1996 (9) TMI 46 - HC - Income Tax

Summary

Issues:

1. Validity of Circular No. 681, dated March 8, 1994, requiring tax deduction at source for professionals.
2. Interpretation of the term "service contract" and its application to professionals under section 194C of the Income-tax Act, 1961.
3. Controversy regarding the deduction of tax for professionals prior to the insertion of section 194J from July 1, 1995.
4. Comparison of judgments by different High Courts regarding Circular No. 681 and its jurisdiction under section 194C.
5. Historical perspective of circulars issued by the Central Board of Direct Taxes regarding professional services and tax deduction.

Analysis:

The High Court considered a writ petition challenging Circular No. 681, dated March 8, 1994, which required tax deduction at source for professionals. The circular defined "service contract" to include services by lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc., based on the Supreme Court's observations in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435. The petitioner contended that this circular was contrary to the provisions of the Income-tax Act, 1961.

The Court noted that section 194J was inserted from July 1, 1995, settling the controversy prospectively. Prior to this, the Bombay and Gujarat High Courts had quashed Circular No. 681, stating that it extended the scope of section 194C improperly. The language of section 194C was deemed clear and unambiguous, not encompassing payments for professional services.

The Court highlighted historical circulars, such as Circular No. 86, dated May 29, 1972, and Circular No. 93, dated September 26, 1972, which excluded professional service contracts from tax deduction. The judgment in Associated Cement Co. Ltd. [1993] 201 ITR 435 was seen as the basis for Circular No. 681, but the Court found that the interpretation of "any work" in the context of the judgment did not apply to professionals like lawyers and accountants.

The Court aligned with the views of the Delhi and Madras High Courts, quashing Circular No. 681 for the period up to June 30, 1995. The Court held that the circular's interpretation exceeded the scope of section 194C, and with the enactment of specific provisions from July 1, 1995, they would prevail. Consequently, the writ petition was allowed, and Circular No. 681 was quashed for the relevant period.