Key Takeaways: - Background of the provision - Facts of the case - Contentions of the parties - Final ruling - Key observations

1. SHREE CHOUDHARY TRANSPORT COMPANY
vs.
INCOME TAX OFFICER
SUPREME COURT OF INDIA
[2020] 118 TAXMANN.COM 47 (SC)

2. RESEARCH CREDITS
Hepsibah Caroline

3. LEGENDS USED
AO Assessing Officer
AY Assessment Year
CIT Commissioner of Income Tax
HC High Court
IT Income -Tax
ITAT Income -Tax Appellate Tribunal
PY Previous Year
SC Supreme Court
SG State Government
TDS Tax Deducted at source
TCM Tax Collection Machinery

4. PRESENTATION SCHEMA
Facts of the Case Issues and Orders
Contention of the
Parties
Observations of SC
Decision of the SC

5. FACTS OF THE CASE

6. FACTS OF THE CASE
1) The Assessee-Appellant a
partnership firm, named Shree
Choudhary Transport Company had
entered into contract with M/s
Aditya Cement Limited, for
transporting cement to various
places in India.
2) As the Appellant was not having
transportation of his own, had
engaged the services of other
transporters for this purpose.
3) Cement marketing division of
M/s Aditya Cement Limited, made
payments towards transportation
charges to the appellant after
deduction of TDS.
4) On 28-10-2005, the Assessee-
appellant filed its return for the AY
2005-06, showing total income at
Rs. 2,89,633/- derived from
business of 'transport contract'.
5) On verifying the records placed
before him, AO observed that while
making payment to the truck
operators/owners, the appellant
had failed to deduct TDS for net
payment exceeding Rs. 20,000/-.
6) Appellant contended, that the
trucks hired belonged to different
operators who were not the sub-
contractors or contractors, who
came from different parts of India
and mostly required cash payment
for diesel and other running
expenses.

7. ISSUES AND ORDERS

8. ISSUE UNDER CONSIDERATION
Whether there existed a contract between the Appellant and Truck operator/owner resulting in the responsibility of
the Appellant to deduct TDS on freight charges paid to the truck operator/owner.
Whether disallowance u/s 40(a)(ia) would be applicable in the case of the assessee for the AY 2005-06 ?

9. ORDERS AT VARIOUS LEVELS
An appeal was made to Supreme Court regarding the same
HC,
Opined that ‘transport the goods’ being the primary responsibility of appellant , consequential to which hiring of
services of truck operators/ owners results in a subcontract.
ITAT,
Dismissed the appeal on grounds that Appellant did not own any trucks, so had engaged in services of other truck
owners, which constitutes a separate contract between the appellant and truck operator/owner
CIT(Appeals),
Held that payments made to truck operators/owners represented expenditure, as such were made only on
completion of ’work’, & affirmed the existence of a contract & applicability of relevant provisions to contract for
transportation of goods
AO,
Opined that there existed a contract between the appellant and the truck operators/owners w.r.t each challan for
transportation, as the payments to different truck operators/owners were made directly by the appellant firm.

10. CONTENTIONS OF THE PARTIES

11. CONTENTIONS OF THE ASSESSEE-APPELLANT
Sec 194C was not
applicable when there
had not been any
specific contract
between the appellant
and the truck owners,
whose vehicles were
hired on freelance and
need basis.
The Expenses already
paid cannot be
disallowed, as sec.
40(a)(ia) intends to
disallows only amount
remaining ‘payable’
Disallowance under sec.
40(a)(ia) as introduced
by Finance Act, 2004
was applicable to and
from AY 2006-07.
Amendment made to
sec. 40(a)(ia) in the
Finance Act 2014, (i.e.
disallowing 30% of
expenses incurred) has
to be applied
retrospectively for the
FY 2005-06.
1
3
2
4

12. CONTENTIONS OF THE REVENUE DEPARTMENT
Carrying out the work of
transportation by hiring the
trucks & payments made to
the operators/owners by
issue of invoice for every
such hiring, constituted a
separate contract/sub-
contract.
Appellant has defaulted in
deducting TDS u/s 194C of
the Act on such payment
made to such truck
operator/owner exceeding
Rs. 20,000/-
The Section 40(a)(ia) was
not limited only to the
expenses payable but also
extends to the expenses
already incurred and paid.
Amendment to section
40(a)(ia) of the Act by the
Finance Act, 2004 with
effect from 1-4-2005 directly
applies to the assessment
year 2005-06
1 2 3

13. OBSERVATIONS OF SC

14. RELEVANT EXTRACT OF SECTION
Section 194C (as amended by Finance Act 2004) –
(1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the
contractor) for carrying out any work ********
**
shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in
cash or by issue of a cheque or draft or by any other mode, whichever is earlier, ******
**
(3) No deduction shall be made under sub-section (1) or sub-section (2) from—
(i) the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the
contractor or sub-contractor, if such sum does not exceed twenty thousand rupees
Section 40(a)(ia) [as amended by Finance Act 2004] –
Notwithstanding anything to the contrary in sections 30 to 58, the following amounts shall not be deducted in
computing the income chargeable under the head "Profits and gains of business or profession",—
(a) in the case of any assessee—
(ia) any interest, commission or brokerage, fees for professional services or fees for technical services payable
to a resident, or a *****

15. 1.APPLICABILITY OF SEC 194C
Assessee-Appellant
(Transporting Company)
Aditya Cement
Company
Destination
Truck
operators/
Owners
Contract
Sub Contract
As once a particular truck was hired by the appellant for carrying
out the part of work undertaken(transportation) , the
operator/owner of that truck became the sub-contractor.
As it was the responsibility and at the domain of the appellant to
transport the goods of the company, and how to accomplish the
task.
2. Whether appellant had specific/identified trucks on its rolls /
had been picking them up on freelance basis was not significant,
1. Goods transported through trucks hired, even in the absence of
any contract with the truck operators/owners, constituted a
contract,

16. ADDUCED CASE BY APPELLANT
SC stated the - Delhi HC case CIT V. Hardarshan Singh is not relevant here,
- as in the present case there exists no privty of contract between the consignor company and
the truck operator/owner,
- but, there is a subcontract between the truck owner and the appellant for transportation of
goods.

17. 2.DISALLOWANCE LIMITED TO ‘PAYABLE’ OR ‘PAID’
Purpose of Disallowance
(Calcutta Export Co.)
It is Clear from
Memorandum’s
explanation that sec.
40(a)(ia) was introduced to
ensure tax compliance.
Purpose is not to punish
the assessee but only
shifting of the year in
which the expenditure
can be claimed as
deduction.
Provisions & Procedures
relating to TDS
(P.M.S. Diesels case)
Liability to TDS is mandatory
as the words used is “shall”
and not “may”.
Identification of the payees
& confirming the network of
assesses.
Enabling of TCM to bring
within its fold all such persons
who are liable to pay tax and
to make requirement of
deducting TDS mandatory.
Term "payable“
(Cresent export
syndicate case)
Is descriptive of the payments
which attract the liability to
deduct TDS in a particular period
& does not categorize defaults
on the basis of when the
payments are made.
The term payable is only indicative
and It thus cannot be held the term
refers to only those cases where
the amount is yet to be paid and
not the amount actually paid.

18. CASE LAW REFERRED
According to SC ,
The observations in Palam Gas Service that the enunciations in P.M.S. Diesels had been of correct
interpretation of section 40(a)(ia) of the Act.
The decision in Palam Gas Service covers the entire matter and the said decision, in SC view, does not
require any reconsideration as SC is unable to find in substance any of the contentions made by the assessee.
Thus, the contention of the assessee that disallowance u/s 40(a)(ia) does not relate to the amount already
paid and is applicable only to the balance amount payable stands rejected.

19. 3.WITH EFFECT FROM AY 2005-06
In the case Karmtharuvi Tea Estate Ltd v. State of Kerala, it was laid
‘It is well-settled that the IT Act, amended on the first day of April of any FY must apply to the assessments of that
year.
Amendments in the Act which come into force after the first day of April of a FY, would not apply to the assessment
for that year even if the assessment is actually made after the amendment came into force.’
HC Decision in CIT v. Isthmian Steamship Lines was observed by the SC and laid that
‘though the subject of the charge is the income of the PY, the law to be applied is that in force in the AY, unless
otherwise stated or implied’
Applying these principles to the case in hand SC viewed that amendment in sec 40(a)(ia) w.e.f. 1/4/2005 would
apply from and for AY 2005-06.
The contention of the assessee that the said section shall be applicable only from AY 2006-07 as the assent of the
president was received only after the April 2005 is baseless.

20. 4. DISALLOWANCE OF DEDUCTION
The necessity of disallowance comes into operation only when default of the
nature specified in the provisions takes place.
The appellant had shown payments in Truck Freight Account at Rs.
1,37,71,206/- and receipts from the company at Rs. 1,43,90,632/-.
Amount of Rs. 57,11,625/- has been disallowed on which the appellant
failed to deduct TDS and not the entire amount received from the company
or paid to the truck operators/owners.
Viewing from any angle, SC did not find any case of prejudice or legal
grievance with the appellant.

21. CONTD..
Insertion & Amendments in the year 2008 & 2010,
• provides requisite relief only to tax payers who had collected TDS but could not deposit within
prescribed time
• who had made the deduction as required and had paid the same to the revenue.
• Hence, SC opined that Amendment does not apply to the assessee, who is in default.

22. THE EFFECTS OF THE CASE
Prior to Amendment to Sec 40(a)(ia)
in the year 2014,
any expense w.r.t default in
deduction of TDS shall be disallowed
entirely.
After Amendment to Sec 40(a)(ia) in the
year 2014,
any expense w.r.t default in deduction of
TDS shall be disallowed to the extent of 30%
of such expense in default.
The benefit of amendment made in the year 2014 to the provision in question is not available to the appellant in the
present case.

23. CONCLUDING POINTS

24. CONCLUSION
Payment made by assessee to truck operator/owner was clearly a payment made to a sub-contractor and
hence TDS u/s 194C was deductible.
Where assessee had not deducted TDS, such payments had rightly been disallowed from deduction while
computing total income of assessee.
Disallowance u/s 40(a)(ia) is not limited only to amount outstanding at end of year and this provision
equally applies to expenses that had been incurred and paid by assessee.
Disallowance u/s 40(a)(ia) as introduced by Finance Act, 2004 w.e.f. 1-4-2005 is applicable to this case
relating to AY 2005-06;
and benefit of amendment made in year 2014 to provision is not available to the assesse.

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