Shri Mukul Kr. Shrawat, J.M:— This is an appeal at the behest of the Assessee which has emanated from the order of Learned CIT (Appeals)-XXI Ahmedabad dated 22/10/2010 passed for Assessment Year 2009-2010. The substantive ground is in respect of confirmation of penalty levied u/s. 271C of the I.T Act of Rs. 1,75,506/-.
2. Vide an order u/s. 271C of the I.T Act dated 24/06/2010, it was noted by the Assessing Officer that there was a failure on the part of the assessee in deduction of correct tax u/s. 194-I of the I.T Act. It was clarified that the assessee had deducted tax @ 2% u/s. 194C of the I.T Act instead of @ 10% u/s. 194-I of the I.T Act. The nature of payment was stated to be towards hiring of Cars. The Assessing Officer was of the view that while making the payment for hiring of Cars, the assessee should have deducted the tax as required u/s. 194-I of the I.T Act. On the other hand, the assessee has deducted the tax as prescribed u/s. 194C of the I.T Act. It was explained to the Assessing Officer that penalty must not be levied because there was a reasonable cause as defined u/s. 273B of the I.T Act because the assessee was under an honest belief that the deduction of tax was at the rate as prescribed u/s. 194C of the I.T Act. The Assessing Officer has held that the rate of tax as prescribed u/s. 194C of the I.T Act was in respect of “hire contract” which was not tenable on the facts of the assessee's case, however, the assessee had paid rent in respect of hiring of machinery, therefore should have deducted the tax at source as per section 194-I of the I.T Act which was introduced w.e.f 13/7/2006. He has concluded that there was a violation of TDS provisions, therefore subject to levy of penalty u/s. 271-C of the I.T Act. Accordingly, a penalty of Rs. 1,75,506/- u/s. 271C of the I.T Act was levied. The same was challenged before the first appellate authority. It was submitted before the Learned CIT (Appeals) that the assessee is an autonomous body governed under Gujarat Town Planning and Urban Development Act, 1976. It was also informed that the assessee is registered u/s. 12AA of the I.T Act. The assessee has deducted tax @ 2% as prescribed u/s. 194C of the I.T Act. As against that, the Assessing Officer has held that the tax @ 10% should have been deducted as prescribed us/.194-I of the I.T Act. It was contemplated that there could have been a bona fide belief in short deduction of TDS but it was not a deliberate failure on the part of the assessee for non-deduction of tax. However, The Learned CIT (Appeals) was not convinced and in his opinion the order passed by the Assessing Officer was hunky-dory judgement. Being aggrieved, now the assessee is further in appeal.
3. The Learned Authorised Representative of the assessee Mr. S.N Soparkar has placed an order of ITAT “A” Bench Ahmedabad bearing No. 1637.Ahd/2010 for Assessment Year 2009-10 in assessee's own case, dated 10/03/2011, wherein while deciding the issue of short deduction of tax in respect of demand created u/s. 201(1) of the I.T Act and consequential demand of interest charged u/s. 201(1A) of the I.T Act., it was held that the Revenue Authorities have wrongly applied the provisions of section 194-I of the I.T Act and the relevant portion is reproduced below:—
“5. We have considered the rival submissions and the material available on record. The facts noted by the AO are not in dispute that the assessee had hired cars on fixed rent payment and TDS was deducted @ 2% treating the same as contract as per section 194C of the IT Act. The AO also noted that the assessee had made vehicle hire charges payment in connection with plying of employees from one place to another. It was also noted by the AO that vehicles are owned and maintained by contractors. The assessee paid fixed payment for use of the hired cars and all the expenses are borne by the contractors. It is also admitted fact that the assessee is a local authority. The provisions of section 194C of the IT Act is applicable to the assessment year under appeal provided (a) any person responsible for paying any sum to any resident ((b) any local authority (as the assessee is) referred to as a contractor for carrying out any work in pursuance of the contract between the contractor and the local authorities etc., shall at the time of credit of such sum to the account of the contractor or at any time of payment thereof in cash or issue of a cheque or draft or by any other mode whichever is earlier, deduct an amount equal to, (i) 1% in case of “advertising”, (ii) or in any other case 2%, of such sum as income tax or income comprised therein. The definition of “work” has been provided in Explanation (iii) to Section 194C of the IT Act which provides for the purpose of this section, expression “work” shall also include:
(a) Advertising,
(b) Broadcasting and telecasting including production of programmes for such broadcasting or telecasting,
(c) Carriage of goods and passengers by any mode of transport other than railways,
(d) Catering.
The AO admitted that the assessee had hired the cars on fixed rent payment owned and maintained by contractor. The assessee paid vehicle hire charges and all the expenditure are borne by the contractor. It is also admitted fact that vehicle charges were paid in connection with plying of employees from one place to another. Thus, it implies that the passengers were transported by the drivers and vehicles of the vehicle owner/contractor and in consideration of that the vehicle owners/contractors were paid by the assessee the fixed amount. Therefore, sub-clause (c) to Explanation (iii) of the provisions of Section 194C of the IT Act would apply in the case of the assessee. In our opinion the above payment of vehicle hire charges clearly falls within the scope of section 194C of the IT Act. The assessee, therefore, correctly deducted tax thereof as per the provisions of section 194C (Explanation (iii)(c)) of the IT Act. Same view is taken by ITAT Ahmedabad “B” Bench in the case of Mukesh Travels Co. (supra) copy of which is placed on record. The AO however, noted that the provisions of section 194-I of the IT Act would apply in the matter being rent paid to the contractor which provides as under: (prior to amendment w.e.f 1-10-2009)
The above definition of rent does not provide any item for vehicle hire charges. Therefore, provisions of section 194-I has been wrongly applied in the matter by the AO. Considering the above discussions we are of the view that the authorities below have wrongly applied the provisions of section 194-I of the IT Act in the matter. We accordingly, set aside the orders of the authorities below and delete the demand and the interest thereon for shortfall as noted by the AO on this issue. In view of the above finding, there is no need to admit the additional ground of appeal of the assessee.
6. In the result, the appeal of the assessee is allowed.”
4. Once the Respected Co-ordinate Bench has approved the action of the assessee and held that under the facts and circumstances of the case, deduction of tax u/s. 194C was correctly deducted and the Assessing Officer wrongly applied the provisions of section 194-I of the I.T Act therefore the consequential effect is that the penalty u/s. 271C of the I.T Act being directly connected with the impugned default gets automatically cancelled. In the result, we hereby reverse the findings of the Learned CIT (Appeals) and direct to delete the penalty.
5. As a result, appeal of the Assessee stands allowed.