2025 (1) TMI 1388 - AT - Income Tax

ITAT deletes TDS disallowance under Section 40(a)(ia) for freight expenses as no formal contracts existed with truck owners

Sitaram Dattatrya Waikar Versus Income Tax Officer, Mumbai

ITAT Mumbai ruled in favor of assessee regarding TDS disallowance under Section 40(a)(ia) for freight, diesel and fuel expenses. The tribunal held that AO ... TDS u/s 194C - disallowance of freight, diesel and fuel expenses under Section 40(a)(ia) on non deduction of TDS - contention of the assessee is that there existed no contract between the assessee and the truck owners, since the trucks are hired from the market as per the demand at prevailing market rates - HELD THAT:- AO has not brought on record any material to show that there existed any oral or written contract between the assessee and lorry owners. Hence the provisions of sec.194C, as per the above discussed decisions, will not apply. Even if it is assumed for a moment that there existed an oral contract between the parties, it is the submission of the assessee that the payment made to each lorry on each occasion did not exceed the threshold limit prescribed for deducting tax at source u/s 194C of the Act. The above said submission has not been disproved. Accordingly, we are of the view that the AO was not justified in invoking the provisions of sec. 40(a)(ia) of the Act for disallowing the freight charges - Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the above said addition. Non deduction of TDS on Diesel & Fuel expenses - The reasoning given by us for deleting the disallowance of freight charges u/s 40(a)(ia) of the Act would equally apply to this expenditure also. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance of Diesel & Fuel expenses. Partial disallowance of Truck repairs and maintenance expenses - AO had initially disallowed entire expenditure and CIT(A) restricted the disallowance to 15% of the expenses in the first round of proceedings. The same has been reiterated by the AO in the second round also - HELD THAT:- We notice that the above said adhoc disallowance was made for the reason that the assessee did not produce bills and vouchers, which defect remained unrectified in the second round also. Accordingly, we confirm the disallowance of 15% of the Truck repaid and maintenance expenses. Appeal filed by the assessee is partly allowed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the disallowance of freight charges under Section 40(a)(ia) of the Income Tax Act, 1961, for non-deduction of tax at source was justified.Whether the disallowance of diesel and fuel expenses under the same section for non-deduction of tax at source was appropriate.Whether the partial disallowance of truck repair and maintenance expenses due to non-production of bills and vouchers was warranted.ISSUE-WISE DETAILED ANALYSISDisallowance of Freight ChargesRelevant legal framework and precedents: The disallowance was made under Section 40(a)(ia) of the Income Tax Act, 1961, which mandates the deduction of tax at source for certain payments. The assessee argued that there was no contract with the truck owners, referencing precedents such as R R Carrying Corporation vs. ACIT and COMMISSIONER OF INCOME TAX vs UNITED RICE LAND LTD.Court's interpretation and reasoning: The Tribunal agreed with the assessee, noting the absence of any written or oral contract requiring TDS under Section 194C. The Tribunal found that the Assessing Officer (AO) failed to provide evidence of a contractual relationship.Key evidence and findings: The Tribunal found that the payments were made based on prevailing market rates without any formal contract, thus not subject to TDS requirements.Application of law to facts: The Tribunal applied the legal principle that, in the absence of a contract, TDS under Section 194C is not required, thereby invalidating the disallowance of Rs. 12,79,600.Treatment of competing arguments: The Tribunal rejected the AO's position due to lack of evidence of a contract.Conclusions: The Tribunal directed the deletion of the disallowance of freight charges.Disallowance of Diesel and Fuel ExpensesRelevant legal framework and precedents: Similar to the freight charges, the disallowance was under Section 40(a)(ia) for non-deduction of TDS.Court's interpretation and reasoning: The Tribunal extended its reasoning from the freight charges issue, noting that the diesel and fuel expenses were also not subject to TDS in the absence of a contract.Key evidence and findings: The Tribunal found no evidence of a contractual obligation requiring TDS.Application of law to facts: The Tribunal applied the same legal reasoning as for the freight charges, leading to the conclusion that the disallowance was unjustified.Treatment of competing arguments: The Tribunal dismissed the AO's reasoning as it lacked evidentiary support.Conclusions: The Tribunal directed the deletion of the disallowance of diesel and fuel expenses amounting to Rs. 54,40,044.Partial Disallowance of Truck Repair and Maintenance ExpensesRelevant legal framework and precedents: The disallowance was based on the lack of supporting bills and vouchers.Court's interpretation and reasoning: The Tribunal upheld the disallowance of 15% of the expenses due to the assessee's failure to rectify the documentation deficiency.Key evidence and findings: The absence of bills and vouchers was a critical factor in the Tribunal's decision.Application of law to facts: The Tribunal found that the lack of documentation justified the partial disallowance.Treatment of competing arguments: The Tribunal agreed with the AO and CIT(A) on the need for documentation to support the expenses.Conclusions: The Tribunal confirmed the 15% disallowance of truck repair and maintenance expenses.SIGNIFICANT HOLDINGSCore principles established: The Tribunal reinforced the principle that TDS requirements under Section 194C are contingent upon the existence of a contract. In the absence of such a contract, disallowances under Section 40(a)(ia) are not justified.Final determinations on each issue: The Tribunal directed the deletion of disallowances related to freight charges and diesel and fuel expenses while upholding the partial disallowance of truck repair and maintenance expenses.The appeal was partly allowed, with the Tribunal providing relief on the disallowance of freight and fuel expenses but maintaining the partial disallowance for truck repair and maintenance due to insufficient documentation.