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In a recent judgment ITAT Chandigarh has upheld that there is no provision in the Income Tax Act, 1961 to the effect that tax is not deductable at source in case of exempt income.

Case Law:
ITA Nos. 648 & 649/Chd/2014 Assessment years : 2010-11 & 2011-12
M/s Ambuja Cement Limited (Appellant) Vs. The ITO-TDS (Respondent)
Date of Judgment: 04-02-2016

Facts of the Case:
The assessee entered into an agreement with Himachal Road Transport Corporation (‘HRTC’) in availing bus services on contract basis. The employees engaged with the assessee company including their families were permitted to travel in the buses provided by HRTC. The assessee did not deduct tax u/s 194C of the Income Tax Act, 1961 while making payment to HRTC in view of the fact and request by HRTC that it was registered as a trust and enjoyed the benefit of exempt income provided u/s 11& 12 of the Income-Tax Act, 1961. The ITO (TDS) by order passed u/s 201(1) / 201(1A) treated the assessee as an assessee in default on the ground that registration of HRTC as a trust u/s 12A is not a pre-condition for non deduction of tax u/s 194C of the Act.

On appeal CIT(A) upheld the default by observing as under:

“After considering the rival submissions it is noted that the appellant's submissions is contrary to the provisions of section 190(1) and misplaced, The section nowhere provides that tax is not deductible at source in case of any exempt income. The provision u/s 190(1) is that the tax on income shall be payable by deduction at source. It does not say that tax is to be deducted on 'taxable income'. Further, the taxability of income or exemption u/s 11 is subject to various conditions and subject to assessment of income by the Assessing Officer. So the deductor cannot assume that since HRTC is registered as a trust for charitable purpose its income is non-taxable. The only provision available for lower rate of deduction or no tax deduction is according to certificate obtained from assessing officer as per provisions of section 197 of the Act. So the AO was justified in treating the deductor as assessee in default for no deduction of tax on payments made to HRTC. However, the directions given as in para 5.18 to the AO in view of Board's circular No. 275 (supra) is applicable on the present ground also. Accordingly, the relief is available to the appellant subject to verification by A.O.”

Excerpts from ITAT Judgment:

We have heard the rival submissions. In the above findings, the Ld. CIT(A) has given certain directions to the Assessing officer as per para 5.18 of the order. These are as under;_

“5.18 In view of the aforesaid decision it is found that even though the deductor has been held as assessee in default, tax cannot be recovered from them to the extent if the same has been paid by the recipient. There are no findings by the ITO (TDS ) regarding the payment of taxes by the deductees. Therefore, the ITO (TDS) is directed to find out the extent and quantum of tax paid by the deductees. If the entire amount as claimed from the deductor has been paid by the deductees then for that amount the deductor cannot be treated as assessee in default. Accordingly the relief is available to the appellant subject to verification by Assessing officer.”

After considering the entire facts of the present case, we are of the view that the Ld. CIT(A) has taken a correct view that that there is no provision in the Income Tax Act, 1961 to the effect that tax is deductable at source in case of exempt income. The assessee claimed that the deductee HRTC is registered as a Trust and enjoyed the benefit of exempt income as per sections 11 & 12 of the Income-tax Act. In our opinion, the taxability of income or exemptions u/s 11& 12 is subject to various conditions and subject to assessment of income by the Assessing officer. Thus, the deductor (assessee) cannot assume that since HRTC is a Trust / Charitable Institution registered u/s 12A of the Act and its income is non-taxable. In that view of the matter, we do not see any infirmity to the above extent in the order of the CIT(A) on this issue as he has correctly directed the ITO (TDS) to find out the extent of quantum of tax paid by the payees. The Ld. CIT(A) has also directed the ITO (TDS) that if entire tax amount has been claimed from the deductor has been paid by the deductees, then for that amount the deductor cannot be treated as assessee in default. Accordingly, the CIT(A) has directed the Assessing officer to give relief subject to verification as above. In our opinion, before deciding the issue the Assessing officer should give an opportunity of being heard to the assessee. The Assessing officer is further directed to decide the issue keeping in view the relevant provisions of Income-tax Act, 1961 applicable to the facts of the present case.

Download Full Judgment Click Here >>

There is no provision in the Income Tax Act providing no TDS deduction if the payments made form exempt income in the hands of the payee u/s 11-12 | 10-02-2016 |

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