Bhaurao G Patil, Jalgaon vs Assessee

Income Tax Officer, Shri Bhaurao Gambhir Patil, Ward - 1(1), Jalgaon Prop. of Shri Samarth Tours & Travels, Vs. 21, Ranchod Nagar, Jilha Peth, Jalgaon (Appellant) (Respondent) PAN No. AAMPP1451A

ITA No. 2462/PN/2012 Assessment Year : 2009-10

Income Tax Officer, Smt. Jyoti Manoj Patil, Ward - 1(1), Jalgaon Prop. Swami Samarth Travels, Vs. 21, Ranchod Nagar, Jilha Peth, Jalgaon (Appellant) (Respondent) PAN No. AIWPP7844B

ITA No. 2519/PN/2012 Assessment Year : 2009-10

Shri Bhaurao Gambhir Patil, Income Tax Officer, Prop. of Shri Samarth Tours Ward - 1(1), Jalgaon & Travels, Vs. 21, Ranchod Nagar, Jilha Peth, Jalgaon (Appellant) (Respondent) PAN No. AAMPP1451A

ITA No. 2520/PN/2012 Assessment Year : 2009-10

Smt. Jyoti Manoj Patil, Income Tax Officer, Prop. Swami Samarth Travels, Ward - 1(1), Jalgaon Vs. 21, Ranchod Nagar, Jilha Peth, Jalgaon (Appellant) (Respondent) PAN No. AIWPP7844B 2 ITA Nos. 2461, 2462, 2519 & 2520/PN/2012, A.Y. 2009-10

Assessee By: Shri Nikhil Pathak Revenue By: Shri P.S. Naik

Date of hearing : 10-06-2015 Date of pronouncement : 30-06-2015

ORDER

PER VIKAS AWASTHY, JM:-

These are set of four appeals, two are by the Revenue and one

each by two assessees, related to each other. ITA No. 2461/PN/2012 by

the Revenue and ITA No. 2519/PN/2012 by the assessee are directed

against the order of Commissioner of Income Tax (Appeals)-II, Nashik

dated 10-10-2012 for the assessment year 2009-10. In ITA No.

2462/PN/2012 the Revenue has challenged the order of Commissioner

of Income Tax (Appeals)-II, Nashik dated 10-10-2012 for the assessment

year 2009-10 in the case of second assessee; Smt. Jyoti Manoj Patil. The

assessee has filed cross appeal in ITA No. 2520/PN/2012 impugning the

same order of Commissioner of Income Tax (Appeals). Since, the facts in

all the appeals are similar, the appeals are taken up together for

adjudication.

2. The facts as emanating from records are : The assessees are

engaged in the business of providing vehicles to various companies like

Reliance Next-Link Pvt. Ltd., Idea Cellular Ltd., China Petroleum Pipe

Line, etc. on contract. The assessees do not own any vehicle of their own

but are arranging the vehicles from various transporters. The vehicles

are provided by the assessees to the companies in accordance with the

contract agreement executed between the assessees and the contractee

companies. In lieu of services provided by the assessees, the companies

make payment after deducting tax at source. The assessees further

make payments to the third parties from whom the vehicles are

arranged. On the said payments, the assessees did not deduct tax at 3 ITA Nos. 2461, 2462, 2519 & 2520/PN/2012, A.Y. 2009-10

source (TDS). The assessees in their respective return of income show

the receipts from contractee companies as 'commission'.

3. During the course of scrutiny assessment, the Assessing Officer

held that the assessees are providing vehicles to the companies under

contract agreement therefore, they are contractors. The Assessing

Officer further held that, the assessees hired vehicles from various

persons and make payments to them without deducting TDS. The

relationship between the assessees and the persons from whom vehicles

are hired are in the nature of sub-contract. Therefore, the assessees are

liable to deduct tax at source under the provisions of section 194C/194I

of the Act on the payments made for hiring the vehicles. Since, the

assessees have violated the provisions of section 194C/194I of the Act,

the Assessing Officer made disallowance of Rs.70,45,194/- u/s. 40(a)(ia)

of the Act. The Assessing Officer further observed that the assessee has

debited vehicle expenses of Rs.89,650/-. No proper bills and vouchers

were maintained by the assessee in support of such expenses. The

Assessing Officer made 20% disallowance of the said expenses i.e.

Rs.17,930/-.

In the case of Smt. Jyoti Manoj Patil, i.e. ITA Nos. 2462 &

2520/PN/2012, the Assessing Officer disallowed Rs.1,36,71,346/- u/s.

40(a)(ia) and made ad-hoc addition of Rs.50,453/- on account of

decrease in net profit in impugned assessment year as compared to the

previous assessment year.

Aggrieved by the additions/disallowance made by the Assessing

Officer, the assessees filed appeals before the Commissioner of Income

Tax (Appeals) in their respective cases. The Commissioner of Income Tax

(Appeals) after appreciating the facts of the case held that the assessees

are contractors and not commission agents as claimed. The 4 ITA Nos. 2461, 2462, 2519 & 2520/PN/2012, A.Y. 2009-10

Commissioner of Income Tax (Appeals) further held that, the vehicles

hired by the assessees from third persons amounts to sub-contract.

Therefore, the assessees were liable to deduct TDS on the payments

made to owners of the hired vehicles. The Commissioner of Income Tax

(Appeals) upheld the action of Assessing Officer in making disallowance

u/s. 40(a)(ia) of the Act. However, the Commissioner of Income Tax

(Appeals) restricted the disallowance u/s. 40(a)(ia) to the sums 'payable'

by following the decision of Special Bench of the Tribunal in the case of

M/s. Merilyn Shipping & Transport Co. 70 DTR (Visakha) (SB) (Trib) 81.

Thus, in the case of first assessee i.e. ITA Nos. 2461 & 2519/PN/2012,

the Commissioner of Income Tax (Appeals) restricted the disallowance

u/s. 40(a)(ia) to Rs.25,36,242/-. Similarly, in the case of second

assessee i.e. Smt. Jyoti Manoj Patil, in ITA Nos. 2462 & 2520/PN/2012

the Commissioner of Income Tax (Appeals) restricted the disallowance

u/s. 40(a)(ia) to Rs.35,63,173/-. In respect of disallowance of vehicle

expenses, the Commissioner of Income Tax (Appeals) held that the

assessee has not been able to fully substantiate the ground raised in the

appeal, therefore, the disallowance was restricted to Rs.10,000/-. In

respect of addition of Rs.50,453/- on account of trading result, the

Commissioner of Income Tax (Appeals) deleted the same, as the addition

was made merely on assumptions without rejecting or raising any

suspicion over the books of account.

Against these findings of the Commissioner of Income Tax

(Appeals), both, the Revenue and the assessees have come in appeal

before the Tribunal.

4. Shri P.S. Naik appearing on behalf of the Revenue submitted that

the Commissioner of Income Tax (Appeals) has rightly come to the

conclusion that the vehicle owners who had supplied vehicles to the

contractee companies according to the instructions of the assessee were 5 ITA Nos. 2461, 2462, 2519 & 2520/PN/2012, A.Y. 2009-10

in fact sub-contractees of the assessee. Thus, the payments made to

them were subject to TDS u/s. 194C of the Act. However, the

Commissioner of Income Tax (Appeals) has erred in applying the ratio of

decision in the case of M/s. Merilyn Shipping & Transport Co. (supra).

The Hon'ble Gujarat High Court in the case of CIT Vs. Sikandar Khan N.

Tunvar reported as 357 ITR 312 and the Hon'ble Calcutta High Court in

the case of CIT Vs. Crescent Export Syndicate reported as 216 Taxman

258 have held that the decision rendered by the Special Bench in the

case of M/s. Merilyn Shipping & Transport Co. (supra) is not a good law.

Thus, the Commissioner of Income Tax (Appeals) has erred in restricting

the disallowance u/s. 40(a)(ia) on the distinction of 'paid' and 'payable'.

The ld. DR further submitted that the Commissioner of Income Tax

(Appeals) has erred in restricting the addition of Rs.17,930/- on account

of disallowance of vehicles expenses to Rs.10,000/-. The ld. DR further

impugned the action of Commissioner of Income Tax (Appeals) in

deleting the addition of Rs.50,453/-.

5. On the other hand Shri Nikhil Pathak appearing on behalf of the

assessees submitted that the assessees are merely charging commission

for supplying vehicles. The assessees do not own any vehicles of their

own for supplying them on hire. The assessees are hiring vehicles from

third parties and are providing the same to the companies. There is no

contact or sub-contract between the assessees and the third parties from

whom vehicles are hired. Therefore, the provisions of section 194C will

have no application viz-a-viz assessees and the owners of the vehicles.

In support of his submissions the ld. AR placed reliance on the following

decisions:

i. CIT Vs. Mukesh Travels Company; 108 DTR 396 (Guj).

ii. Kranti Road Transport (P.) Ltd. Vs. ACIT; 18 taxmann.com 124

(Visakha.).

6

ITA Nos. 2461, 2462, 2519 & 2520/PN/2012, A.Y. 2009-10

iii. ITO Vs. M/s. Gaurimal Mahajan & Sons; ITA No. 1852/PN/2012

decided on 06-01-2014.

iv. Vicky Roadways Vs. JCIT; ITA No. 38/Agra/2013 decided on

31-10-2013.

6. We have heard the submissions made by the representatives of

both sides and have perused the orders of the authorities below. We

have also examined the decisions on which the ld. AR has placed

reliance. The case of the assessees is, that the assessees are providing

transport vehicles to the companies on the terms and conditions set out

by the companies and accepted by the assessees. For the services

rendered by the assessees, the companies make payment after deducting

tax at source. According to the assessees the amount received by them

is a commission. On the payments made by assessees to third parties

for supply of vehicles the assessees are not liable to deduct tax at source,

as it is not a case of contract/sub-contract. On the other hand the case

of the Revenue is that the assessees are providing vehicles to the

companies under specified terms and conditions of contract agreement.

The assessees have entered into sub-contract between the vehicle

owners for providing vehicles to the contractee companies. The

payments made by the assessees to the supplier of the vehicles are

subject to TDS provisions u/s. 194C. Since, the assessees have not

complied with the provisions of section 194C, the payments made by the

assessees are disallowed u/s. 40(a)(ia) of the Act.

In first appeal, the Commissioner of Income Tax (Appeals) granted

partial relief to the assessees by placing reliance on the decision of

Special Bench of the Tribunal in the case of M/s. Merilyn Shipping &

Transport Co. (supra).

7

ITA Nos. 2461, 2462, 2519 & 2520/PN/2012, A.Y. 2009-10

7. Before we proceed further, let us first ascertain, whether the

assessees are providing vehicles to the companies under contract? A

sample purchase order, and terms and conditions attached thereto for

Vehicle hire Services by Idea Cellular Ltd. is placed on record at page 27

of the Paper Book. The terms and conditions as set out therein are as

under:

"1. The validity of this contract is from 01st July, 2008 to 30th June, 2009.

2. The above rates are inclusive of fuel and maintenance charges of the

vehicles.

3. The readings in for distance and time (Kilometres & Hrs.) will be measured

from our office at Beed. Vehicle will be provided for 24 hours service.

4. This contract can be terminated by giving thirty (30) days prior notice in

writing without assigning any reason by Idea Cellular Limited.

5. The driver under no circumstances would be treated as our employee,

however you shall ensure that all statutory obligation in any consequent to

that employment are fully complied by you at your cost.

6. You shall provide the vehicle as required and intimated to you by our office

at Beed for use of Idea Cellular Limited personnel within 1 hour of

intimation.

7. You shall provide vehicle in excellent condition with good upholstery. No

vehicle shall be more than six (6) months old.

8. In case of break down, you have to provide standby vehicle with one (1)

hour in Beed and within twelve (12) hours in places other than Jalgaon,

form the time of reporting of break down.

9. Drivers shall be properly dressed and well behaved and they shall not be

intoxicated while on duty.

10. You shall maintain the vehicles in excellent condition at your cost and

expense.

11. You shall provide the vehicles with up to date RTO Papers, Insurance &

Pollution Control Certificates and any such statutory documents.

12. Your drivers must carry the valid driving license while on duty and shall

be proficient in driving.

8

ITA Nos. 2461, 2462, 2519 & 2520/PN/2012, A.Y. 2009-10

13. All the vehicles shall have good condition stepney and necessary took kit

for the purpose of minor maintenance/repair as and when required.

14. All vehicles shall be with proper interior work and shall have good quality

music system & audio cassettes.

15. The insurance for vehicle requirement and its utilization shall be given to

you by our appointed representative.

16. You shall submit your bills to our Beed office. The payment will be made

within Fifteen (15) days from the date of submission of bills duly certified.

Contact Person :- Mr. Rammohan Reddy, Mobile - 9881748790.

17. The rates given are inclusive of all taxes, TDS shall be deducted as per

Income Tax Act and rules. However, Service Tax as applicable of the total

bill amount shall be paid extra.

18. All incidental expenses such as penalty due to traffic rules violation or any

other duties shall be at your cost.

19. Please sign the duplicate copy of this contract as a token of your

acceptance of all the terms and conditions given above."

8. A perusal of the terms and conditions of the contract shows that it

is the responsibility and liability of the assessees to provide vehicles in

good condition as and when required by the company. The assessees

have to ensure all compliances viz payment of road taxes, insurance,

pollution control etc. with respect to the vehicles. In case of any break

down the assessees have to provide alternate vehicle within specified

time, from the time of reporting of break down. It is the duty of

assessees to maintain the drivers. Thus, from the terms and conditions

mentioned above, it is evident that it is the duty, responsibility and

liability of the assessees to provide the vehicles with drivers to the

contractee companies. A perusal of the terms and conditions make it

amply clear that it is a contract between the company and the assessees

for providing vehicles. Therefore, the contention of the assessees that

they are not contractors but commission agents is not tenable. The

Commissioner of Income Tax (Appeals) after analyzing similar agreement 9 ITA Nos. 2461, 2462, 2519 & 2520/PN/2012, A.Y. 2009-10

entered into between the assessees and China Petroleum Pipe Line had

come to the conclusion that the assessees are contractors and not

commission agents as claimed. Thus, we concur with the findings of the

Commissioner of Income Tax (Appeals) in coming to such a conclusion.

9. Now, the question before us is:

i. Whether the service relation between the assessees and the third

parties/owner of vehicles is out of contract/sub-contract?; and

ii. Whether the assessees are liable to deduct tax on the payments

made to the third parties/owner of vehicles under the provisions of

section 194C for supply of vehicles?;

10. The Commissioner of Income Tax (Appeals) after holding that the

assessees are contractors for supplying vehicles to the contractee

companies has held that the assessees entered into sub-contract with

third parties/owner of vehicles for supply of vehicles on behalf of the

assessees to contractee companies. However, in coming to such a

conclusion no document has been brought on record to show that the

assessees have passed on the strings of responsibility and liability to

vehicle owners from whom vehicles are hired. The Revenue has not

brought on record any document to show that the assessees have

entered into a sub-contract with the vehicle owners for providing such

service. The assessees simply hired the vehicles on payment of hire

charges and provided the same to the contractee companies in

pursuance of contract agreement. For invoking the provisions of section

194C(2), the essential condition is that there should be a sub-contract

for carrying out the whole or any part of the work undertaken by the

contractor and the payment should be made for carrying out the whole

or any part of such work. It is a well accepted principle of law that the

contract can either be oral or written. In the present case, the Revenue 10 ITA Nos. 2461, 2462, 2519 & 2520/PN/2012, A.Y. 2009-10

has not been able to establish the existence of any contract between the

assessees and the individual vehicle owners. Therefore, in the facts of

the case we hold that the assessees have not entered into any sub-

contract with individual vehicle owners for supplying vehicles to the

contractee companies.

11. Since, the first question has been answered in negative, the

payments made by the assessees to the third parties/individual vehicle

owners do not fall within the ambit of section 194C. Thus, we hold that

the payments made by the assessees are not subject to TDS provisions.

Hence, the assessees have not violated the provisions of section 194C.

12. Our view is further fortified by the decision of Hon'ble Gujarat

High Court in the case of CIT Vs. Mukesh Travels Company (supra).

Wherein, under similar circumstances where no sub-contract was

established between the assessee and transporters, the Tribunal deleted

the disallowance u/s. 40(a)(ia) of the Act. The Revenue went in appeal

before the Hon'ble High Court. The Hon'ble High Court upheld the

findings of the Tribunal and dismissed the appeal of the Revenue.

13. The Visakhapatnam Bench of the Tribunal in the case of Kranti

Road Transport (P.) Ltd. Vs. ACIT (supra) has held that where assessee

has hired lorries/trucks for his own use and are under his own control

and supervision, TDS is not required to be deducted on payments made

to truck/lorry owners. In the said case the assessee had hired the

trucks/lorries for transporting of the consignment booked by it under its

own supervision and control with all responsibility and liabilities. The

Tribunal held that the assessee is not liable for deduction of TDS for

lorry/truck owners as per section 194C. In the present case also the

liability and responsibility of providing vehicles as per agreed terms and 11 ITA Nos. 2461, 2462, 2519 & 2520/PN/2012, A.Y. 2009-10

conditions has not been passed on to the individual vehicle owners.

Therefore, it is not a case of sub-contract.

14. The Revenue in its appeal has assailed the order of Commissioner

of Income Tax (Appeals) in restricting the disallowance u/s. 40(a)(ia) by

applying the decision of Special Bench of the Tribunal in the case of

M/s. Merilyn Shipping & Transport Co. (supra). Since, we have already

held that the payments made by the assessee to the individual vehicle

owners are not arising out of any sub-contract, therefore, the provisions

of section 194C will not be applicable on such payments. Since, no TDS

is to be deducted on the said payments, there is no question of making

any disallowance u/s. 40(a)(ia) of the Act. In view of our above findings,

this ground of appeal of the Revenue is dismissed and that of the

assessee is allowed.

15. The Revenue in its appeal in ITA No. 2461/PN/2012 has raised

second ground with respect to restricting of disallowance on vehicle

expenses. The Assessing Officer had made an ad-hoc disallowance of

Rs.17,930/- @ 20% of total vehicles expenses. The Commissioner of

Income Tax (Appeals) has restricted the same to Rs.10,000/-. In the

absence of any cogent material, we find no reason to disturb this finding

of the Commissioner of Income Tax (Appeals). Accordingly, this ground

of appeal of the Revenue is dismissed.

16. In ITA No. 2462/PN/2012 the second ground raised by the

Revenue in appeal is against the deleting of addition of Rs.50,453/- on

account of fall in net profit. The Assessing Officer has made addition of

Rs.50,453/- merely on ground that there has been fall in net profit in the

current assessment year as compared to previous assessment year. The

Assessing Officer in an arbitrary manner increased the net profit by 12 ITA Nos. 2461, 2462, 2519 & 2520/PN/2012, A.Y. 2009-10

0.25% on gross receipts. The Commissioner of Income Tax (Appeals)

deleted the same with following observations:

"14. As regards addition of Rs.50,453/- on account of fall in NP, I find that AO has made the addition on adhoc basis (increased NP by 0.25%) without going into merits of the case. He has failed to bring any material on record which could warrant increase in NP by 0.25%. AO was not justified in disturbing the book results without assigning any specific defect. In view of the above addition of Rs.50,453/- is deleted."

We find no reason to interfere with the order of the Commissioner

of Income Tax (Appeals) on this issue.

17. In the result, the appeals of the Revenue are dismissed and the

appeals of the assessees are allowed.

Order pronounced on Tuesday, the 30th day of June, 2015

at Pune

Sd/- Sd/-

(R.K. PANDA) (VIKAS AWASTHY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Pune, Dated: 30th June, 2015 RK/PS

Copy to

1 Assessee 2 Department 3 The CIT(A)-II, Nashik 4 The CIT-II, Nashik 5 The DR, ITAT, "A" Bench, Pune. 6 Guard file.

//True Copy// By Order

Private Secretary, Income Tax Appellate Tribunal, Pune