Mahavir Singh, J.M.

1.This appeal by revenue is arising out of the order of CIT(A), Asansol in Appeal No. 84/CIT(A)/Asl/Cir-3/Asl/2009-10 vide dated 22.06.2010. The assessment was framed by ACIT, Cir-3, Asansol Under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") for Assessment Year 2007-08 vide his order dated 24.12.2009.

2. The two interconnected issues in this appeal of the revenue are against the order of CIT(A) deleting the disallowance made by Assessing Officer on account of payment of hire charges of heavy earth moving machines amounting to Rs. 1,35,29,972/-and sum of Rs. 2,24,78,140/-on account of payment of hired vehicles for transporting earth material by invoking the provisions of Section 40(a)(ia) for non-deduction of tax Under Section 194-I and lower deduction of tax Under Section 194C of the Act. For this, the revenue has raised following ground Nos. 1 and 2:

i) Whether Ld. CIT(A), Asl was justified in deleting the addition made by the A.O. Under Section 40(a)(ia) in view of the facts and circumstances of the case and materials available on records.

ii) Whether Ld. CIT(A), Asl was justified in deleting the addition made by the A.O. on account of Non Deduction of tax Under Section 194I in view of the facts and circumstances of the case and materials available on record.

3. Brief facts leading to the above issue are that the Assessing Officer during the course of assessment proceedings made disallowance on following heads:

1) Disallowed Under Section 40(a)(ia) Rs. 1,35,29,972/-

2) Disallowed Non-deduction of tax Under Section 194I Rs. 2,24,78,140/-

The Assessing Officer noted that the Assessee firm is engaged in the business of earth cutting, transporting and road development and during the year under consideration it has debited a sum of Rs. 1,35,29,972/-under the head payment of hired Heavy Earth Moving Machine for which the Assessee has made payment to different parties after deducting tax @ 1%. Assessee claimed that it had expended on maintenance of heavy earth moving machines at Rs. 5,78,19,190/-and incurred operating expenses at Rs. 6,17,88,713/-. The Assessing Officer required the Assessee to explain as to why tax was not deducted Under Section 194-I of the Act, since it had taken the machinery on rent and rate of TDS Under Section 194-I of the Act is 20%. The Assessee replied that it did not take any machine on hire or rent but a contract was given by Assessee firm for doing certain work and, therefore, it did not fall Under Section 194-I of the Act but falls Under Section 194C as sub-contractor and accordingly, it has rightly deducted tax at 1%. The Assessing Officer was not convinced with the reply of the Assessee and he disallowed the expenditure of Rs. 1,35,29,972/-by invoking the provisions of Section 40(a)(ia) of the Act. Similarly, the Assessing Officer noted that it had deducted a sum of Rs. 2,24,78,140/-under the head payment of hired vehicle for transporting earth" for which it had made payment to different parties after deducting tax @ 1% Under Section 194C of the Act. The Assessing Officer required the Assessee to explain as to why TDS Under Section 194 I of the Act was not deducted. The Assessee replied that it did not take any vehicle on hire but the contract was given to concerned firm for doing certain amount of work, therefore, the firm does not fall Under Section 194-I of the Act and falls Under Section 194C of the Act as a sub contractor. Accordingly, Assessing Officer disallowed this expenditure also for non-deduction of tax Under Section 194-I of the Act by invoking provisions of Section 40(a)(ia) of the Act. Aggrieved, Assessee preferred appeal before CIT(A) on both the issues.

4. The CIT(A) deleted the disallowance by observing in para 7, 8 and 9 of his appellate order as under:

7. I have considered the matter. Firstly, Section 194I pertains to rent received from letting out or hiring out of land, building, machinery, plant, equipment, furniture or fittings. Transport vehicles such as Trucks or lorries are specifically excluded from the purview of this Section. In fact, transport vehicles are entitled to a separate rate of depreciation in the depreciation schedule as compared to plant and machinery. Secondly Section 194C specifically provides for deduction of tax at source from works contract and "Work" has been defined in Clause (iv)(c) of Explanation to Section 194C to include carriage of goods and passengers by any mode of transport other than railways. In the present case, the payment has been made for Carriage of goods. The A.O. has laid strong emphasis on fact that the Assessee had incurred operating and maintenance expenses for the transport vehicles belonging to the other parties and hence it was a case of rent on which tax was deductible under Section 1941. I have examined the matter and discussed in detail the issue in Paragraph-4 of this order and have arrived at the conclusion that the maintenance and operating expenses in respect of the HEM Ms and Trucks pertained to the Assessees own HEM Ms and Trucks. Further the A.O. has pointed out to the fact of absence of a contract between the Assessee and the transport operators and has come to the conclusion that in the absence of a contract, provisions of Section 194C would not apply.

I have considered the matter. The question as to whether the payments were made in pursuance of a contract is a question of fact and will have to be examined for each case individually and on a standalone basis. It cannot be anybodys case that there cannot be a possibility of the existence of a contract in all cases where transport charges are paid. Thus, the main issue to be examined is as to whether the payments were made pursuant to a contract, written or verbal. Before discussing the facts of the case under appeal it would be appropriate to discuss as to what is a contract. The common sense meaning of a contract is that it is an agreement with specific terms between two or more persons in which there is a promise to do something in return of a consideration. This is at the heart of most business dealings. The existence of contract requires finding of the following factual elements (a) an offer (b) acceptance of that offer (c) promise to perform (d) agreement regarding consideration (e) a time or event when performance must be made that is meeting commitments (f) term and conditions of performance, including fulfilling of commitments (g) actual performance. The Assessee is a transport contractor and transports sand, earth etc. For this purpose, the Assessee obtained the services of various vehicle owners/drivers to carry out this work. I have given a list of the possible factual elements which are required for the existence of a contract. It would be worthwhile to analyze whether the activities of the Assessee of transporting sand constituted a contract. The said analysis is as under:

a) An offer - An offer by the Assessee or his employees or brokers to the vehicle operators for transporting the goods subject to payment of consideration and other conditions.

(b) Acceptance of that offer - The vehicle operators accept the offer.

(c) Promise to perform - The vehicle operators agree to transport the goods from Point X to Point Y.

(d) Agreement regarding consideration - The quantum of consideration is agreed upon by both parties.

(e) A time or event when performance must be made that is meeting commitments - The vehicle operators agree to transport the goods within a given time frame.

(f) Terms and conditions of performance including fulfilling of commitments - The goods must be delivered without loss or pilferage.

(g) Actual performance - The goods are actually transported as per the terms and conditions.

A perusal of the above would show that all the elements of a contract existed when the Assessee was engaging transport vehicles. As per Section 194C, tax is to be deducted in case of verbal contracts also. It may also be pointed out that verbal contracts are also valid contracts under the Indian Contract Act. Further, carriage of goods is defined to be work as per Clause (iv)(c) of Section 194C. It would thus be evident that the payments fell within the purview of Section 194C and the A.O. wrongly held that tax would be deductible Under Section 194I. I am of the considered opinion that the payments did not constitute payment of rent as envisaged in Section 194I. I, therefore, hold that the Assessee had rightly deducted tax Under Section 194C and the expenditure was therefore not liable for disallowance under the provisions of Section 40(a)(ia) and the same is therefore deleted.

Aggrieved, revenue came in appeal before us on both inter-connected issues.

5. We have heard rival submissions and gone through facts and circumstances of the case. We find that Assessee firm is engaged in the business of earth cutting, transporting and road development and for that it has made the following payments by deducting tax @ 1% by invoking Section 194C of the Act as a sub-contractor:

i) Payment for heavy earth moving machinery at Rs. 1,35,29,972/-

ii) Payment for hired vehicle for transporting earth at Rs. 2,24,78,114/-

We find that the Assessee was deducting TDS @1% Under Section 194C of the Act on the payments made to sub-contractors for last many years in respect to the above payments. We find that it is a fact that there was no change in nature and style of business during this year what was in the last years. Even though the Assessee has incurred expenditure claimed on maintenance and operating expenses for his own truck and not for the hired trucks. As per schedule N of P&L Account wherein operating expenses consisting of fuel and lubricant, salary, overtime, fooding, bonus, leave allowance etc. is debited under the head operating expenses for own truck and HEMM and it was stated that the same schedule also debits payments for hired vehicles and this amount was allowed by the AO. We find that the revenue could not controvert the argument, which is carried by the Assessee from the very beginning, that these expenses were for Assessees own HEMM and trucks and the operating expenses consists on items such as puja bonus and leave allowance, which was not paid to the employees of the other concerns. Even the control over the vehicles hired by Assessee vested with the owners of the vehicles and not with the Assessee firm. The payment was on the basis of removal of material or earth work on per metric ton basis or on per cubic meter basis. We find that the CIT(A) has recorded a categorical finding that this fact is evidenced from the books of account and relevant documents produced before the AO at the assessment stage and even before CIT(A). The Assessee also produced some sample contracts before the AO at the time of assessment, which clearly shows that the payments were on contract basis and not a rent or hire charges on daily basis. We find that the Assessee even produced copies of contract with some of the sub-contractors at the first appellate stage in support of its contention and revenue could not rebut the same. In view of these facts, we are of the view that the Assessee firm has made these payments on the basis of sub-contracts entered with sub-contractors and accordingly is liable to deduct TDS under the provisions Section 194C of the Act and not Under Section 194I of the Act. We confirm the order of CIT(A) and this common issue of the revenues appeal is dismissed. We order accordingly.

6. In the result, the appeal of the revenue is dismissed.

7. Order pronounced in open court on 30.6.2011.