Beneficial Interpretation Disallowance u/s 40a(ia) is not attracted if deduction is done in wrong section or if there is a shortfall in deduction

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Beneficial Interpretation Disallowance u/s 40a(ia) is not attracted if deduction is done in wrong section or if there is a shortfall in deduction

Conditions laid down under Section 40(a) (ia ) requires addition  to the income if

–       tax is deductible at source and

–       such tax has not been deducted.

If both the conditions are satisfied then such payment can be disallowed under Section 40(a)(ia ).

Provisions of Section 40(a)(ia) have two limbs,

  1. Assessee has to deduct tax and
  2. Where after deducting tax, the assessee has to pay into Government Account.

There is nothing in the said section to treat the assessee as defaulter where there is a shortfall in deduction.

The Section 40(a) (ia) refers only to the duty to deduct tax and pay it to the Government Treasury.

 If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under any of the TDS provisions, assessee can be declared to be an assessee-in-default under Section 201 and no disallowance can be made by invoking the provisions of Section 40(a )(ia)

DEPUTY COMMISSIONER OF INCOME TAX vs. S.K. TEKRIWAL

ITAT, ITAT, KOLKATA ‘B’ BENCH

Mahavir Singh, J.M. & C.D. Rao, A.M.

ITA No. 1135/Kol/2010; Asst. yr. 2007-08

21st October, 2011

(2011) 30 CCH 0553 KolTrib

(2011) 48 SOT 0515

Legislation Referred to

Section 40(a)(ia), 194C(2), 194-I

Case pertains to

Asst. Year 2007-08

Decision in favour of:

Assessee

Disallowance under s. 40(a)(ia)—Wrong rate applied for TDS—Machine hire charges under s. 194-I or contract payments under s. 194C—Assessee engaged in construction business and heavy earth moving activities in contract with Government and semi-Government bodies, claimed a deduction of Rs. 3.37 as machine hire charges on which tax was deducted @ 1 per cent—AO contended that the tax should be deducted under s. 194-I being ‘machine hire-charges’ and hence provisions of s. 194-I are applicable so, tax should have been deducted @ 10 per cent and also made disallowance under the provisions of s. 40(a)(ia) in respect to ‘machinery hire charges’—Provisions of s. 40(a)(ia) has two limbs, one is where, inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into Government account—Assessee has deducted tax under s. 194C(2) and not under s. 194-I and there is no allegation that this TDS is not deposited with the Government account—Where tax is deducted by the assessee, even under bona fide wrong impression, under wrong provisions of TDS, the provisions of s. 40(a)(ia) cannot be invoked

It is Held that:

CIT(A) has gone into the controversy of assessee falling under the head ‘Sub-contractor’ or falling under the head ‘Rent’, the expenses made under the head ‘Machinery hire charges’. It is also a fact that the assessee has deducted TDS under s. 194C(2) and covered itself under the head ‘Sub-contractor’. CIT(A) after verifying records and explanation submitted by assessee reached to a conclusion that payments are in the nature of contract payments made to sub-contractors. On merits, we are in agreement with the findings of CIT(A) and even revenue before us could not controvert the same. Another facet of this issue is that once the assessee has deducted TDS under s. 194C(2) whether disallowance can be made by invoking the provisions of s. 40a(ia). In this provision it is provided that where in respect of any sum, as referred in this section [40(a)(ia)], tax has not been deducted or after deduction has not been paid on or before the due date specified in sub-s. (1) of s. 139, such sum shall be disallowed as a deduction while computing the income of the assessee for the previous year relevant to assessment year under consideration. But in the present case, the assessee has deducted tax, although under s. 194C(2) and it is not a case of non-deduction of tax or no deduction of tax as is the import of s. 40a(ia). Even otherwise if it is considered that this particular sum falls under s. 194-I it may be considered as tax deducted at a lower rate and it cannot be considered a case of non-deduction or no deduction.—Dy. CIT vs. Chandabhoy & Jassobhoy (ITA No. 20/Mum/2010, dt. 8th July, 2011) applied.

(Para 5)

In the present case, the assessee has deducted tax under s. 194C(2) being payments made to sub-contractors and it is not a case of non-deduction of tax or no deduction of tax as is the import of s. 40a(ia). But the Revenue’s contention is that the payments are in the nature of machinery hire charges falling under the head ‘rent’ and the previous provisions of s. 194-I are applicable. According to revenue, the assessee has deducted tax @ 1 per cent under s. 194C(2) as against the actual deduction to be made at 10 per cent under s. 194-I thereby lesser deduction of tax. The Revenue has made out a case of lesser deduction of tax and that also under different head and accordingly disallowed the payments proportionately by invoking the provisions of s. 40(a)(ia). The conditions laid down under s. 40(a)(ia) for making addition is that tax is deductible at source and such tax has not been deducted. If both the conditions are satisfied then such payment can be disallowed under s. 40(a)(ia) but where tax is deducted by the assessee, even under bona fide wrong impression, under wrong provisions of TDS, the provisions of s. 40(a)(ia) cannot be invoked. Here in the present, the assessee has deducted tax under s. 194C(2) and not under s. 194-I and there is no allegation that this TDS is not deposited with the Government account. The provisions of s. 40(a)(ia) has two limbs, one is where, inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into Government account. There is nothing in the said section to treat, inter alia, the assessee as defaulter where there is a shortfall in deduction. With regard to the shortfall, it cannot be assumed that there is a default as the deduction is not as required by or under the Act, but the facts is that this expression, ‘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-s. (1) of s. 139’. This s. 40(a)(ia) refers only to the duty to deduct tax and pay to government account. If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default under s. 201 and no disallowance can be made by invoking the provisions of s. 40(a)(ia). Accordingly, the order of CIT(A) allowing the claim of assessee is confirmed and this issue of Revenue’s appeal is dismissed.

(Para 6)

Short overview:

Where tax is deducted by the assessee under wrong provisions of TDS as per s. 194C(2) instead of s. 194-I and there is no allegation that this TDS is not deposited with the Government account no disallowance can be made by invoking the provisions of s. 40(a)(ia) nor the assessee can be declared to be an assessee in default under s. 201.

In favour of:

Assessee

Counsel appeared:

Niraj Kumar, for the Appellant : Sanjay Bajoria, for the Respondent

ORDER

MAHAVIR SINGH, J.M. :

ORDER

This appeal by revenue is arising out of order of CIT(A)-XX, Kolkata in Appeal No. 194/CIT(A)-XX/DC Cir-33/09-10/Kol dt. 12th March, 2010. Assessment was framed by DCIT, Circle-33, Kolkata under s. 143(3) of the IT Act, 1961 (hereinafter referred to as “the Act”) for asst. yr. 2007-08 vide his order dt. 30th Dec., 2009.

  1. The only issue in this appeal of revenue is against the order of CIT(A) deleting the addition made by AO by invoking the provisions of s. 40a(ia) of the Act for lower rate of deduction of tax. The Revenue’s contention in the grounds is that in the instant case the provisions of s. 194-I for deduction of tax will apply instead of tax deducted by assessee under s. 194C(2) of the Act. For this, revenue has raised following ground :

“Factual circumstances of the case reveals that in the instant case s. 194-I is applicable instead of s. 194(2) of the IT Act. Hence the AO has rightly made addition as s. 40a(ia) of the IT Act. Therefore 2nd appeal is suggested.”

  1. We have heard rival submissions and gone through facts and circumstances of the case. The brief facts are that assessee is engaged in the business of construction of bridges, roads, dams and canals, and heavy earth moving activities in contract with Government and semi-Government bodies, such as, BRO, PWD, NTPC etc. Return of income was filed on 27th Oct., 2007 showing total income at Rs. 45,49,360. During the course of assessment proceedings, AO noticed that the assessee has debited total payments of Rs. 3,37,37,464 in the P&L a/c under the head ‘machine hire charges’. The AO also found that the assessee has deducted tax @ 1 per cent on such payments, therefore, he required the assessee as to why tax under s. 194-I of the Act was not deducted. It was explained before the AO that payments were made to sub-contractors for completion of specific work; and therefore, tax was deducted @ 1 per cent as per the provisions of s. 194C(2) of the Act. The payments were not made for hiring of machines, but, the same have been wrongly grouped under the head ‘machine hire charges’. Copies of agreements with the concerned parties were filed at the assessment stage to show that they were sub-contractors, who were assigned specific work; and that the payments do not actually relate to hiring of machines. The AO did not accept the explanation. The AO observed that it was clearly mentioned in the agreements that the rate are exclusively for machine and maintenance, all material will be supplied by us. The AO concluded that the payments were made for hiring of machines, and that the provisions of s. 194-I of the Act are applicable in the case of the assessee and so, tax should have been deducted @ 10 per cent. The AO then made proportionate disallowance under the provisions of s. 40a(ia) of the Act in respect to ‘machinery hire charges’. Aggrieved, assessee preferred appeal before CIT(A).
  2. The CIT(A) deleted the disallowance by holding the ‘machinery hire charges’ expenses falling under s. 194C(2) of the Act, by holding as under :

“7. I have considered the assessment order and the submission of the appellant. I have also perused the assessment record. The AO has relied solely on the accounting entries made in the books of account in as much as the subcontract expenses are clubbed under the head ‘machine hire charges’. The AO has confined himself only to a particular line mentioned in the agreement; but, has failed to properly analyze the agreement in its totality. The nature and particulars of work that has been assigned to each sub-contractor is clearly specified in the agreement, which includes back filling, gravel filling, morum/sand filling and rubber soiling; excavation with transportation; PCC, RCC and Dewatering; Pile & Open foundation work; Earthworks in filling from earth-quarry to works-site with all lift in layers as approved by the Railways, including all machineries and equipments and manpower regarding earth transportation, loading and unloading; and, providing RCC M-30 grade in well curb using concrete mixture and manual means and machinery and completing the job as per specification and direction of E/I.

In each of the agreements, the quantity of work is fixed, and, the rate is also fixed on the basis of such quantity of work. I find substance in the argument that hire charges depend on the time period for which the machines are used. But, in the present case, the time consumed by the sub-contractors, or the period for which the machines are used, is not at all a factor in deciding the payments made to the sub-contractors; it is only on the basis of the quantity of work that the payments have been made. The sub-contractors are required to complete the assigned job by utilizing their machines and equipments, and also, by employing local labour. But then, the time period for which the machines and equipments are used has no role in deciding the payments made to the sub-contractors; moreover, labour charges are paid by the sub-contractors, and, the sub-contract expenses debited in the books of account of the appellant do not include labour charges. It was contended before me that the nature of work assigned to the sub-contractors is such that there was actually no requirement of any material in completion of the work, except for providing RCC M-30, where the principal employer itself has supplied the required material (iron and cement) for quality reasons. It was also argued that the payments made to the sub-contractors have been shown by them as receipts from sub-contract work. The P&L a/c, computation of income, etc., in respect of some sub-contractors is available in the assessment record, e.g., Archana Shah, Julie Agrawal and Sweta Agrawal. I find that they have shown the payments made by the appellant to them as receipts from subcontract work, and, offered profit @ 8 per cent on such receipts.

The decision of the AO is not based on proper findings. The AO has confined himself only to the accounting entries made in the books of account, and failed to properly analyze the material on record. The explanations, and also the evidences, submitted by the appellant seem to have been summarily rejected more on ground of presumption and assumption than on factual ground. This has led the AO to a state of affairs where salient evidences have been overlooked. In view of the above, I am of the opinion that the payments of Rs. 3,37,37,464 were made to the sub-contractors, and, that the provisions of s. 194C(2) are applicable in the case of the appellant. Since the appellant has deducted tax @ 1 per cent on such payments, which is in conformity with the provisions of s. 194C(2), the provisions of s. 40(a)(ia) are not attracted. The addition is directed to be deleted. The grounds raised by the appellant are liable to he allowed.”

Aggrieved, revenue is in appeal before us.

  1. From the order of CIT(A), we find that CIT(A) has gone into the controversy of assessee falling under the head ‘sub-contractor’ or falling under the head ‘rent’, the expenses made under the head ‘Machinery hire charges’. It is also a fact that the assessee has deducted TDS under s. 194C(2) of the Act and covered itself under the head ‘sub-contractor’. We find that CIT(A) after verifying records and explanation submitted by assessee reached to a conclusion that payments are in the nature of contract payments made to sub-contractors. On merits, we are in agreement with the findings of CIT(A) and even revenue before us could not controvert the same. Another facet of this issue is that once the assessee has deducted TDS under s. 194C(2) of the Act, whether disallowance can be made by invoking the provisions of s. 40a(ia) of the Act. The relevant provision reads as under :

“40a(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-s. (1) of s. 139 :”

In this provision it is provided that where in respect of any sum, as referred in this section, tax has not been deducted or after deduction has not been paid on or before the due date specified in sub-s. (1) of s. 139 of the Act, such sum shall be disallowed as a deduction while computing the income of the assessee for the previous year relevant to assessment year under consideration. But in the present case before us, the assessee has deducted tax, although under s. 194C(2) of the Act and it is not a case of non-deduction of tax or no deduction of tax as is the import of s. 40a(ia) of the Act. Even otherwise if it is considered that this particular sum falls under s. 194-I of the Act, it may be considered as tax deducted at a lower rate and it cannot be considered a case of non-deduction or no deduction. Similar view is taken by ‘C’ Bench of Mumbai Tribunal in ITA No. 20/Mum/2010 in the case of Dy. CIT vs. Chandabhoy & Jassobhoy dt. 8th July, 2011, wherein it is held that there is no dispute with reference to the deduction of tax under s. 192 of the Act with the fact that the alleged consultants, in their individual assessments declared these payments as salary payments and accepted by revenue as it is. Further, it is held that the assessee had deducted tax under s. 192 of the Act as against the allegation of revenue that the provisions of s. 194J of the Act would be attracted as these consultants are in the capacity of professionals. The Bench held that the provisions of s. 40(a)(ia) of the Act will not apply as the said provision can be invoked only in the event of non-deduction of tax but not for lesser deduction of tax. In that case the assessee has deducted tax under s. 192 of the Act as against s. 194J of the Act as against the claim of revenue.

  1. In the present case before us the assessee has deducted tax under s. 194C(2) of the Act being payments made to sub-contractors and it is not a case of non-deduction of tax or no deduction of tax as is the import of s. 40a(ia) of the Act. But the Revenue’s contention is that the payments are in the nature of machinery hire charges falling under the head ‘rent’ and the previous provisions of s. 194-I of the Act are applicable. According to revenue, the assessee has deducted tax @ 1 per cent under s. 194C(2) of the Act as against the actual deduction to be made at 10 per cent under s. 194-I of the Act, thereby lesser deduction of tax. The Revenue has made out a case of lesser deduction of tax and that also under different head and accordingly disallowed the payments proportionately by invoking the provisions of s. 40(a)(ia) of the Act. The learned CIT, Departmental Representative also argued that there is no word like failure used in s. 40(a)(ia) of the Act and it referred to only non-deduction of tax and disallowance of such payments. According to him, it does not refer to genuineness of the payment or otherwise but addition under s. 40(a)(ia) can be made even though payments are genuine but tax is not deducted as required under s. 40(a)(ia) of the Act. We are of the view that the conditions laid down under s. 40(a)(ia) of the Act for making addition is that tax is deductible at source and such tax has not been deducted. If both the conditions are satisfied then such payment can be disallowed under s. 40(a)(ia) of the Act but where tax is deducted by the assessee, even under bona fide wrong impression, under wrong provisions of TDS, the provisions of s. 40(a)(ia) of the Act cannot be invoked. Here in the present case before us, the assessee has deducted tax under s. 194C(2) of the Act and not under s. 194-I of the Act and there is no allegation that this TDS is not deposited with the Government account. We are of the view that the provisions of s. 40(a)(ia) of the Act has two limbs, one is where, inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into Government account. There is nothing in the said section to treat, inter alia, the assessee as defaulter where there is a shortfall in deduction. With regard to the shortfall, it cannot be assumed that there is a default as the deduction is not as required by or under the Act, but the facts is that this expression, ‘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-s. (1) of s. 139’. This s. 40(a)(ia) of the Act refers only to the duty to deduct tax and pay to government account. If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default under s. 201 of the Act and no disallowance can be made by invoking the provisions of s. 40(a)(ia) of the Act.

Accordingly, we confirm the order of CIT(A) allowing the claim of assessee and this issue of revenue’s appeal is dismissed.

  1. In the result, appeal of the Revenue is dismissed.

 bonafide wrong impression, under wrong provisions of TDS, the provisions of s. 40(a)(ia) cannot be invoked.

In favour of:

Assessee

Case referred to

Ran Prasad vs. CIT 86 ITR122

Gestetner Duplicators Pvt. Ltd. vs. CIT 117 ITR 1

DCIT vs. S. K. Tekriwal in ITA No.1135/Kol/2010 dated 21.10.2011

DCIT vs. M/s Chandabhoy & Jassobhoy dated 08.07.2011

Counsel appeared:

Ravi Tulsiyan for the Revenue.: M. Bhattacharya for the Assessee

ORDER

{JUDGMENT}PER BENCH

  1. These appeals by revenue and Cross Objections by assessee are arising out of orders of CIT(A)-XII, Kolkata in appeal Nos.416/CIT(A)-XII/Cir-11/09-10/Kol and 691/CIT(A)- XII/Ward-11 (4)/09-10/Kol dated 25.03.2010. Assessment for Assessment Year 2006-07 was framed by DCIT, Circle-11, Kolkata dated 30.10.2008 and assessment for Assessment Year 2007-08 was framed by ITO, Ward-11(4), Kolkata dated 30.11.2009 u/s. 143(3) of the Income Tax Act, 1961(hereinafter referred to as “the Act”). For the sake of brevity and clarity, we dispose of both these appeals and cross objections by this consolidated order.
  2. The only issue in these appeals of revenue and Cross Objections of assessee is against the order of CIT(A) in reversing the action of Assessing Officer in making the disallowance of commission payment by invoking the provisions of section 40(a)(ia) of the Act as the assessee has not deducted tax in terms of provisions of section 194H of the Act . The revenue has raised following common ground in both the years:

“On the facts and in the circumstances of the case, Ld. CIT(A) has erred in deleting the addition made u/s. 40(a)(ia) of the I. T. Act for violation of sec. 194H of the I. T. Act.”

  1. We have heard rival submissions and have gone through the facts and circumstances of the case. Brief facts are that the assessee is a distributor of pharmaceuticals products of M/s. Unichem Laboratories and UCB India Ltd., filed its returns of income on the basis of audited accounts. In these assessment years, the assessee company paid commission to its directors on the basis of net profit determined. Assessee claimed that the commission paid to directors was part of salary in terms of Articles of Association of Company. The assessee company’s net profit was determined on completion of accounts and commission was payable to directors, which was calculated as per accounts. The assessee company debited this commission in P&L Account and was shown as liability in Balance Sheet. The assessee treated this commission as part of salary and deducted TDS u/s. 192 of the Act at the time of payment of the same to directors in both the years. The assessee made TDS u/s. 192 of the Act but Assessing Officer while framing assessment made a disallowance of this expenditure by applying the provision of section 40(a)(ia) of the Act as according to him assessee has not deducted TDS on commission as per provisions of section 194H of the Act. Hence, he made disallowance by invoking the provisions of section 40(a)(ia) of the Act. Aggrieved, assessee preferred appeal before CIT(A). CIT(A) deleted the addition by treating the commission paid to directors as part of salary and held that the assessee has rightly applied the provisions of section 192 of the Act for deducting TDS under the head salary. The CIT(A) while deciding the issue has relied on the case of Hon’ble Apex Court in the case of Ran Prasad V, CIT ( ) 86 ITR122 and also Gestetner Duplicators Pvt. Ltd. Vs. CIT 117 ITR 1.
  2. Before us, the Ld. Sr. DR argued that Assessing Officer in para 3(a) and 3(b) of assessment order clearly stated that under provisions of section 291 of Companies Act, where directors who only direct the affairs of the company and not in service or employment of the company in the capacity of either Secretary or Manager or Accountant or otherwise, shall not be treated as employee of the company. He also argued that provisions have been made in the articles of Association for fees for the directors for attending Board Meetings. The right to fees for sitting in Board meetings makes the directors indisputably distinct and separate from employees. He also argued that nowhere in the Articles of Association, there is any clause in respect of employer-employee relationship which evidences the existence of an employer employee relationship. Therefore, payments made to the Managing Director/Directors are not the same as salary paid to employees and hence, according to him assessee was thus liable to deduct tax at source under the provision of section 194H of the Act. The company has failed to deduct tax accordingly. On the other hand, the Ld. Counsel Shri Ravi Tulsiyan heavily relied on the decision of ITAT, Kolkata “C” Bench in the case of Jahangir Biri Factory (P) Ltd. Vs. DCIT, ITA No. 1173/Kol/2008, A.Y 2005-06 and stated that the Tribunal has held that the commission paid to directors as per terms of employment for the work done in their capacity as whole-time directors is to be treated as incentive in addition to salary, etc. and did not come within the purview of commission and brokerage as defined in section 194H or fee for professional or technical services as defined in s. 194J and therefore, same cannot be disallowed under s. 40(a)(ia) of the Act.
  3. After hearing the rival submissions, we find that, admittedly, the assessee has deducted tax u/s. 192 of the Act under the head salary and this fact has not been denied by revenue. Revenue’s contention is that this particular payment i.e. commission paid to directors was not part of salary and it is only commission, reason being there was no employer employee relationship between company and directors and further no contractual relationship existed there. Without going into this controversy, even though the issue is covered in favour of the assessee, we are of the view that the assessee has deducted tax in both years u/s. 192 of the Act under the head salary and in view of this, this issue is covered in favour of assessee by the decision of this Tribunal “B” Bench of Kolkata in the case of DCIT Vs. S. K. Tekriwal in ITA No.1135/Kol/2010 dated 21.10.2011, wherein it held as under:
  4. From the order of CIT(A), we find that CIT(A) has gone into the controversy of assessee falling under the head ‘sub contractor’ or falling under the head ‘rent’, the expenses made under the head ‘machinery hire charges’. It is also a fact that the assessee has deducted TDS u/s. 194C(2) of the Act and covered itself under the head ‘sub contractor’. We find that CIT(A) after verifying records and explanation submitted by assessee reached to a conclusion that payments are in the nature of contract payments made to sub contractors. On merits, we are in agreement with the findings of CIT(A) and even revenue before us could not controvert the same. Another facet of this issue is that once the assessee has deducted TDS u/s. 194C(2) of the Act, whether disallowance can be made by invoking the provisions of section 40a(ia) of the Act. The relevant provision reads as under:

“40a(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 subsection (1) of section 139:”

In this provision it is provided that where in respect of any sum, as referred in this section, 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 of the Act, such sum shall be disallowed as a deduction while computing the income of the assessee for the previous year relevant to AY under consideration. But in the present case before us, the assessee has deducted tax, although u/s. 194C(2) of the Act and it is not a case of non-deduction of tax or no deduction of tax as is the import of section 40a(ia) of the Act. Even otherwise if it is considered that this particular sum falls under section 194I of the Act, it may be considered as tax deducted at a lower rate and it cannot be considered a case of non- deduction or no deduction. Similar view is taken by ‘C’ Bench of Mumbai ITAT in ITA No. 20/Mum/2010 in the case of DCIT v M/s Chandabhoy & Jassobhoy dated 08.07.2011, wherein it is held that there is no dispute with reference to the deduction of tax u/s 192 of the Act with the fact that the alleged consultants, in their individual assessments declared these payments as salary payments and accepted by revenue as it is. Further, it is held that the assessee had deducted tax u/s. 192 of the Act as against the allegation of revenue that the provisions of section 194J of the Act would be attracted as these consultants are in the capacity of professionals. The Bench held that the provisions of section 40(a)(ia) of the Act will not apply as the said provision can be invoked only in the event of non-deduction of tax but not for lesser deduction of tax. In that case the assessee has deducted tax u/s. 192 of the Act as against section 194J of the Act as against the claim of revenue.

  1. In the present case before us the assessee has deducted tax u/s. 194C(2) of the Act being payments made to sub-contractors and it is not a case of non-deduction of tax or no deduction of tax as is the import of section 40a(ia) of the Act. But the revenue’s contention is that the payments are in the nature of machinery hire charges falling under the head ‘rent’ and the previous provisions of section 194I of the Act are applicable. According to revenue, the assessee has deducted tax @ 1% u/s. 194C(2) of the Act as against the actual deduction to be made at 10% u/s. 194I of the Act, thereby lesser deduction of tax. The revenue has made out a case of lesser deduction of tax and that also under different head and accordingly disallowed the payments proportionately by invoking the provisions of section 40(a)(ia) of the Act. The Ld. CIT, DR also argued that there is no word like failure used in section 40(a)(ia) of the Act and it referred to only non-deduction of tax and disallowance of such payments. According to him, it does not refer to genuineness of the payment or otherwise but addition u/s. 40(a)(ia) can be made even though payments are genuine but tax is not deducted as required u/s. 40(a)(ia) of the Act. We are of the view that the conditions laid down u/s. 40(a)(ia) of the Act for making addition is that tax is deductible at source and such tax has not been deducted. If both the conditions are satisfied then such payment can be disallowed u/s. 40(a)(ia) of the Act but where tax is deducted by the assessee, even under bonafide wrong impression, under wrong provisions of TDS, the provisions of section 40(a)(ia) of the Act cannot be invoked. Here in the present case before us, the assessee has deducted tax u/s. 194C(2) of the Act and not u/s. 194I of the Act and there is no allegation that this TDS is not deposited with the Government account. We are of the view that the provisions of section 40(a)(ia) of the Act has two limbs, one is where, inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into Government Account. There is nothing in the said section to treat, inter alia, the assessee as defaulter where there is a shortfall in deduction. With regard to the shortfall, it cannot be assumed that there is a default as the deduction is not as required by or under the Act, but the facts is that this expression, ‘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’. This section 40(a)(ia) of the Act refers only to the duty to deduct tax and pay to government account. If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default u/s. 201 of the Act and no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act.”
  2. After going through the facts and circumstances of the case, legal proposition discussed in the case law of S. K. Tekriwal (supra) of this Tribunal, we confirm the order of CIT(A) and these two appeals of revenue are dismissed. Since, we have dismissed revenue’s appeal, the Cross Objections of the assessee being supportive to the order of CIT(A) needs no adjudication and dismiss as infructuous.
  3. In the result, both appeals of revenue and Cross Objections of assessee are dismissed.
  4. Order pronounced in open court on 28.10.2011

 

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