2013 (7) TMI 142 - HC - Income Tax

TDS u/s 194C - nature of contract - sales of goods versus works contract - contract with the department of post and telegraph - manufactures postal seals and stamps - Held that - A bare perusal of the order passed by Income Tax Commissioner (TDS), Aligarh shows that there is no application of mind in this regard - Said question is not germane to the controversy in issue. Para 7(vi) (b) of the circular merely clarifies that in case of simple contract relating to sale of goods , section 194 C will not apply - agreement between the petitioner and the postal department is a simple contract for sale of goods then the provision of section 194-C will have no application - Following decision of Associated Cement Co. Ltd Vs. CIT 1993 (3) TMI 1 - SUPREME Court - Decided in favour of assessee.

Summary

Issues:
Deduction of income tax at source from bills of a cooperative society under a contract with the Department of Post and Telegraph.

Analysis:
The petitioner, a cooperative society under the control of the Central Government through the Department of Post and Telegraph, entered into a contract to manufacture postal seals and stamps. The petitioner challenged the deduction of income tax at source and a recovery certificate issued by the Income Tax Department. The petitioner relied on a circular clarifying the Supreme Court judgment in Associated Cement Co. Ltd Vs. CIT, stating that no tax should be deducted under section 194 C as the contract is for the sale of goods, not for carrying out works.

The Department contended that the agreement falls under "carrying out work" as per Section 194 C (I) of the Act, making tax deduction at the source applicable. The Department argued that the circular cited by the petitioner is not applicable, citing a judgment regarding circulars conflicting with statutory provisions or court decisions. The Income Tax Department held the Postal Stores Form and Seals in default for not deducting tax at source from the petitioner's bills.

The High Court referred to the Supreme Court judgments in Associated Cement Co. Ltd Vs. CIT and Birla Cement Works Vs. CBDT, emphasizing that the applicability of tax deduction at source depends on the nature of the contract. The Court noted that the order by the Income Tax Commissioner lacked consideration on whether the contract was for the sale of goods or for carrying out works as per Section 194 C.

The Court clarified that if the agreement is a simple contract for the sale of goods, Section 194 C does not apply, regardless of the circular's alignment with statutory provisions or court judgments. The Court directed the Income Tax Commissioner to decide if the contract is for the sale of goods or for carrying out works, resolving the issue of tax deduction. The petitioner was instructed to appear before the Income Tax Commissioner for further proceedings, ensuring the deduction of TDS aligns with the decision made by the authority.

In conclusion, the High Court disposed of the writ petition, emphasizing the need for a proper determination by the Income Tax Commissioner on whether the contract between the petitioner and the Department of Post and Telegraph is for the sale of goods or for carrying out works, to settle the dispute regarding tax deduction at the source conclusively.