1996 (9) TMI 103 - HC - Income Tax

Summary

Issues:
Challenge to Circular No. 681 dated March 8, 1994 issued by the Central Board of Direct Taxes (CBDT) under section 190 of the Income-tax Act, 1961. Interpretation of section 194C of the Act regarding deduction of income tax at source from payments made to professionals. Legality of Circular No. 681 in light of Supreme Court judgment in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435. Scope of powers of CBDT under section 119 of the Act in issuing directions.

Analysis:
The judgment involved two petitions challenging Circular No. 681 dated March 8, 1994, issued by the CBDT. The petitioners contested that the circular wrongly imposed a two per cent tax liability on professionals like lawyers, chartered accountants, etc., under section 194C of the Income-tax Act, 1961. The circular was challenged for misinterpreting the Supreme Court's decision in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435, which clarified the broad scope of "any work" under section 194C.

The CBDT's power to issue circulars under section 119 of the Act was scrutinized. The judgment highlighted that CBDT's directions should only serve the proper administration of the Act. The circular in question, Circular No. 681, was issued without appreciating the Supreme Court's decision and misreading the scope of section 194C. The judgment noted that earlier circulars explicitly excluded payments for professional services from the purview of section 194C.

The judgment discussed the legislative intent behind the Income-tax Act amendments. It pointed out that the proposed section 194E in the Finance Bill, 1987, aimed to cover deductions for professional services, indicating that section 194C did not encompass such payments. Subsequently, section 194J was introduced in 1995 for deductions from fees for professional services, further emphasizing that the CBDT's Circular No. 681 was erroneous.

The judgment cited precedents from various High Courts, including Bombay, Delhi, Gujarat, and Madras, which held Circular No. 681 as illegal and misinterpretation of the law. The court concluded that the circular exceeded the CBDT's authority under section 119 and misapplied section 194C, ultimately quashing Circular No. 681.

In conclusion, the writ petitions challenging Circular No. 681 were allowed, and the circular was declared invalid. No costs were awarded in the matter.