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TMI Blog1994 (7) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... ner associations. By the impugned circular, the first respondent had issued instructions, inter alia, that the payment of fees for professional services is also covered by the provisions of section 194C of the Act and that persons making payments of such fees would be required to deduct tax at source as provided in the said section. The above instructions have been issued in the light of the judgment of the Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435. The petitioners contend that these instructions are illegal and without jurisdiction. Mr. N. A. Palkhivala, learned counsel appearing for the petitioners, submits that section 194C of the Act does not include professionals within its ambit. According to Mr. Palkhivala, the first respondent, the Central Board of Direct Taxes, has misconstrued and misinterpreted the judgment of the Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 and erroneously construed the observations made therein in regard to the true meaning and import of the word "work" appearing in sub-section (1) of section 194C of the Act. Before we deal with the legal submissions of Mr. Palkhivala, it may be expedient to refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. (3) No deduction shall be made under sub-section (1) or sub-section (2) from-- (i) any sum credited or paid in pursuance of any contract the consideration for which does not exceed ten thousand rupees ; or (ii) any sum credited or paid before the 1st day of June, 1972; or (iii) any sum credited or paid before the 1st day of June, 1973, in pursuance of a contract between the contractor and a cooperative society or in pursuance of a contract between such contractor and the sub-contractor in relation to any work (including supply of labour for carrying out any work) undertaken by the contractor for the cooperative society. (4) Where the Assessing Officer is satisfied that the total income of the contractor or the sub-contractor justifies the deduction of income-tax at any lower rate. or no deduction of income-tax, as the case may be, the Assessing Officer shall, on an application made by the contractor or the sub-contractor in his behalf, give to him such certificate as may be appropriate. (5) Where any such certificate is given, the person responsible for payi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of-- (a) fees for professional services, or (b) royalty, or (c) fees for technical services, or (d) rent, or (e) commission (not being insurance commission referred to in section 194D) or brokerage, or (f) payments for goods supplied to Government or any local authority or any corporation or body established by or under a Central, State or Provincial Act or any company, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force: Provided that . . . . (2) In this section,-- (a) 'professional services' means services rendered by a person in the course of carrying on a legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or such other profession as is notified by the Board for the purposes of section 44AA ;......" However, due to strong opposition to the said measure, the proposal to insert secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract between the contractor and the bodies mentioned therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to two per cent. of such sum as income-tax on the income comprised therein. Sub-section (2) of section 194C of the Income-tax Act, 1961, lays down that when a contractor makes payment of any sum to a resident sub-contractor in pursuance of a contract made with him for carrying out the whole or any part of the work undertaken by the contractor, or, for supplying any labour, the contractor shall deduct an amount equal to one per cent. of such sum as income-tax on the income comprised therein. Section 194C was introduced with effect from April 1, 1972. Shortly after its introduction, the Board issued Circulars Nos. 86, dated May 29, 1972 (F. No. 275/9/72-ITJ), No. 93, dated September 26, 1972 (F. No. 275/100/72-ITJ), and No. 108, dated March 20, 1973 (F. No. 131/ 9/73-TPL), in this regard. Some of the issues raised in the abovementioned circulars need to be reviewed in the light of the judgment dated March 23, 1993, del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d amount which at present is Rs. 10,000 (ten thousand only) ... (v) Service contracts would be covered by the provisions of this section since service means doing any work as explained above . . . (viii) The provisions are wide enough to cover not only written contracts but also oral contracts. . . . It may be noted that-- (i) the term 'service contracts' would include services rendered by such persons as lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. However, services rendered for which payment is in the nature of salaries which is chargeable under the head of income 'A. Salaries' in Chapter IV of the Income-tax Act, 1961, shall not be covered by section 194C. (ii) The term 'transport contracts' would, in addition to contracts for transportation and loading/unloading of goods, also cover contracts for plying of buses, ferries, etc., along with staff (e.g., driver, conductor, cleaner, etc.). Reference in this regard is also invited to Board's Circular No. 558@, dated 28th March, 1990. (iii) The term 'materials contracts' in the context of section 194C would mean contracts for supply of materials where the principal contract is for w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at rate for loading packed cement bags into wagons or trucks. This rate was fixed on the basis of daily basic wages, dearness allowance, etc., and clause 13 of the agreement stipulated reimbursement by the appellant to the contractor in case of certain increase in the dearness allowance, etc., payable by the contractor to the workmen employed by him. The appellant paid the contractor the amount stipulated at a flat rate as well as amounts by way of reimbursement under clause 13. But the deduction of tax at source made by the appellant under section 194C(1) of the Income-tax Act, 1961, fell short of the deductions required to be made thereunder. On a show-cause notice being issued by the Income-tax Officer, the appellant company contended that it was not liable to deduct any amount on payments made for loading and unloading as section 194C was applicable only to payments made in execution of "works contracts" which produce tangible property and not to other works. It was in this context that the Supreme Court observed (at pages 439 and 440) : "Thus, when the percentage amount required to be deducted under the sub-section as income-tax is on the sum credited to the account of or pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing out any work" either in common parlance or in legal terminology. It will be a total misnomer to describe such professionals as "contractors" or "sub-contractors". If the contention of the Revenue in this regard is accepted, a solicitor or an advocate on record will have to be described as a "contractor" and counsel briefed by him in the matter a "sub-contractor". An interpretation which leads to such a ridiculous result cannot be a proper interpretation of the section. It is a well-settled rule of construction that judgments must be read as a whole and the observations from the judgments should be considered in the light of the questions which were before the court. As observed by the Supreme Court in CIT v. Sun Engineering Works P. Ltd. [1992] 198 ITR 297, it is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete "law" declared by the Supreme Court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts must care ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and ambit of section 194C are clearly in the nature of contemporanea exposito which can legitimately be used as aids in the construction of the said provision. In construing the statute, the courts are entitled to give due weight to the interpretation put upon it by those who are entrusted with the task of construing, executing and applying it. Under the Income-tax Act, the Central Board of Direct Taxes is the highest executing authority and it has been vested with statutory powers to issue orders, instructions and directions to all officers employed in the execution of the Act. The uncontroverted position is that ever since the incorporation of section 194C in the year 1972, it was understood by all concerned including the Central Board of Direct Taxes that its scope was confined to payments made in respect of "works contracts" and "labour contracts" and not to payments made on account of. professional services. This interpretation was reiterated and acted upon by the Central Board of Direct Taxes from time to time. It is this interpretation which is sought to be departed from by the Central Board of Direct Taxes itself purportedly in the light of the decision of the Supreme Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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