# SHREE CHOUDHARY TRANSPORT COMPANY v. INCOME TAX OFFICER

- **Citation:** [2020] 8 S.C.R. 165
- **Court:** Supreme Court of India
- **Decided:** 2020-07-29
- **Case number:** Civil Appeal No. 7865 of 2009
- **Bench:** A. M. Khanwilkar, Dinesh Maheshwari
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/shree-choudhary-transport-company-v-income-tax-officer-34847
- **Pages:** 57

## Headnote

Income Tax Act, 1961:
ss. 40(a)(ia) and 194C - Applicability of - Scope - Deduction
of tax at Source - For the assessment year 2005-2006 - Failure by
assessee, while making payment to the truck operators engaged by
assessee for the purpose of its contract for transportation of goods
- Deduction claimed by assessee on account of such payment -
Revenue disallowed deduction of payments made to the Truck
operators exceeding Rs. 20,000/- without TDS in terms of s. 40(a)(ia)
- Appellate Authority held that assessee's case was squarely covered
by the provisions of s. 194C and in view of mandatory provisions of
s. 40(a)(ia), the payments in question cannot be allowed as deduction
while computing the total income of the assessee - Appellate Tribunal
as also High Court affirmed the findings of the Authorities - Appeal
to Supreme Court - Held: The contract of assessee with consignor
company for transport of goods could not have been accomplished
without a contract with the truck operator - Thus the truck operators
answered the description of 'sub-contractor' for the purpose of s.
194(2) - Thus, in assessee's case s. 194C was applicable and hence
it was obliged to deduct tax at source - The disallowance u/s.
40(a)(ia) is not limited to the amount outstanding i.e. 'payable', it
equally applies to the amount already incurred and paid by the
assessee - Sub-clause (ia) of s. 40(a) has been consciously made
applicable by legislature effective from 01.04.2005 and hence would
be applicable for the assessment year in question i.e. 2005-2006 -
The payments in question have rightly been disallowed from
deduction while computing the total income of assessee.
Dismissing the appeal, the Court
HELD: 1. The nature of contract entered into by the
appellant with the consignor company makes it clear that the
[2020] 8 S.C.R. 165
165
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appellant was to transport the goods (cement) of the consignor
company; and in order to execute this contract, the appellant
hired the transport vehicles, namely, the trucks from different
operators/owners. The appellant received freight charges from
the consignor company, who indeed deducted tax at source while
making such payment to the appellant. Thereafter, the appellant
paid the charges to the persons whose vehicles were hired for
the purpose of the said work of transportation of goods.
Indisputably, it was the responsibility of the appellant-assessee
to transport the goods (cement) of the company; and how to
accomplish this task of transportation was a matter exclusively
within the domain of the appellant. Hence, hiring the services of
truck operators/owners for this purpose could have only been
under a contract between the appellant and the said truck
operators/owners. Whether such a contract was reduced into
writing or not carries hardly any relevance. In the given scenario
and set up, the said truck operators/owners answered to the
description of "sub-contractor" for carrying out the whole or part
of the work undertaken by the contractor (i.e., the appellant) for
the purpose of Section 194C(2) of the Income Tax Act, 1961.
Thus, the provisions of Section 194C were applicable and the
assessee-appellant 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.
[Paras 15.1 and 20][197-G-H][198-A-C; 220-D-E]
Palam Gas Service v. Commissioner of Income-Tax
(2017) 394 ITR 300 - relied on.
Commissioner of Income-Tax v. Hardarshan Singh
(2013) 350 ITR 427 - distinguished.
2.1 Disallowance under Section 40(a)(ia) of the Act is not
limited only to the amount outstanding and this provision equally
applies in relation to the expenses that had already been incurred
and paid by the assessee. Section 194C is placed in Chapter XVII
of the Act on the subject "Collection and Recovery of Tax"; and
specific provisions are made in the Act to ensure that the
requirements

## Text

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SHREE CHOUDHARY TRANSPORT COMPANY
v.
INCOME TAX OFFICER
(Civil Appeal No. 7865 of 2009)
JULY 29, 2020
[A. M. KHANWILKAR AND DINESH MAHESHWARI, JJ.]
Income Tax Act, 1961:
ss. 40(a)(ia) and 194C - Applicability of - Scope - Deduction
of tax at Source - For the assessment year 2005-2006 - Failure by
assessee, while making payment to the truck operators engaged by
assessee for the purpose of its contract for transportation of goods
- Deduction claimed by assessee on account of such payment -
Revenue disallowed deduction of payments made to the Truck
operators exceeding Rs. 20,000/- without TDS in terms of s. 40(a)(ia)
- Appellate Authority held that assessee's case was squarely covered
by the provisions of s. 194C and in view of mandatory provisions of
s. 40(a)(ia), the payments in question cannot be allowed as deduction
while computing the total income of the assessee - Appellate Tribunal
as also High Court affirmed the findings of the Authorities - Appeal
to Supreme Court - Held: The contract of assessee with consignor
company for transport of goods could not have been accomplished
without a contract with the truck operator - Thus the truck operators
answered the description of 'sub-contractor' for the purpose of s.
194(2) - Thus, in assessee's case s. 194C was applicable and hence
it was obliged to deduct tax at source - The disallowance u/s.
40(a)(ia) is not limited to the amount outstanding i.e. 'payable', it
equally applies to the amount already incurred and paid by the
assessee - Sub-clause (ia) of s. 40(a) has been consciously made
applicable by legislature effective from 01.04.2005 and hence would
be applicable for the assessment year in question i.e. 2005-2006 -
The payments in question have rightly been disallowed from
deduction while computing the total income of assessee.
Dismissing the appeal, the Court
HELD: 1. The nature of contract entered into by the
appellant with the consignor company makes it clear that the
[2020] 8 S.C.R. 165
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appellant was to transport the goods (cement) of the consignor
company; and in order to execute this contract, the appellant
hired the transport vehicles, namely, the trucks from different
operators/owners. The appellant received freight charges from
the consignor company, who indeed deducted tax at source while
making such payment to the appellant. Thereafter, the appellant
paid the charges to the persons whose vehicles were hired for
the purpose of the said work of transportation of goods.
Indisputably, it was the responsibility of the appellant-assessee
to transport the goods (cement) of the company; and how to
accomplish this task of transportation was a matter exclusively
within the domain of the appellant. Hence, hiring the services of
truck operators/owners for this purpose could have only been
under a contract between the appellant and the said truck
operators/owners. Whether such a contract was reduced into
writing or not carries hardly any relevance. In the given scenario
and set up, the said truck operators/owners answered to the
description of "sub-contractor" for carrying out the whole or part
of the work undertaken by the contractor (i.e., the appellant) for
the purpose of Section 194C(2) of the Income Tax Act, 1961.
Thus, the provisions of Section 194C were applicable and the
assessee-appellant 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.
[Paras 15.1 and 20][197-G-H][198-A-C; 220-D-E]
Palam Gas Service v. Commissioner of Income-Tax
(2017) 394 ITR 300 - relied on.
Commissioner of Income-Tax v. Hardarshan Singh
(2013) 350 ITR 427 - distinguished.
2.1 Disallowance under Section 40(a)(ia) of the Act is not
limited only to the amount outstanding and this provision equally
applies in relation to the expenses that had already been incurred
and paid by the assessee. Section 194C is placed in Chapter XVII
of the Act on the subject "Collection and Recovery of Tax"; and
specific provisions are made in the Act to ensure that the
requirements of Section 194C are met and complied with, while
also providing for the consequences of default. Section 200
specifically provides for the duties of the person deducting tax to
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deposit and submit the statement to that effect. The
consequences of failure to deduct or pay the tax are then provided
in Section 201 of the Act which puts such defaulting person in the
category of "the assessee in default in respect of the tax" apart
from other consequences which he or it may incur. [Para 16][200D-F]
2.2.
Section 40(a)(ia) provides for the consequences of
default in the case where tax is deductible at source on any
interest, commission, brokerage or fees but had not been so
deducted, or had not been paid after deduction (during the
previous year or in the subsequent year before expiry of the
prescribed time) in the manner that the amount of such interest,
commission, brokerage or fees shall not be deducted in computing
the income chargeable under "profits and gains of business or
profession". In other words, it shall be computed as income of
the assessee because of his default in not deducting the tax at
source. In the overall scheme of the provisions relating to
collection and recovery of tax, it is evident that the object of
legislature in introduction of the provisions like sub-clause (ia)
of clause (a) of Section 40 had been to ensure strict and punctual
compliance of the requirement of deducting tax at source. In the
proviso added to clause (ia) of Section 40(a) of the Act, it was
provided that where in respect of the sum referable to TDS
requirement, tax has been deducted in any subsequent year, or
has been deducted during the previous year but paid in any
subsequent year after the expiry of the time prescribed in Section
200(1), such sum shall be allowed as a deduction in computing
the income of the previous year in which such tax has been paid.
[Paras 16.1 and 16.2][200-F-H; 201-A-C]
Commissioner of Income-Tax v. Calcutta Export
Company: (2018) 404 ITR 654 - relied on.
2.3 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. In other words,
the expression "payable" is descriptive of the payments which
attract the liability for deducting tax at source and it has not been
used in the provision in question to specify any particular class of
default on the basis as to whether payment has been made or
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INCOME TAX OFFICER
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not. It is not correct to say that the expression "payable" should
be read in contradistinction to the expression "paid". Reference
to the definition of the term "paid" in Section 43(2) of the Act is
of no assistance to the appellant. [Para 16.11][209-G-H]
*Palam Gas Service v. Commissioner of Income-Tax :
(2017) 394 ITR 300 - relied on.
J.K. Synthetics Limited v. Commercial Taxes Officer:
(1994) 4 SCC 276 - distinguished.
P.M.S. Diesels and Ors. v. Commissioner of Income-Tax:
(2015) 374 ITR 562 - approved.
P.M.S. Diesels and Ors. v. Commissioner of Income-Tax:
(2015) 374 ITR 562; Commissioner of Income-Tax,
Kolkata-XI v. Crescent Export Syndicate: (2013) 216
Taxman 258; Institute of Chartered Accountants of
India v. Price Waterhouse (1997) 93 Taxman 588 -
referred to.
2.4 There is no substance in the plea that the decision in
*Palam Gas Service case requires reconsideration. The decision
of Co-ordinate Bench in Palam Gas Service case on the core
question of law is equally binding on this Bench and could be
doubted only if the view, as taken, is shown to be not in conformity
with any binding decision of the Larger Bench or any statutory
provisions or any other reason of the like nature. The Court finds
none. [Para 16.8][206-F-H]
2.5 It is not correct that scope of Section 40(a)(ia) of the
Act cannot be decided on the basis of Section 194C. Section
40(a)(ia) is not a stand-alone provision but provides one of those
additional consequences as indicated in Section 201 of the Act
for default by a person in compliance of the requirements of the
provisions contained in Part B of Chapter XVII of the Act. The
scheme of these provisions makes it clear that the default in
compliance of the requirements of the provisions contained in
Part B of Chapter XVII of the Act (that carries Sections 194C,
200 and 201) leads, inter alia, to the consequence of Section
40(a)(ia) of the Act. Hence, the contours of Section 40(a)(ia) of
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the Act could be aptly defined only with reference to the
requirements of the provisions contained in Part B of Chapter
XVII of the Act, including Sections 194C, 200 and 201. When the
obligation of Section 194C of the Act is the foundation of the
consequence provided by Section 40(a)(ia) of the Act, reference
to the former is inevitable in interpretation of the latter.
[Para 16.10][207-D-F]
3.1. In income tax matters, the law to be applied is that in
force in the assessment year in question, unless stated otherwise
by express intendment or by necessary implication. As per
Section 4 of the Act of 1961, the charge of income tax is with
reference to any assessment year, at such rate or rates as provided
in any central enactment for the purpose, in respect of the total
income of the previous year of any person. The expression
"previous year" is defined in Section 3 of the Act to mean 'the
financial year immediately preceding the assessment year'; and
the expression "assessment year" is defined in clause (9) of
Section 2 of the Act to mean 'the period of twelve months
commencing on the 1st day of April every year'. Sub-clause (ia)
was inserted to clause (a) of Section 40 of the Act with effect from
01.04.2005 by Finance (No.2) Act, 2004. 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. The legislature consciously made
the said sub-clause (ia) of Section 40(a) of the Act effective from
01.04.2005, meaning thereby that the same was to be applicable
from and for the assessment year 2005-2006; and neither there
had been express intendment nor any implication that it would
apply only from the financial year 2005-2006. [Paras 17.4, 17.1
and 17.6][210-B-D; 208-D]
3.2. The requirement of deducting tax at source was already
existing as per Section 194C of the Act and it was the bounden
duty of the appellant to make such deduction of TDS and to make
over the same to the revenue. Section 201 was also in existence
which made it clear that default in making deduction in accordance
with the provisions of the Act would make the appellant "an
assessee in default". The appellant cannot suggest that even if
the obligation of TDS on the payments made by him was existing
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by virtue of Section 194C(2), he would have honoured such an
obligation only if being aware of the drastic consequence of default
that such payment shall not be deducted for the purpose of drawing
up the assessment. [Para 17.7][211-H; 212-A-B]
3.3.
By the amendment in question, clause (ia) was added
to Section 40(a) of the Act with a proviso to the effect that where,
in respect of the sum referable to TDS requirement, tax has been
deducted in any subsequent year, or has been deducted during
the previous year but paid in any subsequent year after expiry of
the time prescribed in Section 200(1), such sum shall be allowed
as a deduction in computing the income of the previous year in
which such tax has been paid. The proviso effectively took care
of the case of any bonafide assessee who would earnestly comply
with the requirement of deducting the tax at source. The
relaxation by way of the proviso/s to Section 40(a)(ia) of the Act
had further been modulated by way of various subsequent
amendments to further mitigate the hardships of bonafide
assessees. [Para 17.7.1][212-C-E]
3.4 If sub-clause (ia) of Section 40(a) of the Act is held
applicable only from the financial year 2005-2006, the result would
be that this provision would apply only from the assessment year
2006-2007. Such a result is neither envisaged nor could be
countenanced. Hence, the contention that sub-clause (ia), of
clause (a) of Section 40 of the Act would apply only from the
financial year 2005-2006 and cannot apply to the present case
pertaining to the financial year 2004-2005 stands rejected.
[Para 17.8][212-F-G]
3.5 It is also not correct that disallowance cannot be applied
to the payments already made prior to 10.09.2004, the date on
which the Finance (No.2) Act, 2004 received the assent of the
President of India. The said date of assent of the President of
India to Finance (No.2) Act, 2004 is not the date of applicability
of the provision in question, for the specific date having been
provided as 01.04.2005. Of course, the said date relates to the
assessment year commencing from 01.04.2005 (i.e., assessment
year 2005-2006). [Para 18][212-G-H; 213-A-B]
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3.6
Even if it be assumed that the requirements of Section
40(a)(ia) became known on 10.09.2004, the appellant could have
taken all the requisite steps to make deductions or, in any case,
to make payment of the TDS amount to the revenue during the
same financial year or even in the subsequent year, as per the
relaxation available in the proviso to Section 40(a)(ia) of the Act
but, the appellant simply avoided his obligation and attempted to
suggest that it had no liability to deduct the tax at source at all.
Such an approach of the appellant, when standing at conflict with
law, the consequence of disallowance under Section 40(a)(ia) of
the Act remains inevitable. [Para 18.1][213-B-C]
3.7 The appellant is not correct in saying that the
amendment by way of Finance (No.2) Act, 2014, whereby
disallowance under Section 40(a)(ia) has been limited to 30% of
the sum payable, deserves to be held retrospective in operation.
The amendment 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.
[Paras 19 and 19.2][213-D; 216-E]
Commissioner of Income-Tax v. Calcutta Export
Company (2018) 404 ITR 654 - distinguished.
3.8 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. [Para 19.6][220-A-C]
SHREE CHOUDHARY TRANSPORT COMPANY v. INCOME
TAX OFFICER
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Karimtharuvi Tea Estate Ltd. v. State of Kerala (1966)
60 ITR 262 - followed.
Commissioner of Income-Tax, West Bengal v. Isthmian
Steamship Lines (1951) 20 ITR 572 - relied on.
PIU Ghosh v. Deputy Commissioner of Income-Tax &
Ors. (2016) 386 ITR 322 - not approved.
4. The payments in question have rightly been disallowed
from deduction while computing the total income of the assesseeappellant. The Court does not find any case of prejudice or legal
grievance with the appellant. In the first place, it is clear from
the provisions dealing with disallowance of deductions in part D
of Chapter IV of the Act, particularly those contained in Sections
40(a)(ia) and 40A(3) of the Act, that the said provisions 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 dealings of the parties. The necessity of
disallowance comes into operation only when default of the nature
specified in the provisions takes place. Looking to the object of
these provisions, the suggestions about prejudice or hardship
carry no meaning at all. Secondly, by way of the proviso as originally
inserted and its amendments in the years 2008 and 2010, requisite
relief to a bonafide tax payer who had collected TDS but could
not deposit within time before submission of the return was also
provided; and as regards the amendment of 2010, this Court ruled
it to be retrospective in operation. The proviso so amended,
obviously, safeguarded the interest of a bonafide assessee who
had made the deduction as required and had paid the same to the
revenue. The appellant having failed to avail the benefit of such
relaxation too, cannot now raise a grievance of alleged hardship.
Thirdly, the appellant had shown total payments in Truck Freight
Account at Rs. 1,37,71,206/- and total receipts from the company
at Rs. 1,43,90,632/-. What has been disallowed is that amount of
Rs. 57,11,625/- on which the appellant failed to deduct the tax at
source and not the entire amount received from the company or
paid to the truck operators/owners. [Para 21][221-A-E]
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Case Law Reference
(2013) 350 ITR 427
distinguished
Para 15.3
(2017) 394 ITR 300
relied on
Para 15.4
(2018) 404 ITR 654
relied on
Para 16.3
(2017) 394 ITR 300
relied on
Para 16.4
(2015) 374 ITR 562
referred to
Para 16.5
(2015) 374 ITR 562
approved
Para 16.5.1
(2013) 216 Taxman 258
referred to
Para 16.5.1
(1994) 4 SCC 276
distinguished
Para 16.11
(1997) 93 Taxman 588
referred to
Para 16.11
(2016) 386 ITR 322
not approved
Para 17.1
(1951) 20 ITR 572
relied on
Para 17.5
(1966) 60 ITR 262
followed
Para 17.5
(2018) 404 ITR 654
distinguished
Para 19
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 7865
of 2009.
From the Judgment and Order dated 15.05.2009 of the Rajasthan
High Court at Jodhpur in D.B. Income Tax Appeal No. 164 of 2008.
Vikramjit Banerjee, ASG, V. Shekhar, Sr. Adv., Puneet Jain, H.D.
Thanvi, Rishi Matoliya, Ms. Christi Jain, Shashank Shekhar,
Ms. Sheetal Rajput, Sarad Kumar Singhania, Ms. Praveena Gautam,
Ms. Purnima Bhat Kak, Ms. Siddhartha Sinha, Abhishek Mahajan,
Mrs. Anil Katiyar, B. V. Balaram Das Advs. for the appearing parties.
SHREE CHOUDHARY TRANSPORT COMPANY v. INCOME
TAX OFFICER
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The Judgment of the Court was delivered by
DINESH MAHESHWARI, J.
Preliminary
1. By way of this appeal, the assessee-appellant has called in
question the order dated 15.05.2009 passed in Income Tax Appeal No.
164 of 2008 whereby, the High Court of Judicature for Rajasthan at
Jodhpur has summarily dismissed the appeal against the orderdated
29.08.2008 passed in ITA No. 117/JU/2008 by the Income Tax Appellate
Tribunal, Jodhpur Bench at Jodhpur; and thereby, the High Court has
upheld the computation of total income of the assessee-appellant for the
assessment year 2005-2006 with disallowance of payments to the tune
of Rs. 57,11,625/-, essentially in terms of Section 40(a)(ia) of the Income
Tax Act, 19611,for failure of the assessee-appellant to deduct the requisite
tax at source2.
2. We may take note of the relevant factual and background
aspects of the case while keeping in view the root point calling for
determination in this appeal, that is,as to whether the payments in question
have rightly been disallowed from deduction in computation of total income
of the appellant?
Relevant factual and background aspects; the impugned
order of assessment
3. In a brief outline of the relevant factual aspects, it could be
noticed that the assessee-appellant, a partnership firm, had entered into
contract with M/s Aditya Cement Limited, Shambupura, District
Chittorgarh3 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,effected payments towards transportation charges to the appellant
after due deduction of TDS, as shown in Form No. 16A issued by the
company.
4. On 28.10.2005, the assessee-appellant filed its return for the
assessment year 2005-2006, showing total income at Rs. 2,89,633/- in
1 Hereinafter referred to as 'the Act of 1961' or simply 'the Act'.
2 'Tax deducted at source' being referred as 'TDS'
3 Hereinafter also referred to as "the consignor company" or "the company''.
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the financial year 2004-2005 arising out of the business of 'transport
contract'.
5. In the course of assessment proceedings, the Assessing Officer4
examined the dispatch register maintained by the appellant for the period
01.04.2004 to 31.03.2005, containing all particulars as regards the trucks
hired, date of hire, biltyand challan numbers, freight and commission
charges, net amount payable, the dates on which the payments were
made, and the destination of each truck etc. The contents of the register
also indicated 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.
5.1. On verifying the contents of record placed before him, the
AO observed that while making payment to the truck operators/owners,
the appellant had not deducted tax at source even if the net payment
exceeded Rs. 20,000/-. Following this, a notice dated 05.11.2007 was
issued to the appellant, requiring the details of amount paidto the truck
operators/owners, TDS thereupon, and date of depositing the same in
the Government account. In reply, by its letters dated 12.11.2007 and
15.11.2007, the appellant contended, inter alia, that the trucks hired
were belonging to different operators/owners who were not the subcontractors or contractors; that they came from different parts of India
and mostly required cash payment for diesel and other running expenses;
thatthe 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.
5.2. While drawing up the assessment order dated 22.11.2007,
the AO observed that the payments to different truck operators/owners
were made directly by the appellant firm and not the consignor company;
that the appellant firm was responsible for transportation of goods of the
company as per the contract for which, the appellant received payment
from the company after tax being deducted at source therefrom. The
AO also observed that the appellant firm paid freight charges to the
truck operators/owners from the income so earned; and the remaining
amount was shown as commission. Looking to the nature of dealings of
the parties, the AO observed that there existed a contract between the
4 'AO' for short
SHREE CHOUDHARY TRANSPORT COMPANY v. INCOME
TAX OFFICER [DINESH MAHESHWARI, J.]
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appellant and the truck operators/owners in respect of each challan/bilty
for transportation. The AO also referred to the Circular bearing No. 715
dated 08.08.1995 issued by the Central Board of Direct Taxes5, to observe
that each goods receipt could be considered a separate contract. While
further observing that a contract may be written or oral, the AO held
that when the truck operators/owners in the case at hand were not to be
considered as contractors, they were undoubtedly the sub-contractors
of the appellant. The AO also pointed out that despite sufficient
opportunity being given, a copy of the agreement of the appellant firm
with the company for providing transportation services was not furnished.
5.3. Having perused the material placed before him, the AO held
on the appellant's responsibility for deducting tax at source while making
payment to the truck operators/owners where such payment exceeded
Rs. 20,000/- on a single bilty/challan or goods receipt in the following
words:-
"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 was a contract or sub-contract between the
assessee firm and the truck operator as per the provisions of
Section 194C of the Act and Board's circular supra, and 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 subcontractor exceeded twenty thousand rupees.
***
***
***
From the facts and circumstances of the case discussed above
the final position emerging is that in view of the provisions of
Section 194C of the Act the assessee was liable to deduct tax at
source while making payment to truck owners/operators where
such payment exceeded Rs. 20,000/- on the basis of single bilty/
challan or GR."
5 'CBDT' for short
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5.4. After examining the details contained in the dispatch register,
cash book and payment vouchers, the AO found that tax was not deducted
at source by the appellant while making payment to the truck operator/
owner, even though the payment under a single goods receipt (challan/
bilty) exceeded the sum of Rs. 20,000/-. Thereupon, the assesseeappellant was called upon to explain as to why deduction claimed on
account of such payment from the income be not disallowed in terms of
Section 40(a)(ia) of the Act. In the order of assessment, the AO took
note of and dealt with various submissions made on behalf of the
assessee-appellant in this regard as follows:-
"Since the assessee failed to deduct the tax at source while making
payment to truck owners/ operators exceeding Rs. 20,000/-, the
assessee was asked to explain as to why deduction claimed on
account of such payments from the income be not disallowed
within the meaning of Section 40(a)(ia) of the Act. The learned
counsel of the assessee firm stated that there was no payment
exceeding Rs. 20,000/-. In this regard he furnished photocopy of
extract of cash book and also payment vouchers which indicate
that each payment exceeding Rs. 20,000/- was shown in the cash
book in two parts though paid on the same date and the assessee
made two separate vouchers for such payment just to give an
impression that payment to truck owners/ operators was not
exceeding Rs. 20,000/-. In this regard it is pertinent to mention
that merely by showing payment of one challan/ bilty in two
pieces the assessee cannot absolve itself of the provisions
of the Section 40(a)(ia) inasmuch as Section 194C(3)(i) clearly
speaks of - "the amount of any sum credited or paid or likely to
be credited or paid to the account of, or to, the Contractor or subcontractor, if such sum does not exceed twenty thousand rupees".
The learned counsel further submitted that 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 as no need
for further TDS. He further stated that 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
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made to the truck owners/ operators was out of the purview of
Section 194C of the Act. He further stated that 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.
This argument put forth on behalf of the assessee firm is not
acceptable inasmuch as Section 194C(1) clearly says that - "Any
person responsible for paying any sum to any resident......." Since
the assessee firm was responsible for making payment to
the truck owners operators, it was mandatory on the part
of the assessee to deduct tax at source while making such
payment. Further there is no direct nexus between the
Company and the truck owners/operators and thus it cannot
be said that the assessee firm was a mediator between the
company and the truck owners/ operators......"
(emphasis in bold supplied)
5.5. In view of the above, the AO proceeded to disallow the
deduction of payments made to the truck operators/owners exceeding
Rs. 20,000/- without TDS, which in total amounted to Rs. 57,11,625/-;
and added the same back to the total income of the assessee-appellant.
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,
accordingly, as under:-
"Therefore, considering the provisions of Section 194C, Section
40(a)(ia) and Board's Circular No. 715, dated 08.8.1995, the
payment made to the truck owners/operators, exceeding to Rs.
20,000/- without deducting tax at source is disallowed and added
back to the total income of the assessee firm which works out to
Rs. 57,11,625/-, supra. The assessee has shown total payments
in Truck Freight Account at Rs. 1,37,71,206/- and total receipts
from the company at Rs. 1,43,90,632/-.
The assessee has shown commission income of Rs. 6,23,300/- on
which net profit of Rs. 2,89,694/- has been shown giving N.P.
rate of 46.47% as against N.P. rate of 50.91% declared in the
immediate preceding year on commission income of Rs. 6,00,450/
-. The N.P. rate declared this year is on the lower side. Considering
the nature of various expenses debited to the Profit and Loss
Account like Staff Welfare Expenses, Telephone Expenses,
Travelling expenses, Motor Cycle Repairs etc. where involvement
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of personal element cannot be ruled out, a lump sum disallowance
of Rs. 20,000/- is made to the declared income."
Before the Commissioner of Income Tax (Appeals), Jodhpur
6. Aggrieved by the order so passed by the Assessing Officer, the
assessee-appellant preferred an appeal before the Commissioner of
Income Tax (Appeals)6, being Appeal No. 183 of 2007-08, that was
considered and dismissed on 15.01.2008.
6.1. The CIT(A) re-examined the record and rejected the
contentions of the appellant that it had only received commission income
and was not liable to deduct tax at source on payments made to the
truck owners while observing as under:-
"On careful consideration of the material facts, it is observed that
the appellant entered into a contract for transportation of goods
(cement) with M/s Aditiya Cement Limited in order to honour the
contract, the appellant hired various trucks all through out the
year for the purpose of transportation of cement. The appellant
received freight charges from M/s Aditiya Cement Limited on
which tax was deducted. The appellant paid freight charges to
individual truck owners, after transportation of goods. 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. In other words, there
existed a contract or a sub-contract between the appellant firm
and the transporters. Under such circumstances, the appellant
was required to deduct tax at source on the payments made to
truck drivers/ owners within the meaning of provisions of Section
40(a)(ia) read with Section 194C of the Act. Under no
circumstances, it can be said that the appellant only received
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commission income and therefore provisions of Section 194C are
not applicable."
(emphasis in bold supplied)
6.2. In regard to the contention that the appellant was not required
to deduct tax at source when no payment exceeded Rs. 20,000/-, the
CIT(A) found that the appellant had, for its convenience and to avoid
the rigour of Section 40A(3) of the Act, chose to split the payments into
two parts but the entries of such split payments were available
consecutively in the cash book. Thus, while not accepting such
methodology, the CIT(A) observed that even in the split payments, it
was required of the appellant to deduct tax at the time of making final
payment. The relevant observation of the CIT(A)read as under:-
"The facts have been gone through and it is observed that the
appellant made payments in a manner according to which individual
payment to the truck owner(s) did not exceed Rs. 20,000/-. In
other words, the payment was splitted into two parts. However,
the total amount paid to the truck owner(s) for individual contract
exceeded Rs. 20,000/-. For instance, cashbook dated 31-1-2005
of the appellant shows payments of Rs. 14,750/- and Rs. 10,510/
- to Truck No.RJ14-G-5599 for transport of cement from the
premises of the Cement Company to Bhatinda. The same
cashbook page also shows payments of Rs. 14,750/- and Rs. 9,431/
- to Truck No.RJ23-G-3041 for transport of cement. It is the
argument that since the individual payment did not exceed Rs.
20,000/-, the provisions of Section 194C are not applicable. On
careful consideration of the material facts, it is observed that
both the entries are consecutive in the cashbook and,
therefore, it is observed that the appellant, for its
convenience and to avoid rigors of the provisions of Section
40A(3), splitted the payments into two parts. Had the
payments been really made in two parts, both the entries should
not have been consecutive. It is also not understood as to why the
truck owners after completing the contract, would accept the
amount in two parts and why they would come to the office of the
appellant twice for seeking payments. The theory of making
payments in two parts is merely a story, which is capable
neither on facts nor on practicability. It is also surprising to
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note that in none of the case the appellant made fully payment to
any truck owner all through out the year exceeding Rs.20,000/."
(emphasis in bold supplied)
6.3. The CIT(A) also examined in detail the question as to whether
transport contracts were subject to deduction of tax at source and, with
reference to clause (c) of Explanation (iii) of Section 194C of the Act
as also to CBDT Circular Nos. 558 dated 28.03.1990 and 681 dated
08.03.1994, held that the provisions of Section 194C of the Act were
applicable to the contracts for transportation of goods; and the appellant
was required to deduct tax at source if the gross credited or paid or
likely to be credited or paid exceeded the limit of Rs. 20,000/-. Having
found that the appellant's case was squarely covered within the provisions
of Section 194C of the Act, the CIT(A) held that in view of the mandatory
provisions of Section 40(a)(ia) of the Act, the payments in question cannot
be allowed as deduction while computing total income. Thus, the CIT(A)
proceeded to dismiss the appeal while holding, inter alia, as under:-
"It is, therefore, clear that the appellant's case was squarely
covered within the provisions of the Section 194C and, therefore,
it was required to deduct tax at sources while making payments
to the truck owners.
Provisions of Section 40(a)(ia) clearly provide that if any amount
payable to a contractor or subcontractor 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 during the previous year, or in the subsequent year before
the expiry of the time prescribed under sub-section (1) of Section
200, such sum shall not be allowed as a deduction while computing
the total income. As can be seen, the provisions are mandatorily
to be complied with in the case a default and the question of
existence of any reasonable cause has got no meaning.
In the light of the entire discussion as above, I hold that the
appellant was required by the provisions of the Act to deduct tax
on freight payments totalling to Rs.57,11,625/-. Since the appellant
failed to deduct tax at source the sum of Rs.57,11,625/- was rightly
disallowed by the Ld. AO. The Ld. AO rightly invoked the
provisions of Section 40(a)(ia) of the Act. Therefore, on the given
facts as also in law, the ground of appeal fails."
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Before the Income Tax Appellate Tribunal, Jodhpur Bench
7. Aggrieved again, the appellant approached the Income Tax
Appellate Tribunal, Jodhpur Bench7 in further appeal, being ITA No.
117/JU/2008. This appeal was considered and dismissed by ITAT by
way of its order dated 29.08.2008.
7.1. The ITAT pointed out that by an application dated 16.07.2008,
the appellant sought permission to produce additional evidence i.e., the
agreement dated 01.04.2003 executed between itself and M/s Grasim
Industries Limited, and as the Department had no-objection, the same
was admitted as additional evidence by the order dated 17.07.2008but,
another application for admission of evidence in shape of affidavit of
partner of the appellant firm,was objected to by the Department and
was rejected.
7.2. The ITAT found that the agreement in questionwas on principal
to principal basis whereby, the appellant was awarded the work of
transporting cement from Shambupura 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 the truck operator/owner. The ITAT,
therefore, endorsed the findings of AO and CIT(A) in the following
words:-
"13.The perusal of agreement on record reveals that the assessee
was awarded a works contract by M/s. Grasim Industries Limited,
a cement marketing division of M/s. Aditya Cement Ltd. This
agreement was on principal to principal basis whereby the appellant
was awarded the cement transportation work and in terms of
agreement the scope of work was to include placement of trucks
for cement transportation from their plant at Shambupura on
regular basis in the state of Rajasthan.