BIRLA CEMENT WORKS VS CENTRAL BOARD OF DIRECT TAXES
2001 P T D 2690
[248 I T R 216]
[Supreme Court of India]
Present: S. P. Bharucha, N. Santosh Hegde and Y. K. Sabharwal, JJ
BIRLA‑ CEMENT WORKS
versus
CENTRAL BOARD OF DIRECT TAXES and others
Civil Appeal No.5004 of 1997, decided on 28/02/2001.
(Appeal from the judgment and order, dated April 9, 1997, of the Rajasthan High Court in D.B.C. W.P: No. 1667 of 1995).
Income‑tax‑‑‑
‑‑‑‑Deduction of tax at source‑‑‑From payments to contractors and sub contractors‑‑‑Provisions before amendment in 1995‑‑‑Not applicable to payments to transport contractors‑‑‑Contemporary circulars to that effect‑‑ Circular issued in 1994 seeking to withdraw earlier circulars not valid‑‑ Indian Income Tax Act, 1961, S.194C, Expln. III‑‑‑Circular No.86, dated May 29, 1972‑‑‑Circular No.93, dated September 26, 1972‑‑‑Circular No.681, dated March 8, 1994.
Section 194C of the Income Tax Act, 1961, which provides for deduction of tax at source from payments to contractors and sub‑contractors, prior to the insertion of Explanation III therein with effect from July 1, 1995, was not applicable to transport contracts, i.e., contracts for carriage of goods. This interpretation, which is one of two possible interpretations as to whether contacts for carrying of goods would or would not come within the ambit of the expression "carrying out any work" in that section, Which favours the assessee and which has been acted upon and accepted by the Revenue for a long period, should not be disturbed except for compelling reasons. Further, there are no compelling reasons for holding that Explanation III was clarificatory in nature or retospective in operation.
Soon after the insertion of section 194C in the Income Tax Act, 1961, with effect from April 1, 1972, Circular No.86, dated May 29, 1972, was issued by the Central Board of Direct Taxes stating that the provisions of that section would apply only in relation to "works contracts" and "labour contracts" and would not cover a contract for the sale of goods. Another Circular No.93, dated September 26, 1972, was issued clarifying that section 194C would not apply to transport contracts. Right from April 1, 1972, according to the understanding of the Department, section 1940 was not applicable to payments made in respect of transport contracts, till the issue of a fresh Circular No.681, dated March 8, 1994, withdrawing the earlier circulars and issuing fresh guidelines directing that section 194C would apply to all types of contracts for carrying out work including transport contracts, because of certain observations of the Supreme Court in' Associated Cement Co. Ltd. v. CIT (1993) 201 ITR 435. The question whether the expression "carrying out any work" would include therein the carrying of goods or not was not in issue in that case and that decision has not been correctly understood by the Central Board of Direct Taxes. Circular No.681, dated March 8, 1994, which was made applicable with effect from April 1, 1994, to the extent that it related to transport contracts is invalid:
Held accordingly, that the appellant was not liable to deduct tax at source under section 194C from payments made during the period April 1, 1994 to June 30, 1995 to transport operators for the transport of the cement manufactured by it to different destinations.
Associated Cement Co. Ltd. v. CIT (1993) 201 ITR 435 (SC) explained.
Bombay Goods Transport Association v. CBDT (1994) 210 ITR 136 (Bom.); Calcutta Goods Transport Association v. Union of India (1996) 219 ITR 486 (Cal.) and V. M. Salgacar & Bros. Ltd. v. ITO (1999) 237 ITR 630 {Kar.) approved.
CBDT v. Cochin Goods Transport Association (1999) 236 ITR 993 (Ker.) and Ekonkar Dashmesh Transport Co. v. CBDT (1996) 219 ITR 511 (P & H) disapproved.
The judgment of the High Court is printed below.
The judgment of the Division Bench of the High Court comprising B.R. Arora and G.L. Gupta, JJ., delivered 'by B.R. Arora, J., ran as follows:
B.R. Arora, J. [9‑4‑1997].‑‑‑The petitioner, a manufacturer of cement, is a public limited company, whose registered office is at Calcutta and the factory/works is at Chittorgarh. The cement manufactured by the petitioner factory is being transported to different destinations with the assistance of approved transport operators/companies. The petitioner did not deduct the tax at source (TDS) on the payments made to the transporters under section 194C of the Income Tax Act, 1961. Therefore, a letter, dated March 18, 1995, was issued to the petitioner‑company by the Income‑tax Officer (TDS), Chittorgarh, requesting and reminding it to deduct the tax at source from the payments made to the transport contractors in accordance with Circular No.681, dated March 8, 1994 [see (1994) 206 ITR (St.) 299].
No deduction of the tax at source was made by the petitioner‑company under section 194C of the Income Tax Act, 1961 (for short, "the Act"), as according to the petitioner it was not obliged to deduct the amount of tax at source under section 194C of the Act from the payments made to the transport companies as the provisions are not applicable to such transactions. The respondents, therefore, initiated penalty proceedings against the petitioner. The petitioner, by this writ petition, challenges the legality and validity of the Circular No.681, dated March 8, 1994 [see (1994) 206 ITR (St.) 299], issued by the Central Board of Direct Taxes, New Delhi, and the notices issued by the income‑tax Officer (TDS), Chittorgarh.
It is contended by learned counsel for the petitioner, that (i) section 194C of the Act covers only works contracts and does not cover the payment of transport charges for carriage of goods; (ii) the service rendered for carrying and transportation of the goods can by no imagination, be treated as covered, by the words "any work" used in section 194C of the Act and the coverage and scope of section 194C given in Circular No.86 [see (1972) 84 ITR (St.) 99], has been wrongly withdrawn by Circular No.681 [see (1994) 206 ITR (St.) 299]; (iii) Explanation III added to section 194C of the Act, covering carriage of goods within the expression of the word "works" is only protective and does not cover the case of the petitioner between the period from April 1, 1994 to June 30, 1995; (iv) while issuing Circular No.681 [see (1994) 206 ITR (St.) 299] (Annexure A), the decision of the Supreme Court in Associated Cement Co. Ltd. v. CIT (1993) 201 ITR 435, has been wrongly interpreted; and (v) the Central Board of Direct Taxes has no power, authority or competence to make the law or to impose any liability by issuing Circular No.681, dated March 8, 1994 [see (1994) 206 ITR (St.) 299]. In support of his contention, learned counsel for the petitioner has placed reliance over Bombay Goods Transport Association v. CBDT (1994) 210 ITR 136 (Bom.); Delhi Goods Transport Association v. CBDT (1995) 80 Taxman 525 (Delhi); All Gujarat Federation of Tax Consultants v. CBDT (1995) 214 ITR 276 (Guj.); Madras Bar Association v. CBDT (1995) 216 ITR 240 (Mad.) and Calcutta Goods Transport Association v. Union of India (1996) 219 ITR 486 (Cal.)
Learned counsel for the respondents, on the other hand, has submitted that (i) Circular No.681 [see (1994) 206 ITR (St.) 299] was issued by the Central Board of Direct Taxes rightly and properly in exercise of the statutory powers and is neither without jurisdiction nor a nullity; (ii) the Circular was issued on the proper interpretation of the judgment of the Supreme Court in Associated Cement Co. Ltd.'s case (1993) 201 ITR 435, and section 194C of the Act covers cases of payment of transport charges for carrying the goods; (iii) Explanation III added to section 194C by the Finance Act of 1995 with effect from July 1, 1995, is only clarificatory in nature and even without this Explanation the petitioner was obliged to deduct the tax at source and the writ petition filed by the petitioner is without any substance and deserves to be dismissed. In support of his contention, learned counsel for the respondents has placed reliance over Associated Cement Co. Ltd.'s case (1993) 201 ITR 435 (SC) and Ekonkar Dashmesh Transport Co. v. CBDT (1996) 219 ITR 511 (P & H).
Before we embark on a discussion on the controversy involved in the case, it is necessary first to state the facts which led to the present controversy. Section 194C of the Act making provision for deduction of tax at source from payments made to the contractors and sub‑contractors in certain cases, was originally inserted by the Finance Act, 1972, with effect from April 1, 1972, and the amended section reads as under:
"194C. Payments to contractors and sub‑contractors.‑‑‑(1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and: ....
(d) any company: ....
shall, at the time of credit of such sum to the account of the contractor or at the time of 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‑‑‑
(i) one per cent. in case of advertising;
(ii) in any other case two per cent. of such sum as income‑tax on income comprised therein...
Explanation III.‑‑‑For the purpose of this section, the .expression 'work' shall also include‑‑‑
(a) advertising;
(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
(c) carriage of goods and passengers by any mode of transport other than by railways;
(d) catering
The provisions of, and the formalities requisite in connection with section 194C, were explained by the Central Board of Direct Taxes in its Circular No. 86, dated May 29, 1972 [see (1972) 84 ITR (St.) 99].
(F. No.275)/9/1972‑ITJ). Sub‑clause (ii) of clause (1) of this Circular which relaxes to the present controversy.,. reads (page 99):
"(ii) The deduction of the income‑tax will be made from sums paid for carrying out any work or for supplying labour for carrying out any work. In other words, the new provision will apply only in relation to 'works contracts' and 'labour contracts' and will .not cover contracts for sale of goods. "
The Finance Ministry received several queries from various trade associations and members of the public seeking clarification on several points arising out of the scheme of tax deducted at source for payment made to contractors and sub‑contractors in certain cases. The point, on which the enquiries were made and clarifications were sought, were answered by the respondents by Circular No.93 (F. No.275/100/72‑ITJ, dated September 26, 1972) [see (1972) 86 ITR (St.) 30]. Question No.5, formulated by the Ministry and answered, deals with the question. Whether the provisions of section 194C apply to transport contracts? The question and ‑answer stated in this circular read (page 31):
"Question No.5: Does the requirement apply to transport contract?
Answer: A transport contract cannot ordinarily be regarded as a contract for carrying out any work and, as such, no deduction in respect of income‑tax is required to be made from payments made under such a contract. In the case of a composite contract involving transport as well as loading and unloading the entire contract will be regarded as works contract and income‑tax will have to be deducted from payments made thereunder. Where, however, the element of labour provided for loading and unloading is negligible, no income‑tax will be deductible."
The Department, in pursuance of these two circulars issued by the Central Board of Direct. Taxes, in the cases of transport contracts, did not insist on the deduction of the tax at source and the petitioner and other like assessees did not deduct the tax at source.
The matter whether a person who credits to the account of or pays to the contractor any sum as per the terms and conditions of contract of loading packed cement bags from its packing plant into wagons or trucks, is liable to deduct two per cent. of such sum as income‑tax as required under section 194C(1) of the Act, came up for consideration before the Supreme Court in Associated Cement Co. Ltd.'s case (1993) 201 ITR 435 and the apex Court, while interpreting the words "any work" answered the question is under (page 440):
"Work envisaged in the subsection, therefore, ha& a wide import and covers any work which one or the other of the organisations specified in the subsection can get carried out through a contractor under a contract and further it includes obtaining by any of such organisations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the work, but for its specific inclusion in the subsection."
On the basis of the decision of the Supreme Court, a circular was issued by the Ministry of Finance giving instructions regarding deduction of tax at source under section 194C. In pursuance of this circular issued by the Ministry of Finance and in view of the judgment of the Supreme Court in Associated Cement Co. Ltd.'s case (1993) 201 ITR 435, the Central Board of Direct Taxes considered that the earlier circular issued under section 194C needs to be reviewed in the light of the judgment. The Board was of the view that the conclusion flowing from the judgment of the Supreme Court is that the provisions of section 194C would apply to all types of contracts including transport contracts, labour contracts, service contracts etc. The Board, therefore, decided to withdraw Circulars No.86, 93 and 108 and issued guidlines vide Circular No. 681 in regard to applicability of the provisions of section 194C. Guidline No. (i) which is relevant for adjudication of the present controversy, reads as under (page 300 of 206 ITR):
"(i) The provisions of section 194C shall apply to all types of contracts for carrying out any work including the transport contracts, service contracts, advertisement contracts, broadcasting contracts, telecasting contracts, labour contracts, materials contracts and works contracts. "
This circular was made effective with effect from April 1, 1994, and it was made clear by this circular that tax deduction made in accordance with Circulars Nos. 86, 93‑and 108 up to March 31, 1994, will be regarded as compliance with the provisions of section 194C.
Explanation III to subsection (2) of section 194C of the Act was thereafter added by section 34 of the Finance Act, 1995, with effect from July 1, 1995. This Explanation III has been reproduced in the earlier part of this judgment in para. 5 (page 219 supra) while quoting section 194C.
The controversy raised in the present writ petition is: whether the payment to the transporters for carriage of goods from the works of the petitioner‑company to different destinations can be considered as payment for works involving labour or supply of labour for carrying out such work within the scope of section 194C.
The answer to this controversy depends upon the interpretation of section 194C in the light of the judgment of the Supreme Court in Associated Cement Co. Ltd. v. CIT (1993) 201 ITR 435. Section 194C casts a duty upon the person .responsible for making payment of a sum to any contractor for carrying out "any work" in pursuance of a contract between the contractor and the company to deduct a sum of tax at source at the time of credit of such sum to the account of the contractor or at the time of payment thereof by cash or by issuance of a cheque, draft or by any order mode whichever is earlier.
To attract the provisions of section 194C, the following conditions have to be satisfied; namely, (i) there must be a contract between the person responsible for making payment and the contractor; (ii) the contract must be for carrying out "any work"; (iii) the work is being carried out through the contractor; (iv) consideration for the contract should exceed Rs. 10,000, i.e. the amount fixed by section 194C and (v) the payment is made to the contractor for the work carried out by him.
If these conditions are satisfied then it is obligatory upon the person responsible for making such payment to deduct tax at source from the payment to be made. The expression "carrying out any work" is the soul of the section and the applicability of the section depends upon the interpretation of this expression. The word "any" is a word which excludes limitation and qualification and can mean "all", "each" and "every". The meaning of this word given in the statute depends upon the context and the subject‑matter of the statute and its generality can be restricted by the context in which it has been used. It has been used as a prefix to the word "work" which means engagement in the performance of a task, duty or the like. The term "work" covers all forms of physical and mental exertions or both combined for the attainment of some object other than recreation or amusement.
The dictionary meaning of the words "carrying on" implies a repetition of acts. Whether carriage of goods, therefore, amounts to carrying out any work is to be seen. The words "any work" used in section 194C came up for interpretation before the Supreme Court in the matter of loading cement bags from its packing plant on the trucks which carry the cement bags to various destinations The Supreme Court in the Associated Cement Co. Lstd.'s case (1993) 201 ITR 435, 439 held that:
"Thus, when the percentage amount required to be deducted under the subsection as income‑tax is on the sum credited to the account of or paid to a contractor in pursuance of a contract for carrying out a work or supplying labour for carrying out a work, of any of the organisations specified therein, there is nothing in the subsection which could make us hold that the contract to carry out a work or the contract to supply labour to carry out a work should be confined to works contract as was argued on behalf of the appellant. We see no reason to curtail or to cut down the meaning of the plain words used in the section. 'Any work' means any work and not a works contract, which has a special connotation in the tax law.
Indeed, in the subsection, the word referred to therein expressly includes supply of labour to carry out a work. It is a clear indication of the Legislature that the "work" in the subsection is not intended to be confined to or restricted to works contract. Work envisaged in the subsection, therefore, has a wide import and covers any work which one or the other of the organisations specified in the subsection can get carried out through a contractor under a contract and further it includes obtaining by any of such organisations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the work, but for its specific inclusion in the subsection.."
The Supreme Court has, thus, given a wide import to the words "any work" used in the section and it covers all the work and is not merely restricted to work contract or supply of labour. The expression "carrying out any work" used in section 194C has, thus, wide amplitude and covers works of all kinds which are carried out through contractors by the specified organisations mentioned in section 194C.
The same controversy came up for consideration before the Bombay High Court in Bombay Goods Transport Association v. CBDT (1994)‑210 ITR 136. The Division Bench of the Bombay High, Court, considering the judgment of the Supreme Court in Associated Cement Co.. Ltd.'s case (1993) 201 ITR 435 and the earlier circulars issued by the Central Board of Direct Taxes treating transport contracts as not falling within the purview of section 194C, held (page 150 of 210 ITR):
"We do not find anything in the decision of the Supreme Court to justify the reversal of the above view by the Central Board of Direct Taxes by the impugned circular. The Supreme Court has not interpreted the provisions of section 194C 'in the manner it is sought to be interpreted by the Central Board of Direct Taxes to apply to all types of contracts including transport contracts, service contracts, advertisement contracts, broadcasting contracts, telecasting contracts, labour contracts, materials contracts, works contracts, etc. In our opinion, the Central Board of Direct Taxes has committed a manifest error of law in interpreting the judgment of the Supreme Court. It is well‑settled that the judgment of the Supreme Court has to be read subject to the facts directly presented for consideration before it and not affecting those matters which may lurk in the record.
In Associated Cement Co. Ltd.'s case (1993) 201 ITR 435 (SC), the controversy before the Supreme Court was limited to the applicability of section 194C to labour contracts. The various circulars of the Central Board of Direct Taxes were not before the Supreme Court. The Supreme Court interpreted section 194C de hors those circulars. It did not approve the narrow construction of the expression "any work" to include only "works contract". There is nothing beyond that in the above judgment of the Supreme Court.
With respect, we find ourselves unable to agree with the view expressed by the Division Bench of the Bombay High Court. The Division Bench of the Bombay High Court, while deciding the issue, laid much stress on the earlier circulars issued by the Central Board of Direct Taxes and mainly based the judgment on the interpretation given by the Central Board of Direct Taxes in its earlier circulars. The question before the Supreme Court in Associated Cement Co. Ltd.'s case (1993) 201 ITR 435 was as to the interpretation of the words "any work" relating to contracts to general vis‑a‑vis labour contracts and not in particular to the labour contract also as pointed out by the Division Bench in the judgment. The Supreme Court has given a wide connotation to the expression "any work" used in the section. It has specifically been laid down by the Supreme Court in Associated Cement Co. Ltd.'s case (1993) 201 ITR 435 that the words "any work" envisaged in section 194C have a wide import and cover any work which one or the other of the organisations specified in the subsection, can get carried out through a contractor under a contract.
The same controversy also came up for consideration before the Delhi High Court in Delhi Goods Transport Association v. CBDT (1995) 80 Taxman 525. The Delhi High Court relied upon the judgment of the Bombay High Court in Bombay Goods Transport Association's case (1994) 210 ITR 136 and held that the impugned circular is ultra vires the provisions of section 194C insofar as it purported to cover the cases of actual carriage of goods for hire. 'While quashing the order, the Delhi High Court relied upon the judgment of the Bombay High Court in Bombay Goods Transport Association's case (1994) 210 ITR 136 and the earlier judgment of the Delhi High Court in S.R.F. Finance Ltd. v. CBDT (1995) 211 ITR 861 which relates to the business of leasing the hire purchase of articles such as vehicle, plant and machinery, etc. No discussion has been made on the point in issue in this judgment.
In All Gujarat Federation of Tax Consultants v. CBDT (1995) 214 ITR 276, the same controversy came up for consideration and the Division Bench of the Gujarat High Court, after considering the judgment of the Supreme Court, the judgments of the Bombay; Calcutta and Madras High Courts and the circulars issued by the Board observed that (page 294):
"...the only question that fell for determination was whether the applicability of section f94C was confined to works contracts only as contended by the assessee. The Supreme Court decided only this limited question and held that there was no reason to curtail or cut down the meaning of the plain words used in section 194C to confine or restrict it to works contracts. ".
The Division Bench of the Gujarat High Court, therefore, quashed and set aside Circular No. 681.
The same controversy, also, came up for consideration before the Madras High Court in Madras Bar Association v. CBDT (1995) 216 ITR 240 and the Madras High Court, held that the circular is illegal and without jurisdiction so far as it has cast an obligation for deduction of the tax at source under section 194C in respect of a contract for mere carriage of goods which does not include any other service like loading and unloading and are not, in any way, connected with "any work" to be performed by the carrier.
The Calcutta High Court in Calcutta Goods Transport Association v. Union of India (1996) 219 ITR 486, 497 dealing with the same controversy held that "mere transportation of goods by a common carrier does not affect or result in the goods carried nor are the goods affected thereby and as such cannot be brought within the scope of section 194C". While considering the judgment of the Supreme Court in Associated Cement Co. Ltd.'s case (1993) 201 ITR 435, the learned Judge of the Calcutta High Court observed that "the Supreme Court has not gone on to clarify or explain or define as to the sense in which the word was being used by the Supreme Court".
With respect, we find ourselves unable to agree with the view expressed by the Gujarat, Madras and Calcutta High Courts in view of the judgment of the Supreme Court in Associated Cement Co. Ltd.'s case (1993) 201 ITR 435. The Supreme Court, while considering the words "any work" used in section 194C, clearly took the view that the word "work" has to be given a wider connotation and its application cannot be restricted only to "works contract" or "contract for labour". The expression "any work" used in the section covers each and every work where the work is being carried out in pursuance of a contract between the contractor and the person responsible for making payment and the consideration of the contract exceeds the sum fixed in section 194C(iii).
The same controversy whether carriage of goods amounts to carrying out "any work", came up for consideration before the Punjab and Haryana High Court in Ehankar Dashmesh Transport Co. v. CBDT (1996) 219 ITR 511, 515 and the Punjab and Haryana High Court, after considering the judgment of the Supreme Court in Associated Cement Co. Ltd.'s case (1993) 201 ITR 435 and that of the Bombay, Calcutta and Madras High Courts, held that "the circular issued by the Board, insofar as it provides that the transport contract falls within the mischief of section 194C, is legal and valid and the challenge to this provision in the circular cannot be sustained".
We agree with the above view of the Punjab and Haryana HighCourt. The company in the present case, under the contract, transported the cement from its factory to different destinations through the approved transporters who are engaged in the system of operating their trucks for carrying the goods from one place to another. The carrying of the goods is an act or a business of transport operators involving an effort of exertion directed to a definite end expressly as a means of gaining one's livelihood. The contract of transportation of the cement bags from the factory to various destinations, thus, falls within the expression "carrying out any work". The consideration for the contract exceeded the amount fixed by section 194C(iii) and, therefore, the company, being responsible for making payment, was obliged to make deduction of tax deducted at source. All the necessary requirements for the applicability of section 194C were, thus, satisfied and, therefore, it was, obligatory upon the petitioner‑company to deduct the tax at source.
The dispute in the present case regarding non‑deduction of tax deducted at source relates only for the period with effect from April 1, 1994, to June 30, 1995, i.e. prior to the addition of Explanation III appended to section 194C. After the addition of Explanation III the compliance of section 194C is being made by the petitioner. Explanation III added by the Finance Act of 1995 is merely clarificatory in nature. Even otherwise, without this Explanation III the carrying on of business of transportation of cement from the factory of the petitioner to various destinations, also comes within the expression "carrying out of any work" and the provisions of section 194C were, also, applicable. Explanation III has been inserted merely in order to remove the doubts and clarifying position that the provisions of section 194C are applicable in this transaction also.
The Central Board of Direct Taxes was, therefore, right in reconsidering and reviewing its earlier circular in view of the judgment of the Supreme Court. We see no infirmity in Circular No. 681, issued by the Central Board of Direct Taxes. It was issued under the authority of law and within the jurisdiction and competence of the Board.
In the result, we do not find any merit in this writ petition and the same is hereby dismissed.
S. Ganesh, M.L. Patodia and Praveen Kumar for Appellant.
T.L.V. Iyer, Senior Advocate (Ashok K. Srivastava" S.K. Dwivedi and Ms. Sushma Suri with him) for Respondents.
JUDGMENT
Y.K.SABHARWAL, J.‑‑‑The legality of circular, dated March 8 1994 (hereinafter referred to as the "impugned circular"), issued by the Central Board of Direct Taxes (the "CBDT"), prescribing fresh guidelines regarding the applicability of section 194C of the Income‑tax Act, 1961 (for short, the "Act"), to the extent it relates to transport contracts, i.e., contracts for carriage of goods, is in issue in this appeal. The said circular, inter alia, states that the provisions of section 194C shall apply to all types of contracts for carrying out any work including transport contracts. Section 194C provides for deduction of tax at source from payments to contractor and subcontractors. Section 194C was brought into existence by the Finance Act, 1972, with effect from April 1, 1972. Various amendments have been made in that section since then but the material part relevant for the present purposes reads as under:
"194C. Payments to contractors and sub‑contractors.‑‑‑(1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and‑‑‑...
(d) any company; or .....
shall, at the time of credit of such sum to the account of the contractor or at the time of 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 income comprised therein. "
Soon after insertion of section 194C, a circular dated May 29, 1972, was issued, inter alia, stating that the provisions of section 194C would apply only in relation to "work contracts" and "labour contracts" and will not cover contracts for sale of goods. Another Circular No.93 (see (1972) 86 ITR (St.) 30), dated September 26, 1972, was issued clarifying that the provisions of section 194C will not be applicable to transport contracts. This circular, inter alia, states that a transport contract cannot ordinarily be regarded as a "contract for carrying out any work" and, as such, no deduction in respect of income tax is required to be made from payments made under such a contract. In the case of a composite contract involving transport as well as loading and unloading, the entire contract will be regarded as a "works contract" and income tax will have to be deducted from payments made thereunder. Where, however, the element of labour provided for loading and unloading is negligible, no income‑tax will be deductible. By letter, dated February 3, 1982, in reply to a quarry from a transporter, the Government of India stated that if the contracts are purely transport contracts involving only transportation of goods entrusted for carriage to the transport operators, the provisions of section 194C would not be applicable to such payments. There is no controversy that according to the understanding of the Revenue of section 194C, right from April 1, 1972, till the issue of the impugned circular, this provision was not applicable to payments made in respect of transport contracts. It is not disputed that prior to the issue of the impugned circular, various circulars and clarifications were issued by the Central Board of Direct Taxes stating that the provisions of section 194C were not applicable to payments made for carriage of goods to transport operators.
The appellant manufactures cement. The cement manufactured by the appellant is transported to different destinations through transport operators/companies. Since, the appellant did not deduct the tax at source from the payments made by it to the transporters under section 194C of the Income‑tax Act by letter, dated March 18, 1995, the Income‑tax Officer required the appellant to deduct the tax at source from such payments in accordance with the impugned circular. According to the appellant, no deduction of tax at source was made from payment made to the transport operators/companies as section 194C was not applicable to such transactions. It is, however, not in dispute that the appellant has paid the income‑tax. The question has cropped up in view of the penalty proceedings initiated by the Department against the appellant which led to the filing of the writ petition by the appellant challenging the legality and validity of the impugned circular. The period in question is from April 1, 1994, to June 30, 1995.
The contention urged before the High Court was that section 194C does not apply to payments made for transport charges for carrying of goods as transportation of goods is not covered by the words "any work" used in the section and by the impugned circular the Central Board of Direct Taxes has illegally withdrawn earlier circulars stating that section 194C is not applicable to such transactions. It was also contended that Explanation III was only prospective and does not cover the period in question, i.e., April 1, 1994, to June, 30, 1995. Rejecting these contentions, the High Court by the impugned judgment has held that the payment to the transporters for carriage of goods to different destinations is a payment for work which comes within the expression "carrying out any work" and is covered by section 194C and, therefore, on such transactions tax was deductible at source. It was held that the expression "carrying out any work" would include carrying the goods. Explanation III was held to be merely clarificatory and inserted in order to remove the doubts and clarify that .section 194C is applicable to such transactions also.
The impugned circular came to be issued because of the observations made by this Court in Associated Cement Co. Ltd. v. CIT (1993) 201 ITR 435. The circular states that some of the issues raised in Circular No. 86 .(see (1972) 84 ITR (St.) 99), dated May 29, 1972 and Circular No. 93 (1972) 86 ITR (St.) 30), dated September 26,` 1972, need to be reviewed in the light of the judgment of this Court in Associated Cement Co. Ltd.'s case (1993) 201 ITR 435. The conclusion drawn by the Central Board of Direct Taxes from this decision, as stated in the impugned circular, is that this Court has held that the provisions of section 194C would apply to all types of contracts including transport contracts, labour contracts, service contracts, etc. In the light of this judgment the Central Board of Direct Taxes decided to withdraw earlier circulars and issued fresh guidelines directing that section 194C shall apply to all types of contracts for carrying out any work including transport contracts. The impugned circular was made applicable with effect from April 1, 1994.
In Associated Cement Co. Ltd.'s case (1993) 201 ITR 435 (SC), the facts were that under the terms and conditions of an agreement between the Associated Cement Co. Ltd. and a contractor, the contractor was to be paid at a flat rate for loading packed cement bags into wagons and 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 Associated, Cement Co. Ltd. to the contractor in case of certain increase in the dearness allowance payable by the contractor to the workmen employed by him. The company 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 company under section 194C(1) fell short of the deductions required to be made thereunder. The claim of the company was that it was not liable to deduct any amount under the section. The notices issued to the company to show cause why action should not be taken under sections 276B(1), 201 and 221 for short deduction were challenged in the writ petition filed by the company in the High Court. The writ petition was dismissed by the High Court. On appeal, this Court held that section 194C(1) had a wide import and covered "any work" which could be got carried out through, a contractor under a contract including the obtaining of supply of labour under a contract with a contractor for carrying out any work. The section was not confined or restricted in its application to "works contracts". There was nothing in the language of the section which permitted exclusion for the amount reimbursed by the company to the contractor under clause 13 from the sum envisaged therein. The facts of the case and observations made in Associated Cement Co. Ltd.'s case (1993) 201 ITR 435 (SC), make it clear that in the said decision, this Court was concerned with a work carried through a contractor under a contract which further included obtaining supply of labour under a contract with a contractor for carrying out its work which would have fallen outside "work" but for its specific inclusion in the subsection. Under these circumstances, it was said.(page 440):
... there is nothing in the subsection which could make us hold that the contract to carry out a work or the contract to supply labour to carry out a work should be confined to works contract as was argued on behalf of the appellant. We see no reason to curtail or to cut down the meaning of the plain words used in the section. Any work means any work and not a works contract which has a special connotation in the tax law. Indeed, in the subsection, the work referred to therein expressly includes supply of labour to carry out a work. It is a clear indication of the legislature that the work in the subsection is not intended to be confined to or restricted to works contract. Work envisaged in the subsection, therefore, has wide import and covers any work which one or the other of the organisations specified in the subsection can get carried out through a contractor under a contract and further it includes obtaining by any of such organisations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the work, but for its specific inclusion in the subsection. "
It is evident that Associated Cement Co. Ltd.'s case (1993) 201 ITR 435 (SC), was not in respect of transport contracts. The controversy therein was deduction :of tax at source from payments made for loading and unloading of goods. The question whether the expression carrying out any work would include therein carrying of the goods or not, was not in issue in Associated Cement Co. Ltd.'s case (1993) 201 ITR 435 (SC). That is precisely the question in the present case. The decision in Associated Cement Co. Ltd.'s case (1993) 201 ITR 435 (SC) has not been correctly understood by the Central Board of Direct Taxes. It would not be; correct to come to the conclusion, as the Central Board of Direct Taxes did that the question involved is covered by the decision in the case of Associated Cement Co. Ltd.'s case (1993) 201 ITR 435 (SC).
Section 194C was amended, by the Finance Act, 1995, with effect from July 1, 1995, Explanation III was inserted. So far as relevant for the present purpose, the said Explanation reads as under:
"Explanation III.‑‑‑For the purposes of this section, the expression work shall also include:...
(c) carriage of‑goods and passengers by any mode of transport other than by railways:..."
In view of the above, it is not in dispute that from July 1, 1995, section 194C is applicable to transport contracts as well. The question, however, is whether the aforesaid Explanation is only clariftcatory or it makes applicable the provisions of section 194C to the types of contracts in question for the first time from the date of insertion of the Explanation i.e. July 1, 1995 .
The Rajasthan High Court in the judgment under challenge has followed the interpretation placed on section 194C by the Kerala High Court in CBDT v. Cochin Goods Transport Association (1999) 236 ITR 993 and the Punjab and Haryana High Court in Ehankar Dashmesh Transport Co. v. CBDT (1996) 219 ITR 511. The contrary views expressed by the High Courts of Bombay, Calcutta, Karnataka, Gujarat, Madras, Orissa and Delhi quashing the impugned circular have been dissented from in the judgment under challenge.
The key words in section 194C are "carrying out any work". Learned counsel for the appellant contended that word or collection of words should fit into the structure of the sentence in which the word is used or collection of words formed. The contention is that in the context of section 194C, carrying out any work indicates doing something to conduct the work to completion or something which produces such result. The mere transportation of goods by a carrier does not affect the goods carried thereby. The submission is that by carrying the goods, no work to the goods is undertaken and the context in which the expression "carrying out any work" has been used, makes it evident that it does not include in it the transportation of goods by a carrier. In Bombay Goods Transport Association v. CBDT (1994) 210 ITR 136, the Bombay High Court quashing the impugned circular has held that the expression "carrying out any work" would not include the carrying of‑goods. In Calcutta Goods Transport Association v. Union of India (1996) 219 ITR 486 (Cal.), a similar view has been expressed by the Calcutta High Court. It has also been pointed out in this decision that Parliament had sought to bring professional services and other works‑within the net of tax deduction at source. If such "works" were already covered by section 194C, it was wholly unnecessary for Parliament to introduce separate statutory provisions in this regard and, thus, it follows that the word "work" is to be understood in the limited sense as a product or result. The carrying out of work indicates doing something to conduct the work to completion or an operation which produces such result. In V.M. Salgaacar & Bros. Ltd. v. ITO (1999) 237 ITR 630, the Karnataka High Court has concurred with the views expressed by the Bombay and Calcutta High Courts. The High Courts of Gujarat, Madras, Orissa and Delhi have also expressed similar views. On the other hand, as already noticed, the Rajasthan High Court in the judgment under appeal has expressed the contrary view relying upon the decision in Associated Cement Co. Ltd.'s case (1993) 201 ITR 435 (SC).
Two interpretations are reasonably possible on the question whether the contractor for carrying of goods would come or not within the ambit of the expression "carrying out any work". One of' the two possible interpretations of a taxing statute, which favours the assessee and which has been acted upon and accepted by the Revenue for a long period should not be disturbed except for compelling reasons. There can be no doubt that if the only view of section 194C had been the one reflected in the impugned circular, then the issue of earlier circulars and acceptance and acting thereupon by the Revenue reflecting the contrary view would have been of no consequence. That, however, is not the position. Further, there are no compelling reasons to hold that Explanation III inserted in section 194C with effect from July 1, 1995, is clarificatory or retrospective in operation. We hold that section 194C before insertion of Explanation III is not applicable to transport contracts i.e., contracts for carriage of goods.
For the aforesaid reasons the appeal is allowed, the impugned circular to the extent it relates to transport contracts is quashed. The parties are left to bear their own costs.
M.B.A/950/FC Appeal allowed.