Gujarat H.C : The Tribunal has erred in law in upholding the decision of the CIT(A), deleting the addition of Rs.2,13,99,519/- made u/s.40A(3) of the IT Act being payment made in contravention with the provisions of sec.40A(3)

High Court Of Gujarat

CIT –III VS. Ankleshwar Taluka ONGC and Land Looser Travellers Co-op. Society

Assessment Year : 2009-10

Section : 40A(3)

Akil Kureshi And Ms. Sonia Gokani, JJ.

Tax Appeal No. 366 Of 2013

February 4, 2014


Akil Kureshi, J. – Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal dated 26.10.2012 raising following questions for our consideration:

“Whether on the facts and in the circumstances of the case, the Tribunal has erred in law in upholding the decision of the CIT(A), deleting the addition of Rs.2,13,99,519/- made u/s.40A(3) of the IT Act being payment made in contravention with the provisions of sec.40A(3) of the I.T. Act?”

2. Brief facts are that the respondent-assesee is a society of land-losers who had lost their land in a particular area due to the acquisition undertaken by the ONGC. For the assessment year 2009-10, the Assessing Officer disallowed 20% of sum of Rs.3.79 crores (rounded off) on the ground that such sum was expended and payments in excess of Rs.20,000/- each were made to individuals without following the requirements of section 40A(3) of the Act.

3. The assessee contended that it was only a cooperative society enabling the land losing farmers to survive by way of alternate means of plying vehicles on rent to the ONGC. The payments received from ONGC were being routed through the assessee and in this manner, the assessee was aiding illiterate farmers. Such demands were, therefore, not in the nature of expenditure.

4. For the assessment year 2005-06 similar payments were the subject matter of proceedings under section 40(a)(ia) and under section 40A(3) of the Act, on the ground that no TDS was deducted and payments in excess of Rs.20,000/- were made in cash. The assessee carried the matter in appeal before CIT (Appeals) who had taking into account the peculiar facts of the case deleted the additions on both the counts. The Revenue curiously carried only one question of addition under section 40(a)(ia) of the Act before the Tribunal. The Tribunal confirmed the view of the CIT (Appeals), upon which the Revenue filed Tax Appeal No.1456 of 2011 before this Court. Such appeal was dismissed with following observations:

“5. The facts as emerging from the record indicate that ONGC Ltd. had found Crude Oil and Natural Gas in the areas of Ankleshwar, Hansot taluka and nearby talukas of Bharuch District. Such lands belonged to many small illiterate farmers. ONGC formulated a scheme to acquire the said oil field land area from the farmers by compensating them. As part of the compensation mechanism, some of the farmers who were eligible were given jobs or services as per their qualifications. However and many other illiterate farmers were not eligible for any job, to compensate such farmers ONGC decided to give a special right to each land losing farmer, for this purpose it was decided that each such farmer would be provided with one jeep each (transport vehicle) which would be taken on rent by ONGC so that each farmer was provided with a means of livelihood. To begin with, ONGC had entered into an agreement with these individual farmers which continued for a few years. However, the number of such farmers was increasing day by day and it became difficult for ONGC to maintain accounts of each individual farmer for releasing payments. With a view to obviate such difficulties in September, 1988 ONGC decided that a co-operative society be formed consisting of farmers whose land was acquired by ONGC which could maintain the individual account of each farmer and would be one stop entity coordinating all matters with ONGC on behalf of the farmers. Thus, the assessee Society, a non-profit making organization was formed. The assessee was maintaining vehicle-wise accounts comprising of details of expenses and receipts. All these vehicles were hired by ONGC and lump sum receipt was paid by ONGC after deducting TDS to the society, who thereafter allocated the amount to respective members after deducting the administrative expenses depending on actual usage. During the year under consideration, the assessee-Society received Rs.2,57,62,253/- and the entire amount was distributed to the farmers. The Assessing Officer was of the view that the society is functioning as a sub-contractor and that it ought to have deducted TDS on payments made to each of the farmers as per the provisions of section 40(a) (ia) and section 194C. According to the Assessing Officer the assessee was hiring cabs from farmers and renting them to ONGC. Since in respect of jeep rental income of Rs.2,57,36,253/- no TDS was deducted the entire expenditure was not allowable under section 40(a)(ia) of the Act. Since the entire amount of Rs.2,57,36,253/- was paid to the farmers in cash, 20% of the expenditure amounting to Rs.51,47,250/- was also added to the income under section 40A(3) of the Act.

6. The Commissioner (Appeals) was of the view that the functions performed by the society had no profit motive and were more in the nature of a welfare activity performed by it. The context in which the society was formed was essentially to facilitate receipts and distribution of income and accounting for the expenses. The society acted as an interface between the farmers and ONGC for this limited purpose was receiving the jeep rental income on behalf of the illiterate farmers. This mechanism helps both ONGC and the farmers as it precludes individual interaction and smoothens the entire operation. The society prepares the individual logbook for the farmers and on the basis of such log books the ONGC releases the payment which is distributed to the farmers. The original agreement always remained between the ONGC and the individual farmers. The Commissioner (Appeals), accordingly, found that there was no element of work contract in terms of provisions of section 194C in the activities performed by the society and accordingly set aside the disallowance under section 40(a)(i) of the Act. He further held that there was no case for disallowance under section 40A(3) as no expenditure was incurred by the society in distributing the rentals to the farmers.

7. The Tribunal, after appreciating the material on record and carefully considering the reasons for the formation of the society was convinced that the assessee had no profit motive and the activity of the society was more of a welfare activity. The Tribunal concurred with the findings recorded by the Commissioner (Appeals) and accordingly upheld the same.

8. In the light of the above noted concurrent findings of fact recorded by the Tribunal upon appreciation of the evidence on record, this court is of the opinion that the reasoning adopted by the Tribunal is just and reasonable. Under the circumstances, it is not possible to state that there is any infirmity in the impugned order of the Tribunal so as to give to any question of law, much less, a substantial question of law so as to warrant interference. The appeal being devoid of merit is, accordingly, dismissed.”

5. In the present round, when the CIT (Appeals) and thereafter the Tribunal held against the Revenue, the present appeal has been preferred. We notice that the Tribunal in the impugned judgment relied heavily on its previous order in the case of the same assessee for the assessment year 2005-06.

6. It is true, as pointed out by the learned counsel for the Revenue, that in strict sense the question of disallowance under section 40A(3) of the Act was not an issue before this Court in Tax Appeal No.1456 of 2011. However, from the portion of the order noted hereinabove, it can be seen that the Court did advert to such an issue in the context of the findings of the CIT (Appeals) as well as the Tribunal and approved the same. More interestingly, if such issue was arising in the assessment year 2005-06, the question is, why did the Revenue not raise such a question before the High Court and having not done so, can in the present case, raise such a question. Without giving any finality to such an issue, for the same reasons assigned by us in the earlier order in Tax Appeal No.1456 of 2011 for the assessment year 2005-06, we are not inclined to entertain the present appeal of the Revenue. In the said order, the view of the CIT (Appeals) and the Tribunal that the payments in question were not expended by the assessee and that therefore would not come within the meaning of expenditure (be it based on section 40(a)(ia) or section 40A(3) of the Act) was confirmed.

7. In above view of the matter, this Tax Appeal is dismissed.

[Citation : 362 ITR 92]