Tribunal in not filing Form No.15J by the assessee. See Valibhai Khandbai Mankad’s case (2011 (4) TMI 887 - ITAT, AHMEDABAD ) upheld by the High Court of Gujarat reported in (2012 (12) TMI 413 - GUJARAT HIGH COURT) wherein it is held that once the Conditions of Section 194C(3) were satisfied, the liability of the payee to deduct tax at source would cease and accordingly, application of Section 40(a)(ia) would also not arise. - Decided in favour of assesse. Issues:Challenge to ITAT order by Revenue for Assessment Year 2009-10 - Interpretation of Section 40(a)(ia) - Non-filing of Form No.15-I/J - Technical default or Section 40(a)(ia) applicability.Analysis:The appeal before the Karnataka High Court involved the challenge by the Revenue against the order of the Income Tax Appellate Tribunal (ITAT) for the Assessment Year 2009-10. The case revolved around the computation of total income by the Assessing Officer, including payments to sub-contractors towards freight charges under Section 40(a)(ia) of the Income Tax Act, 1961. The Commissioner of Income Tax (A) allowed the appeal by the assessee, which led to the Revenue's appeal before the ITAT, Bangalore. The ITAT, based on the judgment of the Ahmedabad Bench, dismissed the Revenue's appeal, prompting the Revenue to approach the High Court under Section 260A of the Act.The main issue before the High Court was whether the non-filing of Form No.15-I/J within the prescribed time constituted a technical default or triggered the provisions of Section 40(a)(ia) of the Act. Section 40(a)(ia) pertains to payments to contractors or sub-contractors on which tax is deductible at source but has not been deducted or paid on time. Section 194C(3) provides exceptions to the deduction of tax at source, particularly in cases where the sub-contractor has filed the necessary declaration forms.The High Court analyzed the provisions of Section 40(a)(ia) and Section 194C(3) to determine the applicability of the former based on compliance with the latter. It was established that if the requirements of Section 194C(3) were met, the liability to deduct tax at source would cease. In this case, the sub-contractors had filed Form No.15I, relieving the assessee from the obligation to deduct tax under Section 194C(3) and file Form No.15J. The High Court referred to the judgment of the ITAT, Ahmedabad Bench, which upheld that once the conditions of Section 194C(3) were fulfilled, the liability to deduct tax at source would end, thereby negating the application of Section 40(a)(ia).Ultimately, the High Court upheld the ITAT's decision, stating that the filing of Form No.15I/J was directory and not mandatory. Consequently, the Court found no grounds to interfere with the Tribunal's well-considered order, leading to the dismissal of the Revenue's appeal. No substantial questions of law were found to arise from the case, resulting in the rejection of the Revenue's appeal.