INCOME TAX ACT, 1961

Section 40(a)(ia) Section 194C

Business disallowance under section 40(a)(ia) - Payment to contractor without TDS - Hire charges paid to cab owners without TDS after collecting same from customers by assessee -

During the course of assessment proceedings, the AO noticed from the profit and loss account that the assessee had debited a sum of Rs. 6,18,73,785 for vehicle hire charges paid and Rs. 2,48,39,356 for petrol and diesel expenses paid. The assessee was asked to produce details of TDS on expenses, however, the assessee was failed to do so. According to the AO section 194C will only apply to a contractor during the course of business of plying, hiring or leasing goods carriages and not to a contractor engaged in the business of plying passenger vehicle. Accordingly, AO held the assessee liable to deduct TDS and disallowed a sum of Rs. 6,18,73,785 for vehicle hire charges, under section 40(a)(ia). CIT(A) confirmed the disallowance made by the AO. Held: The cab owners have received the payments from the assessee towards the hiring charges, therefore, the presumption normally be that one would proceed on the basis that there was a contract for hiring of vehicles. Therefore, if the assessee had made the payment for hiring the vehicles, the provisions of section 194C are clearly applicable. The contract had to be looked into party-wise not on the basis of the individual. All the payments made to a cab owner throughout the year were to be aggregated to ascertain the applicability of the TDS provision as all the payments pertain to a contract. Contract need not be in writing. It may infer from the conduct of the parties. Under section 194C, sub-section (5) proviso thereto, the aggregate amount of all the payments or credited to a person should exceed only Rs. 75,000, then the assessee shall be liable to deduct income-tax at source. Thus, the settled position in law is that if the deductee/payee had paid the tax, no recovery can be made from the person responsible for paying of income from which he failed to deduct tax at source. This issue was restored to the file of the AO with the direction that the assessee shall provide all the details to the AO with regard to the recipients of the income and taxes paid by them. In the present case, the authorities below had added the entire sum of Rs. 6,18,73,785 by disallowing the whole amount. Though the substitution in section 40 had been made effective with effect from 1-4-2015, the benefit of the amendment should be given to the assessee either by directing the AO to confirm from the cab owners, as to whether the said parties have deposited the tax or not and further or restrict the addition to 30% of the disallowance. It will be tied of justice if the disallowance iwould only restricted to 30% of the amount liable for TDS under section 194C.

Relied:Smt. J. Rama v. CIT (2012) 344 ITR 608 (Kar.) : 2010 TaxPub(DT) 2110 (Karn-HC), Grindlays Bank Ltd. v. CIT (1992) 193 ITR 457 (Cal) : 1992 TaxPub(DT) 0097 (Cal-HC) decided on 5-9-1989, Hindustan Coca Cola Beverage (P.) Ltd. v. CIT (2007) 293 ITR 226 (SC) : 2007 TaxPub(DT) 1452 (SC) and [IT Appeal No. 302 of 2011, GA 3200/2011, and CIT v. Virgin Creations, decided on 23-11-2011] : 2014 TaxPub(DT) 4851 (Cal-HC).