2021 (12) TMI 511 - HC - Income Tax

Court rules payments to sub-agents not subject to tax, disallowance unjustified.

The High Court upheld the Tribunal's decision that Sections 194H and 194G of the Income Tax Act were not applicable to payments made by the assessee to ... TDS u/s 194H OR 194G - assessee purchases lottery tickets from the agencies referred to above and claim to sell the lottery tickets to the retailers - the assessee purchased lottery tickets from the State of Kerala and claims to have sold to the retail vendors - According to the assessee, there is no relationship of Principal and Agent between the assessee and the end sellers of lottery tickets to the general public and the retailers have become eligible for receiving their entitlement as successful agents' prize money/commission, etc. - HELD THAT:- The assessee acts as a post-office by receiving counterfoils of prize winning tickets sold by different retailers in the organisation of lottery business presented to the State government and the prize/incentive/bonus received from the government is transferred to retailers. In the circumstances of the case our attention has been drawn to the flow of counterfoils into the hands of assessee and presentation of counterfoils to government and receipt of incentive by assessee and subsequent transfer of incentive to retailers. The person responsible for making the payment is the government. Admittedly, the government after affecting TDS has paid the amount to the assessee towards prize incentive etc. The assessee has collected the amount and claims to have made over the incentive to the end retailers. Section 194G, as rightly held by the Commissioner of Income Tax and the Tribunal, is not attracted to the instant payment inasmuch as assessee is not under obligation to pay towards commission etc to any of these persons. The substantial questions of law framed by the Revenue are examined by keeping in perspective the confirming order of the Tribunal. And the findings of facts recorded by the Tribunal on which no exception is pointed out to the effect that Sections 194H and 194G are not attracted. It is definitely a case for consideration of substantial questions of law, had the Revenue established the basic ingredients required for attracting any one of the sections to the controversy covered by the appeal. We are of the view that the assessee being a wholesale dealer/Stockist of lottery has purchased from the government and sold to the retailers. It is accepted as a purchase from the organizing agency of lottery and sale to retailers. The amount covered is incentive payable by the organizing department to the agent and none of the ingredients required for adding the disputed amount is established. The questions, in our view, do not arise for consideration particularly having regard to the findings appreciated by the CIT (Appeals) and the Tribunal and accordingly the questions are answered in favour of the assessee and against the Revenue. Issues Involved:1. Applicability of Section 194G/194H of the Income Tax Act to payments made by the assessee to sub-agents.2. Applicability of Section 40(a)(ia) of the Income Tax Act to the above payments.3. Validity of the Tribunal's decision to delete the disallowance made under Section 40(a)(ia) for non-deduction of tax at source under Section 194H/194G.4. Tribunal's refusal to consider certain issues on merits.Detailed Analysis:Issue 1: Applicability of Section 194G/194H of the Income Tax ActThe Revenue argued that the payments made by the assessee to sub-agents fall within the scope of Section 194G/194H, which necessitates the deduction of tax at source. The Assessing Officer held that the relationship between the assessee and the end buyers of lottery tickets was one of Principal and Agent, making the incentive/commission payments subject to tax deduction under Section 194H or alternatively, Section 194G.The CIT (Appeals) and the Tribunal found that the sub-dealers purchasing lottery tickets from the assessee did not render any service to the assessee in the course of buying or selling of goods. Thus, Section 194H was not applicable as there was no Principal-Agent relationship. Further, the Tribunal held that Section 194G was not attracted because the assessee acted merely as a conduit or post-office, transferring the prize money received from the government to the retailers. Hence, the payments did not qualify as commission or remuneration under Section 194G.Issue 2: Applicability of Section 40(a)(ia) of the Income Tax ActThe Assessing Officer added the payments made to sub-agents to the assessee's income under Section 40(a)(ia) due to non-deduction of tax at source. The CIT (Appeals) and the Tribunal rejected this addition, holding that Section 40(a)(ia) does not contemplate disallowance consequent upon default under Section 194G. Since Section 194G was not applicable, Section 40(a)(ia) could not be invoked to disallow the payments.Issue 3: Validity of the Tribunal's DecisionThe Tribunal upheld the CIT (Appeals)'s decision, which found that neither Section 194H nor Section 194G applied to the payments made by the assessee. The Tribunal categorically held that the payments were not subject to tax deduction at source, thus disallowance under Section 40(a)(ia) was not justified.Issue 4: Tribunal's Refusal to Consider Certain IssuesThe Revenue contended that the Tribunal erred in not considering certain issues on merits. However, the Tribunal's decision was based on the factual findings that the sub-agents did not render any service to the assessee and that the payments were not in the nature of commission or remuneration. These findings were upheld as there was no evidence to the contrary.Conclusion:The High Court concluded that the CIT (Appeals) and the Tribunal correctly interpreted the law and facts, holding that Sections 194H and 194G were not applicable to the payments made by the assessee. Consequently, the disallowance under Section 40(a)(ia) was also not justified. The substantial questions of law framed by the Revenue were answered in favor of the assessee, and the appeals were dismissed. The decision is fact-specific and should not be relied upon as a precedent for other cases involving similar issues.