Material Cost Not Liable for TDS u/s 194C: ITAT Restricts Sec. 40(a)(ia) Disallowance to 30% of Defaulted Amount [Read Order]

The Income Tax Appellate Tribunal (ITAT), Kolkata Bench, partly allowed the assessee's appeal and directed the AO to restrict disallowance under Section 40(a)(ia) after holding that material purchased for installation purposes was not liable for TDS under Section 194Cof the Income Tax Act.

The assessee, Aircon India Incorporated, a partnership engaged in the business of sales and services of air conditioners, had incurred labour charges of Rs.1.84 crore and material cost of Rs.2.97 crore for installation work.

During assessment proceedings, the AO held that the payments were covered under Section 194C and disallowed the entire amount under Section 40(a)(ia) for non-deduction of tax at source.

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The CIT(A) affirmed the disallowance made by the AO. Aggrieved, the assessee preferred an appeal before the Tribunal.

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Before the Tribunal, the assessee contended that material purchased for installation was not subject to deduction of tax at source under Section 194C. The assessee further contended that tax had already been deducted on substantial labour payments and that any disallowance could only relate to the amount on which tax was deductible but had not been deducted.

However, the Revenue supported the orders passed by the lower authorities.

The Tribunal comprising Rajesh Kumar (Accountant Member) and Pradip Kumar Choubey (Judicial Member) observed that the assessee had purchased materials for installation and that no tax was required to be deducted on such purchases. It further observed that the tax, in respect of the material component, was required to be deducted by the person awarding the contract and not by the assessee.

The Tribunal further observed that out of service charges of Rs.1.84 crore, tax had already been deducted on labour payments of Rs.1.21 crore. It also noted that certain payments were below the monetary thresholds prescribed under Section 194C(5). Consequently, the amount on which tax was deductible but had not been deducted worked out to Rs.56.72 lakh.

Relying on Dipak Arui v. ITO and Shri Rajendra Yadav v. ITO, the Tribunal held that disallowance under Section 40(a)(ia) was liable to be restricted to 30% of the defaulted amount.

Accordingly, the Tribunal directed the AO to restrict the disallowance to Rs.17.01 lakh. The assessee's appeal was partly allowed.

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