1993 (3) TMI 1 - SC - Income Tax

Whether a person who credits to the account of or pays to a contractor any sum payable by any of the organisations specified in section 194C(1) of the Income-tax Act, 1961 for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the specified Organisation is liable to deduct two per cent. of such sum as income-tax as required under that sub-section.

Summary

Issues:
Interpretation of Section 194C(1) of the Income-tax Act regarding deduction of income-tax from sums payable to a contractor for carrying out work.

Detailed Analysis:
The case involved a question regarding the applicability of Section 194C(1) of the Income-tax Act, which requires deduction of income-tax from sums payable to a contractor for carrying out work. The appellant, a company, had issued a contract to a contractor for loading cement bags, and payments were made based on the terms of the contract. However, the appellant had not deducted the required amount under Section 194C(1) of the Act. This led to notices from the Income-tax Officer for short deductions, prompting the appellant to challenge the notices in a writ petition before the High Court, which was dismissed, leading to the appeal before the Supreme Court.

The main argument put forth by the appellant was that the deduction under Section 194C(1) should only apply to contracts producing tangible property, known as "works contracts." The appellant contended that the deduction should only be on the income or profit element of the contractor, as per previous court decisions. On the other hand, the Revenue argued against this interpretation, stating that the deduction should apply to any work contract, not limited to "works contracts."

The Supreme Court analyzed the language of Section 194C(1) and concluded that there was no ambiguity in the provision. The Court highlighted that the section applies to contracts for carrying out any work or supplying labor for work, involving various specified organizations. The Court emphasized that the term "any work" in the provision has a broad meaning and is not limited to "works contracts." The inclusion of supplying labor in the definition of work further supported this interpretation.

The Court also addressed a previous decision related to the cost of materials supplied in government contracts, clarifying that it did not support the appellant's argument. The Court emphasized that the deduction required under Section 194C(1) is a deduction at the source and not based on the contractor's income component. It was deemed impractical to expect the payer to determine the contractor's income portion from the sums paid.

Ultimately, the Supreme Court ruled in favor of the Revenue, affirming that the deduction under Section 194C(1) applies to any work contract and is not limited to "works contracts." The appeal was dismissed, and the appellant was directed to pay the costs to the Revenue.