Disallowance of Expense upheld by Supreme Court of India
In a recent judgment of the year 2020, Hon’ble Supreme Court discusses the disallowance of expenses under Section 40(a)(ia) of the Income Tax Act. While deciding the Civil Appeal No. 7865 of 2009, Supreme Court upheld the order of High Court for disallowance of expense under Income Tax Act.
Table of Contents
- Facts of the Case
- Notice by AO
- Reply by Appellant to AO
- Held by AO
- Appeal beforethe Commissioner of Income Tax (Appeals), Jodhpur
- Appeal beforethe Income Tax Appellate Tribunal, Jodhpur Bench
- Appeal beforethe High Court
- Overall Position of Cases before AO, CIT(A), ITAT and High Court
- Appeal before Supreme Court
- Issues framed by Supreme Court
- Commissionerof Income-Tax v. Hardarshan Singh (2013) 350 ITR 427
- Palam GasService v. Commissioner of Income-Tax: (2017) 394 ITR 300
- PIUGhosh v DCIT (2016) 386 ITR 322 (Cal)
Facts of the Case
SHREE CHOUDHARY TRANSPORT COMPANY Shree Choudhary Transport Company (assesse-appellant), a partnership firm, had entered into contract with M/s Aditya Cement Limited (Company)for transporting cement to various places in India.
The assessee was not having its own transport vehicles and hire the trucks from other other transporters for transporting cement.
Company made the payments towards transportation charges to the assesse after deducting TDS.
The assessee filed its return for the assessment year 2005-2006, showing total income at Rs. 2,89,633/- in the financial year 2004-2005 arising out of the business of ‘transport contract’.
Assessing Officer found that Assessee had not deducted TDS on payment made to the truck operators/owners even in case the net payment exceeded Rs. 20,000/-.
The Assessing Officer examined the dispatch register of the appellant and found that each truck was sent only to one destination under one challan/bilty and if one truck was hired again, it was sent to the same or other destination/trip as per separate challan/bilty. The commission charged by the appellant from the truck operators/owners ranged from Rs. 100/- to Rs. 250/- per trip.
AO found that the assesse splits those payments which were exceeding Rs. 20,000 into two parts by raising two vouchers.
Notice by AO
A notice was issued to the appellant for not deducting TDS while payment made to truck operators/owners.
Reply by Appellant to AO
In its reply, the appellant contended that 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.
Held by AO
AO, relying on the Circular bearing No. 715 dated 08.08.1995 issued by the CBDT, held that TDS must be deducted on payment to truck operators/owners as according to him there existed a contract between the appellant .
Therefore, the AO proceeded to disallow the total expense amounting to Rs. 57,11,625/-; and added the same back to the total income of the assesse. The AO also disallowed a lump sum of Rs. 20,000/- from various expenses debited to the Profit and Loss Account and finalised the assessment.
Appeal before the Commissioner of Income Tax (Appeals), Jodhpur
Aggrieved by the AO’s order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), being Appeal No. 183 of 2007-08.
The appeal of assessee was dismissed by CIT (A) by rejecting the contention of the assesse-appellant that it had only received commission income and therefore was not liable to deduct tax at source on payments made to the truck owners. CIT (A) observed:
“There was no nexus between the truck owners/ operators and M/s Aditiya Cement Limited. How the appellant transported the goods (cement) was the exclusive domain of the appellant firm. Under such circumstances, the gross freight received by the appellant from M/s Aditiya Cement Limited represents gross income of the appellant firm. Since the appellant made payments to various truck owners/ operators. Such payments represent expenditure.
It may be mentioned here that the payments to the truck owners/ operators were made only after the goods were transported by them satisfactorily at the given destinations.”
Further, CIT (A) observed that for its convenience and to avoid the rigour of Section 40A(3) of the Act, appellant-assessee choose to split the payments into two parts and even in the split payments,
Appeal before the Income Tax Appellate Tribunal, Jodhpur Bench
Aggrieved by the order of CIT(A), the appellant approached the Incoome Tax Appellate Tribunal, Jodhpur Bench in further appeal, being ITA No. 117/JU/2008.
The ITAT found that the agreement of assesse was on principal to principal basis whereby, the appellant was awarded the work of transporting cement but, as the appellant did not own any trucks, it had engaged the services of other truck operators/owners for transporting the cement; and such a transaction was a separate contract between the appellant and truck operator. And, thus assesse’s contention that there was only commission income which was shown in books of accounts was also rejected by the ITAT. Resultantly, the ITAT upheld the order of AO and CIT(A).
The assesse also contended that the Section 40(a)(ia) of the Income Tax Act was introduced in the Finance (No. 2) Act, 2004, and the circular in this regard was issued on July 15, 2005. Therefore, the time for payment of TDS had by then expired therefore the Section 40(a)(ia) would be applicable w.e.f. AY 2006-07. The ITAT rejected this plea as the amendment was made effective before the closing of financials for the year ending March 31, 2005 and hence ignorance cannot be pleaded by assesse for TDS deduction.
The ITAT, accordingly, dismissedthe appeal.
Appeal before the High Court
Aggrieved by the order of ITAT, the appellant approached the High Court in D.B. Income Tax Appeal No. 164 of 2008.
The Hon’ble Rajasthan High Court (‘HC’) summarily dismissed the appeal stating that there was no privity to direct contract between the truck owners and the consignors and that it was responsibility of the taxpayer to transport the goods, for which it hired the services of the truck owners. Thus, the HC held that there was no error in the order of the ITAT.
However, the appeal was dismissed summarily by the High Court as the prime responsibility of transporting the goods was of assesse and there exist no privity to direct contract between the truck owners and the consignors.
Thus, the HC held that there was no error in the order of the ITAT.
Overall Position of Cases before AO, CIT(A), ITAT and High Court
Thus, the net result of the proceedings aforesaid had been that the consistent views of the AO, CIT(A), ITAT, and High Court that deduction, of the payments made to the truck operators/owners, cannot be allowed while computing the total income of the assesse was affirmed by the High Court.
Appeal before Supreme Court
Aggrieved by the order of High Court, the assesse approached the Supreme Court.
Issues framed by Supreme Court
Hon’ble Supreme Court framed below said issues to decide:
Issue 1: As to whether Section 194C of the Act does not apply to the present case?
Issue 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?
Issue 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 01.04.2005, 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?
Issue 4: As to whether the payments in question have rightly been disallowed from deduction while computing the total income of the assesse?
Issue No.1: As to whether Section 194C of the Act does not apply to the present case?
Assesse submitted that there was no oral or written contract of the assesse with the truck operators/owners, whose vehicles were engaged to execute the work of transportation of the goods only on freelance and need basis.
Assesse further submitted that the question of TDS under Section 194C(2) would have arisen only if the payment was made to a “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”.
Assesse relied upon the case titled Commissioner of Income-Tax v. Hardarshan Singh (2013) 350 ITR 427 of Delhi High Court, where 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 of the Act.
The operator/ owner became the sub-contractor once the trucks were engaged by the assesse on hire charges in order to transport the goods of the assesse and it does not have any legal effect whether trucks were on its rolls or had been picking them up on freelance basis.
Court also referred the case titled Commissioner of Income- Tax v. Hardarshan Singh (2013) 350 ITR 427 of Delhi High Court on which assesse relied upon wherein assesse stated that he was merely acting as a facilitator or intermediary and had no privity to contract between the consignor and the transporter. However, in the present case, the assesse was not acting merely as a facilitator or intermediary as the consignor.
Therefore, Section 194C shall be applicable on assessee.
Issue No.2: As to whether disallowance under Section 40(a)(ia) of the Actis 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?
Assessee contended that Section 40(a)(ia) of the Income Tax Act is applicable only in the case of the amount “payable” and not applicable on the amount “already paid”.
Assessee further contended that interpretation done in the case of Palam Gas Service needs reconsideration because
- Provisions of Income Tax Act has to be strictly construed;
- While passing the judgment, Hon’ble Court fails to consider the change in words from ‘credited orpaid’ to ‘payable’ has been ignored;
- Section 40(a)(ia) of the Income Tax Act intends to disallow only the outstanding or payable amounts and this intent of the Act is ignored by court
- Section 40(a)(ia) is just an expansion which is based on Section194C of the Act.
Consequences of non-deduction of tax at source is provided in Section 40(a)(ia) of the Income Tax Act. This provision is introduced by the legislature for strict compliances of deduction of tax at source.
The term “payable” as used in Section 40(a)(ia) of the Income Tax Act indicates the type or nature of the payments and it describes the payments ob which TDS has to be deducted.
Therefore, the court’s observation in the case of Palam Gas Services, that the term ‘payable’ used in Section 40(a)(ia) of the Income Tax Act is inclusive of the term ‘paid’ and hence the order of Hon’ble Court in Palam Gas Services disallowing such expenses which have already been paid under Section 40(a)(ia) of the Act was upheld.
Reconsideration of the ruling in the case of Palam Gas Service (supra) was not required.
Issue No.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 01.04.2005, 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?
The sub-clause (ia) which was inserted to clause (a) of Section 40 of the Income Tax Act with effect from 01.04.2005 by 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.
Assessee relied upon the decision of Calcutta High Court in the case of PIU Ghosh v DCIT (2016) 386 ITR 322 (Cal).
Assessee contended that the said Finance (No.2) Act, 2004 got presidential assent on 10.09.2004 and was inserted with effect from 01.04.2005. Therefore, the provision cannot be made applicable before the date of assent.
Another contention of the assesse was 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.
That Section 194C for deducting tax at source was already existing and Section 201 was also in existence therefore assesse was duty bound to deduct TDS on payments.
The proviso to Section 40(a)(ia) of the Act takes care of the bonafide assesses who fail to deduct tax at source, by allowing a deduction in the year in which such tax is deducted and paid. The proviso has escaped the attention of the Calcutta High Court in the case of PIU Ghosh (supra). Section 40(a)(ia) of the Act and has further been modulated by way of various subsequent amendments to mitigate genuine hardships. Therefore, the judgement in case of PIU Ghosh cannot be regarded as correct in law.
The amendment made in Section 40(a)(ia) of the Act by the Finance (No. 2) Act, 2014 restricting the disallowance to 30% of the expenditure cannot be stretched so as to reach AY 2005-06.
The case of the Calcutta Export Company relates to a situation where an amendment was made in 2008 to mitigate genuine hardships caused due to the insertion of Section 40(a)(ia) of the Act. However, even after an amendment in 2008, there was a class of assessees who still faced the hardships, which was sought to be remedied by the amendment in 2010. The Calcutta High Court held that the amendment in 2010 was curative in nature and therefore would apply retrospectively. However, the above ruling cannot be applied in the case of amendments made by the Finance (No. 2) Act, 2014, which restrict the disallowance to 30% of expenditure.
That the assesse was not a bonafide assesse as he had not deducted TDS and deposited the same with government exchequer. Since the assesse defaulted at every stage, and its attempt to seek some succor in the amendment of Section 40(a)(ia) of the Act by the Finance (No.2) Act, 2014 is rejected.
Issue No.4: As to whether the payments inquestion have rightly been disallowed from deduction while computing the total income of the assesse?
Section 194C were applicable on to the assesse and he was under obligation to deduct the tax at source in relation to the payments made by it for hiring the vehicles for the purpose of its business of transportation of goods.
Disallowance under Section 40(a)(ia) of the Income Tax Act is applicable to both to the amount outstanding and also to the expenses that had already been incurred and paid by the assesse.
The provision of Section 40(a)(ia) of the Act of 1961 was introduced by the Finance (No.2) Act, 2004 with effect from 01.04.2005 therefore it is applicable to the case at hand relating to the assessment year 2005-2006 and the benefit of amendment made in the year 2014 to the provision in question is not available to the appellant in the present case.
Therefore, the revenue was right in disallowing the payments made to truck owners while computing the income of assesse.