S. 194C(6) & 194C(7) Operates Independently: ITAT directs to Reconsider Disallowance of Transportation charges u/s 40(a)(ia) [Read Order]

The Chennai Bench of the Income Tax Appellate Tribunal ( ITAT ) has ruled that Sections 194C(6) and 194C(7) of the Income Tax Act, 1961 operate independently and that failure to file Form 26Q under Section 194C(7) does not nullify the exemption available under Section 194C(6).

The Tribunal remanded the issue of disallowance of transportation expenses back to the Assessing Officer (AO) for fresh verification of the assessee’s evidence before making any disallowance under Section 40(a)(ia).

The assessee, Royal Impex, had claimed transportation charges of ₹80.65 lakh and fumigation charges of ₹29.19 lakh as part of its direct expenses. While the AO had disallowed the entire direct expenditure of over ₹60 crore on various grounds, the CIT(A) restricted the disallowance to ₹32.95 lakh under Section 40(a)(ia), being 30% of the transportation and fumigation charges. The disallowance was sustained solely because the assessee failed to file the statement of particulars in Form 26Q as required under Section 194C(7).

Before the Tribunal, the assessee argued that it had fully complied with Section 194C(6) by obtaining PANs and declarations from all transport operators engaged, each of whom owned fewer than 10 goods carriages. It was contended that once this substantive condition was satisfied, no tax was required to be deducted at source on payments to transporters.

The omission to file Form 26Q was at best a procedural lapse that may attract penal consequences but should not result in disallowance under Section 40(a)(ia).

The bench of George George K. and S.R.Raghunatha relied on the Madras High Court ruling in CIT v. Parameswari Spinning Mills Pvt. Ltd., which held that Sections 194C(6) and 194C(7) are independent, and non-filing of Form 26Q does not override the benefit of exemption under Section 194C(6).

The Revenue, however, observed that the disallowance was rightly sustained as the assessee had not complied with the statutory requirements in full.

After considering the submissions, the bench accepted the assessee’s contention that the substantive compliance under Section 194C(6) could not be negated merely for failure to file the prescribed statement under Section 194C(7).

The tribunal, following the ruling of the Madras High Court, held that the two provisions operate independently and that procedural non-compliance cannot be a ground for disallowance under Section 40(a)(ia).

Accordingly, it set aside the disallowance of transportation charges and directed the AO to reconsider the claim after verifying all documents, such as declarations and the evidence that the assessee may furnish.

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