The requirement of an agency relationship for Section 194-H to apply, Principle of doubtful penalization in interpreting Section 40(a)(ia)

Sanjiv Khanna, J.

1. This appeal by the Revenue under Section 260-A of the Income Tax Act, 1961 (“Act”, for short) impugns the finding recorded by the Income Tax Appellate Tribunal (“Tribunal”, for short) in their order dated 7th February, 2014 that the respondent-assessee, JDS Apparels Private Limited had not violated Section 194-H of the Act. As a consequence, it has been held that the Assessing Officer was wrong in invoking Section 40(a)(ia) of the Act and accordingly had erred in making addition of Rs.44,65,654/-, i.e. the charges deducted by M/s HDFC Bank Ltd (“HDFC”, for short) on the payments made through credit cards.

2. The respondent-assessee had for the Assessment Year 2009-10 filed a return on 30th November, 2009 declaring income of Rs.4,91,69,380/-, which was made subject matter of scrutiny assessment under Section 143(3) of the Act vide order dated 16th December, 2011. The assessment order records that the respondent-assessee was engaged in the business of trading in readymade garments. A letter was received from the Assessing Officer, TDS Circle Mumbai that the respondent-assessee had paid “commission” to HDFC on payments received from customers who had made purchases through credit cards. Survey under Section 133-A of the Act had been conducted on HDFC, who had provided card swiping machines to retail merchants, including the respondent-assessee. A credit card holder could make payment by swiping the credit card on the said machines. The details of the bill amount, etc. were thereupon forwarded to the acquiring bank, which is the bank which had provided the machine, i.e. HDFC in this case, which then made payment to the respondent assessee. The payment made to the respondent-assessee was after withholding or deducting the fee payable to HDFC. Thereafter, the acquiring bank, i.e. HDFC recovered the bill amount from the issuing bank of the customer.

3. The Assessing Officer held that the amount earned by the acquiring bank, i.e. HDFC in this case, was in the nature of “commission” and should have been subjected to deduction of tax at source @ 10% under Section 194H of the Act. As the commission had not been subjected to tax at source, Rs.44,65,654/- should be disallowed under Section 40(a)(ia) of the Act, as this amount had been claimed as an expenditure by the assessee.

4. The aforesaid opinion was affirmed by the Commissioner of Income Tax (Appeals), who held that the transaction in question was in the nature of bill discounting by the acquiring bank, who had paid the bill amount after deducting the commission payable to them. The acquiring bank had taken up the entire risk relating to recovery of payment from the issuing bank. Reference was made to the following portion of the Circular No.619 dated 4th December, 1991, issued by the Central Board of Direct Taxes (CBDT):-

“For the purpose of this Section commission or brokerage includes any payment received or receivable directly by person acting on behalf of another person for services in the course of buying of selling of the goods or in relation to any transaction relating to any assets, value, article or thing.”

5. As noticed above, the Tribunal has held that Section 194H of the Act is not applicable.

6. Section 194-H of the Act reads as under:-

“Commission or brokerage.

194-H. Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section 194-D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent :

Provided that no deduction shall be made under this section in a case where the amount of such income or, as the case may be, the aggregate of the amounts of such income c