Shree Choudhary Transport Co. vs. Income Tax Officer, Civil Appeal No(s). 7865/2009 dated 29.07.2020

Shree Choudhary Transport Co. vs. Income Tax Officer, Civil Appeal No(s). 7865/2009 dated 29.07.2020

Issues for Consideration:-

  1. As to whether Section 194C of the Act does not apply to the present case?
  2. As to whether disallowance under section 40(a)(ia) of the Act is confined/limited to the amount “payable” and not to the amount “already paid”; and whether the decision of this Court in Palam Gas Service v. Commissioner of Income-Tax [2017] 394 ITR 300 requires reconsideration?
  3. As to whether sub-clause (ia) of Section 40(a) of the Act, as inserted by the Finance (No. 2) Act, 2004 with effect from 1-4-2005, is applicable only from the financial year 2005-2006?

Facts of the case:

Assessee-appellant, a partnership firm, had entered into contract with M/s Aditya Cement Limited, Shambupura, District Chittorgarh for transporting cement to various places in India. As the appellant was not having the transport vehicles of its own, it had engaged the services of other transporters for the purpose. The cement marketing division of M/s Aditya Cement Limited, namely, M/s Grasim Industries Limited, had made the payment for the for the same to the assessee-appellant after due deduction of TDS.

Contention of the assessee

  • The trucks hired were belonging to different operators/owners who were not the sub-contractors or contractors; that they came from different parts of India and mostly required cash payment for diesel and other running expenses; that the appellant had no liability to deduct tax at source because it had not made payments exceeding Rs. 20,000/- in a single transaction; and that the provisions of Section 40(a)(ia) were not applicable to the appellant.
  • The receipts of the assessee firm are full vouched and verifiable and subject to TDS and the payments to truck owners/operators are made by the assessee firm from such receipts and as such there was no need for further TDS.
  • Further, the assessee firm prepares bills for claiming payments from the company on the basis of freight charges payable to various truck owners/operators and when the payment is received on the basis of such bills, further payment is made to the truck owners/operators and nominal commission is retained by the assessee and, therefore, the payment made to the truck owners/operators was out of the purview of Section 194C of the Act.
  • It is not practical to deduct tax at source while making payment to a truck owner/operator because no truck owner accepts payment after TDS.
  • Circular No. 5 was issued only on 15-7-2005 by which date the time for payment of tax at source has also expired and as such it was contended that the provisions as contained in Section 40(a)(ia) of the Act would be applicable not from A.Y. 2005-06 but from 2006-07.
  • The appellant has argued in the alternative that the Section40(a)(ia) w.e.f. 1-4-2005 by the Finance (No.2) Act, 2004, would apply only from the financial year 2005-2006 and hence, cannot apply to the present case pertaining to the financial year 2004-2005.
  • It has been contended that the liability under section 194C(2) would have arisen only if payments were made to “sub-contractor” and that too “in pursuance of a contract” for the purpose of “carrying whole or any part of work undertaken by the contractor”. The appellant argued that when there had not been any specific contract between the appellant and the truck owners, whose vehicles were hired by the appellant on freelance and need basis, the ingredients of Section 194C(2) were not satisfied and the obligation of deducting tax at source could not have been fastened on the appellant.
  • Reliance was placed on Delhi High Court in the case of Commissioner of Income Tax v. Hardarshan Singh [2013] 350 ITR 427 wherein it was held that when the assessee merely acted as facilitator or intermediary in the process of transportation of goods, he had no liability to deduct TDS under section 194C
  • Section 40(a)(ia) of the Act, refers only to those cases where the amount is yet to be paid and does not cover the cases where the amount is actually paid, has been duly considered and specifically rejected by this Court; and the said decision squarely covers the present matter. Elaborate submissions that the decision in Palam Gas Service v. Commissioner of Income-Tax [2017] 394 ITR 300 (SC), requires reconsideration.
    • (a) the taxing provision for disallowance has to be strictly construed as per the language used and there is no scope for adopting the so-called purposive construction;
    • (b) the change of words used in the Bill “credited or paid” to the word “payable” has been ignored;
    • (c) the effect of proviso making it clear that the intent of the main provision is only to disallow the outstanding or payable amounts has not been considered; and
    • (d) the Court has widened the scope of consequences provided under section 40(a)(ia) of the Act based on the scope of Sections 194C and 201 of the Act, although such an approach is impermissible while interpreting a provision in the taxing statute.
  • Relied upon the decision of Calcutta High Court in the case of PIU Ghosh v. Deputy Commissioner of Income-Tax [2016] 386 ITR 322 and argued that, in any case, the Finance (No.2) Act, 2004 received the assent of the President of India on 10-9-2004 and hence, the rigour of sub-clause (ia) of Section 40(a) of the Act cannot be applied in relation to the payments already made before 10-9-2004, the date of introduction of this provision.
  • Amendment made to Section 40(a)(ia) of the Act by the Finance (No. 2) Act, 2014, restricting and limiting the extent of disallowance to 30% of the expenditure and has submitted that the said amendment, being curative in nature and having been introduced to ameliorate the hardships faced by the assessees, deserves to be applied retrospectively and from the date of introduction of sub-clause (ia) to Section 40(a) of the Act. Reliance was placed on the decision in Commissioner of Income-Tax v. Calcutta Export Company [2018] 404 ITR 654, wherein this Court has held the remedial amendment of Section 40(a) (ia) of the Act by the Finance Act, 2010 to be retrospective in nature and applicable from the date of insertion of the said provision.

Case of the Revenue and findings of authorities below confirming the disallowance

  • The dispatch register of the assessee firm as well as the cash book clearly establish beyond doubt that payment to the truck operators was made by the assessee firm. In other words, the assessee firm was the person responsible for deducting the tax at source therefrom within the meaning of Section 194C of the Act. Since the goods were transported by trucks and every truck transported goods under a separate bilty and challan to a particular destination, there existed a contract or a sub-contract between the appellant firm and the transporters. As per the provisions of Section 194C of the Act and Board’s circular No. 715, dated 8-8-1995, the assessee should have deducted tax at source while making payment to the truck operators as per the provisions of Section 194C(3) of the Act where 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 exceeded Rs.20,000/-.
  • Under no circumstances, it can be said that the appellant only received commission income and therefore provisions of Section 194C are not applicable.
  • The Finance (No.2) Act 2004 has brought an amendment in Section 40 of the Act making it applicable w.e.f. 01/04/2004. Since this amendment came before close of the financial year ended on 31/03/2005 in the statute books, the assessee cannot be held to be ignorant of its liability to deduct tax at source.
  • The ITAT further rejected the contention that, the amount of expenditure was not charged to the Profit and Loss Account and only commission was shown as income, on the ground that mere reflection in two different account books would not qualify for distinct and different treatment since both freight paid and freight charged partake the same character.

Findings of the Hon’ble High Court“In our view, on the language of Section 194C(2), and the fact that the good received were sent through truck owners by the appellant, and there was no privity of direct contract between the truck owners and the cement factory. According to the contract between the appellant and the cement factory, it was the appellant’s responsibility to transport the cement, and for that the appellant hired the services of the truck owners, obviously as sub-contractors. In that view of the matter, we do not find any error in the impugned order of the Tribunal. The appeal is, therefore, dismissed summarily.”

Question for determination and Findings of Hon’ble Apex Court

  1. As to whether Section 194C of the Act does not apply to the present case?

Whether the appellant had specific and identified trucks on its rolls or had been picking them up on freelance basis, the legal effect on the status of parties had been the same that once a particular truck was engaged by the appellant on hire charges for carrying out the part of work undertaken by it (i.e., transportation of the goods of the company), the operator/owner of that truck became the sub-contractor and all the requirements of Section 194C came into operation. Thus, we have no hesitation in affirming the concurrent findings in regard to the applicability of Section 194C to the present case. The decision of Delhi High Court in the case of Hardarshan Singh (supra), as relied upon by the counsel of the assessee does not hold good as per the facts and circumstances of the case in question.

  1. As to whether disallowance under section 40(a)(ia) of the Act is confined/limited to the amount “payable” and not to the amount “already paid”; and whether the decision of this Court in Palam Gas Service v. Commissioner of Income-Tax [2017] 394 ITR 300 requires reconsideration?

We are in respectful agreement with the observations in Palam Gas Service that the enunciations in P.M.S. Diesels had been of correct interpretation of the provisions contained in Section 40(a)(ia) of the Act. The decision in Palam Gas Service covers the entire matter and the said decision, in our view, does not require any reconsideration. That being the position, the contention urged on behalf of the appellant that disallowance under section 40(a)(ia) does not relate to the amount already paid stands rejected.

  1. As to whether sub-clause (ia) of Section 40(a) of the Act, as inserted by the Finance (No. 2) Act, 2004 with effect from 1-4-2005, is applicable only from the financial year 2005-2006 and, hence, is not applicable to the present case relating to the financial year 2004-2005; and, at any rate, whole of the rigour of this provision cannot be applied to the present case?

Applying the principles laid in the case of West Bengal v. Isthmian Steamship Lines: (1951) 20 ITR 572, and various other decisions considered by the Constitution Bench of this Court in the case of Karimtharuvi Tea Estate Ltd. v. State of Kerala: (1966) 60 ITR 262, the Court held that the provision in question, having come into effect from 01.04.2005, would apply from and for the assessment year 2005-2006 and would be applicable for the assessment in question.

In yet another alternative attempt, the appellant argued that by way of Finance (No.2) Act, 2014, disallowance under Section 40(a)(ia) has been limited to 30% of the sum payable and the said amendment deserves to be held retrospective in operation. The Court held that the aforesaid amendment by the Finance (No.2) Act of 2014 was specifically made applicable w.e.f. 01.04.2015 and clearly represents the will of the legislature as to what is to be deducted or what percentage of deduction is not to be allowed for a particular eventuality, from the assessment year 2015-2016.

Further observed that the assessee-appellant was either labouring under the mistaken impression that he was not required to deduct TDS or under the mistaken belief that the methodology of splitting a single payment into parts below Rs. 20,000/- would provide him escape from the rigour of the provisions of the Act providing for disallowance. In either event, the appellant had not been a bonafide assessee who had made the deduction and deposited it subsequently. Obviously, the appellant could not have derived the benefits that were otherwise available by the curative amendments of 2008 and 2010. Having defaulted at every stage, the attempt on the part of assessee-appellant to seek some succor in the amendment of Section 40(a)(ia) of the Act by the Finance (No.2) Act, 2014 could only be rejected as entirely baseless, rather preposterous.

Key Notes:-

  • The Apex Court in the case of Shree Choudhary Transport Company has again affirmed and followed the preposition as was decided this court in the case of Palam Gas Service [2017] 81 taxmann.com 43 (SC) and has further confirmed that the words “Payable” as mentioned u/s 40(a)(ia) includes not only the amount of outstanding to be payable to the assessee as on 31st March of the Financial year but also covers into its ambit the amount which has already been paid during the year in which the provisions of Chapter XVII are applicable.
  • The Court held that the aforesaid amendment by the Finance (No.2) Act of 2014 was specifically made applicable w.e.f. 01.04.2015 and clearly represents the will of the legislature as to what is to be deducted or what percentage of deduction is not to be allowed for a particular eventuality, from the assessment year 2015-2016.