THE PRINCIPAL COMMISSIONER OF INCOME TAX 1 vs. ASIAN MILLS PVT. LTD.

ORAL ORDER (PER : HONOURABLE MS. JUSTICE SONIA GOKANI) 1.Aggrieved and dissatisfied with the order passed by the Income Tax Appellate Tribunal(“the Tribunal” for short) dated 02.03.2021, the appellant has preferred this appeal raising the following substantial questions of law: “[A] Whether the Appellate Tribunal has erred in law and on facts in deleting the disallowance of Rs.1,38,350/- made under section 40(a)(ia) of the Act without appreciating that the assessee had not complied with the provision of sub-section (6) and (7) to Section 194C? [B] Whether the Appellate Tribunal has erred in law and on facts in deleting the disallowance of commission expenses of Rs.55,14,372/- without appreciating that the assessee has not been able to demonstrate the nature and scale of services rendered by Smith and Sons Ltd and that the payment of commission is allowable only on the assessee furnishing evidence in support of the services rendered?” 2.The respondent assessee filed return on 30.09.2021 declaring total income of Rs.8,65,92,110/- crores. It was processed under section 143(1) of the Income Tax Act (“the Act” for short) and the same was selected for scrutiny. 3.Notice under section 142(1) of the Act along with questionnaire was issued on 27.08.2012. In response,the authorised representative of the company attended time to time. It was noticed that the respondent assessee had not deducted the tax under section 194(C) for the payments made to various transporters, this included the freight inward charges and clearing and forwarding charges. 4.The Assessing Officer rejected the contention of the respondent assessee that TDS was not deducted, as the same was not applicable as per the provisions of law. According to the assessee Company TDS was not to be deducted on payment made to the transporters as per Clause 6 of section 194(c). Again, the details of the transporters have been filled- in at the time of filing of the TDS return, wherein their PANs have been duly submitted to the authority. Therefore, the condition reflected in sub-section(7) also have been fulfilled. The Assessing Officer held the assessee in default and made the disallowance of all the three charges of the total income of the assessee under section 40(a)(ia). 5.The assessee preferred the appeal before the CIT(Appeals), which deleted the addition to the extent of transportation towards freight, inward charges and clearing charges, but confirmed the addition of Rs.1,38,350/- towards forwarding charges for payment to M/s. Trishul Transport Company. 6.The Revenue as well as the assessee both preferred appeal before the Tribunal. The Tribunal dismissed the appeal of the Revenue and allowed the appeal of the assessee. The appeal of assessee was allowed on the ground that it had obtained PAN card details from the transporters, which were furnished with TDS return. Therefore, the assessee’s claim cannot be denied on account of non-deduction of TDS on the payment made to the transporters towards freight inward charges and clearing charges under sub-section (6) of section 194(c). The claim also cannot be denied on the ground that the assessee was under an obligation after obtaining the PANs from the transporter to furnish the same in the prescribed form to the prescribed authorities. 7.This Court has heard Mr. M.R.Bhatt, learned Senior Advocate appearing with Mr.Karan Sanghani, learned advocate for the appellant and Mr. B.S.Soparkar, learned advocate for the opponent. 8.The issue is covered by the decision of this Court rendered in the case of Commission of Income-tax-I vs. Valibhai Khanbhai Mankad, [2012] 28 taxman.com 119(Gujarat), where the issue was again with regard to payment to the contractor and requirement of deduction of TDS. Relevant paragraphs are reproduced as under: “3) We have heard the learned counsel for the Revenue as well as for the assessee. Section 194C of the Act, as is well known, pertains to payments to contractors. Sub-section (1) of section 194C, as it stood at the relevant time, required that any person responsible for paying any sum to any resident, contractor for carrying out any work in pursuance of a contract between the contractor and the specified entities, shall credit specified sum as income tax on income comprised therein. Likewise, sub-section (2) of section 194C required a person responsible for paying any sum to resident-sub-contractor to deduct tax at source under given circumstances. It is not in dispute that ordinarily the assessee was required to make such deduction on the payments made to the sub-contractors, unless he was covered under the exclusion clause contained in sub-section (3) of section 194C of the Act. Such provision, as it stood at the relevant time, read as under:- “Section 194C(3):- No deduction shall be made under sub-section(1) or sub-section (2) from - (i)the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor or sub-contractor, if such sum does not exceed twenty thousand rupees: Provided that where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds fifty thousand rupees, the person responsible for paying such sums referred to in sub-section (1) or, as the case may be, subsection (2) shall be liable to deduct income- tax under this section: Provided further that no deduction shall be made under sub-section (2), from the amount of any sum credited or paid or likely to be credited or paid during the previous year to the account of the sub-contractor during the course of business of plying, hiring or leasing goods carriages, on production of a declaration to the person concerned paying or crediting such sum, in the prescribed form and verified in the prescribed manner and within such time as may be prescribed, if such sub-contractor is an individual who has not owned more than two goods carriages at any time during the previous year: Provided also that the person responsible for paying any sum as aforesaid to the sub- contractor referred to in the second proviso shall furnish to the prescribed income-tax authority or the person authorised by it such particulars as may be prescribed in such form and within such time as may be prescribed; or (ii)any sum credited or paid before the 1st day of June, 1972; or (iii)any sum credited or paid before the 1st day of June, 1973, in pursuance of a contract between the contractor and a co- operative society or in pursuance of a contract between such contractor and the sub-contractor in relation to any work (including supply of labour for carrying out any work) undertaken by the contractor for the cooperative society. Explanation-For the purpose of clause(i), “goods carriage” shall have the same meaning as in the Explanation to sub-section (7) of section 44AE.” 4) Section 40(a)(ia) of the Act, in turn, provides that certain amounts shall not be deducted in computing the income chargeable to tax under the head 'profits and gains of business or profession', namely, payments made towards interest, commission or brokerage etc., on which tax is deductible at source and such tax has not been deducted or, after deduction, the same has not been paid on or before the due date specified in sub-section (1) of section 139 of the Act. Section 40(a)(ia) of the Act, insofar as it is relevant for our purpose, reads as under:- “Section 40(a)(ia):- Any interest, commission or brokerage,

[rent,

royalty,]

fees

for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, 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 on or before the due date specified in sub-section (1) of section 139:]” 5) From the above statutory provisions, it can be seen that under section 40(a)(ia) of the Act, payments made towards interest, commission or brokerage etc. would be excluded for deduction in computing the income chargeable under the head 'profits and gains of business or profession', where though tax was required to be deducted at source, is not deducted or where after such deduction, the same has not been paid on or before the due date. Thus for application of section 40(a)(ia) of the Act, the foremost requirement would be of tax deduction at source. 6) Section 194C, as already noticed, makes provision where for certain payments, liability of the payee to deduct tax at source arises. Therefore, if there is any breach of such requirement, question of applicability of section 40(a)(ia) would arise. Despite such circumstances existing, sub-section (3) makes exclusion in cases where such liability would not arise. We are concerned with the further proviso to sub-section (3), which provides that no deduction under sub-section (2) shall be made from the amount of any sum credited or paid or likely to be credited or paid to the sub- contractor during the course of business of plying, hiring or leasing goods carriages, on production of a declaration to the person concerned paying or crediting such sum in the prescribed form and verified it in the prescribed manner within the time as may be prescribed, if such sub-contractor is an individual who has not owned more than two goods carriages at any time during the previous year. 7) The exclusion provided in sub-section (3) of section 194C from the liability to deduct tax at source under sub-section (2) would thus be complete the moment the requirements contained therein are satisfied. Such requirements, principally, are that the sub-contractor, recipient of the payment produces a necessary declaration in the prescribed format and further that such sub-contractor does not own more than two goods carriages during the entire previous year. The moment, such requirements are fulfilled, the liability of the assessee to deduct tax on the payments made or to be made to such sub-contractors would cease. In fact he would have no authority to make any such deduction. 8) The later portion of sub-section (3) which follow the further proviso is a requirement which would arise at a much later point of time. Such requirement is that the person responsible for paying such sum to the sub-contractor has to furnish such particulars as prescribed. We may notice that under Rule 29D of the Rules, such declaration has to be made by the end of June of the next accounting year in question. 9) In our view, therefore, once the conditions of further proviso of section 194C(3) are satisfied, the liability of the payee to deduct tax at source would cease. The requirement of such payee to furnish details to the income tax authority in the prescribed form within prescribed time would arise later and any infraction in such a requirement would not make the requirement of deduction at source applicable under sub-section (2) of section 194C of the Act. In our view, therefore, the Tribunal was perfectly justified in taking the view in the impugned judgment. It may be that failure to comply such requirement by the payee may result into some other adverse consequences if so provided under the Act. However, fulfillment of such requirement cannot be linked to the declaration of tax at source. Any such failure

therefore cannot be visualized by adverse consequences provided under section 40(a)(ia) of the Act. 10) When on the basis of the record it is not disputed that the requirements of further proviso were fulfilled, the assessee was not required to make any deduction at source on the payments made to the subcontractors. If that be our conclusion, application of section 40(a)(ia) would not arise since, as already noticed, section 40(a)(ia) would apply when there is a requirement of deduction of tax at source and such requirement is either not fulfilled or having deducted tax at source is not deposited within prescribed time.” 9.Yet another decision of the High Court of Madras is reported in the case of Commissioner of Income Tax, Madurai vs.Sri Parameshwari Spinning Mills(P.)Ltd.,[2019] 10 taxmann.com 386(Madras), where sub-section 6 of section 194, which grants benefit to the assessee, is discussed along with sub- section(7) of section 194. The Court held that this benefit comes with the condition of compliance of sub-section (7) of section 194(c). This is a procedure required to be followed. The Court held that non-filing of the statement in terms of sub-section(7) of section 194(C) cannot take away the benefit, which will accrue to the assessee under sub- section(6) of section 194. Relevant paragraphs are reproduced as under:

“6. We find sub-Section 6 of Section 194C is the provision which grants benefit to the assessee. This benefit comes with the condition of compliance of Sub-Section (7) of Section 194C, which is the procedure to be followed. The question would be as to whether if the procedure under Section 194C(7) has not been adhered to by the assessee would it be fatal and thereby disentitle the assessee to the benefit under sub-Section 6 of Section 194C.

form

to the prescribed authority within prescribed time. section194(C) (7) is reproduced as under: “(7) The person responsible for paying or crediting any sum to the person referred to in sub-section (6) shall furnish, to the prescribed income-tax authority or the person authorised by it, such particulars, in such form and within such time as may be prescribed.”

facts

and circumstances, the agreement which was submitted was treated as sufficient document being prepared after specific query of the Assessing Officer. According to the Assessing Officer three entries were pertaining to NTPC and the fourth one was of Tata Project Ltd., which was not found acceptable and those concerns were the old customers to which the sales had already been made in the past and, therefore, there would not have been any reason for making payment for M/s. C.M. Smith and Sons Ltd. for effecting sales to those concerns during the Assessment Year 2011-12. It did not find any justification for making the payment through any commission agent.

deleted

the disallowance. We notice that the commission agent also was a company and both the companies fall under the same rate of taxation. Therefore, no presumption can be made that the transaction was not genuine, particularly,when the agent had paid the due tax on income. The agent had shown its income Rs.11.50 crores as against the earlier year’s income of Rs.3.75 crores.

“ 8. It is well-settled law that so far as the questions of commercial expediency and business need of an organisation are concerned, it is not the viewpoint of a revenue officer which should count but it should be the view point of a ordinary business mend dealing with a situation like the one faced by the particular assessee in question. It is, therefore, from that particular viewpoint that the question has to be approached.”