Statutory dock workers scheme payments were wages, not labour-contract consideration, so TDS and disallowance failed.

Payments made by a registered employer to dock workers through the statutory Board were treated as wages paid under the dock workers scheme, not as consideration for a contract of labour supply. The Court found that the Board only allocated workers and disbursed wages under a statutory function, so Section 194C of the Income-tax Act, 1961 was not attracted and no tax was deductible at source. As the TDS obligation did not arise, the related disallowance under Section 40(a)(ia) could not be sustained. The appeals were allowed and the Tribunal's orders were set aside.

---

---

Issues: (i) Whether payments made by the registered employer to the dock workers through the Board under the statutory dock workers scheme attracted Section 194C of the Income-tax Act, 1961; (ii) Whether, on that footing, the disallowance under Section 40(a)(ia) of the Income-tax Act, 1961 could stand.

Issue (i): Whether payments made by the registered employer to the dock workers through the Board under the statutory dock workers scheme attracted Section 194C of the Income-tax Act, 1961.

Analysis: The dock workers legislation and the scheme framed thereunder regulate employment of dock workers and require the registered employer to accept the scheme, use only allocated dock workers, and remit wages through the Administrative Body. The scheme contemplates a contract of employment between the registered employer and the dock workers, while the Board only performs the statutory function of allocation and disbursement. The Board does not supply labour under a contract for work or labour, and the payments are made towards wages of the employer's own employees pursuant to the statutory scheme.

Conclusion: Section 194C of the Income-tax Act, 1961 was not attracted, and the assessee was not liable to deduct tax at source on such payments.

Issue (ii): Whether, on that footing, the disallowance under Section 40(a)(ia) of the Income-tax Act, 1961 could stand.

Analysis: Once the payments were held not to be covered by the TDS obligation under Section 194C, the foundation for invoking the disallowance provision disappeared. The disallowance rested entirely on the alleged failure to deduct tax from a payment that was not subject to deduction at source under the statutory scheme.

Conclusion: The disallowance under Section 40(a)(ia) of the Income-tax Act, 1961 could not be sustained.

Final Conclusion: The appeals succeeded, the Tribunal's orders were set aside, and the substantial questions of law were answered in favour of the assessee and against the revenue.

Ratio Decidendi: Where a statutory scheme creates the employment relationship and the intermediary body merely allocates workers and disburses wages as a statutory function, the payments are wages to employees and not consideration for a contract of supply of labour for the purposes of TDS.

---