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Case Number

IT APPEAL NO. 183 (VIZAG) OF 2008

Attorney(S)

C. Subrahmanyam

Judges

B.R. BASKARAND. Manmohan

Acts

2005-06.2. Applicability of provisions of section 40(a)( ia) read with section 194C(2) of the Income-tax Act, 1961
[2001] 78 ITD 228 (Asr.). (d) Section 40(
provisions of section 40(a)( ia)

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Smart Summary

Structured Summary of the Provided Opinion

Factual and Procedural Background

This is an appeal filed by the assessee firm against the order dated 6-2-2008 passed by the Commissioner of Income-tax (Appeals)-I, Visakhapatnam, for the assessment year 2005-06. The assessee is a transport contractor engaged to transport bitumen under contracts with various principals. Because the assessee did not possess a sufficient number of specially equipped tanker lorries, it hired tanker lorries from third parties and issued bills to the principals that included details (lorry number, tonnage, distance, rate).

In its profit and loss account the assessee showed freight receipts for its own lorries and separately accounted only for commissions retained on trips performed by hired lorries. However, the tax audit report (Form 3CD) disclosed a much larger gross turnover on account of freight receipts. The Assessing Officer (AO) concluded that the assessee should have shown the entire gross receipts and debited payments made to hired lorry owners (treating them as sub-contract payments). The AO held that where tax was not deducted at source on such payments as required by section 194C(2), provisions of section 40(a)(ia) were attracted and disallowed deduction of Rs. 92,32,174. The assessee's appeal to the CIT(A) was dismissed. The assessee then appealed to the Tribunal (order under summary: appeal allowed).

Legal Issues Presented

Whether the vehicles hired by the assessee in execution of the transport contract can be termed as a "sub-contract" and consequently whether the assessee is liable to deduct tax at source from payments made for such vehicles under section 194C(2) of the Income-tax Act, 1961.
Whether, if section 194C(2) applies and TDS was not deducted, the payments to hired lorry owners are liable to be disallowed under section 40(a)(ia) of the Act.

Arguments of the Parties

Assessee's Arguments (Appellant)

The tanker lorries are specially designed (with heating arrangements) and the assessee was obliged to engage lorries on hire to meet contractual requirements; the hired lorry owners merely placed vehicles at the assessee’s disposal.
Section 194C(2) applies only where a contractor enters into a contract with a sub-contractor who carries out whole or part of the work. The hired lorry owners did not themselves execute any part of the contract; the assessee alone executed the contract work under its control and supervision. Reliance: Datta Digamber Sahakari Kamgar Sanstha Ltd. v. Asstt. CIT (2002) 83 ITD 148.
In respect of hired lorries the assessee acted as an agent; freight receipts attributable to those lorries are not the assessee's income but income of the lorry owners, with the assessee entitled only to commission (which was disclosed). Thus receipts need not be routed through the assessee’s profit and loss account as gross receipts.
Section 40(a)(ia) uses the word “payable”; that term should be given its plain dictionary meaning and applies only to amounts remaining payable at the year end. Therefore most payments (already paid) should not attract section 40(a)(ia). Reliance: Abdulgafar A. Nadiadwala v. Asstt. CIT (2004) 267 ITR 488 and Smt. Tarulata Shyam v. CIT (1977) 108 ITR 345 on statutory interpretation.
Where the recipients (vehicle owners) have already paid tax on the receipts, tax cannot be recovered again from the assessee-deductor. Reliance: Hindustan Coca Cola Beverage (P) Ltd. v. CIT (2007) 293 ITR 226.
TDS is only one mode of recovery; if tax not deducted under Chapter XVII, the assessee may be directly liable under section 191, but that does not automatically invoke section 40(a)(ia) for disallowance of the expenditure as per the assessee's method of accounting.
CBDT Circular No. 715/8-8-1995 (each Goods Receipt treated as separate contract) was not considered by the AO and is relevant to the assessee's position.
Relied on case law (Paras Transport Co. v. ITO (2005) 92 TTJ (Agra) 607; ITO v. Bindra Ban Bansilal (2001) 78 ITD 228) supporting the assessee's position that hired tankers entrusted to the assessee do not amount to sub-contracts.

Revenue's Arguments (Respondent)

Many lorries engaged on hire were owned by family members of the firm's partners and substantial amounts were diverted to these persons, suggesting design to avoid tax.
The principal (contracting company) deducted TDS on the gross contract amount paid to the assessee (including amounts relating to hired lorries). Therefore payments by the assessee to lorry owners have the character of sub-contract payments and should have attracted TDS under section 194C(2).
There is no agreement showing the lorries were hired on a commission basis; commission rates were inconsistent and often low for family-owned vehicles, suggesting the assessee had discretion over commission and amounts were effectively income of the assessee (application of income rather than diversion by overriding title).
The assessee deliberately did not route receipts and corresponding payments for hired lorries through the profit and loss account to bypass TDS provisions.
The term "payable" in section 40(a)(ia) is akin to "credited" (as in Finance Bill) and should not be narrowly read to mean only amounts outstanding at year-end.
If payments to hired lorry owners are not sub-contract payments under section 194C, they may still attract tax deduction obligations under section 194-I (as rent) depending on characterisation.

CIT(A)'s Reasoning and View (as articulated in the record)

Relied on the Supreme Court decision in CIT v. British Paints (India) Ltd. (1991) 188 ITR 44 that it is the AO's duty to consider whether books disclose true state of accounts and correct income; since the assessee had not routed gross receipts and corresponding payments through P&L, AO was justified in recasting accounts to include entire contract receipts and debit payments to vehicle owners.
Relied on Chowringhee Sales Bureau (P) Ltd. v. CIT, West Bengal (1973) 87 ITR 542 that mode of book entries cannot change the nature of a receipt; thus mere accounting treatment by assessee could not alter tax character.
Held that tanker owners enabled the assessee to execute contract work and were paid after receipt of bills from the contractees with the assessee retaining commission; therefore payments to tanker owners fall within the ambit of sub-contract payments under section 194C and failure to deduct TDS attracted section 40(a)(ia).
Relied on ITO v. Rama Nand & Co. (1987) 163 ITR 702 (Himachal Pradesh High Court) to understand the meaning of "sub-contractor".

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court in this Opinion
CIT v. British Paints (India) Ltd., [1991] 188 ITR 44 (Supreme Court)	AO's duty to examine whether books of account disclose true state of accounts and correct income; AO may recast accounts if necessary.	CIT(A) relied on this principle to justify AO's recasting of profit and loss account to include entire contract receipts and debit payments to vehicle owners. The Tribunal noted this reliance but assessed facts to determine whether payments were truly sub-contract payments.
Chowringhee Sales Bureau (P) Ltd. v. CIT, West Bengal, [1973] 87 ITR 542 (Supreme Court)	Mode of book entries cannot change the nature of a receipt.	CIT(A) relied on this decision to reject the assessee's contention that accounting treatment alone could avoid tax consequences; cited by the Tribunal as part of CIT(A)'s reasoning but Tribunal analyzed factual involvement of lorry owners.
ITO v. Rama Nand & Co., [1987] 163 ITR 702 (Himachal Pradesh High Court)	Understanding/definition of the term "sub-contractor" — any person who enters into contract with the contractor for carrying out whole or part of the work undertaken by the contractor.	CIT(A) relied on this definition in finding that lorry owners amounted to sub-contractors. The Tribunal quoted the definition but applied it to facts and concluded the lorry owners did not carry out part of the work in the requisite sense.
Datta Digamber Sahakari Kamgar Sanstha Ltd. v. Asstt. CIT, [2002] 83 ITD 148 (Pune ITAT)	Where tanker owners entrusted tankers to the assessee-society and the society undertook all work relating to execution, there was no sub-contract between the society and tanker owners.	The assessee relied on this decision to support its contention that hired tanker owners merely placed vehicles at the assessee's disposal and did not perform subcontracted work; Tribunal considered similar facts in its factual conclusion favouring the assessee.
Paras Transport Co. v. ITO, [2005] 92 TTJ (Agra) 607	Authority cited by the assessee (tribunal decision) supporting view that hire of tankers entrusted to an operator may not constitute a sub-contract.	The assessee cited this decision in arguing the hired vehicles did not create sub-contract liabilities; Tribunal considered the assessee's agent argument and ultimately accepted it on the facts.
ITO v. Bindra Ban Bansilal, [2001] 78 ITD 228 (Asr.)	Tribunal authority cited by the assessee supporting non-application of subcontract principles where facts show mere hire/entrustment.	Cited by the assessee as supporting authority; Tribunal resolved factual parallels in favour of the assessee.
Abdulgafar A. Nadiadwala v. Asstt. CIT, [2004] 267 ITR 488 (Bombay HC)	Statutory language should be interpreted according to plain dictionary meaning unless context dictates otherwise.	Assessee relied on this case to argue "payable" in section 40(a)(ia) should be read narrowly; Tribunal did not accept this contention as determinative and disposed the matter on sub-contract analysis.
Smt. Tarulata Shyam v. CIT, [1977] 108 ITR 345 (Supreme Court)	While interpreting taxing statutes, there is no scope for importing words which are not present in the statute.	Assessee cited this for statutory interpretation on "payable"; Tribunal did not find it necessary to resolve the matter on that basis after deciding the main issue in favour of the assessee.
Hindustan Coca Cola Beverage (P) Ltd. v. CIT, [2007] 293 ITR 226 (Supreme Court)	If tax has already been paid by the recipient of income, the tax could not be recovered once again from the deductor-assessee.	Assessee cited this to argue that where recipients (vehicle owners) filed returns/paid tax, the department should not recover again from the assessee; Tribunal did not base its primary decision on this point and observed it need not consider all contentions once main issue decided in favour of assessee.

Court's Reasoning and Analysis

The Tribunal framed the central question explicitly: whether the vehicles hired by the assessee in execution of the transport contract can be termed as a "sub-contract" so as to make the assessee liable to deduct tax under section 194C(2). The Tribunal set out the statutory text of section 194C(2) and distilled four conditions that must be satisfied for section 194C(2) to apply:

The assessee must be a contractor;
The assessee, as contractor, must enter into a contract with a sub-contractor for carrying out whole or any part of the work undertaken by the contractor;
The sub-contractor must carry out the whole or any part of the work undertaken by the contractor;
Payment should be made for carrying out the whole or any part of the work.

On the facts, the Tribunal accepted that the assessee was a contractor and that the assessee had engaged third-party lorries because it lacked sufficient specially equipped tankers. The Tribunal closely examined the work-order (dated 12-2-2005) and noted clauses that made the assessee solely responsible for execution, compliance with laws, and liabilities (including deductions for delays, fraud, etc.), which indicated the assessee retained liability and control toward the principal.

The Tribunal then considered whether the hired lorry owners had “carried out” any part of the contracted work in the sense required by section 194C(2). It analysed the term "carry out" using dictionary gloss ("to carry into practice; to execute; to accomplish") and concluded such a notion requires positive involvement in execution, including spending time, money, energy and taking risks associated with the main contract. The Tribunal found no material showing that hired lorry owners had any such involvement, risk-bearing, or independent execution role. The vehicle owners had simply placed vehicles at the disposal of the assessee and were not fastened with the contractual liabilities contained in the work-order.

Because the vehicle owners did not meet the characteristics of a sub-contractor (no active performance of part of the contract, no assumption of risk or liabilities), the Tribunal held payments to them were akin to ordinary expenditure items (for example, hire charges, akin to rent or salary) rather than subcontract payments. Consequently, the Tribunal concluded that section 194C(2) did not apply to these payments and, therefore, section 40(a)(ia) (which disallows expenditure where TDS was required but not deducted) was not attracted.

The Tribunal expressly noted that, having decided the main issue in favour of the assessee on these factual and legal grounds, it was not necessary to adjudicate the remaining contentions of the parties.

Holding and Implications

Holding: The Tribunal allowed the appeal of the assessee and held that the payments made to hired lorry owners in the facts of this case do not amount to payments to "sub-contractors" within the meaning of section 194C(2) and therefore the assessee was not liable to deduct tax at source under section 194C(2) on those payments. Consequently, the Tribunal held that the provisions of section 40(a)(ia) do not apply to disallow those payments.

Implications (direct effect): The immediate effect is that the disallowance of Rs. 92,32,174 imposed by the Assessing Officer under section 40(a)(ia) is set aside for the facts of this case; the assessee's method of accounting (showing only commission in profit and loss account) is acceptable for these payments because the underlying payments are not treated as subcontract payments. The Tribunal declined to consider other contentions after deciding the principal issue.

The opinion does not state any broader binding precedent beyond the factual conclusion in this appeal; the decision rests on the Tribunal's application of statutory conditions in section 194C(2) to the facts before it.

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Mythri Transport Corporation v. Assistant Commissioner of Income-tax, Circle 1(1), Visakhapatnam

ORDER

Per D. Manmohan, Vice President. - This appeal, filed at the instance of the assessee firm, is directed against the order dated 6-2-2008 passed by the Commissioner of Income-tax (Appeals)-I, Visakhapatnam, and it pertains to the assessment year 2005-06.

2. Applicability of provisions of section 40(a)( ia) read with section 194C(2) of the Income-tax Act, 1961 on payments made to persons from whom vehicles were hired, is the subject-matter of dispute in this appeal.

3. The assessee is a transport contractor. It entered into an agreement with parties whereby the assessee undertook to transport bitumen from the principals to various points as per their directions. For carrying out the contract business so obtained, the assessee claims to have not maintained sufficient number of tank lorries and, therefore, engaged the lorries belonging to various people apart from using their own tank lorries. The bills raised by the assessee with the principals contained details such as lorry number, tonnage of the product transported, the distance covered and the rate per tonne per running kilometre. According to the assessee, the amount received from the principals referable to the transport made on its own lorries falls within the category of gross receipts and the amount received on the bills raised by the assessee in connection with the lorries engaged by the assessee by hiring it from outsiders cannot be treated as its receipt since the assessee is entitled to only commission from such receipts. The assessee, therefore, prepared the trading and profit and loss account wherein it has shown the amount received on the lorries owned by the assessee and the commission received from the truck-owners whose lorries were hired by the assessee. In the profit and loss account filed along with the return, the assessee credited a sum of Rs. 32,31,509 towards freight receipt which comprises of receipts pertaining to own lorries, i.e., Rs. 17,14,696 and commission of Rs. 15,16,813. During the course of scrutiny proceedings, the Assessing Officer noticed from the Tax audit report in Form 3CD that the gross turnover of the assessee on account of freight receipts was Rs. 1,38,41,187. Since there is variation between the turnover declared in the profit and loss account and the gross turnover reported in Tax audit report, the assessee was called upon to explain the reasons as to why the entire gross receipts have not been credited to the profit and loss account. The case of the assessee was that it had engaged lorries belonging to other persons as an agent, apart from using its own lorries and on the hired lorries the assessee raised bills of Rs. 1,21,52,612 which was earned by other parties, the assessee was entitled to only commission and the same having been declared in the profit and loss account, there is no need for claiming any deduction separately in the profit and loss account towards payment made to the third parties and the method followed by the assessee is not contrary to the standard method of accounting.

4. The Assessing Officer noticed that the principals have deducted tax at source on the bills raised by the assessee for the freight charges including the freight charges relatable to the hired lorries. Hence the Assessing Officer was of the view that the assessee having raised the bills against the supplies to the principals and received the amount after deducting tax at source, it is for the assessee to declare the entire gross turnover in its books of account and any payment made to the third parties has to be treated as payment made to sub-contractors and such payment has to be debited to the profit and loss account in which event, the profit and loss account requires to be recasted and in the event of non-deduction of tax at source on the payment made to those sub-contractors as per the provisions of section 194C(2), provisions of section 40(a)( ia) of the Act comes into play whereby the payments made to sub-contractors cannot be allowed as deduction. Accordingly, the Assessing Officer determined the amount that attracts disallowance under section 40(a)( ia) at Rs. 92,32,174 and disallowed the same.

5. Aggrieved, the assessee contended before the learned CIT(A) that the observations of the Assessing Officer that the assessee should have shown its entire contract receipts in the profit and loss account and debit the payments made to various lorry owners from whom lorries were hired by the appellant as expenses is totally unwarranted as there is no specific mandatory requirement to draw the profit and loss account in a specified manner. It was further submitted that there is a subtle difference in the interest of the assessee between the plying receipts attributable to its own vehicles and the plying receipts attributable to the vehicles belonging to others; it has no interest in the profit or loss in respect of the plying receipts belonging to the others' vehicles, inasmuch as its interest terminates with the incidental commission. The assessee relied upon various case-laws in support of its contention that in such cases only commission has to be treated as the turnover and the Assessing Officer is not entitled to recast the profit and loss account by including the receipts on behalf of the hired lorries and then to assume that the payments made to hired lorries ought to have been debited to the profit and loss account which in turn would be hit by section 40 of the Act in the event of deduction of tax at source.

5.1 Ld. CIT(A), by placing his reliance on the decision of Hon'ble Supreme Court in the case of CIT v. British Paints (India) Ltd. [1991] 188 ITR 44 , held that it is the duty of the Assessing Officer to consider whether or not the books of account disclose true state of accounts and correct income. In the instant case, since the assessee has not routed through the profit and loss account, the entire freight receipts as well as the payment made for vehicles hired, the Assessing Officer is justified in recasting the profit and loss account of the assessee by crediting the entire contract receipts and correspondingly debiting the payments made to vehicle owners from whom vehicles were hired.

5.2 The assessee also contended before Ld. CIT(A) that the provisions of section 40 would be attracted only if an expenditure is debited to the Profit and Loss account and in the instant case, the payments made for hired lorries have since not been debited to the profit and loss account, section 40 would not apply. Ld. CIT(A) rejected this contention of the assessee by placing reliance on the decision of Hon'ble Apex Court in the case of Chowringhee Sales Bureau (P) Ltd. v. Cit, West Bengal [1973] 87 ITR 542, wherein it was held that the mode of book entries cannot change the nature of a receipt. Accordingly, Ld. CIT(A) rejected this contention of the assessee.

5.3 The assessee also contended before Ld. CIT(A) that under section 199(1) only the income is required to be disclosed and not the gross receipts and since it has disclosed the income component, viz., commission income, from out of the contract receipts received on lorries hired, there is no contravention of any of the provisions of the Act. This contention was also rejected by Ld. CIT(A) on the ground that the TDS under section 194C has to be deducted on the sub-contract payments.

5.4 The assessee also contended before Ld. CIT(A) that the provisions of section 40(a)( ia) would be attracted only to those amounts which remain "payable" at the year end and, therefore, the amount already paid is outside the scope of section 40(a)( ia). This was also rejected by Ld. CIT(A) on the ground that section 40(a)( ia) has to be read along with section 194C of the Act.

5.5 The last contention of the assessee before Ld. CIT(A) was that the payments made for hired lorries cannot be said to be contractual payments and, hence, section 194C will not apply to such payments. It was also rejected by Ld CIT(A). While arriving at the decision, Ld. CIT(A) noticed the decision of Hon'ble Himachal Pradesh High Court in the case of ITO v. Rama Nand & Co. [1987] 163 ITR 702 wherein Hon'ble High Court has understood the meaning of the word sub-contractor' as under :—

"A 'sub-contractor' would mean any person who enters into a contract with the contractor for carrying out or for the supply of labour for carrying out the whole or part of the work undertaken by the contractor under a contract with any of the authorities named above or for the supply in terms of his contract with any of the aforesaid authorities."

Finally Ld. CIT(A) dismissed the appeal of the assessee with following observations :—

"Against the above background if the appellant's case is examined, it is noticed that no doubt the appellant participated in the tender process and negotiated in order to get the transportation contracts from different contractees. However, for executing the said contract works within the stipulated time limits the appellant didn't have adequate numbers of tank lorries. Consequently, the appellant approached some of the other tank lorry owners for hiring their tank lorries for the purposes of the execution of the contract. The tank lorries taken on hire were utilized for the purposes of the business of the execution of the contract during the entire contract period. The tank lorry owners from whom they were hired were paid the amounts after the receipt of the bills from the contractees by the appellant after retaining his share of profit which is termed as commission. Therefore, these tank lorry owners enabled the appellant to execute the contract work. Hence, the same is clearly in the nature of a sub-contract within the meaning of the said work as stated earlier and any payment made to such tank lorry owners comes within the purview of section 194C. By not deducting tax on such payments made to the tank lorry owners the appellant violated the provisions contained in section 40(a)(ia )."

6. The Ld. counsel for the assessee advanced his arguments before us on the following lines, viz.,

(a) The tanker lorries used for the purpose of transportation of Bitumen are specially designed lorries with heating arrangements. The assessee is under obligation to deploy sufficient number of lorries to ensure uninterrupted supply. Hence it has to engage lorries on hire to meet its requirements.
(b) The provisions of section 194C(2) are attracted only if any payment is made to a sub-contractor in pursuance of a contract with him for carrying out the whole or any part of the work undertaken by the contractor. In the instant case the assessee has only hired the vehicles from other persons who have simply left the vehicles at the disposal of the assessee. The assessee alone has carried out the entire contract work. None of the vehicle owners have involved themselves in execution of the contract and in any case, the assessee has not entered into any contract with them to carry out any part of the contract work undertaken by it. Reliance was placed in this connection upon the decision of Pune bench of Hon'ble ITAT in the case of Datta Digamber Sahakari Kamgar Sanstha Ltd. v. Asstt. CIT [2002] 83 ITD 148 . In that case, the tanker owners had entrusted their tankers to the assessee-society and it was the assessee society which undertook all the work relating to the execution of the transport contract. On consideration of these facts, the Hon'ble tribunal held that there was no sub-contract between the assessee society and the tanker owners.
(c) In so far as the Lorries hired by the assessee are concerned, the assessee has acted only as an agent. Hence the freight receipts pertaining to these lorries cannot be taken as the income of the assessee, as it is a case of diversion of income by overriding title. The assessee is entitled to a commission from the lorry owners and such commission income has been duly accounted for. In view of the above, there is no liability to deduct tax on the payments made for hired Lorries. Also there is no necessity that the receipts pertaining to these hired lorries have to be routed through the Profit and Loss account. Reliance was placed on the following decisions :—

(i) Paras Transport Co. v. ITO [2005] 92 TTJ (Agra) 607;
(ii) ITO v Bindra Ban Bansilal [2001] 78 ITD 228 (Asr.).

(d) Section 40( a)( ia ) uses the word "payable" in contrast to the words "credited or paid" which were originally available in the relevant Finance Bill. Hence section 40( a)( ia), if applicable, is attracted only to that amount which remains payable at the year end. In the instant case, the outstanding amount at the year end is only Rs. 16.63 lakhs. The dictionary meaning of the work "Payable" is ' Must be paid'. The Hon'ble Bombay High Court in the case of Abdulgafar A. Nadiadwala v. Asstt. CIT [2004] 267 ITR 488 has held that in the absence of there being anything contrary to the context, the language of a statute should be interpreted according to the plain dictionary meaning of the terms used therein. While interpreting the taxing statutes, there is no scope for importing into the statute words which are not there as held by Hon'ble Apex court in the case of Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345. In any case, it is a well settled principle that if two alternate views are possible, the view in favour of the assessee has to be adopted.
(e) All the vehicle owners, except one, have already filed their respective Income-tax returns. The Hon'ble Supreme Court in the case of Hindustan Coca Cola Beverage (P) Ltd. v. CIT [2007] 293 ITR 226 has held that if the tax has already been paid by recipient of income, the tax could not be recovered once again from the deductor-assessee. The department has not initiated any proceeding under section 201 or 221 of the Act in the hands of the assessee.
(f ) TDS is only one mode of recovery of the tax due. According to section 191 of the Act, if in any case Income-tax has not been deducted in accordance with the provisions of chapter XVII, Income-tax shall be payable by the assessee direct.
(g) According to CBDT Circular No. 715 dated 8-8-1995, each 'Goods Receipt' has to be treated as a separate contract. Applicability of this instruction has not been considered during assessment proceedings.

7. The submissions of Ld DR are that :—

(a) Most of the Lorries engaged by the assessee on hire are owned by the family members of the partners of the firm and substantial amount was diverted to these persons.
(b) The principal company has deducted TDS on the Gross contract amount paid to the assessee, i.e., including the amount pertaining to the hired Lorries. Hence the payment made for hired Lorries can partake the character of sub-contract payment only and hence such payments are liable for deduction of tax at source under section 194C(2).
(c) There is no agreement to suggest that the assessee has hired the Lorries on commission basis. There is no consistent rate with regard to the commission retained by the assessee. The commission on the lorries hired from outsiders works out to 29 per cent, whereas the commission retained from the vehicles pertaining to the family members of the partners is very less, which only suggests that the authority to decide the percentage of commission vests with the assessee. Hence it is a case of application of income and not diversion of income by overriding title as claimed by the assessee.
(d) In order to bypass the provisions of tax deduction at source, the assessee has not routed the receipts pertaining to the hired lorries and the corresponding payments through the Profit and loss account.
(e) The usage of word 'payable' in the section does not make any difference since the word is akin to the word 'credited' which was available in the Finance bill. There is no basis to assume that the word 'payable' would mean the amount outstanding at the year end.
(f) If the payment made for hired lorries cannot be taken as sub-contract payments, such payments are liable for tax deduction at source under section 194-I of the Act.

8. We have heard the rival contentions and perused the record. The issue before us may be decided if we answer following question.

"Whether the vehicles hired by the assessee in execution of the transport contract can be termed as a "Sub-contract" and consequently the assessee is liable to deduct tax from the payment made for such vehicles under section 194C(2) of the Act?"

In the instant case, the Assessing Officer has invoked the provisions of section 40(a)( ia) to disallow the payments made for hired lorries as according to him, such payments represent payment to 'sub-contractors' liable for tax deduction at source under section 194C(2) of the Act and the assessee has failed to deduct TDS 194C(2). Section 194C(2) of the Act, which is relevant in this context, reads as under :—

"Any person (being a contractor and not being an individual or a Hindu Undivided family) responsible for paying any sum to any resident (hereafter in the section referred to as the sub-contractor) in pursuance of a contract with the sub-contractor for carrying out, or for the supply of labour for carrying out the whole or any part of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor has undertaken to supply shall, at the time of credit of such sum to the account of the sub-contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum as Income-tax on income comprised therein."

8.1 According to our understanding, section 194C(2) is attracted if all the following conditions are satisfied.

(a) The assessee should be a contractor.
(b) The assessee, in his capacity as a contractor, should enter into a contract with a sub-contractor for carrying out the whole or any part of the work undertaken by the contractor.
(c) The sub-contractor should carry out the whole or any part of the work undertaken by the contractor.
(d) Payment should be made for carrying out the whole or any part of the work.

8.2 As stated earlier, the assessee herein is a transport contractor and has entered into an agreement with parties whereby the assessee undertook to transport bitumen to various points as per their directions. According to the assessee, the Lorries used for the said purpose are specially designed with proper heating arrangements. The claim of the assessee is that since it did not have required number of Lorries, it had to hire Lorries from others who simply placed the vehicles at the disposal of the assessee. The assessee alone, under its control and supervision, has executed whole of the contract. According to the assessee, the individual lorry owners have not carried out any part of the work undertaken by the assessee.

8.3 (I) The following are the basis of the Assessing Officer to come to the conclusion that the payment made for hired lorries is a sub-contract payment, liable for tax deduction at source under section 194C(2) of the Act.

(a) The assessee has entered into a contract with the parties and all payments are made to the assessee only.
(b) The assessee is claiming the total TDS credit for the gross receipt where TDS was deducted.
(c) The lorry owners are in no way connected with the party who gives work to the assessee. As the assessee could not manage the work with its own lorries, it took on hire lorries belonging to others on sub-contract, to carry out its contract work, for which payment is made by the assessee. There is no contact or relationship of any kind between the client (principal company) and the sub-contractor.

(II) Ld CIT(A) has confirmed the order of the Assessing Officer with following reasoning.

(a) The tanker Lorries taken on hire were utilized for the purposes of the business of the execution of the contract during the entire contract period.
(b) The tanker lorry owners were paid only after receipt of the bills from the contractees, after retaining the commission.
(c) The tanker lorry owners enabled the appellant to execute the contract work.

8.4 The assessee has placed a copy of work order dated 12-2-2005 issued by a company named "RBM-Pati Joint Venture". We have gone through the said work order and notice the following points.

(a) The scope of work includes loading of Bitumen 60/70 at Vizag, transportation and delivering at RBMP camp site at km. 56 and km. 35 on NH6. As such three types of work are included in the scope of work.
(b) Tanker lorry shall have proper heating arrangement. The company reserves the right to arrange any other means of transportation in case of non-placement/delay in placement of lorry. Any extra payment made for execution of such work will be recovered from the assessee.
(c) The assessee shall not engage and/or allow its personnel in any fraudulent activity in performing the work order. The company is at liberty to deduct any reasonable amount, if any fraud or cheating is discovered.
(d) The assessee, in any circumstance, should not divulge or make public, in any way, any of the business transactions to other parties.
(e) In the event of any unreasonable delay or if the consignment is not delivered, the company shall be entitled to deduct any sum and/or the value of consignment from the outstanding bills of the assessee. No claim whatsoever due to idling of labour, equipment, vehicles and any others shall be entertained by the company under any circumstance.
(f) The assessee shall comply with all existing acts, rules, regulations etc. relating to labour, traffic and transport. In case of any liability arising to the company as principal employer due to failure, negligence or/and accident by transporter, the same shall be recoverable from the assessee.

The above stringent clauses suggest that the assessee is solely responsible for all the acts and defaults committed by the assessee and/or its employees.

8.5 It is not established by the revenue that other lorry owners, from whom the vehicles were hired, have also been fastened with any of the above said liabilities. In a sub-contract, a prudent contractor would include all the liability clauses in the agreement entered into by him with the sub-contractor. The assessee has also claimed before the tax authorities that the responsibility in the whole process lies with it only. Though the passing of liability is not the only criteria to decide about the existence of sub-contract, yet this contention of the assessee read with the liability clauses of the work order cited above, supports its submission that the individual vehicle owners are simple hirers of the vehicles.

8.6 As per the provisions of section 194C(2), as explained in para 8.1 supra, the sub-contractor should carry out the whole or any part of the work undertaken by the assessee. The dictionary meaning of the words "Carry out" is 'to carry into practice'; 'to execute'; 'to accomplish'. It signifies a positive involvement in the execution of the whole or any part of the main work by spending his time, money, energy etc., and further taking the risks in carrying on the said activity. In the instant case, there is no material to suggest that the other lorry owners involved themselves in carrying out any part of the work undertaken by the assessee by spending their time, energy and by taking the risks associated with the main contract work. In the absence of the above said characteristics attached to a sub-contract in the instant case, the payment made to the lorry owners stands at par with the payments made towards salaries, rent etc. Hence the reasoning of the tax authorities, which is stated in para 8.3 supra, to hold that the payment made for hired vehicles is a sub-contract payment, in our opinion, is not correct and not based on relevant considerations. Hence, in our considered opinion, it cannot be said that the payments made for hired vehicles would fall in the category of payment towards a sub-contract with the lorry owners. In that case the assessee is not liable to deduct tax at source, as per the provisions of section 194C(2), on the payments made to the lorry owners for lorry hire. Consequently, the provisions of section 40(a)( ia) shall not apply to such payments.

8.7 As we have decided the issue in favour of the assessee for the reasons stated above, in our opinion, consideration of other contentions of the assessee as well as the revenue is not necessary.

9. In the result, the appeal of the assessee is allowed.

226/123

Mythri Transport Corporation v. Assistant Commissioner of Income-tax, Circle 1(1), Visakhapatnam

Structured Summary of the Provided Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments (Appellant)

Revenue's Arguments (Respondent)

CIT(A)'s Reasoning and View (as articulated in the record)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Mythri Transport Corporation v. Assistant Commissioner of Income-tax, Circle 1(1), Visakhapatnam

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