1994 (7) TMI 82 - HC - Income Tax

Court rules Income-tax Act does not cover professional service payments. Circular deemed illegal. Writ petition allowed.

The court concluded that section 194C of the Income-tax Act, 1961 does not apply to payments for professional services. Circular No. 681, dated March 8, ... Deduction of tax at source under section 194C - scope of 'any work' in section 194C - professional services vis-a-vis contractors - contemporanea expositio and administrative interpretation - legislative intent and the proposed insertion of section 194EDeduction of tax at source under section 194C - scope of 'any work' in section 194C - professional services vis-a-vis contractors - contemporanea expositio and administrative interpretation - legislative intent and the proposed insertion of section 194E - Validity of Circular No. 681 dated 8 March 1994 insofar as it treats payments of professional fees as liable to deduction of tax at source under section 194C. - HELD THAT: - The court examined the judgment of the Supreme Court in Associated Cement Co. Ltd. and concluded that that decision addressed a limited question - whether 'any work' in section 194C was confined to 'works contracts' or also covered labour contracts - and did not decide that professional services fall within section 194C. The Board's circular read the Supreme Court's observations out of context and extended the scope of 'any work' to include professional services, which the court found to be a misreading. The longstanding administrative interpretation, reflected in Circulars Nos. 86, 93 and 108 and consistently acted upon since 1972, is a contemporanea expositio entitled to weight; departure from such an interpretation requires compelling justification which is absent here. Further support for the conclusion that professional fees were not intended to fall under section 194C is found in legislative history: a distinct provision (proposed section 194E) to cover professional/technical fees was introduced in the 1987 Finance Bill (and subsequently dropped), and payments for professional services were specifically excluded when section 194H was enacted. The plain language of section 194C, the context and the authorities relied upon therefore do not justify treating professionals as 'contractors' or payments for professional services as payments for 'carrying out any work' under section 194C.Circular No. 681, insofar as it requires deduction of tax at source under section 194C in respect of payments of fees for professional services, is illegal and without jurisdiction and is quashed.Final Conclusion: The writ petition is allowed; the Board's Circular No. 681 (8 March 1994) is set aside to the extent it treats payments of professional fees as subject to deduction under section 194C, having wrongly extended the Supreme Court's observations and departed from the Board's longstanding interpretation and legislative indications. Issues Involved:1. Validity and legality of Circular No. 681, dated March 8, 1994.2. Interpretation of section 194C of the Income-tax Act, 1961.3. Applicability of section 194C to professional services.Summary:Issue 1: Validity and legality of Circular No. 681, dated March 8, 1994The petitioners, comprising professional bodies and a Chartered Accountant, challenged Circular No. 681 issued by the Central Board of Direct Taxes (CBDT) on March 8, 1994. The circular mandated that payments for professional services are covered u/s 194C of the Income-tax Act, requiring tax deduction at source. The petitioners argued that the circular was illegal and without jurisdiction.Issue 2: Interpretation of section 194C of the Income-tax Act, 1961Section 194C deals with the deduction of tax at source on payments to contractors and sub-contractors for carrying out any work. The petitioners contended that this section does not include professionals within its ambit. They argued that the CBDT misinterpreted the Supreme Court's judgment in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435. The Supreme Court had clarified that 'any work' in section 194C is not confined to 'works contracts' but did not extend this interpretation to include professional services.Issue 3: Applicability of section 194C to professional servicesThe court examined the legislative history and previous circulars issued by the CBDT, which consistently interpreted section 194C to exclude professional services. The court noted that the proposed amendment in 1987 to insert section 194E for tax deduction on professional fees was dropped, indicating legislative intent not to include professional services u/s 194C. The court held that professional services cannot be equated with 'any work' as envisaged in section 194C. Professionals like advocates, solicitors, chartered accountants, doctors, and engineers are not contractors or sub-contractors, and payments to them are not for carrying out any work or supplying labor.Conclusion:The court concluded that section 194C does not apply to payments by way of professional fees. Circular No. 681, dated March 8, 1994, was declared illegal, based on an erroneous reading of the Supreme Court's judgment, and without jurisdiction. The writ petition was allowed, and the rule was made absolute in terms of prayer clause (a), with no order as to costs.