TDS obligation on a payment could not be held to be dependent upon the drastic consequence of default of non-deduction – SC
Chapter IV of the Act of 1961 deals with the subject “Computation of Total Income” and Section 40 occurs in Part D thereof, carrying the provisions relating to the “Profits and Gains of Business or Profession”. Even when Sections 30 to 38 provide for various allowances and deductions in computation of the income from profits and gains of business or profession, Section 40 specifically ordains that certain amounts shall not be deducted, notwithstanding anything to the contrary contained in the said Sections 30 to 38 of the Act.
According to Section 40(a)(ia) after insertion by the Finance (No. 2) Act, 2004, notwithstanding anything to the contrary in sections 30 to 38, any interest, commission or brokerage, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or subcontractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under section 200(1) shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”
Let us refer to the case of Shree Choudhary Transport Co. v. ITO (2020), where the issue under consideration was whether, disallowance under section 40(a)(ia) was confined/limited to the amount ‘payable’ and not the amount already ‘paid’ or not.
Facts of the Case:
- The assessee-appellant, a partnership firm, had entered into contract with M/s Aditya Cement Limited for transporting cement to various places in India.
- As the appellant was not having the transport vehicles of its own, it had engaged the services of other transporters for the purpose.
- The cement marketing division of M/s Aditya Cement Limited, namely, M/s Grasim Industries Limited, effected payments towards transportation charges to the appellant after due deduction of TDS, as shown in Form No. 16A issued by the company
- In the course of assessment proceedings, the Assessing Officer (AO) examined the dispatch register maintained by the appellant containing all particulars as regards the trucks hired, date of hire, bills and challan numbers, freight and commission charges, net amount payable, the dates on which the payments were made, and the destination of each truck etc.
- On verifying the contents of record placed before him, the AO observed that while making payment to the truck operators/owners, the appellant had not deducted tax at source even if the net payment exceeded Rs. 20,000.
- Following this, a notice was issued to the appellant, requiring the details of amount paid to the truck operators/owners, TDS thereupon, and date of depositing the same in the Government account.
- In reply, the appellant contended, inter alia, that the trucks hired were belonging to different operators/owners who were not the sub-contractors or contractors; that they came from different parts of India and mostly required cash payment for diesel and other running expenses; that the appellant had no liability to deduct tax at source because it had not made payments exceeding Rs. 20,000 in a single transaction and that the provisions of Section 40(a)(ia) were not applicable to the appellant.
- The AO treated the assessee in default for failure to deduct tax source under section 194C as there existed a sub-contract between the assessee and truck operators/owners.
- As a result, freight charges were disallowed under section 40(a)(ia).
- The Commissioner, Tribunal and High Court (HC) confirmed the assessment order.
- Aggrieved with the order of the HC, assessee appealed before the Supreme Court (SC)
Observations of SC
- Under the contract with the customer, the assessee was responsible to transport goods and how to accomplish that task, was within exclusive domain of the assessee.
- Hence, hiring the services of truck operators/ owners for carrying out this purpose could only have been under a contract between the assessee and truck operators/owners.
- Whenever a truck was engaged to deliver the goods, all the essentials of making a contract existed between the assessee and truck operators/owners.
- It was irrespective whether such contract was reduced in writing or not.
- In CIT v. Hardarshan Singh (2013) (Delhi)(HC), the assessee was found to be acting only as a commission agent for arranging for transportation through other transporters i.e. a facilitator or intermediary between the consigner company and transporters.
- Contrary to facts of Hardarshan Singh, the assessee was neither a facilitator nor intermediary.
- The assessee had entered into separate contracts with its customer for transportation of goods and also, with truck operators/owners for effectuating the transportation
- In Palam Gas Service v. CIT (2017), the SC held that section 40(a)(ia) covered not only those cases where the amount was ‘payable’ but also when it was ‘paid’.
- Sub-clause (ia), was inserted in clause (a) of section 40 of the Act with effect from 01.04.2005 by Finance (No. 2) Act, 2004.
- The Finance Act got presidential assent on 10.09.2004.
- It was thus argued by the assessee that it could not have foreseen prior to 10.09.2004 that any amount paid to a contractor without deducting tax at source was likely to become not deductible under section 40.
- Following its earlier decision in Palam Gas Services, SC held that once a particular truck was engaged on hire charges for transportation of the goods, the Truck operator/owner became the subcontractor and all the requirements of Section 194C came into operation.
- Further, provisions dealing with disallowance of deductions particularly sections 40(a)(ia) and 40A(3) were intended to enforce due compliance of the requirement of other provisions of the Act and to ensure proper collection of tax and also transparency in dealings.
- The interest of an authentic assessee who had made the deduction as required and had paid the same to the revenue was safeguarded.
- No question about prejudice or hardship arose.
- Following its earlier decision in Palam Gas Services, SC held that the provisions applied not only to amounts ‘payable’ but also paid and that the term ‘payable’ had been used in Section 40(a)(ia) only to indicate the type or nature of the payments by the assessee’s to the payees referred therein.
- Further, accordingly to the SC, its earlier decision of Palam Gas Service did not warrant any reconsideration in absence of anything to show that the decision is not in conformity with any binding decision of larger bench or statutory provision or any other reason of like nature.
- Section 40(a)(ia) having come into force from 01.04.2005, would apply from Assessment Year 2005-06 and onwards.
- SC held that the requirement of deducting tax at source was already existing as per Section 194C of the Act.
- The obligation to deduct tax at source on a payment cannot be held to be dependent upon the drastic consequence of default of non-deduction i.e. disallowance of payment.
- SC also rejected the argument of the assessee that the amendment by Finance (No. 2) Act, 2014, whereby the disallowance under section 40(a)(ia) was restricted to 30% of sum payable, was retrospective and applied from inception of section 40(a)(ia).
- The amendment was specifically made applicable w.e.f. 01.04.2015 relevant to assessment year 2015-16 and therefore held to be applicable from that date.
- Accordingly, the disallowance made by the ITO under section 40(a)(ia) was upheld. (AY. 2005-06)
Failure to deduct tax at source for payments exceeding Rs. 20,000 to each truck owners/operators are liable to be disallowed. Disallowance is not limited only to amount outstanding and this provision equally applies in relation to expenses that had already been incurred and paid by assessee. Also Section 40(a)(ia) as introduced by Finance (No.2) Act, 2004 with effect from 01.04.2005 is applicable to and from assessment year 2005-06 (Amendment by Finance Act, 2014 is prospective)
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