ITO 22(2)(4), NAVI MUMBAI vs. RAHUL MOTILAL SHETH, MUMBAI

The common issue raised in all the grounds is against the confirmation of disallowance made by the AO under section 40(a)(ia) of the Income Tax Act, 1961. (hereinafter called the Act). The AO made the addition of Rs.1,72,14,875/- to the total income of the assessee on account of non deduction of tax at source from reimbursement of expenses.

Facts of the case are that the assessee filed return of income on 31.10.2007 declaring a total income at Rs.7,62,190/- which was processed under section 143(1) of the Act on 31.3.2009. The case of the assessee was selected for scrutiny and statutory notices under section 143(2) and 142(1) of the Income Tax Act, 1961 were issued and served upon the assessee. The assessee was carrying on the business of facilitator in providing transportation services by hiring vehicles on behalf of others and providing these transport vehicles to the various parties for transportation of goods and used to charge his commission. The assessee used to take reimbursements from the parties who availed the transportation by raising bill of reimbursement and pass on the same to the transporters and thus the whole arrangement was of reimbursement of expenses from the parties whose goods were transported to the actual transporter. The assessee was only a mediator /agent/facilitator for arranging the transportation of goods. During the course of assessment proceedings, the AO noted that the assessee has paid following payments to four parties namely (1) Millenium Freight Fwds Pvt Ltd (2)Pomona Cargo Movers (3)SARR Freights Clearing Agencies and (4) Universal Shipping on which no TDS was deducted and deposited: 1 Documentation charges 61340 2 Freight charges paid 12456966 3 Handling charges 2700 4 Loading and unloading 125007 5 Other charges 4466185 6 Transport 102677 Total 17214875 Accordingly, the AO issued show cause notice to the assessee to explain as to why the TDS as per provisions of section 194C of the Act was not deduced and paid to the government treasury and why the same should not be disallowed and added to the total income of the assessee in terms of section 40(a)(ia) of the Act. The AO also observed and noted that the return of the assessee was exceeding Rs.40 lakhs and therefore the assessee was liable to deduct tax at source from the various payment towards Freight charges as per the provisions of section 194C of the Act as the assessee was working as a sub-contractor and accordingly disallowed and added the amount of Rs.1,72,14,875/- to the total income of the assessee by assessing the income of assessee at Rs.1,79,77,065/- vide order dated 29.12.2009 passed under section 143(3) of the Act. Aggrieved by the order of the AO, the assessee preferred an appeal before the ld.CIT(A).

During the course of appellate proceedings, the assessee submitted that the provisions of section 40(a)(ia) of the Act were not applicable to the case of the direct expenses admissible and allowable under section 28 of the Act. The assessee submitted that where the payees have already filed the returns of income offering the payment received from the assessee to tax the provisions of section 40(a)(ia) had no application. The ld. AR relied on the decision of Hon’ble Supreme Court in the case of Hindustan Coca Cola Beverage Pvt Ltd V/s CIT (2007) 393 ITR 226(SC) and the CBDT circular No.275/201/95-IT(B) dated 29.1.1997. The ld.CIT(A) considered and rejected the submissions of the assessee and dismissed the appeal by observing and holding as under :

“I have gone through the assessment order, written submissions made as well as case laws cited by appellant. The appellant has claimed that the freight paid by him are direct expenses and hence they are covered by decision in the case of M/s. Teja Constructions - Hyderabad Bench 'A' (2010) 39 SOT 13 (Hyd)(URO). However, this plea is not supported by any documents. The Assessing Officer in the assessment order has clearly brought this fact that the appellant undertakes contract for transportation of goods from different parties and passes on the contract to third party. This was not denied also by the assessee during the assessment proceedings. In view of this the fact remains that appellant is a contractor who has passed on the contract to others and hence the payments made to them fall within the purview of section 194C(2) are disallowable u/s. 40(a)(ia). The case law of M/s.Teja Constructions - Hyderabad would have been applicable had the appellant been able to support his plea that he is paying his parties to do his job and GP is worked out before taking into consideration administrative and other indirect expenses. Having failed to do that, I hold that case law of M/s. Teja Constructions is distinguishable on facts in the case of appellant, this plea of appellant is rejected . As regards, Hon’ble Supreme Court's decision in the case of M/s. Hindustan Coca Cola Beverage (P) Ltd., in my humble opinion it is on the issue of levying the penalty u/s 201(1) and 201(1A) of the I.T.Act and not on section 40(a)(ia). Even if it is stretched impliedly to disallowances made u/s. 40(a)(ia), the appellant has not been able to show by way of return filed by M/s.Millenium Freight Forwarders Pvt. Ltd., as what was the amount paid to them in the AY 2007-08. The total amount paid as freight charges are Rs.1,24,56,966/- which as per details furnished before the Assessing Officer had been made to difference parties. Further the appellant is silent about the explanation incurred by way of documentation charges, handling charges, loading and unloading charges, other charges and transport charges. In view of insufficient details, benefit cannot be given for the disallowance made u/s 40(a)(ia) for an amount of Rs.1,72,14,875/-. Accordingly, ground Nos. 1 and 2 are dismissed” Aggrieved by the order of the ld.CIT(A), the assessee is in appeal before us.

The ld. AR vehemently submitted before us that the assessee was simply a facilitator arranging the transport for others for he used to take reimbursement from the customers and passed on the same to the actual transporters. The ld. AR referring to the profit and loss account for year ended on 31.3.2005 filed at page No.2 submitted that the reimbursement of expenses of Rs.1,73,09,433/- were received and passed on to the transporters as appearing on both sides of the profit and loss account i.e. on the expenses as well as income side which further corroborated and strengthened the fact that the assessee was receiving reimbursements from the entities to whom transport facilities were provided by arranging the transport from third parties to whom the payments were passed on by the assessee and thus the assessee was only a facilitator of providing services. Therefore the provisions of TDS were not applicable as it is a trite law that no TDS was liable to be deducted from the reimbursements of expenses . Alternatively, the ld.AR argued that the provisions of section 40(a)(ia) of the Act were not to be invoked where payees of the receipt have filed their return and paid dues taxes as provided in Provision-2 to section 40(a)(ia) of the Act. Finally, the ld. AR submitted that in view of these facts and legal position, the order of ld. CIT(A) be set aside and the AO be directed to delete the addition.

On the other hand, the ld. DR heavily relied on the orders of authorities below and prayed for upholding the same specially when the assessee has failed to deduct tax from the payments made on account of documentation charges, freight charges paid handling charges, loading and unloading charges and other charges paid including transport and welfare charges etc. which were contractual payments and prayed before the Bench for upholding the order of CIT(A).

We have heard the rival contentions and after perusing the material placed before us including the orders of authorities below, we find that the assessee was simply engaged in the business of providing mediator services by arranging the transport from other transporters and was not having his own vehicles. In other words, the assessee was only acting as facilitator for providing transport services. From page 2 of the paper book, we find that a sum of Rs.1,73,09,433/- was received as reimbursement of expenses which was shown on income side of the profit and loss account and likewise also shown as reimbursement under the head reimbursement expense in the expenditure side of the profit and loss account. The AO also in the assessment order at page 2 noted that TDS has not been deducted on the contractual payments aggregating to Rs.1,72,14,875/- under various heads such as documentation charges, freight charges paid, handling charges, loading and unloading charges and other charges paid including transport etc and therefore the provisions of section 194C were attracted and accordingly added a sum of Rs. 1,72,14,875/- to the total income of the assessee by invoking the provisions of section 40(a)(ia) of the Act. It is sufficiently clear from the facts discussed hereinabove that the assessee was simply providing services of facilitators by arranging the transport vehicles from the other transporters for which he used to get the reimbursement from those parties for whom he arranged these services and used to charge his commission only which was duly shown as income. We therefore, find merit in the contentions of the ld. AR that the assessee was not supposed to deduct TDS on the reimbursement made. We therefore inclined to restore the matter to the file of AO by setting aside the order of ld.CIT(A) and directing the AO to verify the reimbursement of expenses after hearing the same and accordingly decide the issue as per law and fact. Accordingly, we allow this ground for statistical purposes.

The issue raised in various grounds of appeal