S. 40(a)(ia) TDS: Special Bench verdict binding despite suspension by High Court

ITO vs. M/s MGB Transport (ITAT Kolkata)

The assessee paid dumper hire charges of Rs. 36.37 lakhs and claimed it as a deduction. The AO disallowed the claim u/s 40(a)(ia) on the ground that the assessee had not deducted TDS thereon u/s 194C. Before the Tribunal, the assessee argued that it was not liable to deduct TDS u/s 194C as there was only no “contractual agreement”. In the alternative, it was argued that in accordance with the Special Bench judgement in Merilyn Shipping 136 ITD 23 (SB), the disallowance u/s 40(a)(ia) had to be confined to the amounts “payable” as at the end of the year and it did not apply to the amounts already paid during the year. The assessee also argued that though the Andhra Pradesh High Court had granted an “interim suspension” against the said judgement of the Special Bench, it was still binding. HELD by the Tribunal:

The argument that s. 194C does not apply in the absence of a written contractual agreement is not acceptable. Even a verbal contract is sufficient. As regards the judgement of the Special Bench in Merilyn Shipping 136 ITD 23 (SB) where the view was taken that s. 40(a)(ia) can apply only to the amounts remaining payable as at the end of the year and not to the amounts paid during the year, though the Andhra Pradesh High Court has granted “interim suspension” of the said judgement, the said stay/ suspension applies only to the parties to that proceeding and does not destroy the binding effect of the judgement of the Special Bench. There is a difference between “stay of operation” of an order and “quashing of an order”. While, in the case of a “quashing”, the order of the lower court ceases to exist, in the case of a “stay”, the order of the lower court continues to operate and have binding effect. Accordingly, the judgement of the Special Bench in Merilyn Shipping still holds ground and the TDS provisions will apply, for purposes of invocation of s. 40(a)(ia), only on the amounts remaining payable at the end of the year and not on the amounts paid (Shree Chamund Mopeds Ltd. vs. Church of South India Trust Association AIR 1992 SC 1439, 1444 & Pijush Kanti Chowdhury vs. State of West Bengal 2007 (3) CHN 178 followed).