COMMISSIONER OF INCOME TAX-II V. VISHNUDUTT SHARMA

TAX APPEAL NO. 177 of 2013

AI Insights

The case involves the Commissioner of Income Tax-II as the appellant and Vishnudutt Sharma as the respondent. The core issue was the applicability of section 194C of the Income Tax Act, 1961, concerning the deduction of tax at source from payments made under a contract. The Income Tax Appellate Tribunal had previously ruled in favor of Vishnudutt Sharma, leading to the present appeal by the Commissioner of Income Tax. The Tribunal's decision was based on the interpretation that the amendments to section 194C, which required individuals and HUFs to deduct tax at source, were not applicable to the assessment year in question (2005-2006). The High Court of Gujarat upheld the Tribunal's decision, referencing a similar case (Shri Prashant H. Shah) where it was concluded that the relevant amendments to section 194C did not apply retrospectively to the assessment year in question.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 368916 (HC-GUJARAT)
• Appeal Type: High Court cases
• Pronouncement Date: 01-04-2013
• Appeal Filed By: Department
• Assessment Year: 2005-2006
• Other Referred Cases: Shri Prashant H. Shah
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: S UDHIR M EHTA
• Keywords: Disallowance of Expenditure; Income Tax; Non-deduction of tax; Tax deduction at source
• Section: 40(a)(ia); 194C

Judgement Text

"O/TAXAP/177/2013 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 177 of 2013 ================================================================ COMMISSIONER OF INCOME TAX-II....Appellant(s) Versus VISHNUDUTT SHARMA....Opponent(s) ================================================================ Appearance: MR SUDHIR M MEHTA, ADVOCATE for the Appellant(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MS JUSTICE SONIA GOKANI Date : 01/04/2013 ORAL ORDER (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. Revenue is in appeal against the judgement of the Income Tax Appellate Tribunal dated 31.7.2012 raising following questions for our consideration : “(A) Whether the facts and circumstance of the case and in law the Income Tax Appellate Tribunal is justified in deleting an addition of Rs.2,34,70,294/- made on account of disallowance of expenditure under section 40(a)(ia) of the Income Tax Act for non deduction of tax at source? (B) Whether section 40(a)(ia) of the Income Tax Act can be invoked only to disallow expenditure of the nature referred to therein,m which is shown as ‘payable’ as on the date of the balance sheet or it can be invoked also to disallow such Page 1 of 6 Page 1 of HC-NIC Created On Sat Apr 16 14:21:09 IST 2016 6 O/TAXAP/177/2013 ORDER expenditure which became payable at any time during the relevant previous year and was actually paid within the previous year?” 2. The Tribunal in the impugned judgement relied on the decision in case of Shri Prashant H. Shah to come to the conclusion that the provisions of section 194C of the Income Tax Act, 1961 were made applicable in respect of individuals with effect from 1.6.2007. Present case concerns the assessment year 2005-2006. Such provision therefore, will not be applicable in the case on hand. 3. In case of Shri Prashant H. Shah, Tribunal had made following conclusions : “7. We have heard both the sides at some length. We have also perused the material placed before us in the the light of the provisions of the Act as also the case law cited. Before we proceed further, we may like to point out that the provisions of section 194C of the Act and 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 Page 2 of 6 Page 2 of HC-NIC Created On Sat Apr 16 14:21:09 IST 2016 6 O/TAXAP/177/2013 ORDER later on made a provision according to which an individual or HUF, whose total sale exceeds the monetary limit prescribed under section 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 in concerned, i.e. AY2007-08, this latest amendment of section 194C(1)(k) of the Act being introduced with effect from 01/06/2007 has no applicability. We therefore, hold that if the Revenue Department had made an endeavour to invoke the provisons of section 40(a)(ia) for the infringement of the provisions of section 194C of the Act by holding tha 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 2007-08 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.” 4. Counsel for the Revenue candidly pointed out that such decision of the Tribunal came up for consideration before this Court in Tax Appeal no.1591/2011. Tax Appeal was dismissed by an order dated 9.10.2012. Following observations were made : “7) In the present appeal, we are principally concerned with the interpretation of section 194C of the Act as such provision stood at the relevant time. Sub-section (1) of section 194C, required that any person responsible for paying any sum to any resident for carrying out any work in pursuant to a contract between the contractor and entities specified in clause-(a) to (j) would have to, at the time of crediting such sum to the Page 3 of 6 Page 3 of HC-NIC Created On Sat Apr 16 14:21:09 IST 2016 6 O/TAXAP/177/2013 ORDER account of the contractor or at the time of payment in cash or by cheque or draft or any other mode, deduct a specified amount of tax at source. Till clause (k) was introduced in sub- section (1), the category of individual, HUF or AOP was not included. Such amendment was made with effect from 1st June 2007 and obviously, therefore, would not apply to the case on hand. The Tribunal, therefore, correctly came to the conclusion that the case of the assessee was not covered under section 194C(1) of the Act since in the present case the payment was made by the assessee to individuals. 8) Sub-section (2) of section 194C requires that anyperson, that is, a contractor responsible for paying any sum to any resident sub-contractor in pursuance of a contract with the sub-contractor for carrying out or for supply of labour for carrying out the whole or any part of the work undertaken by the contractor or for supplying any labour, which the contractor had undertaken to supply has to, at the time of credited such sum to the account of sub-contractor, or at the time of payment in cash or in any other manner, deduct TDS at the specified rate. 9) For application of sub-section (2) of section 194C, the requirement is that there is a contractor who has undertaken to carry out any work or supply of labour, a part of such work or supply of labour is executed through a sub-contractor and in pursuance of execution of such work, the payment is being made either in cash or in any other manner or the same is being credited in the account of the sub- contractor. Only under such circumstances, the requirement of deducting tax at source on such payment would arise on the part of the contractor. 10) The Tribunal, upon detailed examination of the nature of relationship between the assessee and the transporter, came to the conclusion that this is not a case of sub-contract. The Tribunal Page 4 of 6 Page 4 of HC-NIC Created On Sat Apr 16 14:21:09 IST 2016 6 O/TAXAP/177/2013 ORDER noted that none of the responsibilities of the contractor vis-a-vis the execution of the work were fastened on the transporters. The Tribunal noted that the assessee had indemnified ANS Construction against any legal or financial liability if such liability arises in future out of such contract. The assessee was solely responsible for execution of the work. No part of such liability was fastened on the transporters. The assessee had only availed of the services of such transporters for carrying out the material to the site. The Tribunal, therefore, concluded and rightly so in our opinion that this was not a case of relationship between the assessee contractor and the transporters in the capacity of sub-contractors. 11) To reiterate, for application of section 194C(2) of the Act what was necessary was a relationship between the contractor and sub- contractor and not merely be hiring of an agency by the contractor during the course of execution of the work. In the present case, such vital requirement of relationship of a contractor and sub-contractor between the assessee and the transporters was missing. The Tribunal, in our view, was perfectly justified in holding that liability to deduct tax at source in the present case do not arise. 12) Relevant portion of explanation-III of section 194C only provides that for the purpose of this section, the expression “work” shall also include carriage of goods and passengers by any mode of transport other than by railways. This explanation applies both to sub-section (1) as well as sub-section (2) of section 194C. Additionally, the explanation at any rate cannot be pressed in service to bring the case of an assessee within the scope of sub-section (2) of section 194C, if the same is otherwise not includable since the requirement of such sub- section are not fulfilled. 13) In the result, we do not find any error in the decision of the Tribunal. Tax appeal is, therefore, dismissed.” Page 5 of 6 Page 5 of HC-NIC Created On Sat Apr 16 14:21:09 IST 2016 6 O/TAXAP/177/2013 ORDER 5. Since the issue is already considered by this Court in case of Shri Prashant H. Shah, this Tax Appeal is also dismissed. (AKIL KURESHI, J.) (MS SONIA GOKANI, J.) raghu Page 6 of 6 Page 6 of HC-NIC Created On Sat Apr 16 14:21:09 IST 2016 6 "