TDS not deductible by Individual & HUF if Turnover not exceeded Tax Audit Limit in preceding Financial year

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HIGH COURT OF GUJARAT

Harshadbhai Naranbhai Bagadia

v.

Assistant Commissioner of Income-tax

SPECIAL CIVIL APPLICATION NO. 12243 OF 2009

JULY 16, 2012

Sub-section (2) of Section 194C under ordinary circumstances does not cover an individual or Hindu Undivided family for the liability of deducting tax at source on the payments credited or made to the sub-contractor. However, proviso brings such individual or HUF within the fold of sub-section (2) if in the financial year immediately preceding the financial year during which such sum is credited or paid, such individual or HUF was covered by clause (a) or clause (b) of Section 44AB. Therefore, to insist that an individual or HUF should deduct tax at source under sub-section (2) of Section 194C on payments made to a sub-contractor, it must be established that in the financial year immediately preceding the financial year in which such sum is paid or credited, total sales, gross receipts or turnover of such individual or HUF from profession or business exceeded the limits provided in Section 44AB of the Act and the accounts were thus compulsorily auditable.

14. In the present case, admittedly such condition was not satisfied in the preceding financial year. The AO however interpreted that liability to deduct tax at source would arise even if the case of the assessee fell under clauses (a) or (b) of Section 44AB in the current financial year. We do not see how such interpretation is possible. Firstly, proviso to sub-section (2) of Section 194C clearly refers to financial year immediately preceding the financial year in which sum is credited or paid to the sub-contractor. Statutory provisions do not permit any ambiguity.

Even otherwise the interpretation put forth by the Revenue would lead to anomalous situation. The assessee as an individual or HUF may be required to make the payments to a sub-contractor on the first date of the financial year or at any rate in the early part of the financial year. At that stage, the assessee would obviously not be in position to foresee whether total sales, gross receipts or turnover would exceed statutory limits and his accounts would be therefore required to be audited under Section 44AB of the Act. In such a situation, the assessee could not be expected to deduct tax at source. If out of abundant caution, he did deduct the tax at that stage, the recipient of the payment would legitimately object to any such deduction. Moreover, eventually during the financial year under consideration, if the assessee’s total sales, gross receipts or turnover did not exceed statutory limits, the entire exercise of deduction of tax at source would be unauthorized. On the other hand, if the assessee did not deduct the tax and by the year end, found that his total sale, gross receipts or turnover had exceed the limit, he would be liable to be declared a defaulter with grave consequences of such payments though actually made, being discarded for deduction under Section 40(a)(ia) of the Act. Surely, the statute never intended to bring about such strange results. It is precisely for this reason that the liability of an individual or HUF to deduct tax at source upon the payments being made to the sub-contractor, is made relatable to his gross receipts, sales or total turnover of the financial year immediately preceding the year when such payment is made or credited.

In the result, we are of the opinion that the Assessing Officer’s reason to believe that the income chargeable to tax in case of the assessee has escaped assessment is without any foundation and lacks validity