The Kerala High Court held that the assessee is not bound to deduct the Tax at Source (TDS) for payment made to individual contractors before June 2007.
The assessee, Sudarshan P.S. is engaged in the business of manufacture and sale of coir mats and mattings. For the assessment year 2007-08, the return filed by the assessee was accepted and a refund was also granted. However proceedings for reopening of assessment were initiated and the assessee was called upon to produce the balance sheet and the profit and loss account for the assessment year 2007-08. Assessee replied that the accounts were misplaced.
The assessee raised the issue whether tribunal was correct in restoring the addition of Rs.32,88,677/- made by the assessing officer on account of the dis- allowance under Section 40(a)(ia) of the Act for non-payment of TDS under Section 194C of the Act.
S.Arun Raj, the counsel for the petitioner argued that appellant argued that as far as dis- allowance of the amounts under Section 40(a)(ia) are concerned, the Tribunal as well as the assessing authority had failed to consider the inapplicability of Section 194C (k) to the assessee for the relevant assessment year.
Mr. Arun Raj contended that the assessee had no liability to deduct TDS for the freight charges paid, since they were all paid separately to different individuals which were all less than Rs.20,000/-. He further pointed out that the disallowance on account of non-deduction of TDS under Section 194H, amounting to Rs.8,86,790/- also ought not to have been directed to be added since even according to the assessing officer, the audit report that was given to the bank was prepared by a reputed chartered accountant and when he had not pointed out any mistake in the audit report, the assessing officer could not have gone behind the audit report and found mistakes in it.
The division bench of Justice S.V.Bhatti and Justice Bechu Kurian Thomas held that the obligation to deduct tax for payments made to an individual under Section 194C, beyond the monetary limit, was brought into effect only from June 1, 2007.
“When the liability to make such deduction arose from 01.06.2007, it cannot be assumed that for failure to deduct such a tax at source for the previous year 2006-07, (i.e.01.04.2006 to 31.03.2007), the assessee should be put to a liability for non-deduction of such tax at source. We, therefore, hold that the assessee was not bound to deduct tax at source for payment made to individual contractors for the assessment year in question. In the circumstances, the Tribunal went wrong in interfering with the order of the First Appellate Authority directing deletion of the disallowance made under Section 40(a)(ia) to the extent of Rs.32,18,677/- for non-payment of TDS under Section 194C of the Act. We hold that the assessee was entitled to deduct the aforesaid sum even though tax had not been deducted at source,” the court said.
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