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Issues: (i) Whether tax deduction at source could be made on earthwork excavation forming part of a contract where no earth was brought from outside source; and (ii) whether the rate of tax deduction on the value of materials used in canal digging, lining and repairing work was 1 per cent or 3 per cent.
Issue (i): Whether tax deduction at source could be made on earthwork excavation forming part of a contract where no earth was brought from outside source.
Analysis: Earthwork excavation in the nature of a pure labour contract was treated as outside the scope of tax deduction at source, unless earth was brought from an outside source and deposited at the work spot.
Conclusion: Tax shall not be collected at source on the earthwork excavation component where no earth is brought from outside source, in favour of the petitioner.
Issue (ii): Whether the rate of tax deduction on the value of materials used in canal digging, lining and repairing work was 1 per cent or 3 per cent.
Analysis: For works of canal digging, lining and repairing, the applicable rate on the material component was held to be 1 per cent under clause (ii) of rule 17-G(1).
Conclusion: The tax deduction on the material component in such work is 1 per cent, in favour of the petitioner.
Final Conclusion: The authorities were directed to apply the stated legal position while deducting tax at source, and the writ petition was disposed of at the admission stage.
Ratio Decidendi: Tax deduction at source cannot be made on pure labour earthwork excavation absent outside sourcing of earth, and in canal digging, lining and repairing works the material component attracts tax deduction at the lower prescribed rate.
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