Gujarat H.C : Where assessee co-operative society having collected jeep rentals on behalf of its members owning those jeeps, remitted said amount to members, it being a welfare activity and there was no element of work contract involved, assessee was not required to deduct tax at source while making remittance in question

High Court Of Gujarat

ITO, Ward – 3 Vs. Ankleshwar Taluka ONGC Land Looser Travellers Co. Op. Society

Section : 194C, 40(a)(ia)

Akil Kureshi And Ms. Harsha Devani, Jj.

Tax Appeal No. 1456 Of 2011

September  18, 2012


Ms. Harsha Devani, J. – In this appeal under section 260A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) the appellant-revenue has challenged the order dated 20.5.2011 passed by the Income Tax Appellate Tribunal by proposing the following question:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the addition of Rs.2,57,36,253/- made u/s.40(a)(ia) of the Act being amount paid to Sub-contractors without deducting the tax at source as required under Section 194C(2) of the I.T. Act, 1961?”

2. The assessment year is 2005-2006 and the relevant accounting period is the year that ended on 31st March 2005. The respondent-assessee is a cooperative society. For the assessment year under consideration, it declared total income at nil. By an order dated 29.10.2007, the Assessing Officer framed assessment under section 143(3) of the Act whereby he disallowed a sum of Rs.2,57,36,253/- by invoking the provisions of section 40(a)(ia) of the Act on the following grounds:

‘(i) The ONGC has deducted “TDS on payment to contractor” and periodically payment were made to the assessee only and ONGC has not stated that these payment has made to the society on behalf of its members;

(ii) As per section 199 of the IT Act, credit shall be given to the assessee for the TDS for AY for which such income is assessable. The assessee has claimed the credit for the entire TDS and therefore the entire income is assessable in the hands of the assessee. In view of this, the stand taken by the assessee that the society is only distributing income does not have any merit;

(iii) The assessee is a person as per section 2(31) and the status of the assessee is AOP. Assessee is carrying on the business of Travelling Agency as per the tax audit report. Annual accounts of the assessee are audited.

(iv) The assessee itself has stated that the service tax paid is allowable as per section 43B of the Act and has claimed credit for TDS as per the section 199 of the IT Act. The assessee cannot take a stand that only those sections which suit the assessee are applicable to the assessee and those sections which do not suit the assessee are not applicable.’

3. The assessee carried the matter in appeal before the Commissioner (Appeals) who deleted the disallowance. The revenue carried the matter before the Tribunal but did not succeed.

4. Mr. Ketan Parikh, learned Senior Standing Counsel for the appellant assailed the impugned order of the Tribunal by submitting that the Tribunal had ignored certain fundamental issues and aspects and had rendered its decision on totally extraneous factors, like, problems faced by the individual vehicle owners and ONGC and non-profit motive of the Society. The impugned order passed by the Tribunal is, therefore, perverse as being contrary to the facts on record and, as such, deserves to be quashed and set aside.

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.

[Citation : 362 ITR 87]