ITAT: TDS U/S 194C Should Not be Applicable Due to Purchase Expenses Reported Under Head Contract Expenses

The Income Tax Appellate Tribunal (ITAT) in Ahmedabad, in a recent ruling, determined that Tax Deduction at Source (TDS) under Section 194C of the Income Tax Act, 1961, should not be applicable to purchase expenses that were categorized as “contract expenses.”

The taxpayer in question, Shubh Infra JV, operates as an Association of Persons (AOP) and is primarily involved in the construction industry. The tax authorities subjected the taxpayer’s case to a thorough examination under the Computer-Assisted Scrutiny Selection (CASS) process. During the assessment proceedings, the Assessing Officer (AO) identified that the taxpayer had reported expenses totalling Rs. 15,50,74,744 beneath the “contract expenses” category in their profit and loss statement.

As a result, the AO concluded that such expenses were subject to TDS, yet TDS had not been deducted at the time of payment for these expenditures.

Consequently, the taxpayer was requested to provide supporting documentation, such as bills, vouchers, ledger accounts, and bank statements, that demonstrated the payments related to these expenses. Regrettably, the taxpayer failed to produce the necessary supporting evidence.

In the absence of the required supporting documents, the AO determined that the claimed expenses pertained to labour supply, for which Tax Deduction at Source (TDS) should have been deducted. Consequently, the AO invoked the provisions of Section 40(a)(ia) of the Income Tax Act and disallowed 30% of the contract expenses.

The taxpayer dissatisfied with the order has furnished the petition to CIT(A) who has affirmed the disallowance. Hence the taxpayer has furnished another petition to the tribunal.

At the time of the proceedings the taxpayer’s counsel, Bandish Soparkar, has argued that the expenses claimed beneath the head of the contract expenses shall get made for the material buying which does not direct to the provision of the tax deducted at source under section 194 of the Income Tax Act.

Ashok Kumar, representing the Revenue, expressed support for the decisions made by the authorities below. He argued that the taxpayer had not provided the necessary information regarding the contract expenses.

During the appeal process, the Tribunal noted that purchases could not be subjected to the provisions of Tax Deduction at Source (TDS) as outlined in Section 194C of the Income Tax Act. However, the responsibility fell upon the taxpayer to demonstrate that the categorization of material purchase expenses as “labour expenses” was an unintentional error.

Consequently, it was determined that the taxpayer had failed to meet this burden of proof before the Commissioner of Income Tax Appeals (CIT-A), based on the available documentary evidence.

Upon a thorough examination of the facts and records, the two-member bench consisting of Waseem Ahmed (Accountant Member) and Siddhartha Nautiya (Judicial Member) directed that the purchase expenses claimed under the category of “contract expenses” should be re-evaluated.