2017 (1) TMI 441 - AT - Income Tax

Revenue's Appeal Dismissed, Section 40(a)(ia) Exemption Upheld

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the addition under Section 40(a)(ia) and ruling that the provisions ... TDS u/s 194C - non-existence of a “formal contractual agreement - relationship of a contractor between the appellant and the small contractor on “oral contracts” - Held that:- The issue is covered in favour of the assessee by the decision of this Tribunal in similar case of M/s Chadda Transport [2016 (3) TMI 1019 - ITAT NAGPUR] since no amount of the freight was unpaid or was payable as on 31-03-2007 we hold that the provisions of section 40(a)(ia) are not attracted and in this view of the matter we are of the opinion that Revenue's appeal is liable to be dismissed. The assessee is a transport contractor. The assessee was awarded contract of transportation to various locations of Ambuja Cement, Manigarh Cement, Maratha Cement etc. The assessee received freight charges from these companies. The contract with these companies shows that the assessee was responsible for transportation of cement from one destination to other. The contractual liability was discharged by transporting cement through assessee's own trucks and also from hired trucks belonging to outside parties. It is clear from the facts on record that the risk and responsibility for carrying out the contract work was solely that of the assessee. There is no material to suggest that there was any contract or sub contract written or oral with the outside truck owners and the assessee. It is in these circumstances that when these outside truck owners do not have any responsibility or liability towards the Ambuja Cement or other principals then in absence of any privity the obligation to deduct the tax at source was not that of the assessee. Since we have already held that the provisions of section 40(a)(ia) were not attracted inasmuch as no amount was payable as on the close of the year as well as in absence of any contracts, there was no obligation on the part of the assessee to deduct the tax at source - Decided in favour of assessee. Issues Involved:1. Deletion of addition under Section 40(a)(ia) of the Income Tax Act.2. Consideration of 'oral contracts' in the context of Section 194C(2).3. Existence of a formal contractual agreement and its impact on the relationship between the appellant and small contractors.Detailed Analysis:Issue 1: Deletion of Addition under Section 40(a)(ia)The Revenue challenged the CIT(A)'s decision to delete the addition of Rs. 15,70,00,465/- made under Section 40(a)(ia) for non-deduction of tax at source as required by Section 194C of the Income Tax Act. The AO disallowed the transport expenses due to non-compliance with TDS provisions, rejecting the forms submitted by the assessee as bogus and incomplete. However, the CIT(A) found that the assessee had indeed filed the necessary forms with the ITO and that there was no contractual relationship between the assessee and the truck owners, thus negating the need for TDS deduction. The CIT(A) relied on several judicial precedents to support this conclusion.Issue 2: Consideration of 'Oral Contracts' in the Context of Section 194C(2)The Revenue argued that the CIT(A) erred by ignoring the practice of 'oral contracts' in the transport business, which should attract the provisions of Section 194C(2). The CIT(A) observed that there was no evidence of any contractual relationship with subcontractors. The trucking business operates on a fragmented basis, with trucks hired on a daily or hourly basis without any formal agreements. The CIT(A) concluded that the absence of a formal contract between the appellant and the truck owners meant that the provisions of Section 194C(2) were not applicable.Issue 3: Existence of a Formal Contractual AgreementThe Revenue contended that the CIT(A) erred in holding that the non-existence of a formal contractual agreement vitiated the existence of an 'oral contract,' thus wrongly concluding that no contractor-subcontractor relationship existed. The CIT(A) noted that the contracts with large companies imposed certain responsibilities on the appellant, but there was no similar contractual obligation on the truck owners. The truck owners were hired based on availability, with no guarantee of future engagements or fixed pricing. Therefore, the CIT(A) determined that there was no contractor-subcontractor relationship, and the provisions of Section 194C(2) did not apply.Tribunal's Findings:The Tribunal upheld the CIT(A)'s order, agreeing that the facts of the case did not attract the provisions of Section 194C(2) as there was no evidence of a contractual relationship with the truck owners. The Tribunal also noted that the entire freight expenditure was paid, with nothing payable as on 31-03-2007, thus aligning with the precedent set by the Hon'ble Allahabad High Court in the case of Vector Shipping Services (P) Ltd. The Tribunal found no distinction between the facts of the present case and similar cases previously adjudicated, thereby dismissing the Revenue's appeal.Conclusion:The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the addition under Section 40(a)(ia) and ruling that the provisions of Section 194C(2) were not applicable due to the absence of a contractor-subcontractor relationship and the non-existence of any formal or oral contracts with the truck owners. The Tribunal's order was pronounced in the open court on December 28, 2016.