CASE ANALYSIS

SHREE CHOUDHARY TRANSPORT CO. v INCOME TAX OFFICER

Submitted By:

Niyati Srivastava

Batch 2021-26

B.B.A. LL.B.

PRN: 21010224036

Symbiosis Law School, NOIDA

Symbiosis International (Deemed University), Pune

In

January 2024

Under the guidance of

Ms. Nikky Jhamtani (Visiting Faculty)

Symbiosis Law School, NOIDA

1
 INDEX

INTRODUCTION -------------------------------------------------------------------------------- 3

FACTS ----------------------------------------------------------------------------------------------4

IRAC ANALYSIS ---------------------------------------------------------------------------------5

ISSUES -----------------------------------------------------------------------------------------5

ANALYSIS ----------------------------------------------------------------------------------- 5

JUDGEMENT -------------------------------------------------------------------------------- 6

CONCLUSION ----------------------------------------------------------------------------------- 8

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 INTRODUCTION

The Finance (No. 2) Act of 2004 added Section 40(a)(ia) to the Income Tax Act, which states
that if tax deductible at source under Chapter XVII-B is not deducted or, if it is, is not paid
within the required period, then interest, commission, fees, or amounts payable to residents,
including contractors or subcontractors, may not be deducted. A disagreement arose in
“Shree Choudhary Transport Co. v. ITO (2020)” 1 on the applicability of this section's
disallowance to amounts that were "payable" or "paid."
In this case, M/s Aditya Cement Limited and a partnership firm signed a cement
transportation contract. The appellant hired outside services due to a lack of transportation,
but it failed to deduct the appropriate tax at the source from the money it paid to truck owners
and drivers. The ITAT verified the disallowance of Rs. 57,11,625 and the Supreme Court
supported this decision, emphasizing the importance of deducting tax at the source.

1
Shree Choudhary Transport Co. v. Income Tax Officer 426 ITR 289/192(Supreme Court 2020)

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 FACTS

A cement company and a partnership business have an agreement for the transportation of
cement to different locations. The company borrowed trucks from other owners because it
lacked its own fleet of vehicles. The business was paid by a different cement manufacturer-
related company after taxes were subtracted.
Authorities discovered during a tax assessment that the company failed to withhold taxes on
payments to the truck owners totaling more than Rs. 20,000. “The company contended that
these trucks belonged to neither contractors nor subcontractors and that they need money for
fuel and other expenses. Additionally, they asserted an exemption because no payment ever
surpassed Rs. 20,000.”2
However, the tax authorities treated it like a subcontract and penalized the business in line
with the tax laws. Consequently, certain freight charges were prohibited by Section 40(a) (ia).
The Commissioner, the Tribunal, and the High Court all affirmed this decision.
The corporation was not happy with the decision made by the High Court, so it filed an
appeal with the Supreme Court. Sadly, the Supreme Court rejected the appeal and maintained
the rejection of payments totaling Rs. 57,11,625 since the required taxes were not deducted at
the source.

2
Shree Choudhary Transport Co. v. ito (2020) https://facelesscompliance.com/tag/shree-choudhary-
transport-co-v-ito-2020 (Accessed: 25 January 2024).

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 IRAC ANALYSIS

CASE NAME: Shree Choudhary Transport Company v. Income Tax Officer

CITATION: (2020) 426 ITR 289/192 DTR 161/315 CTR 849/272 Taxman 272 (SC)
COURT: Income Tax Appellate Tribunal
DATE OF JUDGEMENT: 29 July,2020

ISSUES

 If the appellant failed to deduct tax at source from payments made to the truck
operators/owners, could this constitute a violation of Section 40(a)(ia) of the Income
Tax Act, 1961?3

 Does Section 40(a) subclause (ia) apply to the assessment year 2005–06 and the
financial year 2004–05?

ANALYSIS

Utilizing“truck operators' or owners' services for this purpose could only have happened
under a contract between the assessee and truck operators/owners because the assessee was
inherently responsible for figuring out how to carry out the task of transporting goods, as
required by the customer contract. Each time a truck was contracted to deliver the goods, the
assessee and the truck's owners/operators met all the requirements needed to create a contract.
It does not matter if such a contract was reduced in writing. In the matter of " CIT v.
Hardarshan Singh (2013) 350 ITR 427 (Delhi)(HC),"4 it was found that the assessee was
acting exclusively as a commission agent for arranging transportation through other
transporters, i.e., a facilitator or intermediary between the consigner firm and transporters.”
In contrast to the circumstances presented by Hardarshan Singh, the assessee did not serve as
a middleman or facilitator. The assessee had signed independent contracts with truck owners
and operators to carry out the transportation of goods as well as with its customer.
The Supreme Court ruled in “Palam Gas Service v. CIT (2017) 394 ITR 300 (SC)” 5 that
section 40(a)(ia) applies in both situations—when the money is "payable" and "paid."
Finance (No. 2) Act, 2004 added subclause (ia) to clause (a) of section 40 of the Act,
effective April 4, 2005.On September 10, 2004, the President signed the Finance Act. Thus,

3
Income Tax Act, No. 43, 1961
4
CIT V. Hardarshan Singh 350 ITR 427(High Court 2013)
5
Palam Gas Service v. CIT 394 ITR 300 (Supreme Court 2017)

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the assessee contended that it was not foreseeable before September 10, 2004, that any sum
given to a contractor without withholding tax at source would probably stop being deductible
under section 40.
In the case of Palam Gas Services, the Supreme Court decided that the truck operator/owner
became a subcontractor and was governed by all Section 194C requirements as soon as the
truck was rented out for the purpose of transporting goods. Additionally, "articles 40(a)(ia)
and 40A(3) of the Act, which deal with the disallowance of deductions, are intended to
guarantee sufficient tax collection, proper compliance with other obligations, and openness in
Protected is the interest of a bona fide assessee who correctly deducted the appropriate
amount and paid the associated taxes.”6 There is no question about prejudice or suffering.
The Supreme Court has affirmed that both "payable" and "paid" sums are governed“by
Section 40(a)(ia) of the Income Tax Act, in accordance with its earlier decision in Palam Gas
Services. It was made explicit that in this clause, "payable" only relates to the type or nature
of payments that assessors make to payees. The court upheld its previous decision in Palam
Gas Service and found no grounds for reconsideration. Section 40(a)(ia) is applicable to
Assessment Year”2005–06 as of April 1, 2005; the consequences of not deducting tax at
source remain unchanged. The court rejected the argument that the 2014 adjustment, which
put a 30% cap on disallowance, was retroactive, pointing out that, for the assessment year
2015–16, it took effect on April 1, 2015. As a result, section 40(a)(ia) disallowance issued by
the ITO was maintained. (AY. 2005–06)

JUDGEMENT

The customer contract stipulated that the assessee was in responsibility of product
transportation, and it was up to the assessee to decide how best to fulfill this obligation.
Therefore, the use of the truck“operators'/owners' services for this purpose could only have
been authorized by a contract between the assessee and them. The assessee and the truck
owners/operators had all the requirements to form a contract each time a truck was hired to
deliver the goods. It made no difference if the contract was reduced in writing or not. In the
CIT v. Hardarshan Singh (2013) (Delhi)(HC) case, it was found that the assessee was
acting only as a commission agent, facilitating transportation arrangements between the
consigner company and other transporters.”
Unlike the situation that Hardarshan Singh described, the assessee did not act as a go-
between or a facilitator. Along with its customer, the assessee has separate agreements in
place for the transportation of products with truck owners and operators. The Supreme Court
concluded“in Palam Gas Service v. CIT (2017) that section 40(a)(ia) applied in both
situations—when the money was "payable" and "paid." With effect from April 1, 2005, the
Finance (No. 2) Act, 2004 added subclause (ia) to clause (a) of section 40 of the Act. The
Finance Act was signed by the President on September 10, 2004. Consequently, the assessee
argued that it was not reasonably foreseeable prior to September 10, 2004, that any amount

6
(25/01/2024) Digest of case laws. Available at: https://itatonline.org/digest/shree-choudhary-transport-co-v-ito-
2020-426-itr-289-192 (Accessed: 25 January 2024).

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paid to a contractor without first deducting tax at source would likely”no longer qualify for
section 40 deductions. "
The Most relevant paragraph from the judgement is, “The necessity of disallowance comes
into operation only when default of the nature specified in the provisions takes place.
Looking to the object of these provisions, the suggestions about prejudice or hardship carry
no meaning at all. Secondly, as noticed, by way of the proviso as originally inserted and its
amendments in the years 2008 and 2010, requisite relief to a bonafide tax payer who had
collected TDS but could not deposit within time before submission of the return was also
provided; and as regards the amendment of 2010, this Court ruled it to be retrospective in
operation. The appellant having failed to avail the benefit of such relaxation too, cannot now
raise a grievance of alleged hardship. What has been disallowed is that amount of Rs.
57,11,625/- on which the appellant failed to deduct the tax at source and not the entire
amount received from the company or paid to the truck operators/owners.”7
In summary, complaints based on hardship or injustice are deemed irrelevant, and certain
disallowances of payments stipulated in tax laws are contingent upon meeting particular
conditions. The proviso and other caveats in the rules are meant to help law-abiding
taxpayers who were in compliance with the requirements but had difficulty depositing their
Tax Deducted at Source (TDS) on time. In order to safeguard law-abiding taxpayers, several
clauses, like the 2010 modification, have been applied retroactively. The court made it clear
that these measures take effect on the day of their insertion. The claim that the 2014
substantive modification should be based on the principles of instances such as Calcutta
Export Co. was found to be unsupported.
From every perspective, the court finds no evidence of prejudice or unresolved legal issues
with the appellant. It is evident that the payments in question have been correctly excluded
from deduction when determining the assessee-appellant's total income, i.e., against the
appellant and in favor of the revenue.

CONCLUSION

7
Maheshwari, D. (25/01/2024) Shree Choudhary Transport Co. vs Income Tax Officer,
https://indiankanoon.org/doc/128844418/ (Accessed: 25 January 2024).

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The appeal is dismissed in this case, and fees are also refused. The Supreme Court upheld the
appellant’s payment disallowance because the appellant neglected“to deduct tax at source
from payments made to the truck operators/owners. According to the Court's decision, the
appellant's employment of truck operators/owners constituted a sub-contracting arrangement,
and as such, the appellant was required to withhold tax at source from the payments made to
them.”
The assessee argues that because they kept separate accounts for the payment and receipt of
freight costs, they did not treat the spending amount in the Profit and Loss account. However,
the tax authorities refute this claim. The authorities contend that treating the payment and
receipt of freight charges equally doesn't alter the nature of the transactions, and that having
distinct accounts is just one way to achieve this. They buttress their position that transactions
reflected in separate accounts do not warrant distinct treatment by citing an Orissa High
Court ruling in “Tata Sponge Iron Ltd v. CIT.”8 The ruling highlights that set-off, as
asserted by the assessee, is not allowed if the transactions are of the same character, as they
are in this instance. According to the Income Tax Appellate Tribunal (ITAT), the Finance Act
of 2014's modification of Section 40(a)(ia) of the Income Tax Act of 1961 would not have a
retroactive impact. In this regard, the Court upheld the rulings of the High Court and the
Income Tax Appellate Tribunal.

8
Tata Sponge Iron Ltd. v. CIT 292 ITR 175(Orissa High Court 2007)