ORDER

G.S. Pannu, Accountant Member - This appeal by the assessee is directed against the order of the Commissioner of Income-tax (Appeals), Kolhapur dated 22.3.2009 which, in turn, has arisen from an order dated 17.12.2008 passed by the Assessing Officer under section 143(3) of the Income-tax Act, 1961 (in short "the Act"), pertaining to the assessment year 2006-07.

2. In this appeal, the assessee has raised the following three Grounds of appeal:

"1. The ld CIT(A) erred on fact and in law in not considering ground No. 1 specifically raised before him relating to addition of Rs. 3,74,903/- on account of alleged low GP especially when detailed written submissions were made before him. He ought to have held that the said addition is not warranted on the facts of the case and when the AO has categorically asserted that the book results are not rejected.
2. The ld CIT(A) erred on facts and in law in confirming the disallowance of Rs. 33,34,903/- u/s 40(a)(ia), being payments made to casual labourers. He ought to have appreciated that in the facts and circumstances of the case, sec. 194C itself is not applicable. In any case he ought to have appreciated the circumstances in which these payments were made and the business exigencies.
3. The ld CIT(A) erred on facts and in law in confirming disallowance of Rs. 12,17,005/- u/s 40(a)(ia), being payments made for hire for tractor and trolleys. He failed to appreciate that the provisions of sc. 194C were applicable for contract of carriage of goods and passengers only and not to hire simpliciter of tractor and trolleys."

3. In so far as Ground No 1 is concerned, it was a common point between parties that the issue has not been adjudicated by the Commissioner of Income-tax (Appeals), even though such an issue was raised by the assessee before the Commissioner of Income-tax (Appeals) by way of a Ground of appeal. Under these circumstances, the learned Counsel for the assessee submitted that assessee would be satisfied if the matter is restored back to the file of the Commissioner of Income-tax (Appeals) to be adjudicated in accordance with law. The learned Departmental representative, appearing for the Revenue, has no objection to the said prayer of the assessee. Consequently, the dispute raised in Ground No. 1 above is remanded back to the file of the Commissioner of Income-tax (Appeals) who shall adjudicate the same after allowing the assessee a due opportunity of being heard and in accordance with law. Thus, on Ground No.1 of appeal, assessee succeeds for statistical purposes.

4. Ground No. 2 raised by the assessee relates to a disallowance of Rs. 33,34,903/- representing payments made to casual labourers, which has been disallowed by the Assessing Officer by invoking section 40(a)(ia) of the Act. The relevant facts in this regard are that the Assessing Officer noted that the expenditure claimed by the assessee towards labour charges included cash payment exceeding Rs. 50,000/- throughout year to various labourers as detailed in para 6 of the assessment order, which required deduction of tax at source under section 194C of the Act. The Assessing Officer noted that tax was not deducted at source on such payments and, therefore, such amount was disallowed by invoking the provisions of section 40(a)(ia) of the Act.

5. Before the Assessing Officer as well as the Commissioner of Income-tax (Appeals), the claim of the assessee was that such payments did not require deduction of tax at source under section 194C of the Act. It was explained that the assessee was engaged in the business of executing road contracts even in far-flung areas and casual labour was hired locally. It was explained that some labour come for work for a few days and after that, the labour would depute some other person on his behalf or his immediate family members and sometimes all the family members from one family are engaged as labourers. In such cases, payment for the labour charges was received by the head of the family, although such payment reflected labour charges of more than one person. It was pointed out that business is conducted in remote places and, in this regard, payments made to one person being head of the family may exceed Rs. 50,000/- in a year so as to invite section 194C of the Act, but in actuality, according to assessee, such payments are composite payments made for multiple labourers and the payment for each labour would not exceed Rs. 50,000/- during the year and in any case the recipients are not regular employees, but casual labourers and under these circumstances, the provisions of section 194C were not attracted. The claim of the assessee, all along has been that payments did not exceed Rs. 50,000/- in a year and, therefore, section 194C was not attracted. In support of the aforesaid proposition, the assessee also furnished confirmation from the workers, copies of which have also been placed in the Paper Book filed before us at pages 9 to 33. The Commissioner of Income-tax (Appeals) as well as the Assessing Officer has not accepted the plea of the assessee as, according to the authorities below, the impugned amount is liable for deduction of tax at source under section 194C of the Act. Even before us, the learned Departmental Representative has justified invoking of section 40(a)(ia) of the Act for disallowing the impugned amount as, according to him, such payments were liable for deduction of tax at source under section 194C of the Act, and accordingly the same was disallowable under section 40(a)(ia) of the Act.

6. Before us, the learned Counsel also pointed out that the lower authorities have not doubted that confirmations of the recipients that the payments were made to them as casual daily wagers and under these circumstances, it cannot be said that the payments constituted any contractual payments so as to require deduction of tax at source under section 194C of the Act. On this aspect, the learned Counsel also referred to the judgment of the Hon'ble Delhi High Court in the case of CIT v. Dewan Chand [2009] 17 DTR 337 for the proposition that the provisions of section 194C are not attracted to the payment of daily wages. On this basis, it had been submitted that the Assessing Officer as well as the Commissioner of Income-tax (Appeals) erred in holding that the impugned payments were liable for tax deduction at source under section 194C of the Act and, accordingly, it was submitted that invoking of provisions of sec. 40(a)(ia) of the Act to disallow such expenditure is not justified.

7. On the other hand, the learned Departmental Representative, appearing or the Revenue has primarily relied upon the orders of the authorities below in support of the case of the Revenue.

8. We have carefully considered the rival submissions. The primary reason weighing with the authorities below to invoke section 40(a)(ia) of the Act is the reason that the payments for labour charges exceeded Rs. 50,000/- in aggregate in a year to some of the persons and, therefore, the same was liable for deduction of tax at source under section 194C of the Act, which was not done by the assessee. In our considered opinion, having regard to the orders of the authorities below, one aspect that clearly emerges undisputably is to the effect that the impugned payments are for labour charges. The assessee has explained the circumstances in which such payments have been made. The claim made is that a number of persons from one family work as labourers at the site on daily wage basis and the record is maintained by the site supervisor. It is further explained that the payment is usually made on weekly basis and the head of the family receives the money on behalf of all the family members. It has also been explained in the written submissions filed before the lower authorities that due to practical difficulties for preparing the individual vouchers for each labour payment, only one voucher is prepared in the name of the person who receives the money and if the individual labourers are taken into consideration, the payments do not exceed Rs. 50,000/- in a year to each person. It has also been pointed out that the payments are made to casual labourers, who were not regular employees of the assessee and are working with the assessee on daily wage basis. The various persons who have received money have also put in their confirmations to the aforesaid effect, and such confirmations were before the Commissioner of Income-tax (Appeals) also, as is evident from the Paper Book filed by the assessee before us. Therefore, the plea of the assessee that the payment to each labour does not exceed Rs. 50,000/- per annum cannot be rejected outrightly in the absence of any evidence contrary to the confirmations of the recipients available on record. The applicability of section 194C of the Act is thus to be examined in the aforesaid light.

9. Per the ratio of the Hon'ble Delhi High Court in the case of Dewan Chand (supra), the payment of daily wages to the casual employees cannot constitute contractual payments so as to be liable for deduction of tax in terms of section 194C of the Act. Therefore, under the facts and circumstances of the case, we do not find any justification for the Assessing Officer for having invoked section 40(a)(ia) to disallow the impugned expenditure.

10. At this stage, we may also refer to the argument of the Revenue whereby such payments to head of the family have been treated as payment to labor contractors for supply of labour and, therefore, it is sought to be canvassed that the same constitutes payments liable for deduction of tax at source under section 194C of the Act. In our considered opinion, the aforesaid inference by the authorities below has been drawn on mere presumptions and in dis-regard to the submissions and materials put-forth by the assessee to the contrary. In fact, the individual persons who have received the money have filed confirmations that money has been received by them on behalf of a number of family members. Such confirmations were before the Commissioner of Income-tax (Appeals) and we find that the same have not been repudiated on the basis of any evidence, but has merely been disbelieved. Therefore, the presumption of the Revenue that such payments are to labour contractors cannot be accepted. Hence, in our view, the authorities below are not justified in holding that the impugned payments fall within the ambit of section 194C of the Act and, therefore, invoking of section 40(a)(ia) of the Act to disallow the impugned corresponding expenditure is untenable. We hold so.

11. In the result, on this Ground, order of the Commissioner of Income-tax (Appeals) is set aside and the Assessing Officer is directed to delete the addition.

12. The last Ground raised by the assessee relates to a disallowance of Rs. 12,17,005/- representing payments for hire of tractor and trolleys, which has been disallowed by the Assessing Officer by invoking section 40(a)(ia) of the Act.

13. The background of the dispute is that that the Assessing Officer found that a sum of Rs. 12,17,005/- was debited under the head 'Transport and octroi charges' representing payments to nine persons exceeding Rs. 50,000/- per annum, as per details in para 7 of the assessment order. As per the Assessing Officer, the said payments were transportation charges which required deduction of tax at source as per section 194C of the Act. As the assessee did not deduct the requisite tax at source in terms of section 194C of the Act, the Assessing Officer disallowed the corresponding expenditure by invoking section 40(a)(ia) of the Act.

14. The claim of the assessee before the Assessing Officer as well as before the CIT(A) was that the impugned payments were not on account of any transportation charges and that there was no contract for transport in pursuance to which such payments have been made. It was explained hat the assessee was hiring tractors, trolleys from nearby villages. It was submitted that impugned payments were made to hire tractor and trolleys and not for any transportation work. The assessee also submitted that the vouchers show that hire charges are paid on a per day basis and not per trip basis so as to constitute any transportation charges. Therefore, as per the assessee, provisions of section 194C were not applicable to the impugned payments debited under the head Transport and octroi charges'. The aforesaid explanation of the assessee did not find favour even with the Commissioner of Income-tax (Appeals) as, according to him, the arrangement in question fell within the expression 'work' for the purposes of section 194C of the Act on account of Explanation III to section 194C(1) of the Act. According to the Commissioner of Income-tax (Appeals), the payments in question were made in terms of a transportation contract and therefore the Assessing Officer was justified in invoking provisions of sec. 194C r.w.s. 40(a)(ia) in order to disallow the impugned expenditure. Not being satisfied with the orders of the authorities below, assessee is in further appeal before us.

15. Before us, the learned Counsel for the assessee vehemently submitted that there is no contract for transportation in the present case so as to require deduction of tax at source under section 194C of the Act. It has been explained that the assessee hired tractors and trolleys from nearby villages and paid the owners on a daily basis. It was submitted that some farmers owned only tractors whereas some may own one or two trolleys and by making combinations, the supervisor procured such vehicles on hire for use at the sites. It is submitted that payment of hire charges for taking on hire a vehicle is not includible in the scope of section 194C of the Act, as there is no contract for transportation. As per the appellant, the impugned payments can at best, be considered as payments made for hiring of machineries which may attract the provisions of section 194-I of the Act for the purposes of deducting tax at source, but certainly not section 194C because there is no contract for carriage or transportation. Even the provisions of section 194-I of the Act are not applicable in the instant case, as the same have been brought on the statute with effect from 13.7.2006 requiring deduction of tax at source on machinery hiring charges. Under these circumstances, it has been submitted that the authorities below have erred in making the disallowance by invoking section 40(a)(ia) of the Act. In the course of the hearing, reliance has been placed on the following decisions:

(i) Dy. CIT v. Satish Aggarwal & Co. [2010] 122 ITD 35 (Asr.)
(ii) CIT v. Poompuhar Shipping Corpn. Ltd. [2006] 282 ITR 3 (Mad.)

16. On the other hand, the ld Departmental Representative has relied upon the orders of the authorities below in support of the case of the Revenue. As per the ld Departmental Representative, assessee has itself debited the impugned payments under the head 'Transport and octroi charges' and therefore, the invoking of section 194C read with 40(a)(ia) in order to disallow the impugned expenditure is fair and proper.

17. We have carefully considered the rival submissions and perused the orders of the authorities below as well as other material placed in the Paper Book to which our attention has been drawn in the course of the hearing. In this case, assessee has debited an amount of Rs. 12,17,005/- under the head 'Transport and octroi charges', which as per the Revenue, required deduction of tax at source per section 194C of the Act and for non-deduction thereof, such expenditure was liable for disallowance in terms of section 40(a)(ia) of the Act. The plea of the Revenue that the assessee has debited the expenditure under the head 'Transport and octroi' and therefore it is to be construed as a payment for a transportation contract, in our view, is fallacious. The nature of the expenditure cannot be deduced merely on the basis of the treatment accorded in the account books, but it has to be decided on the basis of substantive character of the transaction. In this case, the assessee has claimed that the impugned expenditure is on account of hiring of tractors and trolleys on a day basis and does not involve any transportation contract. Quite clearly, an activity of hiring of tractor/trolleys for the purposes of using them in business would not amount to a contract for carrying out of 'work' as contemplated under section 194C of the Act. There is no material referred to by the authorities below to demonstrate that the impugned payments constituted payments for carrying out of any transportation or other work within the meaning of section 194C of the Act. In the absence of any material to prove that the payments are for carriage of goods and passengers, the reliance placed by the Commissioner of Income-tax (Appeals) on Explanation III below 194C(2) of the Act, in our view, is misplaced. Hiring of vehicles tractor/trolleys by the assessee, in our view, cannot be equated to a contract for transportation for carriage as contemplated under section 194C of the Act. Even if such an arrangement is considered to be falling within the purview of section 194-I of the Act, so however, for the period under consideration the assessee cannot be made liable for deduction of tax at source since the relevant provisions of section 194-I requiring deduction of tax at source on machinery rentals, are applicable subsequent to the period in dispute before us. Under these circumstances, in our view, the lower authorities erred in holding that the assessee was in default by not deducting the requisite tax at source under section 194C of the Act so as to trigger a disallowance under section 40(a)(ia) of the Act. In our considered opinion, the Commissioner of Income-tax (Appeals) wrongly disregarded the judgment of the Hon'ble Madras High Court in the case of Poompuhar Shipping Corpn. Ltd. (supra) which is to the effect that hiring of transport vehicles is different from a transportation contract for carriage of goods or passengers. The decision of the Hon'ble Madras High Court is clearly in support of the proposition canvassed by the assessee and, in our view, the same is not rendered in effective because of the insertion of Explanation III to section 194C of the Act. In fact, in this regard we are also supported by the decision of the Amritsar Bench of the Tribunal in the case of Satish Aggarwal & Co. (supra) which has been relied upon by the appellant before us.

18. In the result, we hold that the invoking of section 40(a)(ia) of the Act to make the impugned disallowance is unwarranted since the payments in question do not fall within the ambit of section 194C of the Act. Thus, on this Ground the assessee succeeds.

19. Resultantly, appeal of the assessee is partly allowed.