Individuals must Deduct TDS on Payments to Contractors even in Absence of Contract: Supreme Court

The Supreme Court held that the individuals must deduct TDS on payments to contractors even in the absence of a contract.

The assessee-appellant, Choudhary Transport Company is a partnership firm, had entered into a contract with M/s Aditya Cement Limited, Shambhupura, District Chittorgarhfor transporting cement to various places in India. As the appellant was not having the transport vehicles of its own, it had engaged the services of other transporters for the purpose. The cement marketing division of M/s Aditya Cement Limited, namely, M/s Grasim Industries Limited, effected payments towards transportation charges to the appellant after due deduction of TDS, in Form No. 16A issued by the company.

In the course of assessment proceedings, the Assessing Officer examined the dispatch register maintained by the appellant containing all particulars as regards the trucks hired, date of hire, bilty and challan numbers, freight and commission charges, net amount payable, the dates on which the payments were made, and the destination of each truck, etc.

The AO observed that while making payment to the truck operators/owners, the appellant had not deducted tax at source even if the net payment exceeded Rs. 20,000/-.

Consequently, the AO proceeded to disallow the deduction of payments made to the truck operators/owners exceeding Rs. 20,000/- without TDS, which in total amounted to Rs. 57,11,625/-; and added the same back to the total income of the assessee-appellant. The AO also disallowed a lump sum of Rs. 20,000/- from various expenses debited to the Profit and Loss Account and finalized the assessment.

The division bench of A.M. Khanwilkar and Justice Dinesh Maheshwari, while upholding the orders of AO, CIT(A) and the ITAT, held that truck operators/owners answered to the description of “sub-contractor” for carrying out the whole or part of the work undertaken by the contractor (i.e., the appellant) for the purpose of Section 194C(2) of the Act.

“If a particular truck was not engaged, there existed no contract but, when any truck got engaged for the purpose of execution of the work undertaken by the appellant and freight charges were payable to its operator/owner upon execution of the work, i.e., transportation of the goods, all the essentials of making a contract existed; and, as aforesaid, the said truck operator/owner became a subcontractor for the purpose of the work in question,” the court observed.