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Facts
The assessee, an individual providing manpower to shipping companies, claimed 'Crew Wages Expenses' of Rs. 58,76,717/- for AY 2006-07. The AO disallowed this amount under section 40(a)(ia) for non-deduction of TDS under section 194C, contending the payments were to sub-contractors. The assessee argued that these were wages, not contractual payments, and specific TDS provisions for individuals under section 194C were not applicable for the relevant assessment year.
Held
The Tribunal held that for AY 2006-07, the amended provisions of section 194C(1)(k), which make individuals liable for TDS, were not applicable as they were introduced later (w.e.f. 1-6-2007). It further concluded that there was no transfer of contractual responsibility to the crew as sub-contractors, and therefore, the assessee was not obligated to deduct TDS under section 194C, making the disallowance under section 40(a)(ia) incorrect.
Key Issues
Whether 'crew wages expenses' paid by an individual assessee constitute payments to sub-contractors requiring TDS deduction under section 194C(2) of the Income Tax Act for AY 2006-07, and consequently, whether the disallowance under section 40(a)(ia) for non-deduction of TDS was correctly applied.
Sections Cited
143(3), 254, 147, 40(a)(ia), 194C, 194C(1), 194C(1)(k), 194C(2), 44AB
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘C’ BENCH MUMBAI
Before: SHRI AMIT SHUKLA & SHRI GIRISH AGRAWAL
आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against order dated 16/08/2024 passed by NFAC, Delhi for the quantum of assessment passed u/s.143(3) r.w.s. 254 for the A.Y.2006-07.
The only ground which has been placed before us is that the ld. CIT(A) has erred in confirming the action of the ld. AO in disallowing ‘Crew Wages Expenses’ amounting to Rs.58,76,717/- made u/s.40(a)(ia) of the Act and holding that
The brief facts that emerge from the assessment order passed u/s 143(3) r.w.s 147 of the Act dated 29.11.2013, is that assessee in his individual capacity is stated to be in the business of providing manpower to shipping companies through his proprietary concerns. About this issue, the AO has found that the assessee has claimed “crew wages expenses” of Rs. 58,76,717/-. It was also noted by the AO that, on that payment no tax was deducted at source. As per AO, the assessee was required to deduct the TDS as applicable u/s. 194C of the IT Act. According to AO, the assessee himself being a contractor, therefore, got the work done by those parties under an implied contract. Held, the payment was made in contravention of section 194C hence invoked provisions of section 40(a)(ia) of the Act, therefore, the amount claimed was disallowed by the AO. The matter was carried before the first appellate authority.
Before the first round of appellate proceedings, the CIT (A) deleted the addition made by the AO by holding that the provisions of section 194C(1)(k) is applicable from 1st June 2007 and thus the assessee is out of the clutches of provisions of section 194C of the Act. Aggrieved by the same, the revenue filed an appeal before the ITAT. The ITAT set- aside the order of the CIT (A) and restored the filed to the AO with a direction to verify the details /explanation filed by the assessee and decide the case de-novo on merits. Thereafter, Partho Das the order passed by the AO wherein the AO after considering the details filed by the assessee, sustained the addition amounting to Rs 58,76,717/- u/s 40(a)(ia). Aggrieved by the same, the assessee filed an appeal before the first appellate authority, who passed an ex-parte order without providing reasonable opportunity to the assessee was passed. Finally, the appeal has been filed by the assessee before the Tribunal.
Before us, from the side of the assessee, ld. Counsel primarily argued that the assessees hire various crew members and depute them with various shipping companies. He makes individual payments to these persons, list of which was duly submitted to the AO. Therefore, the payments are in the nature of wages to employees and not contractual payments. Even otherwise provisions of section 194C(1) are applicable only in respect of a contractor and the provisions of section 194C(2) are applicable in respect of sub-contractor. Further he has mentioned that the provisions of section 194C(1), as stood for the year under consideration, did not apply on “individual”. The assessee being an individual was not responsible for deduction of tax at source U/s 194C(1). Ld. AR has also placed on record the amended provisions of section 194C of the IT Act, which were applicable from 1st June, 2007. He has pleaded that earlier, as per the law applicable for the year consideration, under section 194C, there was no liability of an individual to deduct the tax. Later on, by an amendment an individual has also been responsible for TDS if his total sales has exceeded the monitory limits prescribed u/s. 44AB of the I.T. Act. He has referred the Partho Das details submitted at the time of assessment proceedings wherein the list of names and amounts of the persons whom payment were made. On the basis of above details, he has argued that the assessee had not entered into a ‘contract’ with any worker. The payment of crew wages charges to various parties did not fall under the head of “sub-contract expenses”. He has argued that section 194C(2) of the Act are therefore not applicable. In support, he has cited Mythri Transport Corporation v. Asstt. CIT [2009] 124 ITD 40 (Visakha), Kavita Chug v. ITO [2011] 44 SOT 95 (Kol.) (URO), ChandrakantThackar v. Asstt. CIT [2010] 129 TTJ 1 (Ctk)(URO), CIT v. United Rice Land Ltd. [2010] 322 ITR 594/[2008] 174 Taxman 286 (Punj. &Har.) and of R.R. Carrying Corporation v. Asstt. CIT [2009] 126 TTJ 240 (Ctk).
From the side of the Revenue, Ld DR placed reliance on the orders of the authorities below. He has argued that as per the provisions of section 194C(2) any person being a contractor responsible for paying any sum to a sub-contractor in pursuance of a contract with the sub-contractor for carrying out any part of the work undertaking by the contractor is required to deduct an amount equal to 1% as TDS. The assessee has not deducted the tax, therefore, the AO has rightly disallowed the claim. Due to this reason, the question of non-deduction of tax, therefore, fall within the ambits of section 194C(2) of the IT Act, ld. DR has pleaded.
We have heard both the parties and perused the relevant finding given in the impugned orders and material referred to Partho Das before us. Before we proceed further, we may like to point out that the provisions of section 194C of the Act had undergone certain vital changes in the recent past. The main purpose of introduction of this section in the Act is to make provisions for deduction of tax at source from payments made to contractors and sub-contractors in certain cases. Income tax is deductible at source from income comprised in payments made by the persons specified in this section. As per the original section 194C(1) any person responsible for paying any sum to any contractor for carrying out any work in pursuance of a contract is required to deduct 2% TDS. However, as per section 194C(2), any person being a contractor responsible for paying any sum to any sub- contractor in pursuance of a contract with the sub-contractor for carrying out any work is required to deduct tax @ 1% at the time of payment. Sub-section (2) has later on made a provision according to which an individual or HUF, whose total sales exceeds the monitory limit prescribes u/s.44AB shall be liable to deduct income tax at the time of payment to a sub-contractor. It is further important to mention that vide an amendment with effect from 1-6-2007 an individual or HUF have also been inducted vide sub-clause (k) in section 194C(1) of the IT Act. At this juncture, it is worth to hold that as far as the AY in hand is concerned, i.e. AY 2006-07, this latest amendment of section 194C(1)(k) of the Act being introduced with effect from 1-6-2007 has no applicability.
We therefore hold that if the Revenue Department had made an endeavour to invoke the provisions of section Partho Das 40(a)(ia) for the infringement of the provisions of section 194C of the Act by holding that the assessee being an individual got covered by sub-section (1), then according to us, it was an incorrect application of law. We therefore hold that for the Asstt. Year under consideration 2006-07 the provisions of sub-clause (k) of 194C (1) are not applicable being introduced w.e.f. 1-6-2007 and the assessee being an individual is consequently out of the clutches of this clause.
On account of the above discussion, the issue confines to the residual sub-section i.e. the applicability of provisions of sub-section (2) of section 194C of the Act. The assessee entered into an agreement with M/s Western Oversea Inc Ohia who are in the business of buying ships for scrapping an needed specialised marine personnel to conduct the delivery of ship from foreign shores to breaking yard in India and Bangladesh for which the assessee claimed to be working as contractor to conduct ship delivery and for this reason the assessee employed the said individuals to provide such services. The details of the payments made by the assessee as crew wages payment is mentioned as under:
The view of the AO was that on payment of “crew wages expense”, the assessee being a sub-contractor was required to deduct the tax at source as prescribed under sub-section (2) of section 194C of the Act. On the other hand, the assessee’s contention is that the assessee has not acted as a sub- contractor but only as a contractor. As per assessee’s contention it was a principal to principal arrangement for providing crew to carry out scrapping activity, so not covered by any of the said contracts. In support of this submission, the assessee has placed reliance on a Board’s Circular No. 715 dated 8-8-1995 [215 ITR (Statute 12)]
In the context of above clarification issued by the CBDT, if we examine the issue in hand, then in terms of the provisions of section 194C(2) of the Act conditions to be satisfied are (i) that the assessee should be a contractor, (ii) that the assessee should enter into a contract with a sub- contractor, (iii) that the sub-contractor should carry out any part of the work undertaken by the contractor and (iv) that Partho Das the payment should be made for the work done. In a case, when a “contract” is assigned, generally the clauses are stringent that the contractor is to be responsible for all the acts and defaults committed.
In the present case as well, when M/s. Western Oversea Ohio INChad granted sub-contract to assessee then the assessee was to deploy his own resources in terms of manpower. Further the assessee was responsible of any legal or financial liability. Assessee was made solely responsible for the execution of the job. These terms, therefore, suggested that the assessee was wholly and exclusively responsible for the acts as also for the defaults, if committed.
In other words, peculiarity of this case is that the contract which was assigned to this assessee was not further sub-contracted to any third party. In a sub-contract, a prudent contractor generally includes the clauses of liability which were undertaken by him while accepting the execution of the work from the main contractor. We may like to clarify that a condition of passing of the liability cannot exhaustive and cannot be said to be the only criteria to decide whether there was an existence of contract or sub-contract. The catalogue of criterion must include certain other clauses as well, yet in this case this criterion can be determinative considering the nature of work assigned by the assessee to workers. It is not the case of the A.O. that he happened to be in possession of some material to allege that there existed a specific contract between the assessee and the crew wage
We, therefore, conclude that in the absence of transfer or pass-over of any contractual responsibility to crew wage worker as a sub-contractor, the assessee being an individual was not responsible for the deduction of tax at source as prescribed u/s. 194C of the IT Act. Consequence thereupon the provisions of section 40(a)(ia) of the Act were incorrectly invoked, hence the view taken by the authorities below are hereby reversed. Reliance has also been placed before us on the decision of Prashant H. Shah Vs Assistant Commissioner of Income-tax (ITA No:17/Ahd/2011) wherein on similar fact, the tribunal held that section 40(a)(ia) has been incorrectly imposed. Thus, the Ground raised by the assessee is allowed.
In the result, appeal of the assessee is allowed.
Order pronounced on 18th December,2024.
Sd/- Sd/- (GIRISH AGRAWAL) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 18/12/2024 KARUNA, sr.ps
(Asstt. Registrar) ITAT, Mumbai