Even Autonomous bodies of States are subject to TDS!

Even Autonomous bodies of States are subject to TDS!

Advanced Topic

Is Panchayat Udyog exempt from Income Tax, if yes on what grounds, If there is any section/direction/ notification, kindly give detail, TDS has been deducted wrongly by some dept. on furniture supplied by Panchayat Udyog which I think is exempt on mutual benefit concept. Total Turnover of P/U for the f/y 2005-2006 is 56.00 lacs.Now if P/U is exempt from income tax would it be possible to file return to claim refund of tds with out Tax Audit. ............vyakatitivemittal@ ... in

I had a similar query whether municipal corporation is liable to tax? what if we have to deduct tax on some payment made to it? is it exempt from TDS? .......................alpachristie@.......in

I take the second question first!

For this Section 4 and Section 10 [20] requires revisit.

Section 4(2 ) is charging section for TDS or TCS and it states "In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act "

Section 4(1 ) states "Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person: "

Now READ section 10(20) of the I T Act which says "In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included-...............................................................................

................

[20] the income of a local authority which is chargeable under the head "Income from house property", "Capital gains" or "Income from other sources" or from a trade or business carried on by it which accrues or arises from the supply of a commodity or service (not being water or electricity) within its own jurisdictional area or from the supply of water or electricity within or outside its own jurisdictional area;

Explanation.—For the purposes of this clause, the expression “local authority” means—

(i) Panchayat as referred to in clause (d) of article 243 of the Constitution; or

(ii) Municipality as referred to in clause (e) of article 243P of the Constitution; or

(iii) Municipal Committee and District Board, legally entitled to, or entrusted by the Government with, the control or management of a Municipal or local fund; or

(iv) Cantonment Board as defined in section 3 of the Cantonments Act, 1924 (2 of 1924)."

Therefore , the income of the Municipal Corporation can not be taken for computing TOTAL INCOME by virtue of Section 10(20) of the I T Act , as such the same is not chargeable to tax as per Section 4(1 ).Thereby , TDS provision is also not applicable.

Now Comes FIRST question :

Is Panchayat Udyog exempt from Income Tax?

The income of Panchayat , by virtue of Section 10[20] is exempt from being included in total income, Therefore,like Municipal Corporation , it is also exempt from TDS also. However, the important question is in the instant case is to know the proper facts and origin of the entity known as Panchayat Udyog. That is, whether the Panchayat Udyog is covered under definition of Panchyat or it is a separate entity. If it is separate entity, then the TDS provision shall be applicable because the exemption under Section 10[20] of the I T Act is not applicable on its income.

The issue that State and its created Autonomous bodies are same or separate entity for the purpose of Income Tax Act can be understood by reading the very recent judgment of Supreme Court in Adityapur Industrial Area Development Authority v. UOI [2006] 283 ITR 97 (SC) wherein the issue whether Area Development Authority [ADA after this]is subject to TDS or not was decided against the ADA . In this case , the I T Authority issued notice to the bank for TDS on the fund /FD deposited by ADA . The notice was challenged before High Court with the argument that DDA being local authority is not subject to tax . However, neither High Court nor Supreme Court , after going through the relevant Act which created the ADA , agreed with the argument of the appellant and found that DDA does not come under the definition of Local Authority , thus not exempt from tax.

Thus answer to the first question is if Panchayat Udyog is same as Panchayat which only facts of the case can decide , TDS will not be appliacble. In that case, your client can get Refund.

However, I find that supply of furniture does not come under the TDS provision because it falls under the category of sales and not the contract. Thus TDS is wrong .

It is always possible to file return of Income and even if six years have passed and you forgot to claim refund which otherwise was allowable, you can apply before CIT/CCIT u/s 119[2][b] of the I T Act.