Fixed Charges for Hire of Vehicles not Rent for Section 194-I (TDS)

Ahmedabad Urban Development Authority vs. ACIT (ITAT Ahmedabad)

Brief Facts:-

The assessee is a local authority and is engaged in development of areas in and aroundAhmedabad outside municipal limits. It was seen that the assessee had hired cars on fixed rent payments but TDS was deducted @ 2% treating the same as contract. Since the cars are one type of machinery, and rent is paid at fixed monthly rate, according to the AO, TDS is applicable at the rate prescribed u/s 194 -I of the IT Act. As per the explanation given by the assessee,  for hiring of cars the provisions of section 194-I of the IT Act are notapplicable. The payment is made towards the work contract executed and not towards hiring of vehicles. The AO on consideration of the reply of the assessee noted that the assessee had made payment for vehicle hire charges in connection with plying of employees from one place to another.The vehicles are owned and maintained by the contractor. The assessee is making fixed payment of an amount. All other expenses of diesel, repair and insurance etc. are paid by the contractor. The AO relied upon Board Circular No.715 dated8-8-1995 which clarify deduction of the tax and section 194C of the IT Act is applicable when a plane or bus or any other mode of transportis chartered by one of the entities mentioned in section 194C of the ITAct and work in section 194C of the IT Act continuously remain in thestatute book and such interpretation of the provision would notcontrovert or the general provisions contained in the section. The AO,therefore, noted that if the assessee paid the rent for hiring out anymachinery then he has to deduct tax at sources u/s 194-I of the Act.In the case of the assessee it paid rent and vehicles had to ply fortransporting employees from one place to another, therefore, theassessee was required to deduct tax @ 10%, however, the assessee had deducted TDS @ 2% u/s 194C of the IT Act. Therefore, thedifference was calculated @ 8% and the assessee was held to be indefault of payment of TDS in a sum of Rs.1,75,506/- and interest u/s201 (1A) in a sum of Rs.26,537/-.Same submissions werereiterated before the learned CIT(A). The learned CIT(A) however,dismissed the appeal of the assessee holding that the assessee hadhired cars on fixed rent payment and deducted tax @ 2% of thecontract but in fact cars are one type of machinery and rent for thesame is paid. Therefore, provisions of section 194-I of the IT Act havebeen rightly invoked. The appeal of the assessee was accordingly dismissed. After that assessee filed the appeal before ITAT.

Held:-

Appeal file by the assessee is allowed.

Reason:

S. 194C defines work to include carriage of goods and passengers by any mode of transport other than railways while s. 194-I defines rent to mean payment for use of plant (which is defined in s. 43 to include vehicles). As the cars were owned and maintained by the contractor and all expenditure was borne by the contractor, the contract was for carriage of passengers for which the assessee paid a fixed amount. Therefore, the payment of vehicle hire charges fell within the scope of s. 194C and was not rent for s. 194-I.

The Full Judgement is as follows:-

IN THE INCOME TAX APPELLATE TRIBUNAL

˜A™ BENCH AHMEDABAD

(BEFORE S/SHRI G. D. AGARWAL, VP AND BHAVNESH SAINI, JM)

ITA No.1637/Ahd/2010

Ahmedabad Urban DevelopmentAuthority,

Sardar Vallabhbhai PatelSankul Usmanpura,

Ashram Road,

Ahmedabad

Vs

The A. C. I. T., TDS Circle

Amrut Jayanti Bhavan,

NavjivanTrust Building,

Off Ashram Road,

Ahmedabad

O R D E R

This appeal by the assessee isdirected against order of the learned CIT(A)-VI, Ahmedabad dated23-02-2010 for assessment year 2009-2010, challenging the order ofthe learned CIT(A) in confirming the demand for short deduction oftax u/s 201 (1) of the IT Act and confirming the demand of interestcharged u/s 201 (1A) of the IT Act.

2. Briefly, the facts of the case are that the assessee is a localauthority and is engaged in development of areas in and aroundAhmedabad outside municipal limits. It was seen that the assesseehad hired cars on fixed rent payments but TDS was deducted @ 2%treating the same as contract. Since the cars are one type ofmachinery, and rent is paid at fixed monthly rate, according to theAO, TDS is applicable at the rate prescribed u/s 194 -I of the IT Act. Explanation of the assessee was called for. It was explained that forhiring of cars the provisions of section 194-I of the IT Act are notapplicable. The payment is made towards the work contract executedand not towards hiring of vehicles. As per the explanation to section194-I of the IT Act, the rent does not include motor cars. Moreover, asper section 194C of the IT Act, the work includes carriage ofpassengers. Accordingly, tax has been correctly collected u/s 194 Cof the IT Act. The AO on consideration of the reply of the assesseenoted that the assessee had made payment for vehicle hire chargesin connection with plying of employees from one place to another.The vehicles are owned and maintained by the contractor. Theassessee is making fixed payment of an amount. All other expensesof diesel, repair and insurance etc. are paid by the contractor. Afterconsidering the provisions of section 194-I of the IT Act whichprovides for rent, the AO noted that it included payment of use ofmachinery, land and rent for hire of any vehicle which is forming partof machinery for the period in use. The AO noted that in the presentcase vehicles are owned and operated by contractor which are usedfor carrying employees from one place to another or such serviceswould fall within the scope of section 194-I of the IT Act and not u/s194C of the IT Act. The AO relied upon Board Circular No.715 dated8-8-1995 which clarify deduction of the tax and section 194C of the ITAct is applicable when a plane or bus or any other mode of transportis chartered by one of the entities mentioned in section 194C of the ITAct and work in section 194C of the IT Act continuously remain in thestatute book and such interpretation of the provision would notcontrovert or the general provisions contained in the section. The AO, therefore, noted that if the assessee paid the rent for hiring out anymachinery then he has to deduct tax at sources u/s 194-I of the Act.In the case of the assessee it paid rent and vehicles had to ply fortransporting employees from one place to another, therefore, theassessee was required to deduct tax @ 10%, however, the assesseehad deducted TDS @ 2% u/s 194C of the IT Act. Therefore, thedifference was calculated @ 8% and the assessee was held to be indefault of payment of TDS in a sum of Rs.1,75,506/- and interest u/s201 (1A) in a sum of Rs.26,537/-. Order was accordingly passed,raising the demand against the assessee. Same submissions werereiterated before the learned CIT(A). The learned CIT(A) however,dismissed the appeal of the assessee holding that the assessee hadhired cars on fixed rent payment and deducted tax @ 2% of thecontract but in fact cars are one type of machinery and rent for thesame is paid. Therefore, provisions of section 194-I of the IT Act havebeen rightly invoked. The appeal of the assessee was accordingly dismissed.

3. The learned Counsel for the assessee reiterated thesubmissions made before the authorities below and submitted theassessee correctly deducted TDS as per provision of section 194C ofthe IT Act. The AO wrongly applied the provisions of section 194-I ofthe IT Act in which vehicle hire charges have not been mentioned.The learned Counsel for the assessee relied upon the order of ITATAhmedabad B Bench in the case of M/s. Mukesh Travels Co. VsITO in ITA No.2594/Ahd/2010 dated 25-2-2011 in which the Tribunalconsidering Explanation (iii) to Section 194C of the IT Act on the identical facts held that the payment of the same nature clearly fallswithin the scope of section 194C of the IT Act. The learned Counselfor the assessee also raised additional ground of appeal statingtherein that the entire amount of tax has been paid by the payee;therefore, there is no loss to the revenue. Copy of the return of thepayee is filed on record.

4. On the other hand, the learned DR relied upon the orders of theauthorities below.

5. We have considered the rival submissions and the materialavailable on record. The facts noted by the AO are not in dispute thatthe assessee had hired cars on fixed rent payment and TDS wasdeducted @ 2% treating the same as contract as per section 194C ofthe IT Act. The AO also noted that the assessee had made vehiclehire charges payment in connection with plying of employees fromone place to another. It was also noted by the AO that vehicles areowned and maintained by contractors. The assessee paid fixedpayment for use of the hired cars and all the expenses are borne bythe contractors. It is also admitted fact that the assessee is a localauthority. The provisions of section 194C of the IT Act is applicable tothe assessment year under appeal provided (a) any personresponsible for paying any sum to any resident ((b) any local authority(as the assessee is) referred to as a contractor for carrying out anywork in pursuance of the contract between the contractor and thelocal authorities etc., shall at the time of credit of such sum to theaccount 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 inany other case 2%, of such sum as income tax or income comprisedtherein. The definition of work has been provided in Explanation (iii)to Section 194C of the IT Act which provides for the purpose of thissection, expression work shall also include:(a) Advertising,(b) Broadcasting and telecasting including production ofprogrammes for such broadcasting or telecasting,(c) Carriage of goods and passengers by any mode oftransport other than railways,(d) Catering.The AO admitted that the assessee had hired the cars on fixed rentpayment owned and maintained by contractor. The assessee paidvehicle hire charges and all the expenditure are borne by thecontractor. It is also admitted fact that vehicle charges were paid inconnection with plying of employees from one place to another. Thus,it implies that the passengers were transported by the drivers andvehicles of the vehicle owner/contractor and in consideration of thatthe vehicle owners/contractors were paid by the assessee the fixedamount. Therefore, sub-clause (c) to Explanation (iii) of the provisionsof Section 194C of the IT Act would apply in the case of theassessee. In our opinion the above payment of vehicle hire chargesclearly falls within the scope of section 194C of the IT Act. Theassessee, therefore, correctly deducted tax thereof as per theprovisions of section 194C (Explanation (iii) (c)) of the IT Act. Same view is taken by ITAT Ahmedabad B Bench in the case of M/s.Mukesh Travels Co. (supra) copy of which is placed on record. TheAO however, noted that the provisions of section 194-I of the IT Actwould apply in the matter being rent paid to the contractor whichprovides as under: (prior to amendment w. e. f. 1-10-2009)194-I Any person, not being an individual or a Hindu undividedfamily, who is responsible for paying to [a resident] any income byway of rent, shall, at the time of credit of such income to theaccount of the payee or at the time of payment thereof in cash or bythe issue of a cheque or draft or by any other mode, whichever isearlier, [deduct income-tax thereon at the rate of”[(a) ten per cent for the use of any machinery or plant orequipment; and(b) fifteen per cent for the use of any land or building (includingfactory building) or land appurtenant to a building (including factorybuilding) or furniture or fittings where the payee is an individual or aHindu undivided family; and:]](c ) twenty percent for the use of any land or building (includingfactory building) or land appurtenant to a building (including factorybuilding) or furniture or fittings where the payee is a person otherthan an individual or a Hindu undivided family.Provided that no deduction shall be made under this section wherethe amount of such income or, as the case may be, the aggregateof the amounts of such income credited or paid or likely to becredited or paid during the financial year by the aforesaid person tothe account of, or to, the payee, does not exceed one hundred andtwenty thousand rupees :[Provided further that an individual or a Hindu undivided family,whose total sales, gross receipts or turnover from the business orprofession carried on by him exceed the monetary limits specifiedunder clause (a) or clause (b) of section 44AB during the financialyear immediately preceding the financial year in which such incomeby way of rent is credited or paid, shall be liable to deduct incometaxunder this section.]

Explanation.”For the purposes of this section,”

[(i) rent means any payment, by whatever namecalled, under any lease, sub-lease, tenancy or any otheragreement or arrangement for the use of (either separatelyor together) any,”(a) land; or(b) building (including factory building); or(c) land appurtenant to a building (including factorybuilding); or(d) machinery; or(e) plant; or(f) equipment; or(g) furniture; or(h) fittings,whether or not any or all of the above are owned by thepayee;]

(ii) where any income is credited to any account,whether called Suspense account or by any other name,in the books of account of the person liable to pay suchincome, such crediting shall be deemed to be credit ofsuch income to the account of the payee and theprovisions of this section shall apply accordingly.]The above definition of rent does not provide any item for vehicle hirecharges. Therefore, provisions of section 194-I has been wronglyapplied in the matter by the AO. Considering the above discussionswe are of the view that the authorities below have wrongly applied theprovisions of section 194-I of the IT Act in the matter. We accordingly,set aside the orders of the authorities below and delete the demandand 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 additionalground of appeal of the assessee.

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

Order pronounced in the open Court on 10-03-2011Sd/- Sd/-(G. D. AGARWAL)VICE PRESIDENT(BHAVNESH SAINI)JUDICIAL MEMBERDate : 10-03-2011Lakshmikant/-Copy of the order forwarded to:1. The Appellant2. The Respondent3. The CIT concerned4. The CIT(A) concerned5. The DR, ITAT, Ahmedabad6. Guard File

BY ORDERDy.

Registrar, ITAT,

Ahmedabad

 

Tag: TDS

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