Should you deduct TDS u/s 194C in absence of a written contract

Introduction

According to Section 194C, any person responsible for paying any sum to any resident (contractor) for carrying out any work (including supply of labour) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the 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-

1. 1% where the payment is being made or credit is being given to an individual or HUF
2. 2% where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family, of such sum as income-tax on income comprised therein.

No deduction shall be made if:-

1. payment to the contractor does not exceed Rs 30,000
2. aggregate of such payments to contractors does not exceed Rs 75,000

Provisions of Law

[Section 194C(6)]-No deduction shall be made from any sum credited or paid to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, [where such contractor owns ten or less goods carriages at any time during the previous year] furnishes a declaration to that effect along with his Permanent Account Number, to the person paying or crediting such sum.

According to Section 40(a)(ia) 30% of any sum payable to a resident, 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 on or before the due date specified in section 139(1), will be disallowed. In view of the second proviso to section 40(a)(ia) read with proviso to section 201(1) of the Income Tax Act no disallowance of expense u/s 40(a)(ia) can be made unless the assessee has been treated as assessee in default under Section 201(1) of the Act for its failure to deduct tax at source from the payment made on account of interest.

In simple words, if the amount paid by payer have been included by the payee in his return of income for relevant AY, filed the return of income u/s 139 and has paid the tax due on the income declared in such return, to the extent the recipient (i.e. payee) from the assessee have so included the sum in his return of income and filed the same, no disallowance u/s.40(a)(ia) of the Act can be made by the AO.

Is a person liable to deduct tax at source under Section 194C if there is no written contract with the contractor?

A similar situation arose in the case of Sri. Singonahalli Chikkarevanna vs Assistant Commissioner Of Income (24/02/2020).‘

Facts of the Case:-

1. Assessee is engaged in the business of vehicle hire and takes vehicles along with drivers on hire from various persons and pays vehicle hire charges and petrol and diesel expenses to such cab owners.
2. During the course of assessment proceedings, the Assessing Officer (AO) noticed from the profit and loss account of the assessee that the assessee has debited a sum for vehicle hire charges paid and for petrol and diesel expenses paid.
3. The assessee was asked to produce details of TDS on expenses, however, the assessee had failed to do so.
4. The AO disallowed payments debited as vehicle hire charges and petrol and diesel charges by invoking the provisions of section 40(a)(ia) for non-deduction of TDS.

Proceedings of CIT(A)

CIT(A) confirmed the disallowance made by the Assessing Officer. Hence, the assessee went in appeal before the Income Tax Appellate Tribunal (ITAT).

Proceedings of ITAT

Pertaining to entire amount of vehicle hire charges which are disallowed by the AO

1. Assessee had contended that he had not entered into an agreement with either with the owners of the vehicles nor with the drivers for the transportation and thus, applicability of section 194C the Act do not arise and consequently disallowance u/s 40(a)(ia) is not warranted.
2. The ITAT held that a contract need not be in writing, even an oral contract is good enough to invoke the provisions of Section 194C. It may be inferred from the conduct of the parties.
3. The cab owners have received the payments from the assessee towards the hiring charges, therefore, the presumption normally would be that there was a contract for hiring of vehicles.
4. Therefore, if the assessee has made the payment for hiring the vehicles, the provisions of section 194C are clearly applicable.
5. The contract has to be looked into party- wise not on the basis of the individual. In our opinion, all the payments made to a cab owner throughout the year are to be aggregated to ascertain the applicability of the TDS provision as all the payments pertain to a contract.
6. The amendment brought in by the Finance Act, 2014 with effect from 01.04.2015 restricts the amount of disallowance for non-deduction of tax to 30% of expenditure. The proviso is also amended to the effect that 30% of such sum shall be allowed as a deduction in computing the income of the previous year in which tax has been paid.
7. Though the substitution in section 40 has been made effective with effect from 01.04.2015, in the view of the Tribunal, the benefit of the amendment should be given to the assessee either by directing the Assessing Officer to confirm from the cab owners, as to whether the said parties have deposited the tax or not and further or restrict the addition to 30% of the disallowance.
8. Accordingly the disallowance is to be restricted to 30% of the amount liable for TDS u/s 194C of the Act. Accordingly, this issue was partly allowed.

With regard to disallowance of a sum of Rs.2,42,41,856 by invoking the provisions of section 40(a)(ia) of the Act towards reimbursement of petrol and diesel charges to the drivers.

1. It was submitted that the assessee has collected a sum towards petrol and diesel expenses from the parties and paid an amount to the cab drivers.
2. According to the assessee, this amount was directly paid by the assessee to the petrol pump and not to the cab owners and accordingly it was reimbursed by the concerned parties.
3. This was duly reflected in the profit and loss account of the assessee and there was no dispute on this account. The assessee submitted that when such amount of petrol and diesel expenses are paid directly to the petrol pump, the assessee is not liable to deduct TDS on the same.
4. The assessee has argued that he had not entered into any contract with the cab owners for the vehicles and drivers provided by them and the individual payments made to them were not regular or routine and as such the provisions of section 194C were not attracted.
5. This argument of the assessee is without any merit, as this is not a case where the payments are being made once in a blue moon to a particular car owner.
6. Further, the assessee has not brought on record anything to show that the payments were not more than the prescribed limit of Rs.30,000 at any instance or Rs.75,000 during the financial year.
7. It is an undisputed fact that the assessee is engaged in the business of vehicle hire and takes vehicles along with drivers on hire from various persons and pays vehicle hire charges and petrol and diesel expenses to such cab owners.
8. When the Assessing Officer has confronted the assessee on the issue of tax deduction at source, the assessee has relied on the provisions of section 194C(6) of the Act and argued that he was not liable to deduct tax at source on the payments as he had obtained PAN of the persons from whom vehicle was taken on hire and these persons were regular income tax payers.
9. Thus, the fact of existence of a contract with the cab owners was not denied by the assessee but he argued that the provisions of section 194C(6) of the Act are applicable to his case.
10. The Department submitted that the claim of the assessee that petrol and diesel expenses were in nature of reimbursement was not acceptable for the reason that the provisions of TDS get attracted even in the case of reimbursement.
11. The assessee has taken vehicle on hire along with the drivers and the payment made to the cab owners includes that for petrol and diesel.
12. It is observed that as agreed by and between the assessee and the cab owners, a vehicle was to be provided by the assessee to the parties and thus, the assessee was to bear the vehicle expenses actually incurred by the said cab owners and which will be reimbursed by the parties concerned.
13. Bills for such expenses incurred by the said cab owners were separately raised by them on the assessee in addition to bills for hire charges and since the amount of bills so raised was towards the actual expenses incurred by them, there was no element of any profit involved in the said bills.
14. It was thus a clear case of reimbursement of actual expenses incurred by the assessee and, therefore, was not of the nature of payment covered by section 194C of the Act.
15. After considering all the facts of the case, Tribunal was of the view that the provisions of section 194C of the Act were not applicable to the reimbursement of actual expenses and the assessee was not liable to deduct tax at source from such reimbursement.

The appeal filed by the assessee was partly allowed by the ITAT:-

1. Upto 30% disallowances for not deducting tax on source on vehicle hire charges(it will be considered as contractor services under section 194C even if there is no written contract.
2. No disallowance for TDS not deducted under section 194C for petrol reimbursements.