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The Societies Registration Act, 1860
The Finance Act, 1996
Article 265 in The Constitution Of India 1949
The Indian Contract Act, 1872
Kerala Financial Corpn vs Cit on 12 May, 1994
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Tvl.Pizzeria Fast Foods ... vs Commissioner Of Commercial Taxes on 15 February, 2005

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Madras High Court
Madras Bar Association & Ors. vs Central Board Of Direct Taxes & ... on 20 March, 1995
Equivalent citations: (1996) 130 CTR Mad 360
Author: Raju



JUDGMENT
 

RAJU, J. :

This batch of writ petitions involves for consideration a challenge to Circular No. 681 dt. 8th March, 1994 [printed at (1994) 206 ITR (St) 299], issued by the CBDT, New Delhi. The impugned circular order is in the form of instructions and guidelines in regard to the applicability of the provisions of s. 194C of the IT Act, 1961 (hereinafter referred to as "the Act"), concerning deduction of income-tax at source in relation to certain categories of payments by specified classes of persons or institutions. The impugned circular further purports to withdraw the Boards Circular No. 86, dt. 29th May, 1972, [printed at (1972) 84 ITR (St) 99], Circular No. 93, dt. 26th Sept., 1972 [printed at (1972) 86 ITR (St) 30] and paragraph 11 of Circular No. 108 dt. 20th March, 1973, and reiterates the Board Circular No. 558 dt. 28th March, 1990 [printed at (1990) 183 ITR (St) 158].

2. The challenge is made to the impugned circular by different classes of persons. Apart from an advocate who in his individual capacity, has challenged the same (Writ Petn. No. 7807 of 1994), professional associations concerning the legal fraternity, the Madras Bar Association (Writ Petn. No. 7803 of 1994) and the Madras High Court Advocates Association (Writ Petn. No. 7804 of 1994) have also challenged this impugned circular for the benefit of their member-advocates. The Chartered Accountants Study Circle, a society registered under the Tamil Nadu Societies Registration Act, 1975, has chosen to file a writ petition challenging the very circular in order to protect the interests of its members, namely, chartered accountants, in Writ Petn. No. 8483 of 1994. The Advertising Club, Madras, which also is a society, registered under the Societies Registration Act, has challenged the circular, for and on behalf of its member constituents who are stated to be advertising agencies rendering professional and creative services to their clients, in Writ Petn. No. 12406 of 1994. The Madras Goods Transporters Association, another society registered under the Societies Registration Act, has also challenged the circular in question, for and on behalf of its constituent members comprising various firms and companies who are stated to be engaged in transporting goods from Madras to various places by using their own trucks or vehicles as also engaging the trucks and vehicles belonging to other owners, in Writ Petn. No. 9020 of 1994. The other writ petitions belong to one or more of the above categories. As a matter of fact, leading submissions have been made in the above noticed writ petitions and the other learned counsel appearing in the remaining writ petitions have adopted the arguments made in those cases.

3. Before adverting to the grounds of challenge, it would be appropriate as also necessary to refer to the salient features of the impugned circular and the earlier circulars withdrawn by the impugned circular. The Finance Act, 1972, has introduced a new s. 194C in the IT Act, 1961, with a view to providing for deduction of income-tax at source from income comprised in payments made to contractors and sub-contractors in certain cases. Sub-s. (1) of s. 194C lays down that any person responsible for paying any sum to any resident contractor for carrying out any work or supplying labour for carrying out any work inclusive of a sub-contract in pursuance of a contract with the Central Government, State Government, local authority, statutory corporation or a company, is obliged, at the time of credit of the 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, to deduct an amount equal to two per cent of such sum as income-tax on the income comprised therein. Likewise, an obligation is cast on the contractor making payment to a resident sub-contractor in pursuance of any contract made with him for carrying out the whole or a part of work undertaken by the contractor or for supplying any labour, to deduct an amount equal to one per cent of such sum as income-tax on the income comprised therein. The above provisions came to be introduced w.e.f. 1st April, 1972.

4. With reference to the modalities of enforcement, guidelines were issued by means of the Board Circular No. 86 dt. 29th May, 1972 (supra), Circular No. 93, dt. 26th Sept., 1972 (supra) and Circular No. 108, dt. 20th March, 1973. Under Circular No. 86 dt. 29th May, 1972, while adverting to the decision of the Supreme Court in State of Himachal Pradesh vs. Associated Hotels of India Ltd. (1972) 29 STC 474 (SC) in paragraph (iii), it has been clarified as follows :

"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 payments relating to such contracts."

In Circular No. 93 dt. 26th Sept., 1972 (supra), which was issued in the form of questions and answers, it has been clarified as follows :

"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".

In Circular No. 108, dt. 20th March, 1973, particularly in paragraph 11(3), it has been stated as follows :

"Contracts for rendering professional services by lawyers, physicians, surgeons, engineers, accountants, consultants, etc., cannot be regarded as contracts for carrying out any work and, accordingly, no deduction of income-tax will be made from payments relating to such contracts."

Circular No. 558 dt. 28th March, 1990 (supra), came to be issued thereafter clarifying the position in respect of payments made by a State Road Transport Corporation to private bus owners, from whom buses have been hired for plying on specified routes. In the said circular, the term "transport-contracts" was considered as not including contracts for plying buses, ferries, etc., along with staff and that the question will have to be considered also in individual cases on the merits in terms of the guidelines disclosed.

5. Thereupon, while matters stood thus, the Supreme Court of India rendered a decision in Associated Cement Co. Ltd. vs. CIT (1993) 201 ITR 435 (SC) while disposing of an appeal filed against a Division Bench decision of the Patna High Court in Associated Cement Co. Ltd. vs. CIT (1979) 120 ITR 444 (Pat). Immediately, after the decision of the Supreme Court, the CBDT considered it necessary to review and reconsider the guidelines and instructions issued in the earlier circulars referred to supra culminating in the issue of Circular No. 681 dt. 8th March, 1994 (supra). The Board was of the view that the conclusion flowing from the judgment of the Supreme Court is that the provisions of s. 194C of the Act would apply to all types of contracts including transport contracts, labour contracts, service contracts, etc., and consequently, the Board has decided to withdraw Circulars Nos. 86 and 93 and paragraph 11 of Circular No. 108 and instead issue the following guidelines in regard to the applicability of the provisions of s. 194C :

"(i) The provisions of s. 194C shall apply to all types of contracts for carrying out any work including transport contracts, service contracts, advertisement contracts, broadcasting contracts, telecasting contracts, labour contracts, materials contracts and works contracts.

(ii) No deduction at source under s. 194C shall be required to be made if the consideration for the contract does not exceed the prescribed amount which at present is Rs. 10,000 (ten thousand only).

(iii) The provisions of s. 194C would not apply in relation to payments made for hiring or renting of equipment, etc.

(iv) the provisions of s. 194C would not apply in relation to payments made to banks for discounting bills, collecting/receiving payments through cheques/drafts, opening and negotiating letters of credit and transactions in negotiable instruments.

(v) Service contracts would be covered by the provisions of this section since service means doing any work as explained above.

(vi) The provisions of this section will not cover contracts for sale of goods.

(a) Since contracts for the construction, repair, renovation or alteration of buildings or dams or laying of roads or airfields or railway lines or erection or installation of plant and machinery are in the nature of contracts for work and labour, income-tax will have to be deducted from payments made in respect of such contracts. Similarly, contracts granted for processing of goods supplied by the Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.

(b) Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or thing is delivered, the contract will be a contract for sale and as such outside the purview of this section.

(c) In State of Himachal pradesh vs. Associated Hotels of India Ltd. (1972) 29 STC 474 (SC), the Supreme Court observed that where the principal objective of the work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is of work and labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials is conclusive although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract is, in substance, one of work and labour or one for the sale of a chattel. A building contract or a contract under which a movable is fixed to another chattel or on the land, where the intention plainly is not to sell the article but to improve the land or the chattel and the consideration is not for the transfer of the chattel, but for the labour and work done and the material furnished, the contract will be one of work and labour. In case of doubt, whether a particular contract is a contract for work and labour or for sale, the matter should be decided in the light of the principles laid down by the Supreme Court in the abovementioned case.

(vii) The provisions of this section would apply in relation to payments made to persons who arrange advertisement, broadcasting, telecasting, etc.

(viii) The provisions are wide enough to cover not only written contracts, but also oral contracts.

(ix) Where the total payment under the contract is likely to exceed Rs. 10,000 for the entire period during which the contract will remain in force, income-tax will have to be deducted at source. In a case where, at the time when the contract was entered into, it was expected that the total payment thereunder would not exceed Rs. 10,000, but later on it is found that the payment exceeds that amount, deduction should be made in respect of earlier payments as well.

(x) The percentage deduction prescribed in law is with reference to the amount of payment and not income comprised in the payment. The person responsible for making payment, therefore, is not required to estimate the income comprised in the payment.

(xi) In a case where advance payments are made during the execution of a contract and such payments are to be adjusted at the time of final settlement of accounts, tax will have to be deducted at the time of making advance payments if the total payment is likely to exceed Rs. 10,000.

(xii) Where any contractor is the recipient of any amount under a contract but the income of the recipient is not subject to the income-tax, such contractor may obtain a certificate from his Assessing Officer under s. 194C(4) for receiving payments without deduction of tax at source.

(xiii) Every contractor, other than an individual or an HUF (Hindu undivided family), who is responsible for paying any sum to any sub-contractor (who is resident in India), in pursuance of a contract with such sub-contractor for carrying out or for the supply of labour for carrying out, wholly or in part, the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor had undertaken to supply, will be required to deduct income-tax at the rate of one per cent of such sum.

8. It may be noted that -

(i) The term service contracts would include services rendered by such persons as lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. However, services rendered for which payment is in the nature of salaries which is chargeable under the head of income A. Salaries in Chapter IV of the IT Act, 1961, shall not be covered by s. 194C.

(ii) The term transport contracts would, in addition to contracts for transportation and loading/unloading of goods, also cover contracts for plying of buses, ferries, etc., along with staff (e.g., driver, conductor, cleaner, etc.). Reference in this regard is also invited to Boards Circular No. 558 dt. 28th March, 1990.

(iii) The term materials contracts in the context of s. 194C would mean contracts for supply of materials where the principal contract is for work and labour and not a contract for sale of materials.

9. Boards Circular No. 86 dt. 29th May, 1972, and No. 93 dt. 26th Sept., 1972, and paragraph 11 of Circular No. 108, dt. 20th March, 1973, are hereby withdrawn. Boards Circular No. 558 dt. 28th March, 1990, is reiterated.

10. It is clarified that this circular explaining the provisions of s. 194C will apply w.e.f. 1st April, 1994. Tax deductions made in accordance with Circulars Nos. 86, 93 and 108 upto 31st March, 1994, will be regarded as compliance with the provisions of s. 194C."

6. The salient grounds of challenge to the impugned circular as raised in the pleadings may be referred to hereinafter. In Writ Petns. Nos. 7803, 7804 and 7807 of 1994 pertaining to the members of the legal profession, it is contended that the circular has been issued by the Board in exercise of the power under s. 119 of the Act only for the purpose of proper administration of the Act and no such circulars could be used to issue directions or even guidelines running contrary to the provisions of the statute so as to create liability to tax in a person who is not otherwise liable. It is stated that the impugned circular is contrary to ss. 119 and 194C of the Act in so far as it purports to expand the scope of s. 194C and include various professions and provisions which are outside the purview of s. 194C itself. Professionals like lawyers, doctors, architects, etc., cannot, according to the petitioners, be brought within the scope of s. 194C by means of a circular. It is also contended that the word "contractor" must be understood in the ordinary commercial sense and by no stretch of imagination, can fees paid to advocates, doctors and other professionals be brought within the scope of s. 194C. The further contention on behalf of the petitioners is that the decision of the Supreme Court in Associated Cement Co. Ltd.s case (supra) does not lend support or authority to issue the impugned circular nor is there any comparison between the facts of the case concerned in the decision dealt with by the Supreme Court and the professions under consideration in these cases nor could the principles laid down or the ratio underlying the said decision be of any help or assistance to issue the impugned circular.

In substance, it is also contended that the circular has the effect of expanding the words "service contracts" and unauthorisedly attempting to bring in various professionals within the ambit and scope of s. 194C. The circular is also stated to be violative of Art. 14 of the Constitution of India. The circular is said to be also discriminatory in so far as it directs tax deduction at source where the payment is made by the company or other categories specified in sub-s. (1) and not making such provision applicable in the case of payment made by the firm or other entity. In so far as the impugned circular attempting to collect tax in contravention of the provisions of the Act is concerned, it is contended to be violative of Art. 265 of the Constitution of India. It is also contended that since the failure to deduct tax at source attracts payment of interest under s. 201(1) of the Act on the amount not so deducted and also exposes the person concerned committing the default to penal action under s. 276B of the Act involving serious consequences, unless statutory provisions themselves are clear with reference to the liability to deduct the tax at source, no person can be made liable to deduct tax at source by means of a mere executive instruction. Finally, it is contended that paragraphs 1 and 10 of the circular are mutually contradictory in that when paragraph 1 says that a sum equal to two per cent of such sum as income-tax on income comprised therein may be deducted, paragraph 10 states that the prescribed percentage may be deducted with reference to the amount of payment and not income comprised in the payment. Apart from the said contradiction in terms, it is also stated to be in contravention of the statutory provisions contained in the Act.

7. The respondents have filed a counter-affidavit in Writ Petns. Nos. 7803, 7804 and 7807 of 1994, which was meant to be for and in respect of all the other writ petitions also since almost identical and similar issues have been raised therein, contending among other things that though the question of deduction from payments made to the various persons contemplated by the impugned circular can really be made even on a proper construction of s. 194C(1) of the Act itself without having recourse to the circular, for easy understanding only, the clarification and the circular came to be issued. It is also contended that s. 194C(1) contemplates that where any payment is made by one of the authorities referred to in the said section to any person for doing "any work" pursuant to a contract between them, deduction will have to be made at the stipulated rate of two per cent of the payment towards income-tax on the income component included in the said payment and that in the cases on hand for consideration before this Court for work done or to be done by the various members of the association, they receive money as and by way of professional fees from one or the other of the various categories of the authorities referred to in the provision in pursuance of an agreement or contract between them, oral or written and, therefore, such cases would fall within the term "work" contemplated in s. 194C and the same cannot be said to be confined merely to the categories of "works contract" which is said to have a special connotation in law, as stated to have been declared by the apex Court in the decision in Associated Cement Co.s case (supra). It is also contended that the ordinary dictionary meaning of the word "service" is work and, therefore, the provisions of s. 194C will squarely apply to the cases of the petitioners and the members of the petitioner-associations. It is also contended that the word "contractor" has been used in s. 194C(1) only to denote a resident who does work and accordingly, so long as a person does work and he is paid for such services, he would come within the scope of the term "contractor" as envisaged by s. 194C. It is, therefore, contended that the scope of the provisions being obvious, there is no need for the authorities to base their action on the basis of the circular and, consequently, the question of the circular being either valid or not will be of no relevance or consequence in the context and the construction and interpretation placed upon s. 194C of the Act by the Supreme Court. The decisions of the Bombay High Court in Chamber of Income-tax Consultants vs. CBDT (1994) 209 ITR 660 (Bom), Bombay Goods Transport Association vs. CBDT (1994) 210 ITR 136 (Bom) and Advertising Agency Association of India vs. CBDT (1994) 210 ITR 152 (Bom) are also adverted to in the counter-affidavit and explained. The counter-affidavit further proceeds to justify the circular and contends that merely because at an earlier point of time a particular view of the statutory provision was taken by the CBDT, it does not mean that the Board cannot take a different view in the teeth of the latest pronouncements of the Supreme Court. It is contended that the fact that the legislature sought to introduce a provision for deduction tax at source from payments made in respect of the various types of contracts that are included in the impugned circular and did not pursue the legislative measure is no ground to contend that the existing section will not cover all the categories of contracts and that the provisions contained in s. 194C as it stands are sufficient to rope in such classes of contracts. It is also stated that the deduction is only towards possible liability to tax and the amount as deducted from the payment can be taken note of and adjusted by the petitioners or their members at the time of making advance payment of tax and such deduction of an amount towards tax is really to the advantage of the members of the petitioner-associations as well as other persons and cannot be said to be in any way detrimental to their interest. It is also contended that the liabilities imposed upon persons who are obliged to deduct, but failed to do so, can, if at all, be made a grievance of and challenged by the persons who are obliged to deduct the amount and not by the recipients of the amounts. The alleged administrative difficulties involved in the maintenance of accounts in complying with the provisions contained in s. 194C are also denied and disputed by the respondents. It is also stated that the tax deducted at source is liable to be adjusted at the time of making advance payment of tax and given credit for against the tax liability ultimately determined with a further right in the person on whose account the same was deducted to get refund in accordance with law on the claimants substantiating the position that they had no such liability under the Act. The percentage of deduction is justified to be reasonable and not arbitrary or discriminatory. It is also contended that sub-s. (4) of s. 194C provides the procedure for non-deduction or deduction at a lower rate in cases where the recipients produce a certificate to the effect obtained from the Assessing Officer (AO) and merely because many of the members of the petitioner-associations or the petitioners themselves cannot get such certificates they have resorted to the method of challenging the circular even at the threshold. As long as s. 194C of the Act is valid and justified, there can be no impediment in the deduction as claimed for the respondents and it is contended that no exception can be taken to the procedure envisaged for deduction.

The alleged violation of Art. 265 of the Constitution of India is denied contending that the deduction at source is only towards possible liability to tax to be given credit for in determining the ultimate tax liability with the concomitant right to obtain refund if the liability was shown not to exist in respect of the particular person concerned. It is contended that the impugned circular is only clarificatory in nature for the guidance of the officers and does not endeavour to impose any additional liability as alleged by the petitioners and, therefore, the question of striking down the same as unconstitutional or illegal does not arise. The submissions on behalf of the petitioners are said to proceed on an incorrect understanding of the word "contractor", and thereby contending that the members of the petitioner-associations are not contractors and that, therefore, the provisions of s. 194C will not apply to them. While emphasising that the said assumptions on behalf of the petitioners are unwarranted, it is contended that the provisions of s. 194C would apply to all cases where any person does work for any one or the other of the various authorities referred to in the section pursuant to an agreement or contract either oral or written and gets paid therefor. Reliance is also placed on the provisions contained in ss. 2(h) and 10 of the Indian Contract Act, 1872, and the decision reported in CIT vs. Panipat Woollen & General Mills Co. Ltd. (1976) 103 ITR 66 (SC) : AIR 1976 SC 640, wherein it was stated to have been held that the Court should look at the substance of the matter and not its form. Relying upon the decision of the Supreme Court in Associated Cement Co.s case (supra), it is reiterated that the deduction has to be made from the payment made for "any work" which it is contended would include service also as the words "work" and service" are really claimed to be complementary and interchangeable and, therefore, of wide import and not to be construed in a restricted manner. While stating that the various types of work done by the petitioners or the members of the petitioner-associations are really pursuant to an agreement which may be oral or written for the work to be done by them and for which they receive consideration, it is stated that the provisions of s. 194C squarely get attracted and that, therefore, the proposed deduction is quite valid and justified and cannot be objected to. Reliance is also placed on an unreported decision of the Gujarat High Court in Special Civil Applications Nos. 4802, 5288, 5289 and 5414 of 1994 [since reported as All Gujarat Federation of Tax Consultants & Ors. vs. CBDT (1995) 126 CTR (Guj) 288] wherein the Gujarat High Court was said to have dismissed a batch of writ petitions challenging the impugned circular by its order dt. 14th July, 1994, observing that the interpretation of law was not the domain of the Board and the said interpretation by the Board is not binding either on the assessing authority or Courts in so far as the question of interpretation of law is concerned.

The respondents also contend that the fact that the petitioners or the members of the petitioner-associations are paid consolidated amounts inclusive of other charges by way of reimbursement rather than for services is said to be not a ground for contending that the circular is invalid, that no deduction under s. 194C can be made and that it is always open to the persons concerned to raise separate bills for services rendered and for other expenses and that there can be no challenge to the inclusion of the category of services undertaken pursuant to any agreement either in writing or oral within the scope of s. 194C of the Act. It is finally contended that the petitioners and others should be really happy in the matter of such deduction since it only goes to lessen their ultimate tax burden and viewed thus, the petitioners cannot be said to be really persons aggrieved who could challenge the deduction of such a small percentage of amounts towards possible tax liability.

8. The learned Advocate-General, appearing for the petitioners in Writ Petns. Nos. 7803, 7804 and 7807 of 1994, while reiterating the stand taken on behalf of the petitioners as noticed supra, strongly relied upon the decisions of the Bombay High Court as also the Delhi High Court in Chamber of Income-tax Consultants vs. CBDT (supra) and S. R. F. Finance Ltd. vs. CBDT (1995) 211 ITR 861 (Del) in addition to explaining and elaborating his submissions with reference to the ratio of the decision in Associated Cement Co. Ltd. vs. CIT (supra) of the Supreme Court to contend that the impugned circular is not warranted at all even on the ratio of the decision in Associated Cement Co. Ltd.s case (supra).

Mr. Datar, learned counsel appearing in Writ Petns. Nos. 8483, 9020 and 12406 of 1994, while adopting the submissions made by learned counsel, made certain further submissions with particular reference to the cases of chartered accountants, transport contractors and advertising agencies. While doing so, learned counsel placed strong reliance upon the decision in Bombay Goods Transport Association vs. CBDT (supra) and Advertising Agency Association of India vs. CBDT (supra). The other learned counsel, as noticed earlier, has merely adopted the submissions of the above learned counsel. Mr. R. Thyagarajan, learned counsel appearing for a transport contractor, also supported the above stand by referring to the decisions in State Bank of Travancore vs. CIT (1986) 158 ITR 102 (SC) and Kerala Financial Corporation vs. CIT (1994) 210 ITR 129 (SC) that circular orders cannot override the provisions of a statute.

9. Mr. S. V. Subramaniam, learned senior counsel instructed by Mr. N. V. Balasubramanian, Junior standing counsel for the IT Department, while justifying the circular orders and instructions contained in the impugned circular, reiterated the stand taken in the counter-affidavit as referred to supra and contended that the scope of the circular is only to serve as a guideline to ensure uniformity among the various authorities and in order to help them to understand the provisions of the Act in their proper perspective and was necessitated as a follow-up action pursuant to the judgment of the Supreme Court in Associated Cement Co.s case (supra). Learned counsel also contended that when the provisions of s. 194C(1) of the Act on their own force and application get attracted to the cases on hand in respect of the nature of transactions also, there is no need to go into the other aspects of sub-s. (2) or the circular orders and, therefore, it is unnecessary for this Court to adjudicate on the validity of the circulars. While dealing with the decisions relied upon for the petitioners, learned senior counsel for the Department contended that the various judgments did not advert to the issue from the angle that even under the provisions of the enactment particularly s. 194C(1), the liability squarely fastens and the circular, if at all, made only clear what was otherwise obvious and an inevitable consequence of the provisions contained in the Act and that the authorities can go into objectively and independently and adjudicate the claims, if any, raised by the petitioners or any other assessees and the apprehensions and grievance made on the basis of the impugned circular have no substance or merit in law. Argued learned senior counsel further, that the authorities concerned, in practice, resolve by resolutions or pass orders appointing a standing counsel or a chartered accountant, particularly, in the teeth of the provisions contained in the Companies Act to engage the services of the various institutions or professionals under consideration and that this constitutes an implied contract and, consequently, the submissions made on their liability to be proceeded against have no substance whatsoever. Reliance was also placed on a Division Bench judgment of the Gujarat High Court in All Gujarat Federation of Tax Consultants vs. CBDT (supra) to contend that, at any rate, the position may be clarified as has been done by the Gujarat High Court declaring the position about the status, nature and efficacy of the impugned circular and relegate the petitioners to the authorities under the Act for actual redress instead of undertaking an adjudication of the various issues. Mr. Datar, learned counsel, while replying, highlighted the position that the circular has been couched in mandatory terms leaving no discretion with the authorities by the conscious use of the words "shall apply" and that, therefore, this Court must decide the issue as has been done by the Bombay and Delhi High Courts and may not be pleased to leave the matters open which will only result in multiplicity of litigation.

10. A reference may be made hereinafter to the various decisions relied upon by learned counsel appearing on either side and to the relevant ratio laid down therein. In the decision in Associated Cement Co. Ltd. vs. CIT (supra), the apex Court held as hereunder :

"Thus, when the percentage amount required to be deducted under the sub-section 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 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 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 sub-section, 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 sub-section is not intended to be confined to or restricted to works contract.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 above decision cannot be of any help to the appellant for it does not lay down that the percentage amount deductible under s. 194C(1) should be out of the income of the contractor from the sum or sums, credited to the account of or paid to, him. The words in the sub-section on income comprised therein appearing immediately after the words deduct an amount equal to two per cent of such sum as income-tax from their purport, cannot be understood as the percentage amount deductible from the income of the contractor out of the sum credited to his account or paid to him in pursuance of the contract. Moreover, the concluding part of the sub-section requiring deduction of an amount equal to two per cent of such sum as income-tax, by the use of the words on income comprised therein makes it obvious that the amount equal to two per cent of the sum required to be deducted is a deduction at source. Indeed, it is neither possible nor permissible for the payer to determine what part of the amount paid by him to the contractor constitutes the income of the latter. It is not also possible to think that Parliament could have intended to cast such an impossible burden upon the payer nor could it be attributed with the intention of enacting such an impractical and unworkable provision. Hence, on the express language employed in the sub-section, it is impossible to hold that the amount of two per cent required to be deducted by the payer out of the sum, credited to the account of or paid to, the contractor has to be confined to his income component out of that sum. There is also nothing in the language of the sub-section which permits exclusion of an amount paid on behalf of the organisation to the contractor according to cl. 13 of the terms and conditions of the contract in reimbursement of the amount paid by him to workers, from the sum envisaged therein, as was suggested on behalf of the appellant."

In the decision in Chamber of Income-tax Consultants vs. CBDT (supra), the Division Bench of the Bombay High Court held as hereunder :

"We have carefully considered the rival submissions. We have perused the decision of the Supreme Court in Associated Cement Co. Ltd.s case (1993) 201 ITR 435 (SC). The controversy before the Supreme Court in that case was whether the expression any work used in sub-s. (1) of s. 194C means only works contract or covers other works also. In the case before the Supreme Court, under the terms and conditions of an agreement between the appellant and a contractor, the contractor was to be paid at a flat rate for loading packed cement bags into wagons or trucks. This rate was fixed on the basis of daily basic wages, dearness allowance, etc., and cl. 13 of the agreement stipulated reimbursement by the appellant to the contractor in case of certain increase in the dearness allowance, etc., payable by the contractor to the workmen employed by him. The appellant paid the contractor the amount stipulated at a flat rate as well as amounts by way of reimbursement under cl. 13. But the deduction of tax at source made by the appellant under s. 194C(1) of the IT Act, 1961, fell short of the deductions required to be made thereunder. On a show-cause notice being issued by the ITO, the appellant-company contended that it was not liable to deduct any amount on payments made for loading and unloading as s. 194C was applicable only to payments made in execution of works contracts which produce tangible property and not to other works. It was in this context that the Supreme Court observed :

Thus, when the percentage amount required to be deducted under the sub-section 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 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" 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 sub-section, "work" referred to therein expressly includes supply of labour to carry out a work. It is a clear indication of the legislature that "work" in the sub-section is not intended to be confined to or restricted to "works contract". "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 "work", but for its specific inclusion in the sub-section.

A reading of the above observations of the Supreme Court in the context of the controversy before it makes it absolutely clear that the Supreme Court did not intend to give an extended meaning to the expression any work so as to include professional services within its ambit. The Supreme Court interpreted the expression any work to decide whether it was confined to works contract as argued by the appellant before it or it was applicable to labour contracts also. It is in this context that the Supreme Court observed that any work means any work and not only a works contract. The above observation of the Supreme Court cannot be interpreted out of context to include payments made to professionals like advocates, solicitors, chartered accountants, tax practitioners, doctors, surgeons, engineers, etc., for the services rendered by them. Neither are such persons rendering professional services known as contractors or sub-contractors nor are payments made to them for the services rendered by them termed as payment for carrying out any work or for supply of labour for carrying out any work either in common parlance or in legal terminology. It will be a total misnomer to describe such professionals as contractors or sub-contractors. If the contention of the Revenue in this regard is accepted, a solicitor or an advocate on record will have to be described as a contractor and counsel briefed by him in the matter a sub-contractor. An interpretation which leads to such a ridiculous result cannot be a proper interpretation of the section.

It is a well-settled rule of construction that judgments must be read as a whole and the observations from the judgments should be considered in the light of the questions which were before the Court. As observed by the Supreme Court in CIT vs. Sun Engg. Works (P) Ltd. (1992) 198 ITR 297 (SC), it is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the Supreme Court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision. It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment.

If we read the decision of the Supreme Court in Associated Cement Co. Ltd.s case (supra) in the light of the principles set out above, it will be abundantly clear that the only question that fell for determination was whether the applicability of s. 194C 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 s. 194C to confine or restrict it to works contracts. It was in this context that the Supreme Court held that the work envisaged in sub-s. (1) of s. 194C has a wide import and covers any work which one or other of the organisations specified in the sub-section can get carried out through a contractor under a contract. This was also the consistent stand of the Revenue ever since the incorporation of s. 194C. The assessee sought to challenge the same and contended that s. 194C was applicable only to works contracts which produces a tangible property and not to labour contracts, It is this contention of the assessee which was repelled by the Supreme Court and the interpretation put by the Revenue on s. 194C was upheld. No other question fell for determination in that judgment. It is, therefore, evident that the CBDT committed a manifest error in reading the above decision in the way it has done in its impugned circular and reversing the interpretation consistently put by it on s. 194C of the Act for the last two decades purportedly in the light of the said decision of the Supreme Court.

The impugned action of the CBDT is also against the well-settled principle of construction of fiscal statutes that the interpretation of a provision in a taxing statute rendered years back and accepted and acted upon should not be easily departed from except for compelling reasons. The circulars issued by the CBDT during the last two decades explaining the scope and ambit of s. 194C are clearly in the nature of contemporanea expositio which can legitimately be used as aids in the construction of the said provision. In construing the statute, the Courts are entitled to give due weight to the interpretation put upon it by those who are entrusted with the task of construing, executing and applying it. Under the IT Act, the CBDT is the highest executing authority and it has been vested with statutory powers to issue orders, instructions and directions to all officers employed in the execution of the Act. The uncontroverted position is that ever since the incorporation of s. 194C in the year 1972, it was understood by all concerned including the CBDT that its scope was confined to payments made in respect of works contracts and labour contracts and not to payments made on account of professional services. This interpretation was reiterated and acted upon by the CBDT from time to time. It is this interpretation which is sought to be departed from by the CBDT itself purportedly in the light of the decision of the Supreme Court. We have already examined the decision of the Supreme Court and noted that it contains nothing of the sort which may justify any departure from the interpretation consistently put on s. 194C by the CBDT all through in the past. Besides, the language of s. 194C is plain and unambiguous and leaves no scope for any controversy in regard to its interpretation. In such a situation, the earlier circulars of the CBDT explaining the scope and ambit of s. 194C must be regarded as a strong circumstance in support of the construction that s. 194C is not applicable to payments by way of professional fees.

The conclusion arrived at by us that s. 194C does not apply to payments made by way of professional fees also gets support from the fact that in the year 1987, in the Finance bill, 1987, provision was sought to be made to provide for deduction of tax at source from payments by way of professional fees by insertion of a new section, viz., s. 194E. The said proposal was, however, dropped at the time of passing of the said Bill. The legislative intent of s. 194C becomes further clear from the fact that while incorporating s. 194H in the Act in the year 1991 to provide for deduction of tax at source in respect of payments made by way of commission, brokerage, etc., payments made for professional services, were specifically excluded from the scope and ambit of the said section.

It is clear from the above discussion that s. 194C is not applicable to payments by way of professional fees."

11. The Division Bench of the Delhi High Court in the decision in S. R. F Finance Ltd. vs. CBDT (supra) has held as hereunder :

"In the instant case, the petitioner is faced by the circulars issued by the CBDT, the highest authority in the hierarchical set up of the IT Department. In view of ss. 116 and 119, no ITO would have the courage (or audacity) to ignore these circulars. It will be a futile exercise for any assessee to challenge the binding nature of these circulars, before the ITOs. The threat posed by the impugned circulars, is real and any person affected by them should not be denied access to this Court to seek appropriate relief at the very moment the threat is posed against him.

As per Art. 265 of the Constitution of India, no tax shall be levied or collected except by authority of law. The words levy and collection are words of wide amplitude in the context of this article, so as to cover any process employed to collect any amount purporting to be a tax. If the procedure employed is unauthorised, the process of collection will render it an illegal levy or illegal collection and, hence, unconstitutional."

"No doubt, the Supreme Court has said the word work referred to in s. 194C has a wide import. But this observation is found in the context of an argument (of the petitioner therein), that the said word work has to be confined to the concept of works contract. The word work has a wider meaning because, it is not to be restricted to the term works contract. The concept conveyed by the word work found in s. 194C is not confined, limited or restricted to the concept of works contract. The word therefore, in the particular sentence clearly brings out the reason for the statement that the word work has a wide import. From this, it cannot be inferred that the Supreme Court intended to give the word a meaning which the sentence in which it is found does not convey. The wider meaning is indicated, according to the Supreme Court, because the section expressly includes supply of labour to carry out a work.

The entire paragraph in which the above observation of the Supreme Court is found, shall have to be read together; lifting one or the other sentence and reading the lifted portion separately would destroy the integrity of the paragraph. In the opening sentence of the paragraph, the scope of the discussion is indicated, when the Supreme Court said in the last part of the first sentence, .... 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" as was argued.

The position becomes clear when the special connotation of the term works contract in the tax law is properly understood.

Works contract involves two elements, - (i) the transfer of materials; and (ii) rendering of services in bringing out a tangible property out of the materials; for example, in the case of a building contract where, the contractor has to use his own materials for the construction, payment made to the contractor is for the transfer of materials used in the construction and towards the services rendered by him in constructing the building. Similarly, when a carpenter is asked to supply a table, the consideration payable to him comprises the cost of the timber and other materials used and the remuneration for the job of converting these materials into a table. However, if the timber and other materials are supplied and the carpenter is asked to make a table, he is paid towards his services in making the table In the case of a building, if the contractor is engaged to perform the construction work, but the entire materials are supplied by the person engaging the contractor, the contractor is paid for supplying the labour and supervising the construction work. While the former type of cases fall within the category of works contract, the latter type are considered as contract for services.

The concept of works contract loomed large, earlier, in sales-tax law. In State of Madras vs. Gannon Dunkerley & Co. Ltd. AIR 1958 SC 560 the Supreme Court held that the legislature had no competence to levy sales tax on the sale of materials involved in a works contract. This necessitated an amendment to the Constitution to enable the levy of sales-tax on the cost of goods supplied by the contractor, while executing the works contract. The history is narrated in detail, in Builders Association of India vs. Union of India AIR 1989 SC 1371.

The narrow meaning attributed to the word work in s. 194C as confined to works contract was rejected by the Supreme Court and in that context, the Court held that the term any work is a term of wide import, to include not only the work involved in the works contract, but also the work resulting in other types of contracts where the contract requires, carrying out of any work.

One more factor makes the meaning of the section beyond the pale of any doubt. If the term any work in s. 194C by itself covers any kind of service, the words found in the bracket, in sub-s. (1) of s. 194C will have to be treated as otiose or superfluous. Supply of labour to carry out any work, is a concept that falls within the concept of service; if so, why should Parliament include these words in the bracket, to give an expanded meaning to the term any work. The Supreme Court in Associated Cement Co. Ltd.s case (1993) 201 ITR 435 (SC) clearly pointed out that but for the specific inclusion of those words (i.e., including supply of labour for carrying out any work), in s. 194C, obtaining of supply of labour for carrying out the work would have fallen outside the word work. The concluding part of the Supreme Court observation quoted above brings out the true purport of the term any work in s. 194C.

Any work, certainly is a term of wide import; but, it is not so wide, as to comprise within its scope the obtaining of the supply of labour to carry out the work, because, the latter concept is essentially, a concept falling within the sphere of services. However, the term any work is wide enough to cover any kind of work which one can get carried out through another. The essentiality is that, it should be a work which is to be carried out."

"It is most inappropriate to equate the rendering of a service to carrying out a work. That is why Parliament thought it expedient to expand the meaning of the word work by including in it the supply of labour. It is obvious that because the word work would not include within its amplitude, the supply of labour, Parliament added the same by including the latter in the former, thereby giving the word work an extended meaning. The extended meaning cannot travel beyond the actual extended area; Parliament has stretched the scope of the word to some extent only.

The manner in which the relevant words were understood and the scope of s. 194C was measured, immediately after its enactment, throws considerable light on the point in issue."

"While issuing the impugned circulars, the CBDT has missed the real purport of the decision of the Supreme Court in Associated Cement Co. Ltds case (1993) 201 ITR 435 (SC). Sec. 194C does not govern the payments of fees towards professional or technical services. The term any work in s. 194C is aimed at the type of work resulting in tangible material and by virtue of the special inclusion, supply of labour to carry out any work also is brought into the net of tax deduction at the source. This inclusive clause ropes in the consideration for the supply of labour. The word supply connotes the meaning of procuring, securing or bringing in, and not rendering of ones own professional or technical services.

The Board has no power to enlarge the scope of the statutory provision. Its powers are conferred to issue administrative instructions. The impugned circulars travel beyond the provisions of s. 194C and have no legal force and are liable to be quashed. The authorities functioning under the IT Act are not bound by them.

In the result the two impugned Circulars No. 666 dt. 8th Oct., 1993, [printed at (1993) 114 CTR (St) 62] and No. 681 dt. 8th March, 1994 [printed at (1994) 206 ITR (St) 299], are quashed to the extent the said circulars govern payments to commission agents and brokers for the services rendered by them; further, we declare that s. 194C of the IT Act does not operate on such payments and the respondents are restrained from enforcing them accordingly."

12. The Bombay High Court, in the decision reported in Bombay Goods Transport Association vs. CBDT (supra), has held as hereunder :

"We have carefully considered the rival submissions. The controversy, in our opinion, is in a very narrow compass. Sec. 194C has been in the statute book almost in the same form ever since its inception in the year 1972. It provides for deduction of tax at source on payments made for carrying out any work including supply of labour for carrying out any work in pursuance of a contract between the contractor and the persons specified therein. The crux of the section is payment made for carrying out any work, which by virtue of specific inclusion also includes supply of labour for carrying out any work. The requirement that such work should be carried out in pursuance of a contract between a contractor and the person/s concerned is an additional requirement. To attract s. 194C, it is, therefore, necessary that the payment should be made for carrying out any work. If this condition is fulfilled then and then only the next condition becomes relevant, i.e., such work should be carried out in pursuance of a contract between the contractor and the person concerned. The word contract is a word of wide import and includes agreements oral or written. There is no dispute in this case that there is a contract or agreement between the transporter and the owner of the goods for carriage of goods. The case of the petitioner is that carriage of goods does not amount to carrying out any work and the payments made on that account, therefore, cannot be said to be payments made for carrying out any work. We find force in the above submission. The word any work has been interpreted by the CBDT itself which is the highest authority under the IT Act for implementation of the provisions of the Act from time to time. It has been made clear in the very first circular on the subject being Circular No. 86 dt. 29th May, 1972 [printed at (1972) 84 ITR (St) 99] that s. 194C applies only to works contracts and labour contracts and it does not apply to contracts for sale of goods. In reply to enquiries from various trade associations and members of the public including the petitioner-association, by Circular No. 93 dt. 26th Sept., 1972 [printed at (1972) 86 ITR (St) 30], it was reiterated 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. It was further made clear that 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. In answer to another question it was even clarified that pipeline/pumping charges for use of pipelines owned and operated by port trusts for movement of petroleum products by pipeline from refinery to port installations would not fall within the purview of s. 194C of the Act. Again, on 13th Oct., 1972, in a letter written to the petitioner-association itself, it was specifically stated that the provisions of s. 194C were not applicable in respect of transport contractors. The same view was reiterated in yet another letter of 3rd Feb., 1982. There is no change in the situation during the last 20 years to justify a departure from the above interpretation of s. 194C given by the CBDT and accepted by the taxpayers. The CBDT has reviewed the above instructions and changed the interpretation given by it and acted upon it for more than two decades only on the basis of certain observations of the Supreme Court in the case of Associated Cement Co.s case (1993) 201 ITR 435 (SC). According to the CBDT, some of the issues raised in the circulars issued by it earlier from 1972 onwards needed review in the light of the above judgment. Accordingly, by Circular No. 681, dt. 8th March, 1994 [printed at (1994) 206 ITR (St) 299], it opined that the provisions of s. 194C shall apply to all types of contracts for carrying out any work including transport contracts, service contracts, advertisement contracts, broadcasting contracts, telecasting contracts, labour contracts, materials contracts and works contracts. The term transport contracts has been defined to cover in addition to contracts for transport and loading/unloading of goods also contracts for plying buses. The term service contracts has also been defined to include services rendered by such persons as lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. In Writ Petn. No. 1052 of 1994, Chamber of Income-tax Consultants vs. CBDT (1994) 209 ITR 660 (Bom), the very same circular was challenged in so far as it purports to include payments made to professionals on account of services rendered by them by including them in service contracts. By our judgment dt. 14th July, 1994, we have held that s. 194C is not applicable to payments made to professionals for services rendered by them. We have also discussed the ratio of the decision of the Supreme Court in Associated Cement Co.s case (supra).

In the light of the above discussion, we are of the clear opinion that the provisions of s. 194C of the Act are not applicable to contracts for mere carriage of goods which do not include any other services like loading or unloading. The Circular of the Board No. 681 dt. 8th March, 1994 in our opinion, is based on an erroneous reading of the decision of the Supreme Court in Associated Cement Co.s case (supra) and certain observations made therein.

We, therefore, hold that the said circular is illegal and without jurisdiction in so far as it requires deduction of tax at source under s. 194C to contracts for mere carriage of goods which do not include any other services like loading and unloading and are not in anyway connected with any work to be performed by the carrier.

In the result, this writ petition is allowed and rule is made absolute in the above terms. Under the facts and circumstances of the case, there shall be no order as to costs."

13. In yet another decision in Advertising Agency Association of India vs. CBDT (supra), a Division Bench of the Bombay High Court has held as hereunder :

"We have considered the submissions of Mr. Bharucha, learned counsel for the petitioners. We had occasion to deal with the scope and ambit of s. 194C of the Act in regard to fees paid to professionals like solicitors, advocates, chartered accountants, etc., in Writ Petn. No. 1052 of 1994 - Chamber of Income-tax Consultants vs. CBDT (1994) 209 ITR 660, filed by the Chamber of Income-tax Consultants and others. We have delivered judgment in the above case on 14th July, 1994. In the above judgment, we have set out the provisions of s. 194C of the Act and have dealt at length with various circulars issued from time to time both by the Ministry of Finance and by the CBDT in regard to the applicability of the provisions of s. 194C. We had also occasion to deal with the said section in another Writ Petn. No. 1277 of 1994 - Bombay Goods Transport Association vs. CBDT (1994) 210 ITR 136 (Bom), filed by the Bombay Goods Transport Association challenging the very same circular of the CBDT dt. 8th March, 1994, with regard to the applicability of s. 194C to payments made to transport operators for carriage of goods. In the petition filed by the Chamber of Income-tax Consultants and others, we have held that s. 194C does not apply to payments by way of professional fees. In the petition filed by the Bombay Goods Transport Association by our judgment dt. 28th and 29th July, 1994, we have held that the provisions of s. 194C do not apply to contracts for mere carriage of goods, i.e., transport contracts. The ratio of the above two decisions squarely applies to the case of payments made to advertising agencies for professional services rendered by them.

In this connection, it may be expedient to mention that by Circular No. 93 dt. 26th Sept., 1972 [printed at (1972) 86 ITR (St) 30], issued by the Deputy Secretary to the Government of India in reply to a query whether the requirements of s. 194C would apply to payments made to advertising agents rendering professional services, it has been categorically stated that service contracts not involving carrying out of any work are outside the scope of s. 194C. Earlier also, by Circular No. 86, dt. 29th May, 1972 [printed at (1972) 88 ITR (St) 99], it was made clear that the provisions of s. 194C are applicable only to works contracts and labour contracts. There is no change in the law since then. Further, the above interpretation has been accepted and acted upon both by the Revenue and the assessee including the petitioners. It is only recently on 8th March, 1994, that the CBDT by Circular No. 681, [printed at (1994) 206 ITR (St) 299], withdrew its earlier circulars on the point purportedly on the basis of the decision of the Supreme Court in Associated Cement Co. Ltd.s case (1993) 201 ITR 435 (SC).

We have discussed the decision of the Supreme Court in Associated Cement Co. Ltd.s case (supra), in our above two judgments. There, we have come to a clear conclusion that the Supreme Court in the said judgment has in no way extended or amplified the scope of s. 194C of the Act. It has merely held that the said section is not confined to works contracts but also applies to labour contracts. This is also the interpretation given by the CBDT throughout in the past. The Supreme Court in that case was required to consider the question of applicability of s. 194C to labour contracts because the contention of the assessee there was that the said section was applicable only to works contracts. It was this contention that was repelled by the Supreme Court. In other words, as aforesaid, the Supreme Court merely affirmed the interpretation put by the CBDT on s. 194C of the Act to include not only works contracts but also labour contracts.

Following the ratio of the above two decisions of this Court, we hold that the impugned circular of the CBDT, dt. 8th March, 1994, is illegal and without jurisdiction in so far as it requires deduction at source from payments made to advertising agencies for professional services rendered by them."

14. I have carefully considered the submissions of learned counsel appearing on either side in the light of the various decisions relied upon and the relevant provisions of the Act. The plea of the respondent based upon the decision of the Division Bench of the Gujarat High Court in All Gujarat Federation of Tax Consultants vs. CBDT (supra) may be considered first. I have been taken through the said judgment but in my view a disposal of that type will do not real or effective justice to the parties who approached the Court at least in the type of cases before us. The threat posed by the impugned circular orders is real and substantial and the consequence and effect of the constraining influence of the same upon the authorities functioning under the Act, having regard to the authority which issued the same and the source of power claimed therefor, cannot be completely erased except by quashing and setting aside the impugned circular. If the respondent is really sincere that the circular was meant to be a guideline and instruction, with option to the authorities under the Act to follow it or not, the mandatory and commanding nature of language need not have been employed. Even that apart, if the object of the respondent was also to leave a free hand in tax matters to the authorities under the Act, nothing prevented the CBDT to simply revoke or cancel the earlier circulars with a mere indication that the authorities shall be at liberty to objectively decide the matter independently. Therefore, it is futile for the respondents to contend that there is no need to quash the circular orders and the same can be allowed with a mere clarification of the position. Further, if on the face of it, even on indisputable facts on record, there is absolutely no statutory liability to pay tax as the provisions of the Act stand at present and it is the circular which attempts to fasten liability upon such persons, the circular is liable to be set aside as illegal and unconstitutional so that no room will be left for any doubt in this regard. Hence, the need to go into the merits of the contentions raised before me.

15. The scope and ambit of s. 194C may next be considered before actually taking up the claim of the various professional bodies in respect of the nature and character of the services rendered by their constituent members to their clients or customers. Sec. 194C(1) mandates any person responsible for paying any sum to any resident, to be referred to thereafter as contractor, for carrying out any work, including supply of labour for carrying out any work, in pursuance of a contract between the contractor and any one of the authorities specified in cls. (a) to (i) to deduct an amount equal to 2% of such sum at the time of credit of such amount 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, as income-tax on the income comprised therein. The mere fact that the word "a resident" otherwise meant to refer to a person who is a resident in India within the meaning of s. 6, has been referred to in s. 194C as the contractor, does not have the effect of dispensing once and for all with the element of contract from consideration for the purpose of identifying the nature of work or the quality of work which alone is sought to be roped into the area of consideration for inclusion in the words "any work" used in the provision. The words "any work" take their colour from the words "contractor" and "contract" and the gamut of the words "any work" gets crystallised and confined in the process of consideration to the category and quality of work involving activities which are predominantly physical and tangible in juxtaposition with activities involving an intellectual aspect playing a dominant role as in the vocations of lawyer, doctor, architect or chartered accountant. The words "any work" used in s. 194C(1), therefore, cannot be construed divorced from their context and the texture in built in the provisions themselves and the other conglomeration of words and phrases used therein. Thus viewed and considered, in my view, the provisions of s. 194C(1) (do not) have the effect of taking within their purview the category of services rendered in return for the fee paid in contrast to a work performed for a price as its consideration.

16. The next aspect for consideration should be as to whether the decision of the Supreme Court of India in Associated Cement Co. Ltd.s case (supra), on which great reliance is placed to justify the issue of the impugned circular, really warrants the expanded meaning to be given to s. 194C(1) as desired by the impugned circular. The case before the Supreme Court was one wherein under the terms and conditions of an agreement between the appellant before the Court and a contractor, the contractor was to be paid at a flat rate for loading packed cement bags into wagons or trucks, fixed on the basis of daily basic wages, dearness allowance, etc., and cl. 13 of the contract stipulated reimbursement by the appellant to the contractor in the case of certain increase in dearness allowance, etc., payable by the contractor to the workmen employed by him. The appellant appears to have paid the contractor the amount stipulated at a flat rate as also the amounts by way of reimbursement under cl. 13 referred to. The deduction made by the appellant fell short of the deduction required to be made and when a show cause notice was issued by the assessing authority, the appellant contended that it was not liable to deduct any amount on payments made for loading and unloading as s. 194C was applicable to only payments made in the execution of works contracts, which produce a tangible property and not in respect of other works. It was only in the context of such a claim and in the teeth of the only question raised therein before the apex Court as to whether s. 194C was confined to "works contracts" only, the Court held that there was no reason or justification, to curtail or cut down the meaning of the plain words "any work" so as to confine or restrict it to "works contracts" and that the same 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, express or implied. The question as to whether professional services are also covered by the said provision was never before the Supreme Court for its consideration and it is purely on surmises and assumptions that the CBDT thought that the Court in that case also must be considered to have decided such an issue, by implication. There is no warrant whatsoever for this premise of assumption. As a matter of fact, the observations of their Lordships of the Supreme Court : "... 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", would go to show that the words "any work" did not carry such wide import as now sought to be ascribed to it by the impugned circular and at any rate the ratio of the decision of the Supreme Court does not lend support for such wide construction. The fact that the services of professionals like lawyers, tax practitioners, solicitors, chartered accountants, etc., are obtained may be and at times are appointed under resolutions of the board or orders passed by the governing executive authorities to secure their services for the authorities concerned does not by itself alter the character or quality of their services and render them any the less professional services or convert them into contractual services or contracts for the supply of labour for carrying out any work.

That apart, the other evidence aliunde before me to justify or strengthen the same would be the very intention of Parliament in that in the year 1987, there was an attempt to insert s. 194E of the Act by the Finance Bill, 1987, requiring deduction of tax at source from "other incomes" which included commission or brokerage as well as fee for professional services, fee for technical services, rent, etc., but the said proposal was not ultimately pursued and it was dropped when the Act was passed. Equally, the Finance (No. 2) Act, 1991, inserted s. 194H w.e.f. 1st Oct., 1991, to provide for deduction of tax at source from commission or brokerage, etc., but the said provision, by virtue of the words "but before the 1st June, 1992" inserted subsequently w.e.f. 1st June, 1992, by the Finance Act, 1992, became ineffective from 1st June, 1992. It is also seen from the Budget presented in Parliament last week [Budget for 1995-96 - Ed.] that once again provision is being inserted making that obligation of tax deduction at source to be extended so as to specifically include fee for professional and technical services, service contracts, etc., of course, when the proposal gets finally incorporated in the Finance Act that may be passed ultimately, it will have the force of law. These factors would also go to lend strong support or credence to the claim made on behalf of the petitioners.

Further, the view taken by the learned Judges of the Division Benches of the Bombay High Court and the Delhi High Court in the decisions referred to supra accords with my abovereferred conclusions and, therefore, I am in respectful agreement with the ratio laid down therein, and I adopt their reasoning also as part of my reasons, in addition to rest my conclusions in these cases and with great respect to the learned Judges of the Gujarat High Court who decided the case in All Gujarat Federation of Tax Consultants vs. CBDT (supra), it will provide no effective or final solution to the problem posed before Courts and would only pave the way further to avoidable litigation which may, if need be, avoided and not encouraged.

In view of the above, there is no need to decide some of the other incidental issues raised before me at the time of hearing of these writ petitions.

17. On the view expressed by me as to the scope and ambit of s. 194C(1), it becomes inevitably necessary to declare that the impugned Circular No. 681, dt. 8th March, 1994 (supra), issued by the CBDT in so far as it purports to issue directions in paragraphs 7 and 8 in derogation of the scope of s. 194C shall stand hereby quashed as being violative of Arts. 14 and 265 of the Constitution of India and opposed to s. 194C of the Act, in so far as it requires deduction at source from payments made by way of professional fees to advocates, solicitors, chartered accountants, tax practitioners, etc., for the services rendered by them.

18. So far as "transport contracts" are concerned, my conclusion is that the impugned circular is illegal and without jurisdiction in so far as it casts an obligation for deduction of tax at source under s. 194C in respect of contracts for mere carriage of goods which do not include any other services like loading and unloading and are not in any way connected with any work to be performed by the carrier. So far as advertising contracts are concerned, payments made to advertising agencies or agents for rendering professional services alone cannot be held to be within the scope of s. 194C(1) and the impugned circular is illegal and without jurisdiction in so far as it requires deduction at source in respect of such payments.

19. The writ petitions are, therefore, allowed to the extent indicated and in the above terms. But, in the circumstances of the case, there shall be no order as to costs.