Liability of TDS u/s 194C(2) of Transporters for further payments to trucks owners/operators. Supreme Court explains the Law
ABCAUS Case Law Citation:
ABCAUS 3348 (2020) (07) SC
Important case law relied upon by the parties:
Commissioner of Income-Tax vs. Hardarshan Singh: (2013) 350 ITR 427
J. K. Synthetics Limited vs. Commercial Taxes Officer: (1994) 4 SCC 276
Institute of Chartered Accountants of India vs. Price Waterhouse: (1997) 93 Taxman 588
Palam Gas Service vs. Commissioner of Income-Tax (2017) 394 ITR 300
PIU Ghosh vs. Deputy Commissioner of Income-Tax & Ors. (2016) 386 ITR 322
Commissioner of Income-Tax v. Calcutta Export Company (2018) 404 ITR 654
In the instant appeal, the assessee had challenged the judgment passed by the Hon’ble High Court upholding the disallowance under Section 40(a)(ia) of the Income Tax Act, 1961 (the Act) for failure of the assessee-appellant to deduct the requisite tax at source (TDS).
The appellant assessee was a partnership firm, had entered into “transport contract” with a company for transporting its goods to various places in India. The appellant in turn had engaged the services of other transporters for the purpose in consideration of commission.
The Assessing Officer (AO) noted 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/-.
The appellant responded that the trucks hired were belonging to different operators/owners who were not the sub-contractors or contractors.
It was submitted that the assessee firm prepared bills for claiming payments from the company on the basis of freight charges payable to various truck owners/operators and when the payment is received on the basis of such bills, further payment was made to the truck owners/operators and nominal commission was retained by the assessee and, therefore, the payment made to the truck owners/ operators was out of the purview of Section 194C of the Act.
It was also submitted that the operators came from different parts of India and mostly required cash payment for diesel and other running expenses.
Further it was contended 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.
The AO observed that the payments to different truck operators/owners were made directly by the appellant firm and not the consignor company. Also, the appellant firm was responsible for transportation of goods of the company as per the contract for which, the appellant received payment from the company after tax being deducted at source therefrom.
The AO also observed that the appellant firm paid freight charges to the truck operators/owners from the income so earned and the remaining amount was shown as commission.
Looking to the nature of dealings of the parties, the AO observed that there existed a contract between the appellant and the truck operators/owners in respect of each challan/bilty for transportation.
The AO also referred to the CBDT Circular No. 715 dated 08.08.1995 to observe that each goods receipt could be considered a separate contract.
While further observing that a contract may be written or oral, the AO held that when the truck operators/owners in the case at hand were not to be considered as contractors, they were undoubtedly the sub-contractors of the appellant.
The AO also pointed out that despite sufficient opportunity being given, a copy of the agreement of the appellant firm with the company for providing transportation services was not furnished.
Accordingly, the AO held that the appellant was responsible for deducting tax at source while making payment to the truck operators/owners where such payment exceeded Rs. 20,000/- on a single bilty/challan or goods receipt.
The AO from the cash book and payment vouchers produced observed that each payment exceeding Rs. 20,000/- was shown in two parts though paid on the same date and the assessee had made two separate vouchers for such payment just to give an impression that payment to truck owners/ operators was not exceeding Rs. 20,000/-.
The AO rejected the contention of the assessee and held that merely by showing payment of one challan/bilty in two pieces the assessee could not absolve itself of the provisions of the Section 40(a)(ia) of the Act.
The AO further held that since the assessee firm was responsible for making payment to the truck owners operators, it was mandatory on the part of the assessee to deduct tax at source while making such payment. There was no direct nexus between the Company and the truck owners/operators and thus it could not be said that the assessee firm was a mediator between the company and the truck owners/ operators.
In view of the above, the AO proceeded to disallow the deduction of payments made to the truck operators/owners exceeding Rs. 20,000/- without TDS and added the same back to the total income of the assessee-appellant.
Both the CIT(A) and ITAT dismissed the appeal of the assessee. Also, the Hon’ble High Court summarily dismissed the appeal of the assessee.
Aggrieved with the judgment of the Hon’ble High Court the assessee took the matter before the Apex Court which dealt with the following submissions / questions of the appellant:
Whether liability u/s 194C(2) arises only if payments were made to “sub-contractor” and that too “in pursuance of written or oral contract?
The Hon’ble Supreme Court opined that it was the responsibility of the appellant to transport the goods (cement) of the company and how to accomplish this task of transportation was a matter exclusively within the domain of the appellant. Hence, hiring the services of truck operators/owners for this purpose could have only been under a contract between the appellant and the said truck operators/owners. Whether such a contract was reduced into writing or not carries hardly any relevance.
Whether disallowance u/s 40(a)(ia) is confined/limited to amount “payable” and not to the amount “already paid”?
The Hon’ble Supreme Court stated that the term “payable” has been used in Section 40(a)(ia) of the Act only to indicate the type or nature of the payments by the assessees to the payees referred therein. In other words, the expression “payable” is descriptive of the payments which attract the liability for deducting tax at source and it has not been used to specify any particular class of default on the basis as to whether payment has been made or not.
Following its own judgment the Hon’ble Supreme Court answered the question in negative against the appellant.
Whether sub-clause (ia) of Section 40(a) inserted by the Finance (No. 2) Act, 2004 with effect from 01.04.2005 is applicable only from the financial year 2005-2006 and not to financial year 2004-2005?
The Hon’ble Supreme Court stated that in income tax matters, the law to be applied is that in force in the assessment year in question, unless stated otherwise by express intendment or by necessary implication.
The Hon’ble Supreme Court opined that that the provision in question, having come into effect from 01.04.2005, would apply from and for the assessment year 2005-2006 (i.e. FY 2004-05) and would be applicable for the assessment year in question.
The Hon’ble Supreme Court rejected the submission that in any case, disallowance could not applied to the payments already made prior to 10.09.2004, the date on which the Finance (No.2) Act, 2004 received the assent of the President of India as the date of assent was not the date of applicability of the provision for the specific date having been provided as 01.04.2005.
Whether amendment made to Section 40(a)(ia) by the Finance (No.2) Act, 2014, restricting the disallowance to 30% being curative to be applied retrospectively?
The Hon’ble Supreme Court opined that the amendment by the Finance (No.2) Act of 2014 was specifically made applicable w.e.f. 01.04.2015 and clearly represented the will of the legislature as to what was to be deducted or what percentage of deduction was not to be allowed for a particular eventuality, from the assessment year 2015-2016.
The Hon’ble Supreme Court distinguished its judgment in when the amendment made by the Finance Act 2010 was held to be curative and retrospective in operation as it was intended to provide relief to a bonafide assessee who could not make deposit of deducted within prescribed time but paid it before the due date for filing of return of income.
The Hon’ble Supreme Court observed that the appellant assessee was either under the mistaken impression that he was not required to deduct TDS or under mistaken belief that the methodology of splitting a single payment into parts would provide him escape from the rigour of the provisions of the Act providing for disallowance. In either event, the appellant had not been a bonafide assessee who had made the deduction and deposited it subsequently.
Accordingly, the Hon’ble Supreme Court upheld the disallowance made and dismissed the appeal of the assessee.
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