Section 40(a)(ia) – No Disallowance u/s. 40(a)(ia) for non-deduction of TDS u/s. 194C if no oral or written contract between the contractor and contractee.

36.  [2018] 66 ITR (Trib.) 525 (Vizag. – Trib.) ACIT vs.
A. Kasivishwanadhan ITA No.:
138/Viz/2017 A.Y.:
2012-13 Dated: 20^th July, 2018

Section 40(a)(ia) – No Disallowance u/s.
40(a)(ia) for non-deduction of TDS u/s. 194C if no oral or written contract
between the contractor and contractee.

FACTS

In this case assessee was engaged in the business
which required large labour force within short notice of time. Assessee had
incurred labour expenses and payments were made through maistries who procured
the labour as per the need of the assessee. The Assessing Officer (AO) inferred
that there is a principal/agent relationship between the assessee and Maistry
and the transactions were in the nature of supply of labour contract and
accordingly held that such payments are liable for deduction of tax at source
u/s. 194C of Act. Since the assessee had not deducted TDS on labour charges,
the AO disallowed the expenditure u/s. 40(a)(ia) of Act.

Aggrieved by
the order of the AO, the assessee appealed before the CIT(A). The assessee
submitted before the CIT(A) that there was no agreement written or oral between
the assessee and the maistries and in the absence of any contract between both
the parties, it cannot be construed that there exists any principal agent
relationship/contract between them. The Assessee argued that the maistries were
not the labour contractors and they were randomly the first among the group of
few people claiming to be the leader of that group. They procured the labour
along with them as when required and for the sake of convenience, the assessee
made the payments to one of the maistries or group leader who in turn
distributed the payments to the rest of the group members. There was no implied
or express contract for supply of labour between the assessee and the maistry.
Thus there was no contract and the question of deduction of tax at source did
not arise. The CIT(A) observed that the labour maistries were not the labour
contractors and the payments made to labour maistries did not bear the
character of contract payment as contemplated u/s.194C of Act, accordingly held
that the payments made to the maistries did not attract deduction of tax at
source u/s. 194C of the Act and accordingly directed the AO to delete the
addition.

Aggrieved by the order, revenue filed appeal
to ITAT.

HELD

The Tribunal concluded that the assessee was
engaged in labour oriented industry which required labour at irregular
intervals yet urgently. It was not convenient to find individual labourers and
hence, the assessee identified some of the maistries or group leaders to
procure the labour who can work as per the requirement of the job. As stated by
the AR, the group leaders were only responsible for procuring the labour and
work was done under the assessee’s personal supervision. There was no written
or oral agreement or contract between the maistries and the assessee for
getting the work done through the maistry or to supply the labour as it was a
general practice used for convenience of obtaining distant labourers. Neither
there was a contract for supply of labour nor there was contract for getting
the work done through labour by the assessee with the maistries. The AO simply
considered the payments made to the group leaders and landed in a presumption
that there was contract in existence for supply of labour between the maistries
and the assessee. The AO did not examine the maistries before coming to such
conclusion. As per the provisions of section 194C of the Act, there must be
contract for deduction of TDS including supply of labour for carrying out any
work.

Thus, in the
opinion of the ITAT No Disallowance u/s. 40(a)(ia) for non deduction of TDS
u/s. 194C if no oral or written contract exist between the contractor and
contractee.