2010 (11) TMI 459 - HC - Income Tax

Assessee in default - TDS u/s 194C - circular no. 681 dated 8.3.94 - the work of preparation and supply of I-cards by HARTON is covered within the meaning of section 194C, as the case of preparation and supply of I-cards is a consolidated case of expenses on labour and raw material which has gone into production of I-cards required to be supplied by HARTON to the assessee - It is clearly mentioned in sub-clause (b) of clause (vi) of para 7 that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Govt. or any other specified person and the property in such article or thing passes to the Govt. or such person only after such article or thing is delivered, the contract will be a contract for sale and outside the purview of section 194C of the Act - assessee acted bona fide in this case on the basis of the said belief and did not deduct tax at source - Still further the default, if any, was only of a technical nature and in the peculiar facts of the case, wherein the two Departments of the Government were involved, the action against the assessee was not required - Decided in the favour of assessee

Summary

Issues:
Interpretation of tax deduction at source under Section 194C of the Income Tax Act for payments made for preparation and supply of laminated photo identity cards.

Analysis:
The High Court considered the common question of law involved in Income Tax Reference Nos. 183 and 184 of 1999 regarding the applicability of Section 194C of the Income Tax Act. The respondent-assessee had made payments to a corporation for laminated photo identity cards without deducting tax at source. The assessing officer held the assessee liable for tax and interest under Section 201 of the Act. The assessee contended that the supply order should be treated as a supply of goods, not a contract payment, based on a CBDT circular. The CIT(A) rejected the assessee's claim, citing previous court decisions invalidating the circular. The Tribunal, however, allowed the assessee's appeal, emphasizing the validity of the circular's provisions. The Tribunal noted that the work of preparing the cards involved expenses on labor and raw material, falling under Section 194C. Despite this, the Tribunal acknowledged the validity of the circular's clauses exempting certain transactions from Section 194C. The Tribunal found that the assessee acted in good faith and that no revenue loss occurred as the contractor had paid the due tax. The Tribunal concluded that the default, if any, was technical and specific to the circumstances, not warranting interest charges under Section 201(1A).

The High Court concurred with the Tribunal's findings, emphasizing the bona fide actions of the assessee and the absence of revenue loss to the government. The Court agreed that the peculiar facts of the case, involving government departments, justified the assessee's position. It was clarified that the decision was specific to the case at hand and should not set a precedent for similar cases. Ultimately, the High Court upheld the Tribunal's decision, ruling in favor of the assessee and setting aside the CIT(A)'s orders for both assessment years.