TDS liability under contract law principles arises only from a qualifying contract; timber purchases alone do not trigger deduction duty.

Tax deduction at source under section 194C applies only where a person is a contractor who has entered into a contract with the Government, local authority, corporation, company, or co-operative society for carrying out work or supplying labour, and a sub-contractor must derive liability through such a contract. On the admitted facts, a firm that merely purchased timber scants without such a contract was not a contractor or sub-contractor for this purpose. The duty to deduct tax at source therefore did not arise, and the complaints did not disclose any offence under section 276B read with section 194C.

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Issues: Whether the respondent firm, having merely purchased timber scants without entering into a contract with the Government, local authority, corporation, company or co-operative society, could be treated as a contractor or as a person liable to deduct tax at source under section 194C of the Income-tax Act, 1961, and whether the complaints alleging default attracted prosecution under section 276B of the Act.

Analysis: Liability under section 194C(2) arises only where a person is a contractor within section 194C(1), that is, a person who has entered into a contract with one of the specified authorities for carrying out work or supplying labour for carrying out work. A sub-contractor is likewise a person engaged by such contractor for carrying out the whole or part of that work or for supplying labour. On the admitted facts, the respondent firm had not entered into any such contract with any of the specified authorities. The payments made by the firm to others therefore could not be treated as payments by a contractor to a sub-contractor, and the statutory duty to deduct tax at source did not arise.

Conclusion: The allegations in the complaints did not disclose any offence under section 276B read with section 194C of the Income-tax Act, 1961, and the discharge of the respondents was justified.

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