As per the order passed by the CIT(A)-24, Mumbai for the quantum of assessment for the assessment year 2006-07. The below order cleared that when any deductor deduct TDS against payment of Contract but if there is no commencement of Contract between Contractor or Subcontractor then there is not liability of Deduction of TDS under Section 1994C.
TAT MUMBAI
Ratnakar Sawant, Dinesh N. Shah & Co. v. ITO
IT Appeal No. 2941 (Mum.) of 2011
[Assessment year 2006-07]
May 11, 2012
Ratnakar Sawant, Dinesh N. Shah & Co. v. ITO
IT Appeal No. 2941 (Mum.) of 2011
[Assessment year 2006-07]
May 11, 2012
ORDER
Amit Shukla, Judicial Member – This appeal has been filed by the assessee against order dated 2-2-2011, passed by the CIT(A)-24, Mumbai for the quantum of assessment for the assessment year 2006-2007.
2. The solitary issue involved in various grounds of appeal relates to addition of Rs. 18,70,375/-, on account of payment made for hiring of vehicles in violation of Section 40(a)(ia). The factual matrix of this ground are that the assessee is an individual and proprietor of two concerns, namely, ‘M/s Ratan Transport’ and ‘M/s Ratan Forklift Hiring Services’, which are engaged in the business of forklift hiring. The hire charges so received from the various parties from hiring of forklift vehicles were either through the forklift vehicles owned by him or taken on hire from outside parties for which he had to make payment to such other parties.
3. The Assessing Officer during the course of the assessment proceedings noted that the assessee had declared-turn over of Rs. 82.73 lacs in M/s Ratan Forklift and Rs. 15.82 lacs in M/s Ratan Transport from hiring business. As against this, the assessee has claimed hire charges paid in both the proprietary concerns aggregating Rs. 81,17,595/-. He proceeded to scrutinize the payment which were made in excess of Rs. 50,000/- to various persons, which amounted to Rs. 18,70,375/-, the details of which has been given at para 11 of the assessment order. The Assessing Officer observed that the assessee had not deducted TDS as per the provision of 194C(2) on these payments and therefore, same is not allowable as expenditure. The assessee contended that he had offered his income u/s 44AE and therefore, such a dis-allowance cannot be made and secondly, provision of Section 40a(ia) will not be applicable to assessee in this year as he is individual not liable to deduct TDS u/s 194C. The Assessing Officer rejected the explanation and held that the assessee was engaged in the business activities of forklift and hiring and had made transactions with various persons and therefore, non-deduction of TDS clearly violates the provision of Section 40(a)(ia) even in this year. Accordingly, sum of Rs. 18,70,375/- was added to the income of the assessee.
4. In the first appeal , the assessee submitted that forklift vehicles were hired from different owners not for any specific job or contract but for carrying out his own obligation as a contractor with the principals. There was no element of contract between the assessee and the parties from whom he had hired the forklift, either oral or written and therefore the provision of Section 194C(2) are not applicable. It was further submitted that individuals are not liable to deduct TDS under Section 194C(2) in respect of payment to sub-contractors under sub-section (2) of Section 194C, which has only come in the statute w.e.f. 1- 6-2007. Further reliance was placed on the following decisions :-
(i) Punjab & Haryana High Court in the case of CIT (TDS) v. United Rice Land Ltd. [2008] 174 Taxman 286.
(ii) Mythri Transport Corporation v. Asstt. CIT [2010] 124 ITD 40 (Visakha.)
(iii) Order of CIT(A) 24 in the case of Janardhan V. Sawant, A.Y. 2007-2008 (Appeal No. CIT(A) 24/ACIT, 13 (2)/337/09-10 dtd.11.06.2010).
5. Learned CIT(A) dismissed the assessee’s contention simply by affirming the finding of the Assessing Officer.
6. Learned AR appearing on behalf of the assessee submitted that firstly, it was not a case for hiring of forklift vehicles from the outsider under a contract and therefore, it does not come within the purview of sub-contract under Section 194C (2), as there was no oral and written agreement and secondly, hiring of forklift vehicles is a machinery which falls within the scope of Section 194(1) and not 194C.Even the Explanation to Section 194(1) provides for TDS liability on hiring of machinery which has come w.e.f. 13-7-2006, hence, does not fall in the impugned assessment year. She also filed copy of decision of ITAT Mumbai Bench in ACIT v. Janardhan V. Sawant, in ITA No.6505/Mum/2010, vide order dated 28-3-2012, wherein on similar facts in the case of assessee’s brother, the Tribunal has dismissed the case of the department.
7. On the other hand, learned Senior DR submitted that there was a clear violation of Section 194C as the assessee has not deducted TDS and the finding given by the Assessing Officer and affirmed by the CIT(A), is liable to be upheld.
8. We have carefully considered the rival submissions and also the findings given in the impugned orders. The assessee is an individual, who has undertaken a contract to provide forklift on hire to his principals, on which he has received hire charges. Besides his own forklift vehicles, he has also hired forklift vehicles from the outside parties for which he has paid hire charges to them and has been claimed as expenditure. In such a case, the assessee is solely responsible for executing the contract with the persons to whom he has given forklift vehicles on hire and it is only for fulfillment of this contract that he has also engaged the forklift vehicles from the outside parties. In case of hiring from outside parties the responsibility and the risk involved for performing the contract work lies with the assessee only and no such risk and responsibility seems to have been transferred to outside parties via-à-vis his principals. The provisions of Section 194C applies to any payment made to a contractor for carrying out any work in pursuance of a contract between the contractor and the specified persons. The contract also includes sub-contract. For application of provisions of Section 194C in this case it has to been seen, whether the assessee has entered into any kind of sub-contract with the outside parties from whom he has hired the forklift vehicles on random basis to fulfil his own commitment towards his principals. There is no material on record to remotely suggest that there was any kind of oral or a written contract or sub-contract with the outside parties from whom he has taken the forklift vehicles. Until and unless risk and responsibility of the contract undertaken by the assessee is shifted to the sub-contractors, it cannot be held that these persons are the sub-contractors of the assessee. The judgments as have been relied upon by the assessee before the CIT(A) clearly clinches the issue in favour of the assessee. The relevant proposition laid down in these cases are given here under :-
United Rice Land Ltd. (supra)
“The assessee-company was engaged in the business of manufacture and export of rice. Whenever there was need for transportation of goods from business premises to the part the assessee used to engage trucks through transporters. The consideration was charged by the transporters from the truck owners or operators and the hire charges were paid by the assessee directly to the truck owners or drivers or through the transporters. There was no contract with any of the local transporters or truck owners. The Assessing Officer treated the assessee as in default for short deduction of tax under Section 201 of the Income-Tax Act, 1961 and levied interest under section 201(IA) of the Act. The Commissioner (Appeals) partly allowed the appeal filed by the assessee. The appeal filed by the revenue was dismissed by the Tribunal. On further appeal:
Held: dismissing the appeal, that the Assessing Officer had held the assessee liable to deduction of tax only on the assumption that the assessee had agreement with the parties through whom trucks were arranged for transportation of goods. The Commissioner (Appeals) had recorded a finding that there was neither an oral nor written agreement between the assessee and the transporters for carriage of goods nor had it been proved that any sum of money regarding freight charges was paid to them in pursuance of a contract for a specific period, quantity or price. This finding of fact was recorded after considering the certificate furnished by the transporters. The tribunal also recorded that this finding of fact had not been controverted by the Department.”
Mythri Transport Corporation (supra)
“In the instant case, there is no material to suggest that the other lorry owners involved themselves in carrying out any part of the work undertaken by the assessee by spending their time, energy and by taking the risks associated with the main contract work. In the absence of the above said characteristics attached to a sub-contract in the instant case, the payment made to the lorry owners stands at par with the payments made towards salaries, rent etc…… Hence, in our considered opinion, it cannot be said that payments made for hired vehicles would fall in the category of payment towards a sub-contract with lorry owners. In that case the assessed is not liable to deduct tax at source, as per provisions of section 194C(2), on payments made to the lorry owners for lorry hire. Consequently, the provisions of section 40(a)(ia) shall not apply to such payments.”
9. This issue has also come up for consideration by the coordinate Bench of the ITAT in the case of Janardhan V. Sawant (supra), which was rendered in the case of the assessee’s brother wherein on similar facts, the appeal of the department has been dismissed.
10. So far as the second contention that hiring of forklift vehicles comes within the purview of hiring of machinery and, therefore, it will fall within purview of Section 194(1), is not adjudicated upon and is left upon to be decided in some other matter. The issues regarding applicability of Section 194C in the cases where income is computed u/s 44AE and also applicability of amendment as contended before the authorities below is also not adjudicated upon as we have already decided the issue on merits.
11. Thus, in view of our finding given above, and also respectfully following the decision of the ITAT in the case Janardhan V. Sawant (supra), we hold that the assessee was not liable to deduct TDS under Section 194C(2) in relation to payment made to the outside parties and accordingly there is no violation of Section 40(ia). Hence, the addition of Rs. 18,70,375/- is deleted.
12. In the result, the appeal filed by the assessee is allowed.
2. The solitary issue involved in various grounds of appeal relates to addition of Rs. 18,70,375/-, on account of payment made for hiring of vehicles in violation of Section 40(a)(ia). The factual matrix of this ground are that the assessee is an individual and proprietor of two concerns, namely, ‘M/s Ratan Transport’ and ‘M/s Ratan Forklift Hiring Services’, which are engaged in the business of forklift hiring. The hire charges so received from the various parties from hiring of forklift vehicles were either through the forklift vehicles owned by him or taken on hire from outside parties for which he had to make payment to such other parties.
3. The Assessing Officer during the course of the assessment proceedings noted that the assessee had declared-turn over of Rs. 82.73 lacs in M/s Ratan Forklift and Rs. 15.82 lacs in M/s Ratan Transport from hiring business. As against this, the assessee has claimed hire charges paid in both the proprietary concerns aggregating Rs. 81,17,595/-. He proceeded to scrutinize the payment which were made in excess of Rs. 50,000/- to various persons, which amounted to Rs. 18,70,375/-, the details of which has been given at para 11 of the assessment order. The Assessing Officer observed that the assessee had not deducted TDS as per the provision of 194C(2) on these payments and therefore, same is not allowable as expenditure. The assessee contended that he had offered his income u/s 44AE and therefore, such a dis-allowance cannot be made and secondly, provision of Section 40a(ia) will not be applicable to assessee in this year as he is individual not liable to deduct TDS u/s 194C. The Assessing Officer rejected the explanation and held that the assessee was engaged in the business activities of forklift and hiring and had made transactions with various persons and therefore, non-deduction of TDS clearly violates the provision of Section 40(a)(ia) even in this year. Accordingly, sum of Rs. 18,70,375/- was added to the income of the assessee.
4. In the first appeal , the assessee submitted that forklift vehicles were hired from different owners not for any specific job or contract but for carrying out his own obligation as a contractor with the principals. There was no element of contract between the assessee and the parties from whom he had hired the forklift, either oral or written and therefore the provision of Section 194C(2) are not applicable. It was further submitted that individuals are not liable to deduct TDS under Section 194C(2) in respect of payment to sub-contractors under sub-section (2) of Section 194C, which has only come in the statute w.e.f. 1- 6-2007. Further reliance was placed on the following decisions :-
(i) Punjab & Haryana High Court in the case of CIT (TDS) v. United Rice Land Ltd. [2008] 174 Taxman 286.
(ii) Mythri Transport Corporation v. Asstt. CIT [2010] 124 ITD 40 (Visakha.)
(iii) Order of CIT(A) 24 in the case of Janardhan V. Sawant, A.Y. 2007-2008 (Appeal No. CIT(A) 24/ACIT, 13 (2)/337/09-10 dtd.11.06.2010).
5. Learned CIT(A) dismissed the assessee’s contention simply by affirming the finding of the Assessing Officer.
6. Learned AR appearing on behalf of the assessee submitted that firstly, it was not a case for hiring of forklift vehicles from the outsider under a contract and therefore, it does not come within the purview of sub-contract under Section 194C (2), as there was no oral and written agreement and secondly, hiring of forklift vehicles is a machinery which falls within the scope of Section 194(1) and not 194C.Even the Explanation to Section 194(1) provides for TDS liability on hiring of machinery which has come w.e.f. 13-7-2006, hence, does not fall in the impugned assessment year. She also filed copy of decision of ITAT Mumbai Bench in ACIT v. Janardhan V. Sawant, in ITA No.6505/Mum/2010, vide order dated 28-3-2012, wherein on similar facts in the case of assessee’s brother, the Tribunal has dismissed the case of the department.
7. On the other hand, learned Senior DR submitted that there was a clear violation of Section 194C as the assessee has not deducted TDS and the finding given by the Assessing Officer and affirmed by the CIT(A), is liable to be upheld.
8. We have carefully considered the rival submissions and also the findings given in the impugned orders. The assessee is an individual, who has undertaken a contract to provide forklift on hire to his principals, on which he has received hire charges. Besides his own forklift vehicles, he has also hired forklift vehicles from the outside parties for which he has paid hire charges to them and has been claimed as expenditure. In such a case, the assessee is solely responsible for executing the contract with the persons to whom he has given forklift vehicles on hire and it is only for fulfillment of this contract that he has also engaged the forklift vehicles from the outside parties. In case of hiring from outside parties the responsibility and the risk involved for performing the contract work lies with the assessee only and no such risk and responsibility seems to have been transferred to outside parties via-à-vis his principals. The provisions of Section 194C applies to any payment made to a contractor for carrying out any work in pursuance of a contract between the contractor and the specified persons. The contract also includes sub-contract. For application of provisions of Section 194C in this case it has to been seen, whether the assessee has entered into any kind of sub-contract with the outside parties from whom he has hired the forklift vehicles on random basis to fulfil his own commitment towards his principals. There is no material on record to remotely suggest that there was any kind of oral or a written contract or sub-contract with the outside parties from whom he has taken the forklift vehicles. Until and unless risk and responsibility of the contract undertaken by the assessee is shifted to the sub-contractors, it cannot be held that these persons are the sub-contractors of the assessee. The judgments as have been relied upon by the assessee before the CIT(A) clearly clinches the issue in favour of the assessee. The relevant proposition laid down in these cases are given here under :-
United Rice Land Ltd. (supra)
“The assessee-company was engaged in the business of manufacture and export of rice. Whenever there was need for transportation of goods from business premises to the part the assessee used to engage trucks through transporters. The consideration was charged by the transporters from the truck owners or operators and the hire charges were paid by the assessee directly to the truck owners or drivers or through the transporters. There was no contract with any of the local transporters or truck owners. The Assessing Officer treated the assessee as in default for short deduction of tax under Section 201 of the Income-Tax Act, 1961 and levied interest under section 201(IA) of the Act. The Commissioner (Appeals) partly allowed the appeal filed by the assessee. The appeal filed by the revenue was dismissed by the Tribunal. On further appeal:
Held: dismissing the appeal, that the Assessing Officer had held the assessee liable to deduction of tax only on the assumption that the assessee had agreement with the parties through whom trucks were arranged for transportation of goods. The Commissioner (Appeals) had recorded a finding that there was neither an oral nor written agreement between the assessee and the transporters for carriage of goods nor had it been proved that any sum of money regarding freight charges was paid to them in pursuance of a contract for a specific period, quantity or price. This finding of fact was recorded after considering the certificate furnished by the transporters. The tribunal also recorded that this finding of fact had not been controverted by the Department.”
Mythri Transport Corporation (supra)
“In the instant case, there is no material to suggest that the other lorry owners involved themselves in carrying out any part of the work undertaken by the assessee by spending their time, energy and by taking the risks associated with the main contract work. In the absence of the above said characteristics attached to a sub-contract in the instant case, the payment made to the lorry owners stands at par with the payments made towards salaries, rent etc…… Hence, in our considered opinion, it cannot be said that payments made for hired vehicles would fall in the category of payment towards a sub-contract with lorry owners. In that case the assessed is not liable to deduct tax at source, as per provisions of section 194C(2), on payments made to the lorry owners for lorry hire. Consequently, the provisions of section 40(a)(ia) shall not apply to such payments.”
9. This issue has also come up for consideration by the coordinate Bench of the ITAT in the case of Janardhan V. Sawant (supra), which was rendered in the case of the assessee’s brother wherein on similar facts, the appeal of the department has been dismissed.
10. So far as the second contention that hiring of forklift vehicles comes within the purview of hiring of machinery and, therefore, it will fall within purview of Section 194(1), is not adjudicated upon and is left upon to be decided in some other matter. The issues regarding applicability of Section 194C in the cases where income is computed u/s 44AE and also applicability of amendment as contended before the authorities below is also not adjudicated upon as we have already decided the issue on merits.
11. Thus, in view of our finding given above, and also respectfully following the decision of the ITAT in the case Janardhan V. Sawant (supra), we hold that the assessee was not liable to deduct TDS under Section 194C(2) in relation to payment made to the outside parties and accordingly there is no violation of Section 40(ia). Hence, the addition of Rs. 18,70,375/- is deleted.
12. In the result, the appeal filed by the assessee is allowed.
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