Dr. B.P Saraf, J.:— This writ petition has been filed by four professional bodies viz. The Chamber of Income-tax Consultants, Bombay Chartered Accountants' Society, All India Federation of Tax Practitioners and Forum of Indian Professional Organisations and a Chartered Accountant Shri Narayan Krishnadas Varma, who also happens to be the President of Forum of Indian Professional Organisations and member of the three other organisations. By this writ petition, the petitioners have challenged the validity and legality of the Circular No. 681 dated 8th March, 1994 issued by the first respondent, Central Board of Direct Taxes. This petition has been filed by way of public interest litigation on behalf of the professionals and in particular the professionals who are members of the petitioners' associations. By the impugned circular, the first respondent had issued instructions, inter alia, that the payment of fees for professional services is also covered by the provisions of section 194-C of the Act and that persons making payments of such fees would be required to deduct tax at source as provided in the said section. The above instructions have been issued in the light of the judgment of the Supreme Court in Associated Cement Company Ltd. v. C.I.T, (1993) 201 ITR 435. The petitioners contend that these instructions are illegal and without jurisdiction.
2. Mr. N.A Palkhivala, learned counsel appearing for the petitioners submits that section 194-C of the Act does not include professionals within its ambit. According to Mr. Palkhivala, the first respondent, Central Board of Direct Taxes has misconstrued and misinterpreted the judgment of the Supreme Court in Associated Cement Company Ltd. v. C.I.T, (1993) 201 ITR 435, and erroneously construed the observations made therein in regard to the true meaning and import of the word “work” appearing in sub-section (1) of section 194-C of the Act.
3. Before we deal with the legal submissions of Mr. Palkhivala, it may be expedient to refer briefly to the provisions of section 194-C, the Circulars issued by the Central Board of Direct Taxes from time to time in regard to the interpretation and scope of the said section, proposed amendment of the Act in 1987 to insert section 194-E with a view to providing for deduction of tax at source on payment of professional fees, and the impugned circular. section 194-C of the Act deals with deduction of tax at source on payments to contractors and sub-contractors. It reads as follows:
section 194-C. Payments to contractors and sub-contractors.— (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and—
(a) the Central Government or any State Government; or
(b) any local authority; or
(c) any corporation established by or under a Central, State or Provincial Act; or
(d) any company; or
(e) co-operative society,
shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to two per cent of such sum as income-tax on income comprised therein.
(2) Any person (being a contractor and not being an individual or a Hindu undivided family) responsible for paying any sum to any resident (hereafter in this section referred to as the sub-contractor) in pursuance of a contract with the sub-contractor for carrying out, or for the supply of labour for carrying out, the whole or any part of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor has undertaken to supply shall, at the time of credit of such sum to the account of the sub-contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income-tax on income comprised therein.
Explanation — For the purposes of this section, where any sum referred to in sub-section (1) or sub-section (2) is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
(3) No deduction shall be made under sub-section (1) or sub-section (2) from—
(i) any sum credited or paid in pursuance of any contract the consideration for which does not exceed (ten thousand rupees); or
(ii) any sum credited or paid before the 1st day of June, 1972; or
(iii) any sum credited or paid before the 1st day of June, 1973, in pursuance of a contract between the contractor and a co-operative society or in pursuance of a contract between such contractor and the sub-contractor in relation to any work (including supply of labour for carrying out any work) undertaken by the contractor for the co-operative society.
(4) Where the Assessing Officer is satisfied that the total income of the contractor or the sub-contractor justifies the deduction of income-tax at any lower rate or no deduction of income-tax, as the case may be, the Assessing Officer shall, on an application made by the contractor or the sub-contractor in this behalf, give to him such certificate as may be appropriate.
(5) Where any such certificate is given, the person responsible for paying the sum referred to in sub-section (1) or sub-section (2) shall, until such certificate is cancelled by the Assessing Officer, deduct income-tax at the rates specified in such certificate or deduct no tax, as the case may be.
4. This section was inserted for the first time by the Finance Act of 1972 with effect from 1-4-1972. In the Memorandum explaining the provisions in the Finance Bill, 1972, it was stated that under the new section 194-C, income tax would be deductible at source from income comprised in payments made by the Central Government or any State Government, local authorities, statutory corporations and companies to contractors engaged for carrying out any work or for supplying labour for carrying out such work. Income-tax would be deductible at 2% of such payments. Similarly, deduction would be made from payments made by contractors to sub-contractors at the rate of 1 per cent of the payment.
5. 3A. Soon after the insertion of section 194-C in the Act, Circular No. 86 dated 29-5-1972 was issued by the Deputy Secretary to the Government of India explaining the scope of the said section. By this Circular, it was clarified that section 194-C would apply only in relation to “Works Contracts” and “Labour Contracts” and would not cover contracts for sale of goods. In the said Circular, it was made clear that the contracts for rendering professional services by lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. could not be regarded as contracts “for carrying out any work” and, accordingly, no deduction of income-tax need be made from payments relating to such contracts.
6. The position was further clarified by Circular No. 98 dated 26-9-1972. This position continued till the issue of the impugned circular in the year 1987–1994. In this connection, it may be pertinent to observe that in the year 1987, in the Finance Bill, 1987, a new section 194-E was introduced to provide for deduction of tax at source from payment of fees for professional services or technical services etc. The relevant clause of the Finance Bill, 1987, proposing to insert section 194-E, reads as under:
“49. Insertion of new section 194-E — After section 194-D of the Income-tax Act, the following section shall be inserted with effect from the 1st day of June, 1987, namely:—
194E. Other incomes. — (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of—
a) fees for professional services, or
b) royalty, or
c) fees for technical services, or
d) rent, or
e) commission (not being insurance commission referred to in section 194-D) or brokerage, or
f) payments for goods supplied to Government or any local authority or any Corporation or body established by or under a Central, State or Provincial Act or any company,
shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force:
Provided that ………………
(2) In this section,—
(a) “professional services” means services rendered by a person in the course of carrying on a legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or such other profession as is notified by the Board for the purposes of section 44-AA;
(b) ……………………..”
7. However, due to strong opposition to the said measure, the proposal to insert section 194-E was dropped.
8. The above exercise of the Government clearly goes to show that section 194-C does not apply to payment of fees for professional services or technical services and it was in that view of the matter that provision was sought to be made by insertion of section 194-E in the Act to provide for deduction from such payments. The above interpretation of section 194-C of the Act was accepted and acted upon both by the revenue and the assessees ever since the enactment of section 194-C in 1972 till the issue of the impugned Circular No. 681 dated 8-3-1994. By this circular the earlier Circular No. 86 dated 29-5-1972 and Circular No. 93 dated 26-9-1972 were withdrawn and fresh instructions issued in the matter of deduction of tax at source under sub-section (1) of section 194-C of the Income-tax Act purportedly in the light of the judgment of the Supreme Court in A.C.C Ltd. (supra), where it was observed that any work in sub-section (1) of section 194-C means “any work” and not a “Works contract” which has a special connotation in the tax laws. In the guidelines issued under the said circular in regard to the applicability of section 194-C of the Act, it is stated that provisions of section 194-C would apply to all types of contracts for carrying out any work including transport contracts, service contracts, advertisement contracts, labour contracts, material contracts and works contracts. The term “service contracts” has been defined in para 8 of the said circular to include services rendered by such persons as lawyers, physicians, surgeons, engineers, accountants, architects, consultants etc. It is this circular which has been challenged by the petitioners in this petition. This circular, so far as relevant, reads:
“Circular No. 681, dated 8th March, 1994.
Subject: Deduction of income-tax at source under section 194-C of the Income-tax Act, 1961, from payments made to contractors/sub-contractors — Supreme Court judgment dated 23rd March, 1993, in Associated Cement Co. Ltd. v. CIT — Instructions — regarding.
sub-section (1) of section 194-C of the Income-tax Act, 1961, lays down that any person responsible for paying any sum to any resident (hereinafter referred to as “contractor”) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies mentioned therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to 2 per cent, of such sum as income-tax on the income comprised therein.
2. Sub-section (2) of section 194-C of the Income-tax Act, 1961, lays down that when a contractor makes payment of any sum to a resident sub-contractor in pursuance of a contract made with him for carrying out the whole or any part of the work undertaken by the contractor, or, for supplying any labour, the contractor shall deduct an amount equal to 1 per cent of such sum as income-tax on the income comprised therein.
3. section 194-C was introduced with effect from 1st April, 1972. Shortly after its introduction, the Board issued Circulars No. 86, dated 29th May, 1972 (F. No. 275/9/72-ITJ), No. 93, dated 26th September, 1972 (F. No. 275/100/72-ITJ), and No. 108, dated 20th March, 1973 (F. No. 141 (9)/73-TPL), in this regard.
4. Some of the issues raised in the above-mentioned circulars need to be reviewed in the light of the judgment dated March 23, 1993, delivered by the Supreme Court of India in Civil Appeal No. 2860 (NT) of 1979, Associated Cement Co. Ltd. v. CIT, (1993) 201 ITR 435.
5. The Supreme Court has held that “……..there is nothing in the sub-section which could make us hold that the contract to carry out a work or the contract to supply labour to carry out a work should be confined to ‘works contract’ ……..”. Their Lordships have further held that “Any work” means any work and not a ‘work contract’, which has a special connotation in the tax law ….. ‘Work’ envisaged in the sub-section, therefore, has a wide import and covers ‘any work’ which one or the other of the organisations specified in the sub-section can get carried out through a contractor under a contract and further it includes obtaining by any of such organisations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the ‘work’ but for its specific inclusion in the sub-section”.
6. It may be pointed out that this appeal before the Supreme Court was by virtue of a special leave petition against the judgment in Writ Petition No. 2909 of 1978 of the Patna High Court in the case of Associated Cement Co. Ltd. v. CIT, (1979) 120 ITR 444. The Patna High Court, while dismissing the writ petition of the aforesaid company, observed that “In a very broad sense, a work done by one person is service rendered to another and indeed one of the dictionary meanings of the word ‘service’ is work”.
7. The conclusion flowing from the aforesaid judgments of the Supreme Court and the Patna High Court is that the provisions of section 194-C would apply to all types of contracts including transport contracts, labour contracts, service contracts, etc. In the light of these judgments, the Board have decided to withdraw their above mentioned Circulars Nos. 86 and 93 and para 11 of Circular No. 108 and issue the following guidelines in regard to the applicability of the provisions of section 194-C:
(i) The provisions of section 194-C shall apply to all types of contracts for carrying out any work including transport contracts, service contracts, advertisement contracts, broadcasting contracts, telecasting contracts, labour contracts, materials contracts and works contracts.
(ii) No deduction at source under section 194-C shall be required to be made if the consideration for the contract does not exceed the prescribed amount which at present is Rs. 10,000 (Ten Thousand only).
………………………………………
(v) Service contracts would be covered by the provisions of this section since service means doing any work as explained above.
……………………………………….
(viii) The provisions are wide enough to cover not only written contracts but also oral contracts.
…………………………………………
8. It may be noted that—
(i) The term “service contracts” would include services rendered by such persons as lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. However, services rendered for which payment is in the nature of salaries which is chargeable under the head of income “A. Salaries” in Chapter IV of the Income-tax Act, 1961, shall not be covered by section 194-C.
(ii) The term “transport contracts” would, in addition to contracts for transportation and loading/unloading of goods, also cover contracts for plying of business, ferries, etc., along with staff (e.g, driver, conductor, cleaner, etc.). Reference in this regard is also invited to Board's Circular No. 558, dated 28th March, 1990.
(iii) The term “materials contracts” in the context of section 194-C would mean contracts for supply of materials where the principal contract is for work and labour and not a contract for sale of materials.
9. Board's Circular No. 86, dated 29th May, 1972, and No. 93, dated 26th September, 1972, and para 11 of Circular No. 108, dated 20th March, 1973, are hereby withdrawn. Board's Circular No. 558, dated 28th March, 1990, is reiterated.
10. It is clarified that this circular explaining the provisions of section 194-C will apply with effect from 1st April, 1994. Tax deductions made in accordance with Circulars Nos. 86, 93 and 108 up to 31st March, 1994, will be regarded as compliance of the provisions of section 194-C.
…………………………………..
(Sd.) Rajesh Chandra.
Under Secretary,
Central Board of Direct Taxes.
(F. No. 275/54/93-IT(B))”.
9. Mr. Palkhivala, learned counsel for the petitioners submit that the above circular is based on an erroneous reading of the judgment of the Supreme Court in Associated Cement Co. Ltd. v. C.I.T, (1993) 201 ITR 435. According to the learned counsel, by no stretch of imagination, the professionals like advocates, solicitors, chartered accountants, doctors, surgeons can be termed as contractors who can be engaged by one or the other of the organisations specified in the said sub-section. Mr. Palkhivala submitted that even on widest interpretation of section 194-C, services of professionals cannot fall within the purview of “any work” envisaged in sub-section (1) of the said section. Payments to professionals cannot be regarded as payments to contractors or sub-contractors within the scope of section 194-C. The decision of the Supreme Court, according to the learned counsel, has to be read in the context of the controversy before it and not out of context. In reply, learned counsel for the respondents Mr. G.S Jetly submitted that in the absence of definition, the words “carrying out any work in pursuance of a contract” should be construed widely so as to include payments for professional services also.
10. We have carefully considered the rival submissions. We have perused the decision of the Supreme Court in Associated Cement Company Ltd. (supra). The controversy before the Supreme Court in that case was whether the expression ‘any work’ used in sub-section (1) of section 194-C means only ‘works contract’ or covers other works also. In the case before the Supreme Court, under the terms and conditions of an agreement between the appellant and a contractor, the contractor was to be paid at a flat rate for loading packed cement bags into wagons or trucks. This rate was fixed on the basis of daily basic wages, dearness allowance, etc., and clause 13 of the agreement stipulated reimbursement by the appellant to the contractor in case of certain increase in the dearness allowance, etc., payable by the contractor to the workmen employed by him. The appellant paid the contractor the amount stipulated at a flat rate as well as amounts by way of reimbursement under clause 13. But the deduction of tax at source made by the appellant under section 194-C(1) of the Income-tax Act, 1961 fell short of the deductions required to be made thereunder. On a show cause notice being issued by the Income-tax Officer, the appellant company contended that it was not liable to deduct any amount on payments made for loading and unloading as section 194-C was applicable only to payments made in execution of ‘works contracts’ which produces a tangible property and not to other works. It was in this context that the Supreme Court observed (at pp. 439-40):
“Thus, when the percentage amount required to be deducted under the sub-section as income-tax is on the sum credited to the account of or paid to a contractor in pursuance of a contract for carrying out a work or supplying labour for carrying out a work, of any of the organisations specified therein, there is nothing in the sub-section which could make us hold that the contract to carry out a work or the contract to supply labour to carry out a work should be confined to “works contract” as was argued on behalf of the appellant. We see no reason to curtail or to cut down the meaning of the plain words used in the section. “Any work” means any work and not a “works contract”, which has a special connotation in the tax law. Indeed, in the sub-section, the “work” referred to therein expressly includes supply of labour to carry out a work. It is a clear indication of the Legislature that the “work” in the sub-section is not intended to be confined to or restricted to “works contract”. “Work” envisaged in the sub-section, therefore, has a wide import and covers “any work” which one or the other of the organisations specified in the sub-section can get carried out through a contractor under a contract and further it includes obtaining by any of such organisations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the “work”, but for its specific inclusion in the sub-section.”
11. A reading of the above observations of the Supreme Court in the context of the controversy before it, makes it absolutely clear that the Supreme Court did not intend to give an extended meaning to the expression “any work” so as to include professional services within its ambit. The Supreme Court interpreted the expression ‘any work’ to decide whether it was confined to works contract as argued by the appellant before it or it was applicable to labour contracts also. It is in this context that the Supreme Court observed that “any work” means any work and not only a “works contract”. The above observation of the Supreme Court cannot be interpreted out of context to include payments made to the professionals like advocates, solicitors, chartered accountants, tax practitioners, doctors, surgeons, engineers, etc., for the services rendered by them. Neither such persons rendering professional services are known as “contractors” or “sub-contractors” nor payments made to them for the services rendered by them termed as “payment for carrying out any work” or for “supply of labour for carrying out any work” either in common parlance or in legal terminology. It will be a total misnomer to describe such professionals as ‘contractors’ or ‘sub-contractors’. If the contention of the revenue in this regard is accepted, a solicitor or an advocate on record will have to be described as a “contractor” and counsel briefed by him in the matter a “sub-contractor”. An interpretation which leads to such a ridiculous result cannot be a proper interpretation of the section.
12. It is well-settled rule of construction that judgments must be read as a whole and observations from the judgments should be considered in the light of the questions which were before the Court. As observed by the Supreme Court in C.I.T v. Sun Engineering Works P. Ltd., (1992) 198 ITR 297, it is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court, divorced from the context of the question under consideration and treat it to be the complete ‘law’ declared by the Supreme Court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision. It is not proper to regard a word, a clause or a sentence occurring in a judgment of the Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment.
13. If we read the decision of the Supreme Court in Associated Cement Co. Ltd. (supra) in the light of the principles set out above, it will be abundantly clear that the only question that fell for determination was whether applicability of section 194-C was confined to “works contracts” only as contended by the assessee. The Supreme Court decided only this limited question and held that there was no reason to curtail or cut down the meaning of the plain words used in section 194-C to confine or restrict it to “works contracts”. It was in this context that the Supreme Court held that the “work” envisaged in sub-section (1) of section 194-C has a wide import and covers any work which one or other of the organisations specified in the sub-section can be carried out through a contract or under a contract. This was also the consistent stand of the revenue ever since the incorporation of section 194-C. The assessee sought to challenge the same and contended that section 194-C was applicable only to “works contracts” which produces a tangible property and not to labour contracts. It is this contention of the assessee which was repelled by the Supreme Court and the interpretation put by the revenue on section 194-C was upheld. No other question fell for determination in that judgment. It is, therefore, evident that the CBDT committed a manifest error in reading the above decision in the way it has done in its impugned circular and reversing the interpretation consistently put by it on section 194-C of the Act for the last two decades purportedly in the light of the said decision of the Supreme Court.
14. The impugned action of the CBDT is also against the well-settled principle of construction of fiscal statutes that interpretation of a provision in a taxing statute rendered years back and accepted and acted upon should not be easily departed from except for compelling reasons. The Circulars issued by the CBDT during the last two decades explaining the scope and ambit of section 194-C are clearly in the nature of contemporanea expositio which can legitimately be used as aids in the construction of the said provision. In construing the statute, the courts are entitled to give due weight to the interpretation put upon it by those who are entrusted with the task of construing, executing and applying it. Under the Income-tax Act, the Central Board of Direct Taxes is the highest executing authority and it has been vested with statutory powers to issue orders, instructions and directions to all officers employed in the execution of the Act. The uncontroverted position is that ever since the incorporation of section 194-C in the year 1972, it was understood by all concerned including the CBDT that its scope was confined to payments made in respect of “works contracts” and “labour contracts” and not to payments made on account of professional services. This interpretation was reiterated and acted upon by the CBDT from time to time. It is this interpretation which is sought to be departed from by the CBDT itself purportedly in the light of the decision of the Supreme Court. We have already examined the decision of the Supreme Court and noted that it contains nothing of the sort which may justify any departure from the interpretation consistently put on section 194-C by the CBDT althroughout in the past. Besides, the language of section 194-C is plain and unambiguous and leaves no scope for any controversy in regard to its interpretation. In such a situation, the earlier Circulars of the CBDT explaining the scope and ambit of section 194-C must be regarded as a strong circumstance in support of the construction that section 194-C is not applicable to payments by way of professional fees.
15. The conclusion arrived at by us that section 194-C does not apply to payments made by way of professional fees also gets support from the fact that in the year 1987, in the Finance Bill, 1987, provision was sought to be made to provide for deduction of tax at source from payments by way of professional fees by insertion of a new section viz. section 194-E. The said proposal was, however, dropped at the time of passing of the said bill. The legislative intent of section 194-C becomes further clear from the fact while incorporating section 194-H in the Act in the year 1991 to provide for deduction of tax at source in respect of payments made by way of commission, brokerage etc. “Payments made for professional services” were specifically excluded from the scope and ambit of said section.
16. It is clear from the above discussion that section 194-C is not applicable to payments by way of professional fees.
17. In view of the foregoing, we are of the clear opinion that the Circular No. 681, dated 8th March, 1994 issued by the first respondent, Central Board of Direct Taxes is illegal and based on an erroneous reading of the observations of the Supreme Court in Associated Cement Co. Ltd. (supra) and it is without jurisdiction in so far as it requires deduction of tax at source under section 194-C of the Act in respect of the payments of fees for professional services.
18. In the result, this writ petition is allowed. Rule is made absolute in terms of prayer clause (a).
19. Under the facts and circumstances of the case, there shall be no order as to costs.
20. Issuance of certified copy is expedited.
Petition allowed.
Income-tax Act, 1961,section 194-C,