Rakesh Raj and Associates vs Central Board of Direct Taxes and Another

N.K. Agrawal, J.—These are two petitions (C. W. Ps. Nos. 6375 and 6731 of 1994), filed in public interest and also in the exercise of the petitioner''s own rights, seeking the quashing of Circular No. 681 (see [1994] 206 ITR 299) dated March 8, 1994, issued by respondent No. 1, Central Board of Direct Taxes (for short, "the Board"). The petitioner in C. W. P. No. 6375 of 1994 is a partnership firm engaged in the profession as Chartered Accountants at Faridabad (Haryana). The petitioner; Shri Sanjay Bansal, is an advocate in C. W. P. No. 6731 of 1994.

The circular in question has been challenged on the ground that the persons rendering services as lawyers, chartered accountants, physicians, surgeons, engineers, architects, consultants, etc., have been wrongly made liable to pay tax at the rate of two per cent. of the remuneration payable to them by the party engaging them for professional services. It is alleged that the said circular has been issued by the Board in excessive exercise of its powers conferred by Section 190 of the Income Tax Act, 1961 (for short, "the Act"). The persons and parties paying remuneration to the professionals, like lawyers, chartered accountants, etc., are required to deduct Income Tax at the rate of two per cent. from the total amount of remuneration credited to the account of, or paid to, the payee by way of remuneration. The Board has, while issuing the said circular, taken the plea that the professionals rendering services to the individuals or the parties are covered for the purposes of deduction of Income Tax at source within the meaning of Section 194C of the Act.

Section 194C was inserted in the Act by the Finance Act of 1972, with effect from April 1, 1972. It required a person responsible for paying any sum to any resident (referred to as "the contractor") for carrying out any work in pursuance of a contract (sic). The marginal heading of Section 194C is "payments to contractors and sub-contractors". The person crediting any sum to the account of the contractor or making any payment in cash or by cheque or draft or by any other mode is required to deduct an amount equal to one per cent. in case of advertising and, in any other case, two per cent. of the amount as Income Tax.

The Board has issued the said circular, dated March 8, 1994, in the exercise of its powers u/s 119 of the Act. Sub-section (1) of Section 119 reads as under :

"119. (1) The Board may, from time to time, issue such orders, instructions and directions to other Income Tax authorities as it may deem fit for the proper administration of this Act, and such authorities and all other persons employed in the execution of this Act shall observe and follow such orders, instructions and directions of the Board ;

Provided that no such orders, instructions, or directions shall be issued -

(a) so as to require any Income Tax authority to make a particular assessment or to dispose of a particular case in a particular manner ; or

(b) so as to interfere with the discretion of the Deputy Commissioner (Appeals) or the Commissioner (Appeals) in the exercise of his appellate functions."

The aforesaid provision empowering the Board to issue instructions and directions was enacted so as to facilitate proper administration of the Act. Therefore, the power to issue direction or any instruction is to be exercised only for carrying out the proper administration of the Act and nothing more.

The Board has issued Circular No. 681, dated March 8, 1994 (reproduced in [1994] 206 ITR 299), after withdrawing the earlier circulars, explaining the applicability of Section 194C of the Act. The reasons for the issuance of the new circular have been given in paragraphs 4 and 5 of the circular, which read as under ([1994] 206 ITR 299) :

" 4. Some of the issues raised in the abovementioned circulars need to be reviewed in the light of the judgment dated March 23, 1993, delivered by the Supreme Court of India in Civil Appeal No. 2860/(NT) of 1979- The Associated Cement Company Ltd. Vs. The Commissioner of Income Tax, Bihar, Patna and another, .

The Supreme Court has held that ''. . . . there is nothing in the sub-section 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" . . . .'' Their Lordships have further held that "''Any work" means any work and not a "work contract", which has a special connotation in the tax law. . . . "Work" envisaged in the sub-section, therefore, has a wide import and covers "any work" which one or the other of the organisations specified in the sub-section 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 sub-section''."

The petitioners'' plea challenging the validity of the circular is based on the argument that the ratio of the decision of the Supreme Court has been wholly misread and misinterpreted. The Supreme Court in The Associated Cement Company Ltd. Vs. The Commissioner of Income Tax, Bihar, Patna and another, was examining the case of a contractor who had been engaged in the work of loading cement bags for, and on behalf of, a company under a contract. It was held that the contract falling u/s 194C need not be a works contract only but may be a contract to carry out any work or to supply labour. Thus, the matter before the Supreme Court did not relate to the persons rendering professional services under an agreement. The petitioners have pleaded that the impugned circular has given a distorted and misconceived meaning and construction to the ratio of the decision of the Supreme Court. The observations made by the Supreme Court were in respect of a contract whereunder a contractor was required to carry out a specified work. Therefore, the observations made by the Supreme Court should be read in the context of the facts of that case and should not be read out of context. The Supreme Court was of the view that the provisions of Section 194C were not confined to the works contract alone. It would, however, not mean that the decision would apply to an agreement for rendering professional services also.

It may be noticed that the Board had earlier issued Circular No. 86, dated May 29, 1972 (reproduced in [1972] 84 ITR 99), containing certain directions regarding deduction of Income Tax at source u/s 194C of the Act, Paragraph (iii) of the said circular explicitly excluded the payments made for rendering professional services. The said paragraph reads as under :

" (iii) Contracts for rendering professional services by lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc., can also not be regarded as contracts ''for carrying out any work'' and, accordingly, no deduction of Income Tax will be made from the payments relating to such contracts. "

The Board issued further clarifications, vide Circular No. 93, dated September 26, 1972 (reproduced in [1972] 86 ITR 30), on the deduction of Income Tax at source u/s 194C of the Act. This circular explained the provisions in the form of questions and answers. Questions Nos. 5, 7, 9 and 11 along with their respective answers appear to be relevant inasmuch as they threw light on the view taken by the Board earlier on the applicability of Section 194C to payments to various persons or parties. These questions and answers, being relevant are reproduced below (at page 31) :

" Question 5 : Does the requirement apply to transport contract ?

Answer : A transport contract cannot ordinarily be regarded as ''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. . . .

Question 7 : Does the requirement apply in relation to payments made to commission agents for arranging sales or to advertising agents rendering professional services ?

Answer : No. Service contracts not involving the carrying out of any work are outside the scope of the provision. . . .

Question 9 : Does the requirement apply in relation to payments made for hiring of equipments, rental, etc. ?

Answer : No. ...

Question 11 : Does the requirement apply in relation to payments made to banks for discounting bills, collecting/receiving payments through cheques/drafts, opening and negotiating letters of credit, etc. ?

Answer : No."

It appears that the Board had earlier taken a clear view that Section 194C of the Act did not apply to the payments made to the professionals for their services. It is only after the decision was given by the Supreme Court in Associated Cement Co. Ltd.''s case [1991] 201 ITR 435 that the Board revised its opinion just so as to issue a new circular, withdrawing the earlier ones. As stated earlier, the Board has taken an incorrect and erroneous view of the matter. The ratio of the decision of the Supreme Court has not been appreciated in the right perspective.

The Government had earlier proposed insertion of a new Section 194E by the Finance Bill, 1987. Clause 49 of the said Bill sought the insertion of the new section so as to provide for the deduction of tax at source from the payments made to a resident by way of fees for professional services, royalty, fees for technical services, rent, commission or brokerage. It was explained in the "Notes on Clauses" appended to the said Bill that the new section provided for deduction of tax at source on payments beyond specified amounts of fees for professional services, royalty, etc. The amendment was proposed to take effect from June 1, 1987. However, the proposed new provision was dropped and did not come on the statute book. It is, therefore, evident that Section 194C did not cover payments made to the professionals for their professional and technical services and that was the reason why a new section was sought to be enacted by the Finance Bill, 1987. But somehow the attempt of the Government failed. The very attempt to enact a new provision for the deduction of tax at source made it clear that the Government intended to provide for the deduction of tax at source on the payment of fees for professional services also inasmuch as this was not covered u/s 194G of the Act.

A new Section 194J has now been enacted. This new provision inserted by the Finance Act, 1995, with effect from July 1, 1995, requires a person responsible for paying any sum by way of fees for professional services or fees for technical services to deduct an amount equal to five per cent. of such sum as Income Tax on income comprised therein. It is thus again apparent that the new provisions u/s 194J were brought on the statute book for the reason that deduction of tax at source was not possible to be made from the fees for professional or technical services under the existing provisions of Section 194C of the Act. The Bombay High Court in Chamber of Income Tax Consultants and others Vs. Central Board of Direct Taxes and others, , has examined the applicability of Section 194C and has, after detailed examination of the provision of law contained in that section, held that Circular No. 681 (see [1994] 206 ITR 299), dated March 8, 1994, issued by the Board is illegal and based on an erroneous reading of the observations of the Supreme Court in The Associated Cement Company Ltd. Vs. The Commissioner of Income Tax, Bihar, Patna and another, . Similar view has been taken by the Delhi High Court in S.R.F. Finance Ltd. Vs. Central Board of Direct Taxes and others, the Gujarat High Court in All Gujarat Federation of Tax Consultants and Others Vs. Central Board of Direct Taxes and Others, and the Madras High Court in Madras Bar Association and Others Vs. Central Board of Direct Taxes and Others, . The view taken by the Bombay High Court in Chamber of Income Tax Consultants and others Vs. Central Board of Direct Taxes and others, was challenged in a SLP before the Supreme Court but their Lordships of the Supreme Court have dismissed the SLP filed by the Department against the decision of the Bombay High Court (see [1995] 212 ITR 61).

The impugned circular issued by the Board is held to be beyond the scope of Section 119 and the result of misreading of Section 194C of the Act. The Board had earlier taken a different view about the applicability of Section 194C while issuing directions in its two circulars dated May 29, 1972, and September 26, 1972, but, later on, giving an erroneous and misconceived interpretation to the observations of the Supreme Court in Associated Cement Co. Ltd.''s case [1993] 201 ITR 455 the Board issued unsustainable and illegal directions (Circular No. 681 (see [1994] 206 ITR 299 dated March 8, 1994). The intention of the Legislature, while enacting Section 194C, is clear and unambiguous and it shall have to be seen in the background of subsequent legislative acts which have already been discussed earlier. Once a provision by way of enactment of Section 194E was attempted to be made in the Act in the year 1987, and since that effort did not materialise, a new provision ultimately came to be inserted in Section 194J in the year, 1995. The impugned Circular No. 681 (see [1994] 206 ITR 299), dated March 8, 1994, is, therefore, quashed.

The writ petitions stand allowed in the above terms. No order as to costs.