Deduction of Income-tax at source-Section 194C of the Income-tax Act, 1961-Deduction from payments to contractors and sub-contractors in bidi manufacturing industry-Clarification regarding - Income Tax - 433/1985

Deduction of Income-tax at source-Section 194C of the Income-tax Act, 1961-Deduction from payments to contractors and sub-contractors in bidi manufacturing industry-Clarification regarding Circular No.433 Dated 25/9/1985 Under section 194C of the Income-tax Act, 1961, a liability is cast on any person responsible for paying any sum of any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between him and (a) the Central Government or any State Government; or (b) any local authority; or (c) any corporation established by or under a Central, Stata or Provincial Act; or (d) any company; or (e) any co-operative society to deduct an amount equal to two per cent. of such sum as income-tax on income comprised therein. 2. In the bidi manufacturing industry, generally there are three parties, the manufacturer, the munshis and the workers. The manufacturer provides the raw material, i.e., leaves, tabacco thread, etc., to the munshis who distribute the same to the workers who work at home. At regular intervals, the munshis collect the bidis prepared by the workers and hand over the same to the manufacturer. For this work, the manufacture pays to the munshis, who in turn, make the payment to the workers. The workers as well as munshis get their payment at the rates agreed to. 3. The Board have had occasion to examine the question whether a munshi engaged by the bidi manufacturers is a contractor or an agent and whether the provisions of section 194C of the Income-tax Act, 1961, would apply to the payments made to him. The Board are advised that in view of the position that the definition of the expression "contractor" in the Bidi and Cigar Workers (Condition of Employment) Act, 1966, includes sub-contractor, agent, munshi, thekedar or sattedar, the provisions of section 194C would apply in respect of payments made to munshis. It may be clarified that the provisions of section 194C are wide enough to cover oral contracts also. By the very nature of the functions performed by the munshis, there is an implied contract between the manufacturer and the munshis and, consequently, the munshis are contractors even though there is no written contractor agreement. As such, the provisions of section 194C of the Income-tax Act, 1961, would apply in respect of payments made to them. Yours faithfully, (Sd.) B. Nagarajan, Secretary, Central Board of Direct Taxes.