Statutory payment versus contract: sewerage work payments did not attract TDS under the contract-based withholding rule.

Payments made to the Punjab Water Supply and Sewerage Board for sewerage and water-supply works were held not to be payments made in pursuance of a contract. The Tribunal found that the liability arose from a statutory obligation under section 24(1) of the Punjab Water Supply and Sewerage Board Act, 1976, under which the Board initially incurred the cost and recovered it from the local authority in the prescribed manner. As section 194C applies only where there is a contract, express or implied, the statutory payment did not attract tax deduction at source. The demands raised under sections 201(1) and 201(1A) were accordingly quashed.

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Issues: Whether payments made to the Punjab Water Supply and Sewerage Board for execution of sewerage and water-supply works were payments made in pursuance of a contract so as to attract tax deduction at source under section 194C of the Income-tax Act, 1961, and consequently justify demands under sections 201(1) and 201(1A) of that Act.

Analysis: The payments were not made under a contractual arrangement but arose from a statutory obligation under section 24(1) of the Punjab Water Supply and Sewerage Board Act, 1976. The provision required the Board to incur the cost initially and recover it from the concerned local authority in the prescribed manner. Since section 194C applies only where payment is made in pursuance of a contract, and a contract, whether express or implied, must nevertheless exist, the statutory liability in the present case did not satisfy that requirement.

Conclusion: Section 194C did not apply, and the demands raised under sections 201(1) and 201(1A) of the Income-tax Act, 1961 were quashed in favour of the assessee.

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