1999 (1) TMI 24 - HC - Income Tax

Tax Deducted At Source - Clarification of the term any work in section 194C - Validity of Circular No. 666 dated October 8 1993/March 8 1996 issued by the Central Board of Direct Taxes (CBDT) - Payment To Contractor - Transport Of Goods - HELD THAT - According to the interpretation of the Department which was prevalent till April 1 1994 the transport contractors were not considered to be falling within the ambit of section 194C. Mere transportation of goods by a common carrier does not affect or result in the goods carried nor are the goods affected. The legislative intent could also be seen from the subsequent amendments. Explanation III was inserted by the Finance Act 1995 by which advertising and travelling agencies etc. were included thereunder. Whether the Explanation could be considered to be explanatory so as to apply for the transaction between April 1 1994 to June 30 1995 ? An interpretation which had continued and acted upon for more than a decade is not to be easily deviated. Circular No. 108 dated March 20 1973 has dealt with the service contracts not involving carrying out of any work and has specifically said that the transport contract would not be included in the purview of section 194C as transport contract cannot be regarded as contract for carrying out any work . From a perusal of the various dictionaries it is evident that the word work has relation with the word labour which has to be put by a person for occupation employment business task or function. The word work refers and comprehends the activities of the workmen and not the operation in the factory or on machines. It is the physical force which has been comprehended in the word work . Section 194C(1) refers to carrying out of any work. If the sub-section (1) is read as a whole then it could be interpreted that it is the work of labour which is done by the contractor or he may supply the labour to do the work as a sub-contractor. Sub-section (2) of section 194C also refers to the contract for carrying out the work undertaken by the contractor or for supplying wholly or partly any labour which the contractor has undertaken to supply. It is only by virtue of Explanation III added by the Finance Act 1995 that advertising broadcasting telecasting carriage of goods and passengers by any mode of transport and catering have been included. This Explanation cannot be considered procedural. The inclusive definition given by this Explanation therefore is to be made applicable only from July 1 1995. The petitions are accordingly allowed.

ISSUES PRESENTED and CONSIDERED

The core legal question considered in this judgment is the validity of Circular No. 666, dated October 8, 1993/March 8, 1996, issued by the Central Board of Direct Taxes (CBDT), which interprets the term "any work" in section 194C of the Income Tax Act, 1961. The specific issue is whether this circular, which extends the scope of section 194C to include transport contracts, service contracts, and other similar contracts, is valid and enforceable.

ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents

Section 194C of the Income Tax Act mandates tax deduction at source for payments made to contractors for carrying out any work. The term "any work" has been a point of contention, with various interpretations by different courts. The Supreme Court, in the case of Associated Cement Co. Ltd. v. CIT, interpreted "any work" to have a broad meaning, not confined to "works contract."

Court's interpretation and reasoning

The Court examined the interpretation of "any work" as provided in section 194C and the subsequent circulars issued by the CBDT. The Court noted that the interpretation of "any work" has evolved over time, with earlier circulars excluding transport contracts from its ambit. The Court also considered judgments from various High Courts, including Bombay, Orissa, Calcutta, and Delhi, which have interpreted "any work" in different contexts.

Key evidence and findings

The Court considered the CBDT's Circular No. 666, which attempted to clarify the scope of "any work" to include transport contracts and other similar contracts. The Court also reviewed the judgment in Associated Cement Co. Ltd., which was cited as a basis for the circular. Additionally, the Court examined the legislative history and amendments to section 194C, particularly the insertion of Explanation III by the Finance Act, 1995.

Application of law to facts

The Court applied the legal principles established in previous judgments to the facts of the case. It noted that the interpretation of "any work" should not be expanded beyond its natural meaning without clear legislative intent. The Court found that the circulars issued by the CBDT, particularly Circular No. 666, were inconsistent with the legislative history and previous interpretations of section 194C.

Treatment of competing arguments

The Court considered the arguments of the petitioners, who contended that the circular imposed an undue burden on transport contractors by expanding the scope of section 194C. The respondents argued that the circular was merely clarificatory and consistent with the Supreme Court's interpretation in Associated Cement Co. Ltd. The Court found the petitioners' arguments more persuasive, given the lack of legislative intent to include transport contracts within the scope of "any work."

Conclusions

The Court concluded that the circulars issued by the CBDT, particularly Circular No. 666, were not valid to the extent that they expanded the scope of section 194C to include transport contracts and other similar contracts. The Court held that the interpretation of "any work" should be confined to its natural meaning and should not include contracts for mere carriage of goods.

SIGNIFICANT HOLDINGS

The Court preserved verbatim quotes from the judgment in Associated Cement Co. Ltd., emphasizing that "any work" should not be restricted to "works contract" but should not be expanded to include mere transportation contracts without legislative backing.

The core principle established is that the term "any work" in section 194C should be interpreted in its natural sense, and any expansion of this term should be supported by clear legislative intent. The Court determined that the CBDT's circulars, which attempted to broaden the scope of section 194C, were not legally enforceable.

The final determination was that the petitions challenging the validity of Circular No. 666 were allowed, and the circular was quashed to the extent that it applied section 194C to transport contracts and similar contracts.

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