1 ITA No. 18/Kol/2014 M/s. Kwality Construction, AY 2009-10 IN INCOME TAX APPELLATE TRIBUNAL C BENCH: KOLKATA [Before Shri N. V. Vasudevan, JM & Shri M. Balaganesh, AM] I.T.A No. 18/Kol/2014 Assessment Year: 2009-10 Income-tax officer, Wd-33(2), Kolkata. Vs. M/s. Kwality Construction (PAN: AAGFK0888G) (Appellant) (Respondent) Date of hearing: 22.09.2016 Date of pronouncement: 14.10.2016 For Appellant: Shri Rajat Kr. Kureel, JCIT, Sr. DR For Respondent: Shri Subash Agarwal, Advocate ORDER Per Shri M. Balaganesh, AM: This appeal by revenue is arising out of order of CIT(A)-XIX, Kolkata vide appeal No. 85/CIT(A)-XIX/Ward-33(2)/Kol/12-13 dated 25.10.2013. Assessment was framed by ITO, Ward-33(2), Kolkata u/s. 143(3) of Income tax Act, 1961 (hereinafter referred to as Act ) for AY 2009-10 vide his order dated 30.12.2011. 2. only issue to be decided in this appeal is as to whether ld CITA is justified in deleting disallowance made u/s 40(a)(ia) in sum of Rs. 2,04,79,685/ -in facts and circumstances of case. 3. brief facts of this issue is that assessee is partnership firm and engaged in business of civil contract under category I under name and style of M/s Kwality Construction of all Government Jobs either state level or central level like railways and other Government undertakings since 1982-83. ld AO observed that assessee in its profit and loss account debited amount of Rs. 2,04,79,685/- towards labour charges and details of same were furnished by assessee. ld AO directed assessee to explain why labour payments made to 14 labour contractors should not be disallowed u/s 40(a)(ia) of Act as same were paid without deduction of tax at source . assessee submitted total number of labours working under each labour contractor / labour sardars and stated that labours are coming from remote villages and even inter 2 ITA No. 18/Kol/2014 M/s. Kwality Construction, AY 2009-10 state and they have no knowledge of Income Tax Act. It was submitted that labour sardars were paid commission from labour bill which is included in labour payments. It was further submitted that no payment has been made over Rs 20,000/- in cash and overall limit of commission paid to each labour sardar also fall within limit prescribed u/s 194C of Act. Accordingly, it was claimed that question of obligation to deduct tax at source does not arise. ld AO however found that payments were made to labour contractors / labour sardars and payments made to each sardar was above Rs 50,000/- in financial year thereby warranting deduction of tax at source in terms of section 194C of Act. Accordingly he disallowed entire labour charges u/s 40(a)(ia) of Act. 4. Before ld CITA , apart from reiterating submissions made before ld AO, assessee submitted that labour contractors / labour sardars were paid commission at rate of 1.5% to 2% on labour bills which does not exceed overall aggregate limit of Rs. 50,000/- in terms of section 194C of Act. It was also argued that such bulk volume of government contract jobs could not be performed by 14 contractors. Hence obviously , various labourers had to be employed under each labour contractor / labour sardars to carry out civil contract work at various project sites of assessee. It was submitted that labour payments were paid to labourers through labour sardars. It was also explained that labour sardars and labour contractors are different. labour sardar merely brings labourers who are directly paid by employer. sardar simply gets commission every time labourers are paid which may vary from 1.5% to 2% of labourers payment and in turn they manage labours and their turnover. On other hand, labour contractor supplies labour and receives any payment in his own name and by keeping his cut, he pays labourers. Thus labourers are not liable to get any direct payment from employers. assessee also filed details that more than 100 labourers were employed under each labour sardar. ld CITA observed that there was no contract between assessee and labourers or even with sardars. It was argued that there was no contract entered into by assessee. ld CITA deleted disallowance by observing as under:- 4.7. That section 40(a)(ia) requires that unless tax is deducted according to section 194C on payment to contractors or sub-contractors, which includes supply of labour for carrying out any work, it will attract disallowance of expenditure. Hon ble supreme court in 3 ITA No. 18/Kol/2014 M/s. Kwality Construction, AY 2009-10 Birla Cement Works Vs. CBDT (2001) 248 ITR 216 has laid down conditions precedent for attracting provisions of section 194C, viz. (i) there must be contract must be for carrying out of any work, (iii) work is to be carried through contractor, (iv) consideration for contract should exceed amount fixed by section 194C and (v) that payment is made to contractor for work carried out by him. Therefore, section 40(a)(ia) cannot be read in isolation or to exclusion of section 194C. In instant case, controversy was regarding payments made for disbursement of labour charges to labour sardars. appellant had specifically stated before AO that there was no contract between appellant and labour sardars. Keeping in view totality of facts and circumstances of case and submissions of assessee, I am of firm opinion that in instant case, appellant does not fall within ambit of section of 40(a)(ia) of Act. I find force in argument of A/R of appellant that labour sardars in instant case cannot be said to be labour contractors within meaning of provision of section 194C(2). In circumstances, there is no requirement in law to deduct tax at source by appellant under provisions of section 194C(2). I find in this case, Labour Sardars have no locus standi as Labour Contractors as Labour Sardar and Labour Contractor are as different as chalk and cheese. I find there was no contract between appellant and Labour Sardars for supply of labour and without which there cannot be any application of section 194C and as such invocation of provision of sec. 40(a)(ia) is outside scope and ambit of such enactment. In view of matter I am of considered opinion that section 194C(2) being not applicable in this case, disallowance of Rs.2,04,79,685/- made by AO by invoking section 40(a)(ia) of I.T. Act, 1961 is hereby deleted. 5. Aggrieved, revenue is in appeal before us on following ground:- Ld. CIT(A) erred in fact and in law, in deleting addition of Rs.2,04,79,685/- made on account of violation of section 40(a)(ia) of I. T. Act 1961 though there was been failure on part of assessee to deduct TDS from payments made to 14 labour contractors. Ld. CIT(A) erred in holding that there was no oral contract between assessee and labour sardars/contractors and also failed to appreciate that payments on account of labour charges was made by assessee to labour contractors despite fact that assessee could not adduce any evidence to prove that payments were made directly to labourers. 6. ld DR argued that observation of ld CITA that there is no contract is incorrect. He stated that muster roll was not submitted by assessee before ld AO which would become primary document. He argued that formal contract is not necessary. In instant case, all ingredients of contract have been duly fulfilled and provisions of section 8 & 9 of Contract Act were fulfilled. He argued that there is no difference between labour sardars and labour contractors with regard to payment of labour charges. Accordingly he argued that order of ld AO need not be interfered with. In response to this, ld AR argued that ledger accounts of entire labour charges for each labour contractors / labour sardars were furnished before ld AO. In said ledger, payments made to labour sardars towards their commission portion is reflected separately in said ledger account and hence primary evidences were indeed 4 ITA No. 18/Kol/2014 M/s. Kwality Construction, AY 2009-10 submitted by assessee. He argued that wage registers as called for by ld AO would be maintained only for permanent labourers and not for temporary labourers. There is no direct contract entered into by assessee and hence payments made by assessee is outside ambit of provisions of section 194C of Act. He placed reliance on following decisions in support of his contentions :- (a) Order of Hon ble Calcutta High Court in case of CIT vs Stumm India in ITA No. 127 of 2009 dated 16.8.2010. (b) Decision of this Tribunal in case of Samanwaya vs ACIT reported in 34 SOT 332 in ITA No. 484 (Kol) of 2008 dated 23.4.2009 . (c ) Decision of this Tribunal in case of ITO vs Saha Agency in ITA No. 2453/Kol/2013 dated 20.5.2016. (d) Decision of this Tribunal in case of Seaking Enterprise vs ITO in ITA No. 1670/Kol/2009 dated 26.8.2016. (e) Decision of this Tribunal in case of ACIT vs Supreme Construction in ITA No. 1252/Kol/2013 dated 7.9.2016. 7. We have heard rival submissions. assessee had made payments of labour charges as below:- DETAILS OF LABOUR CHARGES PAID FOR YEAR 2008-09 Sl. Name of Labour Address No. of Paid to Paid to Sardar Gross amount % paid to No. Sardar Labourers Labourers sardars under Sardars 1. MONTU SEIKH Begunbari, Beldanga, 150 15,32,335.00 31,500.00 15,63,835.00 2.06 Murshidabad 2. KALU SEIKH Begunbari, Beldanga, 160 18,38,625.00 32,000.00 18,70,625.00 1.74 Murshidabad 3. ARMAN All Begunbari, Beldanga, 130 13,30,370.00 21,500.00 13,51,870.00 1.62 Murshidabad 4. IFAQIDDIN Begunbari, Beldanga, 160 14,53,737.00 28,500.00 14,82,237.00 1.96 MOLLA Murshidabad 5. RAKHIBUL Bhagabangola, 120 12,17,383.00 23,120.00 12,40,503.00 1.90 ALAM Murshidabad 6. SUBOL NATH Ranaghat, Nadia. 110 10,37,680.00 18,000.00 10,55,680.00 1.73 7. BASAR SEIKH Basanti, South 24 170 18,54,250.00 31,500.00 18,85,750.00 1.70 Parganas. 8. RABIUL ALAM Basanti, South 24 190 16,95,090.00 30,260.00 17,25,350.00 1.79 Parganas 9. SURABUDDIN Basanti, South 24 110 11,59,480.00 15,800.00 11,75,280.00 1.36 SEIKH Parganas 10. ABUL KAHAR Basanti, South 24 120 11,96,685.00 23,750.00, 12,20,435.00 1.98 MOLL Parganas. 11. MD Kaliachak, Malda. 180 18,53,830.00 31,750.00 18,85,580.00 1.71 KHAJABUDDIN 12. PARI MAL DAS Golabari, South 24 140 13,85,585.00 23,100,00 14,08,685.00 1.67 Parganas 13. SAHAJAHAN Canning, South 24 125 12,55,795.00 20,200,00 12,75,995.00 1.61 GHARAMI Parganas 14. SUNIL MANDAL Ghutiari Sharif, South 24 135 13,18,085.00 19,775.00 13,37,860.00 1.50 Parganas 2,01,28,930.00 3,50,755.00 2,04,79,685.00 5 ITA No. 18/Kol/2014 M/s. Kwality Construction, AY 2009-10 7.1. We find that ld CITA had deleted disallowance on ground that there is no contract entered into by assessee and labour sardars. We find that impugned issue is covered by decision of Hon ble Calcutta High Court in case of CIT vs Stumm India in ITA No. 127 of 2009 dated 16.8.2010 , wherein it was held that :- court: This appeal is sought to be preferred against judgment and order of Ld. Tribunal in relation to assessment year 2005-06, dated October 24, 2008, being aggrieved by portion of same. It is urged before us that learned Tribunal ought not to have accepted judgment and order of CIT (Appeal) who has quashed disallowance of deduction of Rs.41,33,710/- and on account of tax deduction at source. learned Tribunal has recorded fact that department has not been able to bring any material on record to show that assessee has made payment to transporters in pursuance of contract for carriage of goods of assessee and question of deduction at source under section 194C does not and cannot arise. In absence of evidence of payment made by assessee to transporters, assessee cannot be saddled with liability of deducting tax at source. Before us no other point has been urged not it is said that aforesaid fact finding is truthful without any basis whatsoever. 7.2. We find that decision of this tribunal in case of Samanwaya vs ACIT reported in 34 SOT 332 in ITA No. 484 (Kol) of 2008 dated 23.4.2009 directly supports case of assessee wherein it was held that :- We find that in this case, admittedly, labour sardars in present case has no locus standi as labour contractor as labour sardar and labour contractor are as different as chalk and cheese. We find that there was no contract between assessee and labour sardars for supply of labourers and without which there cannot be any application of section 194C and as such invocation of provision of section 40(a)(ia) is outside scope and ambit of such enactment. In view of matter, we are of considered opinion that section 194C(2) being not applicable in this case, disallowance of Rs. 74,33,210/- made by Assessing Officer by invoking section 40(a)(ia) of Income Tax Act, 1961 and sustained by ld CIT(A) is hereby deleted. This ground of assessee is allowed. 7.3. We also find that decision of this tribunal in case of ACIT vs Supreme Construction in ITA No. 1252/Kol/2013 dated 7.9.2016 had held as under:- 9. We have heard rival contentions of both parties and perused materials available on record. At outset, we find that AO has called labour contractors by issuing summons u/s. 131 of Act and their statements were duly recorded. AO failed to bring anything on record that labour charges were paid in pursuance of contract either in writing or oral with labour sardar. AO has held that assessee has not complied provision of Sec. 194C r.w.s. 40(a)(ia) of Act on presumption and surmise. There is no evidence that payments have been made to contractors. We do not find any merit in arguments placed by Ld. DR in this connection. AO has given clear finding in his order which is as follows : In my opinion, all these labourers who are treated as Labour Sardars are enjoying some privileged position in eyes of assessee because assessee collects other 6 ITA No. 18/Kol/2014 M/s. Kwality Construction, AY 2009-10 labourers through them, make payments to other labourers in their presence, though there is no written contract. In absence of any documentary evidence, I can t call them as Labour Sardars but they are enjoying some special status before assessee. All payments were made through them as per Books of Accounts whereas assessee produced Muster Roll establishing through it that payments were made to other co-labourers in their presence for sake of convenience and amounts were debited in their names only because assessee can not keep track of all labourers without help of these labourers. Though assessee claims them to be it s labour and these persons have deposed that they are labourers, yet, I am not fully convinced with their plea that these persons are simply labourers and nothing more than that. From their appearance, dress, behavior and confidence, I am confident that they are labour sardars, though they are denying this fact. Whether you admit or not but it can not be denied that these persons enjoy some privileged positions in comparison to other labourers. From above it is amply clear that AO himself is not sure and forming opinion on his own surmise and conjecture. In our considered view ld. DR has not brought anything contrary to findings of ld. CIT(A). In this connection we rely on decision of ACIT vs. Kalindi Agro Biotech Ltd. (2012) 20 taxmann.com 339 where it was held that provisions of Sec. 194C of Act are applicable if payment has been made to contractor for year exceeding Rs.20,000/-. Similarly jurisdictional ITAT, Kolkata in case of Samanwaya Vs. ACIT 34 SOT 332 has held as under : Business expenditure Disallowance under s. 40(a)(ia) Need for TDS under s. 194C relating to payments made for disbursement of labour charges to labour Sardars Assessee had specifically stated before lower authorities that there is no contract between assessee and labour Sardars Revenue authorities could not controvert submission of assessee in this respect Even before Tribunal, Department could not bring out any evidence by producing cogent material in respect of any contract between assessee and labour Sardars to contradict submission of assessee that there was no contract between assessee and labour Sardar contractor or sub-contractor is engaged on basis of contract which is most important essence of contract job and is primary requirement for application of s. 194C Labour Sardars in present case has no locus standi as labour contractor as labour Sardar and labour contractor are as different as chalk and cheese There was no contract between assessee and labour Sardars for supply of labourers and without which there cannot be any application of s. 194C and as such invocation of provision of s. 40(a)(ia) is outside scope and ambit of such enactment Relying in aforesaid decisions we find that there is nothing on record to suggest that payment to labourers were paid to contractors. On contrary, assessee has made payment to labourers directly and in support of its claim, Ld. AR of assessee has produced muster roll. In this regard, Ld. DR failed to bring any defect / information from muster roll which suggested that labour charges paid by assessee are subject to TDS. Since no cogent material has been brought on record, in our considered opinion, AO was not justified in invoking provision of Sec. 194C r.w.s. 40(a)(ia) of Act. In background of above discussions and precedent we do not find any infirmity in order of Ld. CIT(A) and accordingly we uphold same. In circumstances, this issue of Revenue s appeal is dismissed. 7 ITA No. 18/Kol/2014 M/s. Kwality Construction, AY 2009-10 7.4. Respectfully following judicial precedents relied upon hereinabove, we do not find any reason to interfere with order of ld CITA and accordingly dismiss ground of revenue. 8. In result, appeal of revenue is dismissed. Order pronounced in open court on 14.10.2016 Sd/- Sd/- (N. V. Vasudevan) (M. Balaganesh) Judicial Member Accountant Member Dated : 14th October , 2016 Jd.(Sr.P.S.) Copy of order forwarded to: 1. APPELLANT ITO, Ward-33(2), Kolkata. 2 Respondent M/s. Kwality construction, 48, A.J.C. Bose Road, Kolkata- 700 016. 3. CIT(A), Kolkata 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order, Asstt. Registrar. Income-tax officer, Wd-33(2), Kolkata v. M/s. Kwality Construction