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Can wastage of Gold during jewellery creation be treated as making charges and TDS imposed? ITAT decides

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The wastage of gold during the creation of ornaments cannot be treated as making charges and the provisions of Section 194C would not be applicable to the assessee for non-deduction of TDS on the amount of such wastage, according to an order of the Income Tax Appellate Tribunal (ITAT), Chennai.

In an interesting order dated August 24, 2022, the ITAT dismissed an order of the Assessing Officer (AO), which had held that TDS under Section 194C would be applicable to the amount of gold treated by a jeweller as wastage and kept by the goldsmith as making charges. Here’s a look at this case and what the ITAT said.

The Case

The assessee was engaged in the manufacturing of gold and silver jewellery. During the assessment proceeding, the AO noted that the assessee had purchased old gold from customers and the same was melted through goldsmiths to get pure gold.

As per the facts of the case mentioned in the ITAT order, the assessee had issued 146331.79 gram of gold to goldsmiths for making new jewellery during the assessment year 2013-24 but received back only 141397.61 gram and the balance of 1294.66 gram was left with the goldsmiths, with the assessee claiming wastage of 5454.03 gram of gold in the process.

Similarly, in the assessment year 2014-15, the assessee claimed wastage of 1286.03 gram of gold during the making process. However, the AO noted that for all other jewellery, the assessee had shown charges ranging between 4.5% to 6% but the wastage would only be in the range of 0.5% to 1% and the excess rate of gold claimed by the assessee was actually the gold retained by the goldsmiths in lieu of making charges.

During the recording of the statement of goldsmiths, the AO received contrary statements where some claimed wastage in the range of 5% to 6% while others claimed the wastage was only in the range of 0.5% to 1%. The AO then treated this wastage as payment to goldsmiths without deduction of tax under section 194C of the Income Tax act.

The AO rejected the assessee’s contention that tax need not be deducted at source when consideration is not paid in cash or cheque. “Hence, in view of the above findings, the wastage is restricted to 1% of the gold retained by the goldsmith. Wastage in excess of this 1% is treated as gold in lieu of making charges which work out to 4328.08 gm,” the AO said.

The assessee challenged the AO’s order before CIT (A) which also confirmed the action of the AO. CIT (A) noted that almost all goldsmiths had admitted before the AO that during the manufacturing process they will retain gold around 5% of the input which is claimed by the assessee as wastage. According to CIT (A), the assessee was liable to deduct TDA on this claim of wastage as per Section 194C of the Income Tax Act. Aggrieved with the CIT (A) order, the assessee appealed before the ITAT.

What ITAT said

The ITAT held that TDS cannot be deducted by treating the gold claimed as “wastage” during making as no payment was made through cash, cheque or drafts or by any other made.

“…in the present case the issue of wastage whether it is 0.5% to 1% as estimated by Revenue or it is 4.5% to 6% as claimed by assessee, it neither involves any payment or credit of such sum by way of cash, issue of cheque or draft or by any other mode and hence does not liable for TDS u/s.194C of the Act. Hence, the disallowance made by AO and confirmed by CIT(A) is deleted,” the ITAT said.


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