Payments for cold storage not subject to tax deduction. Interest cancellation under Section 201(1A) upheld. Relief granted to one assessee.

The Tribunal determined that payments for the use of cold storage facilities are not subject to deduction under Section 194-I of the Income-tax Act, 1961, as cold storage is considered a plant, not a building. Consequently, interest under Section 201(1A) for non-deduction of tax was cancelled. The relief granted by the CIT(A) regarding tax demand cancellation was upheld for one assessee, while the department's appeal against the relief granted to another assessee was rejected. The appeals of both assessees were allowed, and the department's appeals were dismissed.

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Issues Involved:
1. Applicability of Section 194-I of the Income-tax Act, 1961 to payments made for the use of cold storage.
2. Levy of interest under Section 201(1A) for non-deduction of tax.
3. Relief granted by CIT(A) regarding tax demand cancellation.

Detailed Analysis:

1. Applicability of Section 194-I of the Income-tax Act, 1961:

The first common ground raised by both assessees was against the holding that payment for the use of cold storage is covered under Section 194-I of the Income-tax Act, 1961, and therefore, tax was deductible on such payment. The Assessing Officer (AO) observed that the assessees had used part of the property owned by M/s. Vinayak Cold Storage (VCS) by keeping their goods in the said cold storage and made payments to VCS. The AO viewed these payments as rent for the use of property and hence covered by Section 194-I. Since the assessees had not deducted tax at source and had not filed the prescribed Form No. 26J, the AO issued a show-cause notice and subsequently levied tax at 20% of the payment made along with interest under Section 201(1A).

The assessees contended that no space was taken on rent, and the payments were preservation charges to save goods from decay, not for the use of property. They argued that the relationship between the cold storage owner and the payer was that of a bailor and bailee, not landlord and tenant, and cited the definition of "manufacturing process" in Section 2(k) of the Factories Act to support their claim that cold storage is a plant, not a building.

The CIT(A) accepted that cold storage was a factory building but held that Section 194-I was applicable as it expressly covered factory buildings. The CIT(A) also referred to the Supreme Court decision in Delhi Cold Storage (P.) Ltd. v. CIT, which held that no processing or manufacturing was involved in a cold storage.

Upon further consideration, it was determined that cold storage is indeed a plant, not a building, and hence Section 194-I does not apply. The Tribunal referred to various decisions, including the Supreme Court's observations in the case of CIT v. Karnataka Power Corpn., which emphasized that a building planned and constructed to serve an assessee's special technical requirements qualifies as a plant. Therefore, payments for the use of cold storage are not subject to deduction under Section 194-I.

2. Levy of Interest under Section 201(1A):

Since it was held that the assessees were not liable to deduct tax at source under Section 194-I, there was no question of levying interest for non-deduction of tax. Consequently, the levy of interest under Section 201(1A) was cancelled for both assessees for the assessment years in question.

3. Relief Granted by CIT(A):

The department appealed against the relief granted by CIT(A) to Ganesh Alu Bhandar for the assessment years 1998-99 and 1999-2000. The CIT(A) had upheld the applicability of Section 194-I but cancelled the tax demand on finding that VCS had already included these payments in its total income and the assessments had become final. The department did not appeal against the relief granted to Ashokkumar Narandas & Co.

Since the Tribunal held that Section 194-I is not applicable to payments made for the use of cold storage facilities, the ground raised by the department in the case of Ganesh Alu Bhandar was rejected.

Conclusion:

(a) The appeals of both the assessees in ITA Nos. 837 to 840/RJT/2002 were allowed.
(b) The appeals of the department in ITA Nos. 2004 & 2005/RJT/2002 were dismissed.

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