1995 (3) TMI 56 - HC - Income Tax

Summary

Issues Involved:
1. Validity of Circular No. 681 dated March 8, 1994.
2. Applicability of Section 194C of the Income-tax Act, 1961, to professional services.
3. Applicability of Section 194C to transport contracts.
4. Applicability of Section 194C to advertising contracts.

Summary:

1. Validity of Circular No. 681 dated March 8, 1994:
The impugned Circular No. 681 dated March 8, 1994, issued by the Central Board of Direct Taxes (CBDT), was challenged by various professional associations and individuals. The circular aimed to expand the scope of Section 194C of the Income-tax Act, 1961, to include professional services, transport contracts, and advertising contracts, and withdrew earlier circulars that excluded these services.

2. Applicability of Section 194C to Professional Services:
The court held that Section 194C(1) of the Income-tax Act, which mandates tax deduction at source for "any work" carried out by a contractor, does not apply to professional services rendered by lawyers, doctors, architects, and chartered accountants. The term "any work" should be interpreted in its context, which relates to physical and tangible activities rather than intellectual services. The court noted that the Supreme Court's decision in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 did not extend the scope of Section 194C to include professional services. Consequently, the circular's attempt to include professional services within the ambit of Section 194C was deemed invalid.

3. Applicability of Section 194C to Transport Contracts:
The court ruled that the impugned circular was illegal and without jurisdiction insofar as it required tax deduction at source for contracts involving mere carriage of goods without additional services like loading and unloading. The term "any work" in Section 194C does not encompass mere transportation contracts.

4. Applicability of Section 194C to Advertising Contracts:
The court held that payments made to advertising agencies for rendering professional services do not fall within the scope of Section 194C(1). The circular was therefore illegal and without jurisdiction in requiring tax deduction at source for such payments.

Conclusion:
The court quashed Circular No. 681 dated March 8, 1994, issued by the CBDT, as it was found to be violative of Articles 14 and 265 of the Constitution of India and opposed to Section 194C of the Income-tax Act. The circular's directions for tax deduction at source from payments made to professionals, transport contractors, and advertising agencies were declared invalid. The writ petitions were allowed to the extent indicated, with no order as to costs.