Nantu Ranjan Roy vs State Of Tripura And Ors.

Heard Ms. R. Purkayastha, learned counsel appearing for the petitioner as well as Ms. A.S. Lodh, learned Additional Government Advocate appearing for the respondents.

By means of this writ petition the petitioner has challenged the action of the respondents by deducting a sum of Rs.68,987 at the time of making payment of the arbitral award to the extent of Rs.13,21,252.

The facts are mostly admitted by the parties.

Having the dispute been referred to him, the Sole Arbitrator awarded a sum of Rs.13,21,252 by the award dated 13.06.2016 in case No.ARB/AC/2015(1). When the respondent No.2 had initially informed the petitioner that there would be statutory deduction from the said arbitral award, the petitioner raised substantive objection and demanded for payment of the entire arbitral award. Despite that, the respondent No.2 made the payment of Rs.12,52,265 on deducting a sum of Rs.68,987 from the said arbitral award. The petitioner received the said amount under objection and, thereafter, by the notice dated 21.09.2016 demanded payment of the deducted sum. The respondent No.2, by the letter dated 01.10.2016 (Annexure-D2 to the writ petition) informed the petitioner that the payment has been made to the petitioner in compliance of the award of the Arbitrator and in terms of the agreement. They further asserted that any amount liable to be paid against the work (including 10C(C)) is subject to payment after deduction of tax at source appropriately.

Ms. R. Purkayastha, learned counsel appearing for the petitioner has submitted that the said deduction has been made by misconstruing the provisions of Section 194C of the Income tax Act, 1961 and the provisions of the CPWD Works Manual. She has referred to the relevant provision of the CPWD Manual [as amended upto 1990], where it has been provided as under:

"3. Section 194C of the Income-tax Act, 1961 contemplates deduction from payments to be made to resident contractors in pursuance of a contract between the contractor and the Central Government. The underlined portion is important inasmuch as the section covers amount payable pursuant to a contract. Where a dispute has arisen between the contractor and the Government and that dispute has gone before the arbitration and the arbitrator makes an award wherein, the payment which the arbitrator directs the Government to pay the contractor by the award is not a payment made pursuant to a contract, but one made pursuant to an award. Secondly, when the award directs that a certain amount shall be payable by the Government to the contractor and that award merges in a decree when the award is made a rule of the court, the Government have no alternative but to pay the whole amount. They will not be within their rights in making any deduction unless the statutory provision expressly authorises the Government to do so even in such cases."

[Emphasis added]

Ms. Purkayastha, learned counsel has also placed reliance on decision of Delhi High Court to contend that no deduction can be made under Section 194C of the Income Tax Act, 1961 in such circumstances. In Unique Enterprises vs. Delhi Development Authority, reported in 2006 1 ArbLr 281, it has been held by Delhi High Court as under:

"(3) SECTION 194C of the Income-tax Act, 1961 contemplates deduction from payments to be made to resident contractors in pursuance of a contract between the contractor and the Central Government. The underlined portion is important inasmuch as the section covers amount payable pursuant to a contract. Where a dispute has arisen between the contractor and the Government and that dispute has gone before the arbitration has arisen between the contractor and the Government and that dispute has gone before the arbitration and the arbitrator makes an award wherein, the payment which the arbitrator directs the Government to pay the contractor by the award is not a payment made pursuant to a contract, but one made pursuant to an award. Secondly, when the award directs that a certain amount shall be payable by the Government to the contractor and that award merges in a decree when the award is made a rule of the court, the Government have no alternative but to pay the whole amount. They will not be within their rights in making any deduction unless the statutory provision expressly authorises the Government to do so even in such cases."

It has been further observed in Unique Enterprises (supra) that no deduction can be made from the decreetal amount (arbitral award) by the Government as such payment is not in pursuance to a contract. By such order of the court the judgment debtor is absolved of his liability of deducting tax at source under Section 194C of the Income Tax Act, 1961. But it does not absolve the person who receives the money from liability of payment of income tax or any other tax.

Ms. A.S. Lodh, learned Addl. Govt. Advocate appearing for the respondents has referred to Section 194C of the Income Tax Act, 1961 which provides as under:

"Any person responsible for paying any sum to any resident for carrying out any work including supply of labour for carrying out any work in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to-

(i) one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;

(ii) two percent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family,

of such sum as income-tax on income comprised therein."

According to Ms. Lodh, learned Addl. Government Advocate, the person who is making such payment is obligated by law to deduct the sum at the rate as provided under Section 194C of the Income Tax Act, 1961. That apart, Ms. Lodh, learned Addl. Govt. Advocate has submitted that the CPWD Works Manual also obligates the person who is making the payment to deduct the due sum in terms of the law. She has contended further that the provision as extracted or annexed by the petitioner as the provisions of the CPWD Works Manual are not any more the part of the CPWD Works Manual. Ms. Lodh, learned Addl. Govt. Advocate has referred CPWD Works Manual 2003, CPWD Works Manual 2012 and CPWD Works Manual 2014 for demonstrating the same. The relevant Manual is CPWD Works Manual 2003. Para 29.12 of the said Manual provides that:

"Under Section 194C of the Income Tax Act, 1961, deduction of Income Tax is required to be made at source by disbursing officers from payments made to contractors in certain cases.

Before signing the first and final bill/Running Account bill/or the final bill in the case of Running Account bill, the SDO/Divisional Officer should see that:

(i) the statutory deduction on account of income tax wherever due has been made from the bill of the contractors and

(ii) the same is specifically shown in the Memorandum of Payments thereof under the item, "By recovery of amounts creditable to other works or heads of accounts". [Note 5]"

Similar provision is also available in para 30.6 of the CPWD Works Manual 2012.

According to Ms. Lodh, learned Addl. Govt. Advocate, under Section 194C of the Income Tax Act, 1961 as explained in the CPWD Works Manual 2003, the respondent No.1 was obligated to deduct the tax at source under Section 194C of the Income Tax Act, 1961 before making payment of the arbitral award inasmuch as the said arbitral award has emerged from the Agreement bearing No.01/CE/EE/DWS/AGT- II/2009-10 dated 24.02.2009 for execution of the work styled as "UWS Scheme at Ranirbazar/Design, supply and construction of RCC overhead tank (1.00 lac gallon capacity) of staging height 18.30 mtr. at market area, Ranirbazar".

What emerges for consideration of this court is that, whether at the time of making payment against the arbitral award, the Disbursing Officer can deduct the income tax at source under Section 194C of the Income Tax Act, 1961? A reading of Section 194C of the Income Tax Act, 1961 would provide that the said Section only provides deduction of such tax while making payment "in pursuance of a contract between the contractor and a specified person" at the time of credit of such sum to the account of the contractor as per the rate or the conditions as provided thereunder. Section 194C of the Income Tax Act, 1961 does not embrace the payment of the award for purpose of deduction. The arbitral award can be executed as a decree. No deduction can be made from the decree or award emerging from any contract. In the ordinary course, when the bills are paid to the contractors or any amount is paid for discharging the obligation from the contract, deduction at source is permissible under Section 194C of the Income Tax Act, 1961, but such deduction cannot be made by the Disbursing Officer from the award. The Disbursing Officers are absolved from their obligation of deduction under Section 194C of the Income Tax Act, 1961 where the payment is made for discharging the arbitral award.

We are persuaded by the opinion of the Delhi High Court in Unique Enterprises (supra) and, direct the respondent No.2 to release the deducted amount to the petitioner within a period of 15(fifteen) days from the day of receipt of the copy of this order, which shall be submitted by the petitioner.

Notwithstanding what has been observed above, the petitioner shall remain exigible to income tax if he is liable to pay such tax.

In the result, this petition stands allowed. There shall be no order as to costs.