Amitava Sen, JCIT, Sr. DR for the Petitioner. K.M. Roy, AR for the Respondent.

The captioned appeal filed by the Revenue and the cross objection filed by the assessee, pertaining to assessment year 2013-14, are directed against the order passed by the Commissioner of Income Tax (Appeal), Shillong, in Appeal No. CIT(A)/Shg/10133/2017-18 dated 09.03.2018 which in turn arises out of an assessment order passed by the Assessing Officer u/s 143(3) (of Income Tax Act, 1961) (in short the ‘Act’) dated 08.03.2016.

2. Grounds of appeal raised by the Revenue are as follows:

i) That the Ld. CIT(A) has erred in law & facts in allowing relief of Rs. 2,18,67,711/- on additions made u/s 40(a)(ia) (of Income Tax Act, 1961) by the Assessing Officer for violation of provisions of section 197(1) (of Income Tax Act, 1961) by the assessee.

ii) That the Ld. CIT(A) erred in law and facts by basing his decision on a case involving section 195(1) (of Income Tax Act, 1961) whereas the instant case deals on the applicability of section 197(1) (of Income Tax Act, 1961).

(iii) For that the appellant craves leave to add, alter, amend any / all of the grounds of appeal before or during the course of the hearing of the appeal.”

3. Brief facts qua the issue are that during the assessment year under consideration, the assessee made payments to members of Scheduled Tribes whose incomes were exempted from payment of Income tax u/s 10(26) (of Income Tax Act, 1961). The assessee also made some payments to Non-scheduled Tribes whose incomes were not exempted from payment of Income tax u/s 10(26) (of Income Tax Act, 1961). During the assessment proceedings, the assessee submitted that since the Tribal Payees were not liable for income- tax, hence there was no occasion for deduction of tax at source, therefore no any addition should be made under section 40(a)(ia) (of Income Tax Act, 1961). However, the assessing officer rejected the contention of the assessee and made addition under section 40(a)(ia) (of Income Tax Act, 1961) to the tune of Rs.2,49,56,873/-.

4.Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the CIT(A) who has partly deleted the addition made by the assessing officer. The ld CIT(A) observed that assessing officer made total addition to the tune of Rs. 2,49,56,873/-, and out of said total addition, the ld CIT(A) disallowed Rs.30,89,162/-, on account of non-deduction of tax at source on payments made to non-tribals.

5. Aggrieved by the order of theld CIT(A), the Revenue is in appeal before us and assessee also filed cross objection before us.

6. We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. Before us, ld Counsel reiterated the submissions made before the ld CIT(A).On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. We have gone through the submissions of the assessee and noted that no TDS should be deductible in cases of payments made to individuals who are specified as Schedule Tribes under the Sixth Schedule of the Constitution of India and thereby these Schedule Tribes are exempted from the provisions of Income Tax Act by virtue of Section 10(26) (of Income Tax Act, 1961). Thus, when the income of the payeesare exempted from tax, there is no occasion for collecting tax at source on the sum payable to them. At this juncture it is appropriate to quote the judgment of the Honorable Supreme Court in the case of GE India Technology Centre P. Ltd Vs. CIT, [2010] 327ITR 456 (SC)wherein it was held that the most important expression in section 195(1) (of Income Tax Act, 1961) ,1961 dealt with deduction of tax at source consists of the words chargeable under the provisions of the Act. A person paying interest or any other sum to a non -resident is not liable to deduct tax if such sum is not chargeable to tax under the Act. The expression chargeable under the provisions of the Act in section 195(1) (of Income Tax Act, 1961) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. If tax is not so assessable, there is no question of tax at source to be deducted. The payer is not required to deduct tax at source if the amount paid is not chargeable to tax under the provisions of the Act.

7. We note that ld CIT(A) deleted the addition in respect of payments made to individuals who are specified as Schedule Tribes. The findings of the ld CIT(A) are as follows:

“5.3 I have carefully considered the matter. As stated earlier, some of the payments were given to members of Scheduled Tribes whose incomes are exempt from payment of Income tax u/s 10(26) (of Income Tax Act, 1961). Appellant's contention is that since the Tribal Payees were not liable for income- tax, there was no occasion for deduction of tax at source. However, the AO strongly relied on the decision of Hon'ble Agartala High Court in case of Chandra Mohan Sinku (Supra). Per contra, appellant relied on decision of Hon'ble Jurisdictional Tribunal in the case of Kommorah Limestone Mining Co Ltd’(Supra) and that of decision of Hon'ble Gauhati High Court in the case of Sing Killing (Supra). Hon'ble Jurisdictional Tribunal, Guwahati had occasion to deal with identical question in the case of Kommorrah Limestone Mining Company Ltd vs ACIT, Circle, Shillong) IT A No.100/Gau/2016 decided on 08.03.2018, In that case, the assessee paid sum of Rs. 77,33,101/- to a Tribal resident of Meghalaya for hiring of Loader and Excavator.

Rental payment of Rs. 17,57,412 was also made tootherTribal landlady/landlord.

The said payments were disallowed by the AO u/s 40(a)(ia) (of Income Tax Act, 1961) as tax was not deducted at source by the assessee. Relying on the decision of the Hon'ble Agartala High Court in case Chandra Mohan Sinku (supra), the order of the AO was confirmed by me in my appeal order dated 18.07.2016. However, the Hon'ble Jurisdictional Tribunal reversed my order and decided the issue in favour of appellant. Relevant portion of the Hon'ble Tribunal's order is extracted as under:

“7. We have heard rival submissions and perused the orders of authorities below and materials available on record. In the instant case, the undisputed facts of the case are that the assessee made payments for hiring of loader and excavator to Shri. L.S. Nongrum of Rs.77,33,101/- without deducting tax at source u/s,194C of the Act and also made payment of land rentto Smt. RekhilaTynsong and Shri BhisonDohkhrat of Rs.17,57,412/- without deduction of tax u/s 194 (of Income Tax Act, 1961)-1 of the Act.

The assessee explainedbefore the AO that as they were tribal persons, their income was not taxable and hence no tax was deducted at source. The AO not being satisfied with this explanation of the assessee disallowed deduction of Rs.77,33,101/- and Rs. 17,57,422/- by invoking provisions of section 40(a)(ia) (of Income Tax Act, 1961).

8. On appeal, the CIT(A) confirmed the action of AO following the decision of Hon'ble Agartala High Court.

9. We find that the Hon'ble Supreme Court in the case of GE India Technology Centre P. Ltd Vs. CIT, [2010] 327 ITR 456(SC) has held that the most important expression in section 195(1) (of Income Tax Act, 1961) dealt with deduction of tax at source consists of the words chargeable under the provisions of the Act. A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the Act. The expression chargeable under the provisions of the Act in section 195(1) (of Income Tax Act, 1961) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. If tax is not so assessable, there is no question of tax at source to be deducted. At reading of the above decision of the Hon'ble Supreme Court shows that the payer is not required to deduct tax at source if the amount paid is not chargeable to tax under the provisions of the Act. In the instant case, the contention of the assessee is that since the payee to whom the payments were made are tribal persons and being exempt from income tax u/s 10(26) (of Income Tax Act, 1961), he was not required to deduct tax at source either u/s,194C or u/s 194 (of Income Tax Act, 1961)-1 of the Act from the payments made to them. No materials has been brought on record by the AO to show that the amounts paid by the assessee towards hiring of loader and excavator charges paid to Mr. L.S. Nongrum of Rs. 77,33,101/- and land rent payment of Rs.17,57,452/- made to SmtRekhilaTynsong and Shri BhisonDokhrat,was chargeable to tax under the provisions of the Act. Therefore, in our considered view the assessee was not liable to deduct tax at source from the payments made and accordingly the AO was not justified in disallowing the payments made u/s.40(a)(ia) (of Income Tax Act, 1961). Hence, we set aside the orders of lower authorities and vacate the disallowance of Rs. 77,33,101/- and Rs. 17,57,452- and allow the ground of appeal of the assessee."

Hon'ble Jurisdictional Tribunal had considered the decisions of Hon'ble Gauhati High Court in case of Sing Kiling ( supra) and that of Hon'ble Agartala High Court in case of Chandra Mohan Sinku(supra). It had also considered a decision of Hon'ble Apex Court on the subject. A ruling had thereafter been given to the effect that payments made to persons whose income is not chargeable to tax will not invite the requirement of tax deduction at source and consequential disallowance of such payments u/s 40(a)(ia) (of Income Tax Act, 1961) in the event of failure to deduct tax by the payer. Considering the binding decision of Hon'ble Jurisdictional Tribunal on identical issue, disallowances of payment to tribals whose incomes are exempt u/s 10(26) (of Income Tax Act, 1961) is to be reversed. In respect of payment to non-tribals, assessee claim is that the recipients disclosed the payments in their respective returns of income. But no documentary evidence in this regard was filed. The non-tribals payees have to satisfy the condition laid down in first proviso to sub-section(l) of section 201 (of Income Tax Act, 1961). Since no evidence in this regard was furnished, the payments to non-tribals have to be disallowed.

5.3.1 In view of the above discussion, out of total addition of Rs. 2,49,56,873/- the following disallowance on account of non-deduction of tax at source on payments made to non-tribals is sustained.

(xi) Consultancy Charge Rs. 93,960/-

(xii) Blaze Flash Carrier Rs. 2,37,050/-

(xii) Vehicle Hiring Charges Rs. 15,66,579/-

(xiv) Repairs & maintenance Rs. 8,98,853/-

(xv) Computer Hiring Charged Rs. 1,50,00/-

(xvi) A.C. Paul & Co. Rs. 1,42,720/-

Total Rs. 30,89,162/-

8. Having gone through the above findings of ld CIT(A), we note that there is no any infirmity in the order of ld CIT(A). That being so, we decline to interfere with the order of Id. CIT(A) in deleting the aforesaid addition in respect of payments made to individuals who are specified as Schedule Tribes and confirmed the addition in case of payments to Non-Schedule Tribes. His order on this issue is therefore upheld and the grounds of appeal of the Revenue are dismissed.

9. Now we shall adjudicate cross-objections filed by the assessee in C.O No.01/Gau/2020 wherein the grievances raised by the assessee are as follows:

“1. That since the payees have disclosed the payment in the return of income there is no scope for disallowance particularly when such fact has not been controverted.

2. The disallowance sustained for Rs.30,89,162/- due to non-deduction of tax at source may be restricted to 30% of the expenses considering to be the amendment as curative, without prejudice to Ground No.1.

3. That the cross-objector reserves the right to raise additional grounds.”

10. Learned Counsel for the assessee, during the course of hearing, informs the Bench that the assessee did not want to press Ground No.2 of the Cross Objections, therefore we dismiss the ground no. 2 of cross-objections, as not pressed.

11. So far ground No.1 of Cross Objection is concerned, the ld. Counsel for the assessee submits before the Bench that the amount received by Non-Schedule Tribes have been included by the Non-Schedule Tribes in their computation of total income and return of income, and the sameis getting reflected in their return of income and computation of total income, therefore the assessee should be given an opportunity to produce payees or to file the computation of total income and return of income of these payees before the Assessing Officer, therefore this issue should be remitted back to the file of the Assessing Officer for fresh adjudication.

12.On the other hand, the ld. DR for the Revenue opposed the plea taken by the ld. Counsel for the assessee.

13. We have heard both the parties and perused the materials available on record. We note that out of total addition of Rs. 2,49,56,873/- the following disallowance on account of non-deduction of tax at source on payments made to non-tribals was sustained by ld CIT(A):

(xi) Consultancy Charge Rs. 93,960/-

(xii) Blaze Flash Carrier Rs. 2,37,050/-

(xii) Vehicle Hiring Charges Rs. 15,66,579/-

(xiv) Repairs & maintenance Rs. 8,98,853/-

(xv) Computer Hiring Charged Rs. 1,50,00/-

(xvi) A.C. Paul & Co. Rs. 1,42,720/-

Total Rs. 30,89,162/-

We are of the view that if above payees have included the receipts in their books of accounts and have offered for taxes then the disallowance on account of non-deduction of TDS will not arise. That is, if these payees have included the receipts in computation of the total income and return of income then it would be sufficient compliance of TDS provisions and no disallowance should be made under section 40(a)(ia) (of Income Tax Act, 1961). Therefore, we direct the Assessing Officer to examine whether these above noted payees had included the receipts in their books of accounts/computation of total income. If they had included the receipts in the books of accounts/ computation total income,then in that situation, no any disallowance should be made. However, if these payees did not include the receipts in their books of accounts/ computation of total income, then the Assessing Officer may make the disallowance in accordance with law. Therefore, we restore this issue to the file of the Assessing Officer for statistical purposes.

14. In the result, the cross-objection filed by the assessee is allowed for statistical purposes.

Order pronounced in the Court on 18.11.2020

Sd/-

(Aby. T. VARKEY)

Sd/-

(A.L.SAINI) JUDICIAL MEMBER / ACCOUNTANT MEMBER

Date: 18/11/2020