Whether when payment is made on account of legal obligation, it does not trigger provisions of Sec 194C - YES: ITAT

THE issue before the bench is - Whether when the payment is made on account of legal obligation, it does not trigger the provisions of Sec 194C. YES is the answer.

Facts of the case

The assessee is a public trust set up under Punjab Towns Improvement Act, 1922. A TDS survey was carried out on the premises of the assessee on 4th February 2010 and 5th February 2010. During this survey, it was noted that the assessee was making payments to Punjab Water Supply and Sewerage Board, but has not deducted tax source from these payments. It was in this background and proceeding on the basis that the assessee was under an obligation, under section 194C, to deduct tax at source from these payments, that demands under section 201(1) and 201(1A) r.w.s. 194C were raised on the assessee.

On appeal, the CIT(A) upheld the action of the Assessing Officer in principle, he restricted the demand only to the extent principal liability of the recipient remained unpaid and in respect of the delay in eventual realization of tax.

On appeal, the Tribunal held that,

++ there is no dispute that the assessee has made payments to Punjab Water Supply and Sewerage Board for execution of work relating to sewerage pipe lines and for treatment of polluted water of the city. However, as the counsel for the assessee rightly points out, such payments are out of legal obligations rather than contractual arrangements, and it is only when payments are made "in pursuance of a contract" that the provisions of section 194C come into play. The contract may be oral or written, express or implied but there must be a contract nevertheless. In the present case, however, the payment is on account of legal obligation under section 24(1) of the Punjab Water Supply and Sewerage Board Act 1976;

++ for the reasons set out above, the provisions of section 194C did not come into play on the facts of this case. Clearly, therefore, the impugned demands under section 201(1) and 201(1A) r.w.s. 194C are wholly devoid of any legally sustainable merits. We quash these demands.

++ as the appellant succeeds in the above grounds, we see no need to deal with the other issues raised by the assessee and the grounds on which the partial relief has been granted by the CIT(A). That aspect of the matter is wholly academic at this stage.