Income-tax Act, 1961 — S. 40(a)(ia), S. 44AE. Provisions of S. 44AE will be applicable to a person who has entered into an agreement with truck owner, by virtue of which he became owner of the trucks for the period of contract and his accounts are not aud

The assessee obtained a contract from Indian Oil Corporation
Ltd. (IOC) for transportation of LPG cylinders and in turn, such transportation
was being done through another contractor. The balance sheet filed alongwith the
return of income showed amount receivable from IOC and also showed the amount
payable to transport contractor. No profit and loss account was prepared. Fixed
percentage of gross receipts was considered by the assessee to be its income.
The assessee used to retain a percentage of amounts received by IOC and the
balance was paid to truck owners with whom the assessee was having agreements.
The payments were made without deduction of income-tax at source. Credit was
claimed in respect of income-tax deducted at source by IOC. Before the Assessing
Officer (AO), it was contended that the provisions of S. 44AE are applicable and
therefore the provisions of S. 40(a)(ia) do not apply. The AO held that the
transport business of the assessee was a contract with IOC and a sub-contract
with the truck owners and therefore, in view of the proviso to S. 194C(2), the
assessee was required to deduct tax at source in respect of payments made to
sub-contractors. Since no tax was deducted at source, he disallowed the
expenditure of Rs.11,26,500 u/s. 40(a)(ia).

Aggrieved the assessee preferred an appeal to the CIT(A)
where it contended that it merely acted on behalf of the truck owners and had
not entered into any sub-contract with the truck owners and also that it had not
debited the amount to profit and loss account and therefore the same cannot be
treated as expenditure to be disallowed u/s. 40(a)(ia). The CIT(A) noted that
the assessee had entered into a contract with IOC and had entered into agreement
with truck owners wherein he was described as transporter and truck owner was
treated as contractors. He held that the payments made to truck owners
constituted sub-contract payments and hence the provisions of S. 194C(2) were
applicable. He also held that the assessee did not own trucks and therefore the
provisions of
S. 44AE are not applicable. He confirmed the action of the AO.

Aggrieved the assessee preferred an appeal to the Tribunal.

The Tribunal on perusal of the agreement entered into by the
assessee with IOC noted that it mentioned that the contractor (the assessee) was
owner and operator of new/old capacity trucks and had undertaken to maintain the
trucks in good working order for the period of the contract, the agreement inter
alia provided that the contractor had to pay the entire operation cost of the
trucks which include and be deemed always to include the expenses enumerated in
the agreement and the agreement also provided that the contractor shall not be
entitled to assign, subrogate, subject or part with his right under the contract
or change the ownership of the trucks. The contractor (assessee) was also
prohibited from changing constitution of its firm without obtaining prior
written consent of the Corporation.

The Tribunal also noted that in order to comply with the
clauses of the agreement entered into by the assessee with IOC, the assessee had
entered into an MOU with a truck owner wherein the truck owner agreed to act as
a manager of the transport business of the assessee. This MOU also provided that
upon the expiry of the contract the truck will be resold by the assessee to Shri
Athaulla Khan (the truck owner). The assessee under this agreement was entitled
to retain 3% of the commission.

As regards the contention on behalf of the assessee that the
assessee was registered with IOC and the truck owner was not registered with IOC
and therefore the contract was taken for the benefit of the person owning the
truck, the Tribunal observed that this may be de facto relationship. However,
one has to consider the legal agreements between the assessee and the IOC and
also considering the MOU between the assessee and the truck owner and from such
agreements, one has to draw a conclusion that de jure relationship of the
assessee with IOC was in the form of a person who has been awarded the contract.
The assessee was required to abide by the conditions mentioned in the agreement.

The Tribunal held that as per the agreement with the truck
owner, the assessee became the owner of two trucks for the period of contract.
The original truck owner became a manager for the transport business of the
assessee. In respect of contract with IOC, the assessee was owner of two trucks.
Since there was no tax audit report in respect of transport contract business,
therefore the income was to be ascertained as per S. 44AE of the Act. Once
income has been ascertained as per provisions of S. 44AE of the Act, then
provisions of S. 40(a)(ia) will not be applicable.

The Tribunal also upheld the alternative contention on behalf
of the assessee viz. that the AO should have restricted the disallowance to
Rs.5,14,725 being the amount paid by the assessee to the truck owner. From the
gross amount due to the assessee from IOC, deductions were made by IOC towards
diesel and TDS. IOC made deduction towards diesel made available for plying the
truck. The amount deducted by IOC was not paid to the truck owner, but only the
net amount received from IOC was paid to the truck owner and hence the amount on
which tax was deductible at source was the net amount of Rs.5,14,725.