1994 (7) TMI 82 - HC - Income Tax

Summary

Issues Involved:
1. Validity and legality of Circular No. 681, dated March 8, 1994.
2. Interpretation of section 194C of the Income-tax Act, 1961.
3. Applicability of section 194C to professional services.

Summary:

Issue 1: Validity and legality of Circular No. 681, dated March 8, 1994

The petitioners, comprising professional bodies and a Chartered Accountant, challenged Circular No. 681 issued by the Central Board of Direct Taxes (CBDT) on March 8, 1994. The circular mandated that payments for professional services are covered u/s 194C of the Income-tax Act, requiring tax deduction at source. The petitioners argued that the circular was illegal and without jurisdiction.

Issue 2: Interpretation of section 194C of the Income-tax Act, 1961

Section 194C deals with the deduction of tax at source on payments to contractors and sub-contractors for carrying out any work. The petitioners contended that this section does not include professionals within its ambit. They argued that the CBDT misinterpreted the Supreme Court's judgment in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435. The Supreme Court had clarified that "any work" in section 194C is not confined to "works contracts" but did not extend this interpretation to include professional services.

Issue 3: Applicability of section 194C to professional services

The court examined the legislative history and previous circulars issued by the CBDT, which consistently interpreted section 194C to exclude professional services. The court noted that the proposed amendment in 1987 to insert section 194E for tax deduction on professional fees was dropped, indicating legislative intent not to include professional services u/s 194C. The court held that professional services cannot be equated with "any work" as envisaged in section 194C. Professionals like advocates, solicitors, chartered accountants, doctors, and engineers are not contractors or sub-contractors, and payments to them are not for carrying out any work or supplying labor.

Conclusion:

The court concluded that section 194C does not apply to payments by way of professional fees. Circular No. 681, dated March 8, 1994, was declared illegal, based on an erroneous reading of the Supreme Court's judgment, and without jurisdiction. The writ petition was allowed, and the rule was made absolute in terms of prayer clause (a), with no order as to costs.