TDS: Disallowance of business expenditure: Sections 40(a)(ia) and 194C of Income-tax Act, 1961: A.Y. 2006-07: Assessee-firm engaged in transportation business, secured contracts with oil companies for carriage of LPG, executed the contracts through its partners retaining 3% commission as charges: Sections 194C and 40(a)(ia) not applicable.

The assessee, a partnership firm, was engaged in the business of transport. It entered into contracts with oil companies for carriage of LPG. From the payment made to it, the companies deducted tax. The assessee firm passed on the transportation work to its partners and made the payment received from the said companies to its partners after deducting 3% commission as charges for the firm having secured the contract. The Assessing Officer held that in giving the contract of transportation by the firm to the partners there was a sub-contract and the firm was liable to deduct TDS [u/s.194C(2)] out of the payment made to the partners. Since the tax was not deducted at source on payments made to the partners, the Assessing Officer disallowed the amounts paid by the firm to the partners resulting in addition to the income. The CIT(A) and the Tribunal accepted the assessee’s plea and deleted the addition.

On appeal by the Revenue, the Punjab and Haryana High Court upheld the decision of the Tribunal and held as under:

“(i) No doubt the firm and the partners may be separate entities for income-tax and it may be permissible for a firm to give a contract to its partners and deduct tax from the payment made as per section 194C, it has to be determined in the facts and circumstances of each case whether there was any separate sub-contract or the firm merely acted as agent as pleaded in the present case.

(ii) The case of the assessee is that it was the partners who were executing transportation contract by using their trucks and payment from the companies was routed through the firm as agent. The CIT(A) and the Tribunal accepted this plea on facts.

(iii) Once this plea was upheld, it cannot be held that there was a separate contract between the firm and the partners in which case the firm was required to deduct tax from the payment made to its partners u/s.194C.

(iv) The view taken by the Tribunal is consistent with the view taken by the Himachal Pradesh High Court in CIT v. Ambuja Darla Kashlog Mangu Transport Co-operative Society, 227 CTR 299 (HP) and the judgment of this Court in CIT v. United Rice Land Ltd., 217 CTR 332 (P&H).

(v) The matter being covered by earlier judgment of this Court, no substantial question of law arises.”