1998 (5) TMI 40 - AT - Income Tax

TDS, Payment To Contractors/sub-contractors, Photo Identity Card, Revenue Loss, Chief Electoral Commission, Interest

Summary

Issues Involved:
1. Non-applicability of provisions of section 194C.
2. Interpretation of CBDT Circular No. 681, dated 8-3-1994.
3. Holding the assessee as assessee in default under section 201.
4. Charging of interest under section 201(1A) despite the tax being paid by the supplier.

Detailed Analysis:

Non-applicability of Provisions of Section 194C:
The assessee, Chief Electoral Officer, Haryana, made payments to Haryana State Electrical Development Corporation Ltd. (HARTRON) for preparation and supply of photo identity cards but did not deduct tax at source, arguing that the supply order was for goods, not a contract payment. The Assessing Officer disagreed, citing that the preparation of photo identity cards was not a contract for sale but for carrying out work, thereby holding the assessee liable under section 201 and for interest under section 201(1A).

Interpretation of CBDT Circular No. 681, dated 8-3-1994:
The assessee relied on para 7(vi)(b) of CBDT Circular No. 681, which states that contracts for the supply of articles fabricated according to government specifications, where property passes only upon delivery, are contracts for sale and outside the purview of section 194C. The CIT(A) noted that this circular had been struck down by various High Courts regarding TDS on professional fees and other services but upheld the Assessing Officer's decision, interpreting the contract as one for carrying out work, not merely for the sale of goods.

Holding the Assessee as Assessee in Default under Section 201:
The CIT(A) upheld the Assessing Officer's view that the provisions of section 194C applied, and the contract was for carrying out work, not for the sale of goods. The CIT(A) referred to the specifications and detailed requirements for the photo identity cards, concluding that the nature of the job indicated it was a contract for work, not a sale of goods. Thus, the assessee was held to be in default under section 201.

Charging of Interest under Section 201(1A) Despite the Tax Being Paid by the Supplier:
The assessee argued that even if liable to deduct tax, no interest should be charged under section 201(1A) since the contractor (HARTRON) had already paid the tax on the income. The Tribunal noted that the object of section 194C was to collect tax on income comprised in payments to contractors and that the contractor had indeed paid the taxes due. The Tribunal accepted the assessee's alternative submission that the object of section 194C read with section 191 was met, as the tax had been paid, and thus no interest should be charged under section 201(1A).

Conclusion:
The Tribunal concluded that the transaction could fall within para 7(vi)(b) of Circular No. 681, which is still valid and binding. It recognized that the assessee acted under a bona fide belief and that no revenue loss occurred since the contractor paid the due taxes. Consequently, the Tribunal set aside the CIT(A)'s orders, holding that the default was of a technical nature, and no interest under section 201(1A) was chargeable. This decision was specific to the peculiar facts of the case and was not intended to set a general precedent.

Result:
Both appeals were allowed, and the orders of the CIT(A) were set aside.