2002 (6) TMI 32 - HC - Income Tax

Deduction Of Tax At Source, Commission Or Brokerage, Stamp Vendors - The petitioner is a registered association of the stamp vendors of Ahmedabad. As the officers of the Income-tax Department called upon the State Government to deduct tax at source under section 194H on commission or brokerage to the persons carrying on the business as stamp vendors , the petitioner-association has approached this court with a prayer to quash and set aside the communication at annexure D collectively, and for a declaration that section 194H of the Act is not applicable to an assessee carrying on business as a stamp vendor. - we uphold the contention urged on behalf of the petitioner s association that the discount made available to the licensed stamp vendors under the provisions of the Gujarat Stamps Supply and Sales Rules, 1987, does not fall within the expression commission or brokerage under section 194H of the Income-tax Act, 1961

Issues Involved:
1. Applicability of Section 194H of the Income-tax Act, 1961, to stamp vendors.
2. Nature of the relationship between the State Government and licensed stamp vendors.
3. Distinction between "discount" and "commission" or "brokerage."

Issue-wise Detailed Analysis:

1. Applicability of Section 194H of the Income-tax Act, 1961, to Stamp Vendors:
The primary issue was whether Section 194H, which mandates tax deduction at source on commission or brokerage, applies to the discount received by stamp vendors. The petitioner, a registered association of stamp vendors, argued that Section 194H does not apply to them as they are not agents of the State Government but purchasers of stamp papers. The Revenue contended that the discount received by stamp vendors qualifies as "commission" under Section 194H.

2. Nature of the Relationship Between the State Government and Licensed Stamp Vendors:
The court examined whether the relationship between the State Government and stamp vendors is that of principal and agent or principal to principal. The petitioner argued that stamp vendors purchase stamp papers by paying the price less discount in advance and sell them independently, thus acting as purchasers, not agents. The Revenue, however, pointed to several features of the Gujarat Stamps Supply and Sales Rules, 1987, such as the requirement for a license, prescribed accounting methods, and the ability to return unsold stamps, to argue that the relationship is one of agency.

3. Distinction Between "Discount" and "Commission" or "Brokerage":
The court referred to various legal definitions and judicial pronouncements to distinguish between "discount" and "commission." According to Black's Law Dictionary and judicial interpretations, "commission" is a recompense for services rendered, often calculated as a percentage of transactions, whereas "discount" is a deduction from the gross amount, typically allowed for prompt payment or cash transactions.

Judgment Analysis:

1. Principal-Agent Relationship:
The court analyzed the rules governing stamp vendors, noting that while there are several restrictions on their operations, these do not necessarily indicate an agency relationship. The court cited the Supreme Court's principles in Bhopal Sugar Industries Ltd. v. STO, emphasizing that restrictions imposed by the government do not convert a sale into an agency relationship. The court concluded that stamp vendors purchase stamp papers on a principal to principal basis, not as agents of the State Government.

2. Ownership and Payment:
The court observed that stamp vendors pay the price less discount upon purchasing stamp papers and bear the risk of loss or destruction of the stamp papers, indicating a transfer of ownership. The court rejected the Revenue's argument that the ability to return stamps under Rules 24 and 25 signifies an agency relationship, explaining that these provisions are necessary due to the nature of stamp papers and the stringent regulations governing their sale.

3. Definition of "Commission" under Section 194H:
The court held that the definition of "commission" under Section 194H requires an element of agency. Since stamp vendors purchase stamp papers and sell them independently, the discount they receive does not qualify as "commission" or "brokerage." The court clarified that if the Revenue's interpretation were accepted, it would unjustifiably extend the scope of Section 194H to all transactions involving discounts, which is not the legislative intent.

Conclusion:
The court ruled in favor of the petitioner, declaring that the discount received by stamp vendors does not fall within the meaning of "commission" or "brokerage" under Section 194H of the Income-tax Act, 1961. Consequently, the impugned communication from the Income-tax Officer and the consequential instructions from the Senior Treasury Officer were quashed and set aside. The court made the rule absolute with no order as to costs.

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