Facts

The assessee entered into a contract with its customer for transporting cement      to various places in India. The assessee engaged the services of other truck operators/owners. The payments made to the assessee by the customer suffered TDS. However, no tax was  deducted at source on  payments of  freight charges  to truck operators/owners. The ITO treated the assessee in default for failure to deduct tax source under section 194C as there existed a sub-contract between the assessee and truck operators/owners. As a result, freight charges were disallowed under section 40(a)(ia). The Commissioner, Tribunal and High Court confirmed   the assessment order.

Issues

• Whether there existed a contract between the assessee and truck operators/ owners?
• Whether disallowance under section 40(a)(ia) was confined/limited to the amount ‘payable’ and not the amount already ‘paid’?
• Whether sub-clause (ia) to Section 40(a) is applicable for the financial year 2004-05 relevant to the assessment year 2005-06?

View

• Under the contract with the customer, the assessee was responsible to transport goods and how to accomplish that task, was within exclusive domain of the Hence, hiring the services of truck operators/ owners for carrying out this purpose could only have been under a contract between the assessee and truck operators/owners. Whenever a

truck was engaged to deliver the goods, all the essentials of making a contract existed between the assessee and truck operators/owners. It is irrespective whether such contract was reduced in writing or not. In  CIT v. Hardarshan Singh (2013) 350 ITR 427) (Delhi)(HC), the assessee was found to be acting only as a commission agent for arranging for transportation through other transporters i.e. a facilitator or intermediary between the consigner company and transporters. Contrary to facts of Hardarshan Singh, the assessee was neither a facilitator nor intermediary. The assessee had entered into separate contracts with  its  customer for transportation of goods and also, with truck operators/owners for effectuating the transportation.

• In Palam Gas Service CIT (2017) 394 ITR 300 (SC), the Supreme Court held that section 40(a)(ia) covers not only those cases where the amount is ‘payable’ but also when it is ‘paid’.
• Sub-clause (ia), was inserted in clause (a) of section 40 of the Act with effect from 04.2005 by Finance (No. 2) Act, 2004.The Finance Act got presidential assent on 10.09.2004. It was thus argued by the assessee that it could not have foreseen prior to 10.09.2004 that any amount paid    to a contractor without deducting tax at source was likely to become not deductible under section 40.

Held

• Following its earlier decision in Palam Gas Services, the Supreme Court held that once a particular truck was engaged onhire charges for transportation of the goods, the Truck operator/owner became the sub- contractor and all the requirements of Section 194C came into operation. Further, provisions dealing with disallowance of deductions particularly sections 40(a)(ia) and 40A(3) are intended to enforce due compliance  of the requirement of other provisions of the Act and to ensure proper collection of tax as also transparency in The interest of a bonafide assessee who had made the deduction as required and had paid the same to the revenue is safeguarded. No question about prejudice or hardship arises.
• Following its earlier decision in Palam Gas Services, the Supreme Court held that the provisions apply not only to amounts ‘payable’ but also paid and that the term ‘payable’ has been used in Section 40(a)(ia) of the Act only to indicate the type or nature of the payments by the assessees to the payees referred therein. Further, accordingly to the Supreme Court, its earlier decision of Palam Gas Service did not warrant any reconsideration  in absence of anything to show that the decision is not in conformity with any binding decision of larger bench or statutory provision or any other reason of like

• Section 40(a)(ia) having come into force from 01.04.2005, would apply from Assessment Year 2005-06 and he Supreme Court held that the requirement of deducting tax at source was already existing as per Section 194C of the Act. The obligation to deduct tax at source on a payment cannot be held to be dependent upon the drastic consequence of default ofnon-deduction i.e. disallowance of payment.
• The Supreme Court also rejected the argument of the assessee that the amendment by Finance (No. 2) Act, 2014, wherebythe disallowance under section 40(a)(ia) has been restricted to 30% of sum payable, was retrospective and appliedfrom inception of section 40(a)(ia). The amendment was specifically made applicable e.f. 01.04.2015  relevant to assessment year 2015-16 and therefore held to be applicable from that date. Accordingly, the disallowance made by the ITO under section 40(a)(ia) was upheld. (AY. 2005-06) (CA. No. 7865 of 2009 dt. 29-7-2020)

• Editorial: Judgement of High Court of Rajasthan in Shree Choudhary Transport Co. v. ITO (2009 225 CTR 125 (Raj) (HC)affirmed.

  Judgement of CIT v. Hardarshan Singh (2013) (350 ITR 427 (Delhi)(HC), PIU Ghosh v. Dy CIT (2016) 386 ITR 322) (Cal.) (HC) and CIT v. Calcutta Export Co. (2018) 404 ITR 654) (SC) distinguished.

  Judgement of Palam Gas Service v. CIT (2017) 394 ITR 300 (SC) followed.

  In CIT v. Calcutta Export Company (2018) 404 ITR 654 (SC) the  Court held that the amendment made by the Finance Act, 2010 in Section 40(a)(ia) of the IT Act is retrospective in nature i.e. from the date of insertion of the said provision

  w.e.f. AY. 2005-06.

  “A small group of determined and like-minded people can change the course of history.”

  – Mahatma Gandhi