Saturday, May 7, 2011

TDS on Hired vehicle on fixed amount Covered under 194C not 194I


on Saturday, May 7, 2011


  1. Briefly, the facts of the case are that the assessee is a local authority and is engaged in development of areas in and around Ahmedabad outside municipal limits. 
  2. It was seen that the assessee had hired cars on fixed rent payments but TDS was deducted @ 2% treating the same as contract. Since the cars are one type of machinery, and rent is paid at fixed monthly rate, according to the AO, TDS is applicable at the rate prescribed u/s 194 -I of the IT Act.
  3. Explanation of the assessee was called for. It was explained that for hiring of cars the provisions of section 194-I of the IT Act are not applicable. The payment is made towards the work contract executed and not towards hiring of vehicles. As per the explanation to section 194-I of the IT Act, the rent does not include motor cars. Moreover, as per section 194C of the IT Act, the work includes carriage of passengers. Accordingly, tax has been correctly collected u/s 194 C of the IT Act. 
  4. The AO on consideration of the reply of the assessee noted that the assessee had made payment for vehicle hire charges in connection with plying of employees from one place to another.The vehicles are owned and maintained by the contractor. The assessee is making fixed payment of an amount. All other expenses of diesel, repair and insurance etc. are paid by the contractor. 
  5. After considering the provisions of section 194-I of the IT Act which provides for rent, the AO noted that it included payment of use of machinery, land and rent for hire of any vehicle which is forming part of machinery for the period in use. The AO noted that in the present case vehicles are owned and operated by contractor which are used for carrying employees from one place to another or such services would fall within the scope of section 194-I of the IT Act and not u/s 194C of the IT Act. 
  6. The AO relied upon Board Circular No.715 dated 8-8-1995 which clarify deduction of the tax and section 194C of the IT Act is applicable when a plane or bus or any other mode of transport is chartered by one of the entities mentioned in section 194C of the IT   Act and work in section 194C of the IT Act continuously remain in the statute book and such interpretation of the provision would not controvert or the general provisions contained in the section. The AO,therefore, noted that if the assessee paid the rent for hiring out any machinery then he has to deduct tax at sources u/s 194-I of the Act. In the case of the assessee it paid rent and vehicles had to ply for transporting employees from one place to another, therefore, the assessee was required to deduct tax @ 10%, however, the assessee had deducted TDS @ 2% u/s 194C of the IT Act. Therefore, the difference was calculated @ 8% and the assessee was held to be in default of payment of TDS in a sum of Rs.1,75,506/- and interest u/s 201 (1A) in a sum of Rs.26,537/-. 
  7. Order was accordingly passed, raising the demand against the assessee. Same submissions were reiterated before the learned CIT(A). The learned CIT(A) however, dismissed the appeal of the assessee holding that the assessee had hired cars on fixed rent payment and deducted tax @ 2% of the contract but in fact cars are one type of machinery and rent for the same is paid. Therefore, provisions of section 194-I of the IT Act have been rightly invoked. The appeal of the assessee was accordingly dismissed.
  8. The learned Counsel for the assessee reiterated the submissions made before the authorities below and submitted the assessee correctly deducted TDS as per provision of section 194C of the IT Act. The AO wrongly applied the provisions of section 194-I of the IT Act in which vehicle hire charges have not been mentioned. The learned Counsel for the assessee relied upon the order of ITAT Ahmedabad “B” Bench in the case of M/s. Mukesh Travels Co. Vs ITO in ITA No.2594/Ahd/2010 dated 25-2-2011 in which the Tribunal considering Explanation (iii) to Section 194C of the IT Act on the identical facts held that the payment of the same nature clearly falls within the scope of section 194C of the IT Act. The learned Counsel for the assessee also raised additional ground of appeal stating therein that the entire amount of tax has been paid by the payee; therefore, there is no loss to the revenue. Copy of the return of the payee is filed on record. .
  9. The above definition of rent does not provide any item for vehicle hire charges. Therefore, provisions of section 194-I has been wrongly applied in the matter by the AO. Considering the above discussions we are of the view that the authorities below have wrongly applied the provisions of section 194-I of the IT Act in the matter. We accordingly, set aside the orders of the authorities below and delete the demand and the interest thereon for shortfall as noted by the AO on this issue.In view of the above finding, there is no need to admit the additional ground of appeal of the assessee.

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