Rajasthan Tax Consultants Association and Others vs Central Board of Direct Taxes and Others

V.K. Singhal, J.—In this writ petition, Circular No. 681*, dated March 8, 1994, requiring to deduct the tax at source has been prayed to be quashed. In the said circular, the term "service contract" was defined as service rendered as lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. This circular was issued on the basis of the judgment of the Supreme Court in the case of The Associated Cement Company Ltd. Vs. The Commissioner of Income Tax, Bihar, Patna and another, where the observations were made that "there is nothing in the sub-section which could make us hold that the contract to carry out a work or the contract to supply labour to carry out a work should be confined to works contract". On the basis of this observation the provision of Section 194C of the Income Tax Act, 1961, was sought to be applied to professionals.

The grievance of the petitioner is that it is contrary to the provisions of the Act.

The arguments of both learned counsel for the parties have been heard. This matter was considered by the Bombay, Gujarat, Delhi and Madras High Courts in respect of professionals though the controversy for the transporters, etc., is not before me and this judgment is restricted to the deduction of tax for professionals. Section 1941 has been inserted from July 1, 1995, and is prospective in nature. It has set at rest the controversy. The said provision has not given retrospectivity and, therefore, in respect of the period prior to July 1, 1995, the law as it was existing has to be considered.

The Bombay High Court in the case of Chamber of Income Tax Consultants and others Vs. Central Board of Direct Taxes and others, has quashed Circular No. 681 (see [1994] 206 ITR 299 ), dated March 8, 1994, observing it to be without jurisdiction in respect of deduction of tax at source u/s 194C for payment of fees for professional services. It was observed that the observations of the apex court in The Associated Cement Company Ltd. Vs. The Commissioner of Income Tax, Bihar, Patna and another, has to be read as a whole and on the basis of a few lines an interpretation which was accepted and was prevailing for more than a decade cannot be disturbed. The language of Section 194C was considered to be fair and unambiguous leaving no scope for controversy so as to include the payment made on account of professional service.

The Gujarat High Court in the case of All Gujarat Federation of Tax Consultants and Others Vs. Central Board of Direct Taxes and Others, has also quashed the circular by applying the principle of contemporaneous exposition and observed that the circular cannot extend the scope of Section 194C.

The provisions of Section 194C cast a responsibility on any person responsible for paying any sum to any resident (hereafter referred to as "contractor") for carrying out any work including supply of labour for carrying out any work in pursuance of a contract between the contractor and

(a) the Central Government or any State Government, or

(b) any local authority ; or

(c) any corporation established by or under a Central, State or Provincial Act ; or

(d) any company ; or

(e) any co-operative society ; or

(f) any authority, constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improve ment of cities, towns and villages, or for both ; or

(g) any society registered under the Societies Registration Act, 1860, or under any law corresponding to that Act in force in any part of India ; or

(h) any trust.

This provision by itself contemplates that there should be a payment to the contractor. With effect from June 1, 1987, the provisions of Section 194E were sought to be inserted providing for deduction of tax in respect of fee for professional services. On opposition, this proposal was dropped. Besides these specific provisions of law which were sought to be inserted by Parliament, Circular No. 86 (see [1972] 84 ITR 99), dated May 29, 1972, was issued in which it was provided as under (page 100):

"Contracts for rendering professional services by lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc., can also not be regarded as contracts ''for carrying out any work'' and, accordingly, no deduction of Income Tax will be made from payments relating to such contracts."

Another Circular No. 93, dated September 26, 1972 (see [1972] 86 ITR 30) (was issued) wherein the service contracts were considered to be outside the scope of section.

The next circular dated March 20, 1973, provides as under :

"Contracts for rendering professional services by lawyers, physicians, surgeons, engineers, accountants, consultants, etc. cannot be regarded as contracts ''for carrying out any work'' and, accordingly, no deduction of Income Tax will be made from payments relating to such contracts."

The above circulars have interpreted the position as was existing and considered proper by the Central Board of Direct Taxes. It is only because of the judgment given by the apex court in the case of The Associated Cement Company Ltd. Vs. The Commissioner of Income Tax, Bihar, Patna and another, that the circular dated March 8, 1994, was issued. In the judgment of The Associated Cement Company Ltd. Vs. The Commissioner of Income Tax, Bihar, Patna and another, the following observations were made by the apex court (page 439) :

"Thus, when the percentage amount required to be deducted under the sub-section as Income Tax is on the sum credited to the account of or paid to a contractor in pursuance of a contract for carrying out a work or supplying labour for carrying out a work, of any of the organisations specified therein, there is nothing in the sub-section which could make us hold that the contract to carry out a work or the contract to supply labour to carry out a work should be confined to ''works contract'' as was argued on behalf of the appellant. We see no reason to curtail or to cut down the meaning of the plain words used in the section. ''Any work'' means any work and not a ''works contract'' which has a special connotation in the tax law. Indeed, in the sub-section, ''work'' referred to therein expressly includes supply of labour to carry out a work. It is a clear indication of the Legislature that ''work'' in the sub-section is not intended to be confined to or restricted to ''works contract''. ''Work'' envisaged in the sub-section, therefore, has a wide import and covers ''any work'' which one or the other of the organisations specified in the sub-section can get carried out through a contractor under a contract and further it includes obtaining by any of such organisations of supply of labour under a contract with a contractor for carrying out its work which would have fallen outside ''work'', but for its specific inclusion in the sub-section."

The expression "any work" which was considered by the apex court has to be understood in this context of the word contract in common and commercial parlance. An advocate or a chartered accountant is not considered to be a contractor and the interpretation of law which was acted upon by the Department could not have been changed as it was not the correct interpretation of the judgment of the Supreme Court in the case of The Associated Cement Company Ltd. Vs. The Commissioner of Income Tax, Bihar, Patna and another, . The words "any work" were found of wide import, but they must be restricted with respect to supply of labour to carry out the work.

The same view has been taken by the Delhi High Court in High Court Bar Association v. CBDT [1995] 81 Taxman 324 and by the Madras High Court in Madras Bar Association and Others Vs. Central Board of Direct Taxes and Others, . The SLP against the decision of the Bombay High Court has been dismissed on January 13, 1995 as reported in [1995] 212 ITR 61. Agreeing with the view taken by these High Courts, I feel that the interpretation which the Central Board of Direct Taxes has taken is beyond the scope of Section 194C. The circular is accordingly quashed in respect of the period up to June 30, 1995. Since the specific provisions have been enacted from July 1, 1995, they will be operative.

The writ petition is accordingly allowed.