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V.M Salgaocar And Bros. Ltd. And Others v. Income-Tax Officer And Others.

Karnataka High Court

Jan 14, 1999

Judgment

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Judgment Summary — V.K. Singhal, C.J.

Factual and Procedural Background

These petitions challenge the validity of Circular No. 666 (reported at [1993] 204 ITR (St.) 40) dated October 8, 1993, and a subsequent circular reported at [1994] 206 ITR (St.) 299 (referred to in the opinion). The Income-tax Officer, by a letter dated November 8, 1993 (in W.P. No. 14991-93 of 1994), had directed that, in view of the October 8, 1993 circular and the Supreme Court's decision in Associated Cement Co. Ltd. v. CIT ([1993] 201 ITR 435), assessees should deduct tax under section 194C on payments under various types of contracts, including transport contracts, service contracts, labour contracts and works contracts.

The petitions were heard together and decided by this common judgment. The statutory provision at issue is section 194C of the Income-tax Act as it then stood, and the effect of Explanation III (inserted by the Finance Act, 1995, effective July 1, 1995) was also considered. Multiple high court decisions and prior CBDT circulars (including Circulars of 1972 and 1973 and the CBDT circulars of 1993 and 1994) form part of the procedural and factual matrix reviewed by the court.

Legal Issues Presented

Whether the CBDT circular(s) (notably the circular dated October 8, 1993 and the circular dated March 8, 1994) correctly interpret the expression "any work" in section 194C so as to bring transport contracts and similar services within the scope of tax deduction at source under section 194C.
Whether Explanation III (inserted by the Finance Act, 1995) which expressly includes advertising, broadcasting/telecasting, carriage of goods and passengers by modes other than railways and catering, is clarificatory (and thus retrospective) or an inclusive/amending provision that operates only from its effective date (July 1, 1995).
Whether the long-standing departmental interpretation that transport contracts for mere carriage of goods are outside the ambit of section 194C can be displaced by the CBDT circulars relying upon the Supreme Court decision in Associated Cement Co. Ltd. v. CIT.

Arguments of the Parties

Petitioners' Arguments

Learned counsel for the petitioners argued that Explanation III (as inserted by Finance Act, 1995) creates a substantial liability on transport contractors because it is inclusive in form (an including clause) and therefore extends the scope of section 194C to cover activities such as carriage of goods and passengers.
One petitioner (in W.P. No. 32004 of 1994) relied on the Bombay decision in Advertising Agency Association of India v. CBDT ([1994] 210 ITR 152 (Bom)) and related authorities (including Chamber of Income-tax Consultants v. CBDT and Bombay Goods Transport Association v. CBDT) to contend that liability under section 194C should not be upheld for the services claimed by the Department.

Respondent's Arguments

Learned counsel for the respondent (the Department) contended that the Explanation is merely clarificatory in nature and that the words "any work" in section 194C always covered the services listed (such as carriage and advertising), consistent with the natural and wide meaning of "any work" as interpreted by the Supreme Court in Associated Cement Co. Ltd. v. CIT.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Associated Cement Co. Ltd. v. CIT, [1993] 201 ITR 435 (SC)	Held that the phrase "any work" in section 194C is wide and not restricted to a "works contract"; decision concerned loading/unloading of cement bags into wagons/trucks.	The court observed that Associated Cement dealt with loading/unloading (hire of labour) and that its ratio was not directed at mere carriage of goods; the court emphasized the factual context of that Supreme Court judgment.
Bombay Goods Transport Association v. CBDT, [1994] 210 ITR 136 (Bom)	Held that Associated Cement was not to be read as applying to all contracts (including transport contracts) and that section 194C does not apply to mere carriage of goods; quashed the CBDT circular to that extent.	The court recorded and followed the Bombay High Court's holding that the CBDT's interpretation to bring transport contractors within s.194C was not correct; the circular was quashed (as noted in the opinion).
Sethi Transport v. CBDT, [1997] 226 ITR 274 (Orissa)	Agreed with Bombay High Court that section 194C does not extend to mere carriage of goods; held the circular illegal to that extent.	The court noted that the Orissa High Court agreed with Bombay and held the circular illegal insofar as it sought to apply s.194C to mere carriage of goods.
Calcutta Goods Transport Association v. Union of India, [1996] 219 ITR 486 (Cal)	Interpreted "work" via authoritative dictionaries and held "work" to mean product/result; mere transportation by a common carrier does not produce or affect the goods and thus falls outside s.194C; declared common carriers not liable under s.194C.	The court recorded the Calcutta High Court's conclusion that "work" should be understood in a limited sense and that common carriers of goods by road are not liable to deduction under section 194C.
Delhi Goods Transport Association v. CBDT, [1995] 80 Taxman 525 (Del)	Held that, on the basis of the CBDT circular, tax on carriage of goods could not be levied under s.194C.	The opinion records the Delhi High Court's conclusion that tax on carriage of goods could not be levied pursuant to the circular.
Ekonkar Dashmesh Transport Co. v. CBDT, [1996] 219 ITR 511 (P&H)	Differed from Bombay and Calcutta decisions; held that the income derived for "carrying out the work" is covered by s.194C.	The court noted this decision as a dissenting view among high courts, which supported a wider scope of s.194C consistent with Associated Cement.
Advertising Agency Association of India v. CBDT, [1994] 210 ITR 152 (Bom)	Addressed liability of advertising agencies under s.194C; held that liability was not upheld in that case.	The petitioner relied on this decision; the court recorded that reliance and treated the petitioner as entitled to relief in view of the observations in the cited decisions.
Chamber of Income-tax Consultants v. CBDT, [1994] 209 ITR 660 (Bom)	Referenced in the context of advertising agency litigation and applied in related Bombay decisions.	The court noted that Advertising Agency Association relied on Chamber of Income-tax Consultants; the combined reasoning supported relief to the petitioner who relied upon them.

Court's Reasoning and Analysis

The court proceeded by examining the statutory text of section 194C (sub-sections (1) and (2) and the Explanation) and the history of departmental practice and circulars. The court summarized the statutory language that requires deduction of tax when sums are paid for "carrying out any work (including supply of labour for carrying out any work)" under specified contracts.

The court reviewed:

The CBDT circular dated October 8, 1993 (which applied Associated Cement to broaden the meaning of "any work" to include transport and other contracts), and the subsequent CBDT circular dated March 8, 1994 (which specified transport contracts, including plying of buses, ferries with staff, etc., and fixed the applicability of s.194C from April 1, 1994).
Earlier CBDT circulars from the 1970s (for example, Circular No. 93 dated September 26, 1972 and Circular dated May 29, 1972) that took the position that transport contracts cannot ordinarily be regarded as "contract for carrying out any work" and thus were outside the ambit of s.194C.
Judicial precedents at the high-court level (Bombay, Calcutta, Orissa, Delhi and Punjab & Haryana) that presented conflicting conclusions on whether mere carriage of goods falls within s.194C.

Key analytical steps and findings:

The court emphasized the factual scope of the Supreme Court's decision in Associated Cement, noting that that case concerned loading/unloading of cement bags (hire of labour) and did not involve mere carriage of goods by transport contractors.
The court observed that for more than two decades the Department had interpreted section 194C as excluding transport contractors for mere carriage, and that this long-standing and acted-upon interpretation is not to be lightly disturbed.
The court examined dictionary meanings of "work" (Webster's, Encyclopaedia Britannica, Oxford English Dictionary) and concluded that "work" has a relation with "labour" and comprehends activities of workmen — i.e., the physical exertion of labour — rather than necessarily comprising every activity that moves goods from A to B.
With respect to Explanation III (Finance Act, 1995) which explicitly includes carriage of goods and passengers and other services, the court held that this Explanation is not procedural or merely declaratory; it is an inclusive provision the effect of which is to be applied from its effective date (July 1, 1995) rather than applied retrospectively to the period April 1, 1994 to June 30, 1995.
The court therefore distinguished the narrow factual ratio of Associated Cement (loading/unloading) from the broad departmental reading that attempted to bring all transport contracts within s.194C. The court noted conflicting high-court authority and the departmental practice that existed prior to the CBDT's changed view in 1993–1994.

Based on these findings, the court concluded that the CBDT circular(s) could not be sustained insofar as they attempted to apply section 194C to mere carriage of goods for the period in dispute (April 1, 1994 to June 30, 1995), and that Explanation III must be given effect prospectively from July 1, 1995.

Holding and Implications

Holding: The petitions challenging the CBDT circular(s) were allowed. The court granted relief to the petitioners (the petitions are accordingly allowed).

Implications and direct effects:

The court treated the Supreme Court judgment in Associated Cement as limited to its factual context (loading/unloading/hire of labour) and did not accept a Departmental reading that stretched that judgment to cover mere carriage of goods by transport contractors.
The court held that Explanation III (Finance Act, 1995) is not merely clarificatory and operates from its effective date (July 1, 1995); it is not to be applied retrospectively to the earlier disputed period (April 1, 1994 to June 30, 1995).
The direct consequence for the petitioners was relief from the application of section 194C for mere carriage contracts in the disputed period, consistent with earlier departmental practice and with the high-court authorities that held the same view; the petitioners were held entitled to the relief sought.
The opinion does not purport to lay down a novel broad precedent beyond these holdings; it frames the decision in terms of statutory interpretation, factual context of Associated Cement, and the temporal application of Explanation III.

This summary is prepared strictly from the text of the provided opinion and does not add or infer facts beyond those contained in the opinion.

Show all summary ...

The Judgment of the Court was delivered by

V.K Singhal, C.J:— The validity of Circular No. 666 (see [1993] 204 ITR (St.) 40), dated October 8, 1993.March 8, 1996 (see [1994] 206 ITR (St.) 299), issued by the Central Board of Direct Taxes is assailed in these petitions and, therefore, all these petitions are disposed of by this common judgment.

2. The Income-tax Officer in W.P No. 14991-93 of 1994 issued a letter dated November 8, 1993, that in view of the circular dated October 8, 1993 (see [1993] 204 ITR (St.) 40), clarification of the term “any work” in section 194C and the decision of the Supreme Court in the case of Associated Cement Co. Ltd. v. CIT, [1993] 201 ITR 435, the assessee is requested to deduct tax as per the provisions of section 194C on all types of contracts such as transport contracts, service contracts, labour contracts, material contracts as well as works contract, etc. The provisions of section 194C are as under:

“(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

(d) any company; or

(e) any 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. Section 194C provides that 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 the Central Government or any State Government; or any local authority; or any corporation established by or under a Central, State or Provincial Act; or any company; or any 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 sums as income-tax on income comprised therein. By amendment by the Finance Act, 1995, this amount has been reduced to one per cent, in the case of advertising and in any other case it is two per cent. Explanation III has been inserted by the Finance Act, 1995, with effect from July 1, 1995, and as per Explanation III for the purposes of section 194C the expression “work” shall include:—

(a) advertising;

(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;

(d) catering.

4. According to learned counsel for the petitioner, this Explanation creates substantial liability on the transport contractors as it is by way of an including clause, while the argument of learned counsel for the respondent is that it is only clarificatory in nature and, therefore, the words “any work” used in section 194C will cover these services as well.

5. Circular of the Board dated October 8, 1993 (see [1993] 204 ITR (St.) 40), which is in dispute is as under (page 42):

“5.3 It is clarified that the term ‘any work’ in section 194C has to be understood in its natural meaning, i.e, any work means ‘any and not only a works contract’ which has a special connotation in the tax law. This has been clearly enunciated by the Supreme Court of India in its judgment dated March 23, 1993, in Civil Appeal No. 2860(NT) of 1979—Associated Cement Co. Ltd. v. CIT, [1993] 201 ITR 435. Thus, the provisions of section 194C are applicable to all types of contracts for carrying out any work, such as transport contracts, service contracts, labour contracts, material contracts as well as works contracts, etc.”

6. Earlier, Circular No. 93, dated September 26, 1972, in respect of transport contracts as published in [1972] 86 ITR (St.) 30 was as under (page 31):

“A transport contract cannot ordinarily be regarded as a ‘contract for carrying out any work’ and, as such, no deduction in respect of income-tax is required to be made from payments made under such a contract. In the case of a composite contract involving transport as well as loading and unloading, the entire contract will be regarded as ‘works contract’ and income-tax will have to be deducted from payments made thereunder. Where, however, the element of labour provided for loading and unloading is negligible, no income-tax will be deductible.”

7. Another circular dated March 8, 1994 (see [1994] 206 ITR (St.) 299), in dispute is on the basis of the judgment given in the case of Associated Cement Co. Ltd., [1993] 201 ITR 435 (SC), was issued by the CBDT where it was pointed out that “any work” is not restricted to “works contract” and is wide enough to cover any work which is carried out through a contractor in a contract. The circular dated March 8, 1994 (see [1994] 206 ITR (St.) 299), provided that the term “transport contracts” would, in addition to contracts for transportation and loading/unloading of goods, also cover contracts for plying of buses, ferries, etc., along with staff (e.g, driver, conductor, cleaner, etc.), Circular No. 86 dated May 29, 1972 (see [1972] 84 ITR (St.) 99) was withdrawn beside the Circulars Nos. 93 and 108 which were issued on September 26, 1972 (see [1972] 86 ITR (St.) 30), and March 20, 1973. In the circular dated March 8, 1994 (see [1994] 206 ITR (St.) 299), it was clarified that the provisions of section 194C will apply from April 1, 1994. Thus the dispute now remains only for the period from April 1, 1994, to June 30, 1995.

8. The Bombay High Court in the case of Bombay Goods Transport Association v. CBDT, [1994] 210 ITR 136 has held that in the judgment of Associated Cement Co. Ltd.'s case, [1993] 201 ITR 435 (SC), the provisions of section 194C were not interpreted in the manner as interpreted by the Central Board of Direct Taxes so as to apply the said judgment to all types of contract including transport contracts, service contracts, etc. It was also pointed out that various circulars issued by the Central Board of Direct Taxes were not before the Supreme Court and the words “any work” could not be restricted to include works contract only and the observations made were that the word “works contract” and labour contracts would be included in “any work”. It was further made clear that labour contract would have fallen outside the “work” envisaged by section 194C but for its specific inclusion in sub-section (1). The Bombay High Court held that the provisions of section 194C are not applicable to contracts for mere carriage of goods which do not include any other services like loading or unloading.

9. The circular was accordingly quashed.

10. The Orissa High Court in the case of Sethi Transport v. CBDT, [1997] 226 ITR 274, had also the occasion to consider the circular dated March 8, 1994 (see [1994] 206 ITR (St.) 299), and agreeing with the decision given by the Bombay High Court observed that section 194C does not extend to the contract for mere carriage of goods, to that extent, the circular issued was held illegal.

11. The Calcutta High Court in the case of Calcutta Goods Transport Association v. Union of India, [1996] 219 ITR 486 has taken into consideration the definition of the word “work” as defined in New Shorter Oxford English Dictionary, and Stroud's Judicial Dictionary and came to the conclusion that the word “work” is to be understood in the limited sense as product or result. The carrying out of work indicates doing something to conduct the work to completion or an operation which produces the result. That being so the mere transportation of goods by a common carrier does not affect or result in the goods being carried nor are the goods affected thereby and as such cannot be brought within the scope of section 194C of the Act. It was declared that common carriers of goods by road are not liable to deduction of tax at source under section 194C of the Act.

12. The Delhi High Court in the case of Delhi Goods Transport Association v. CBDT, [1995] 80 Taxman 525 has held that on the basis of the circular dated March 8, 1994 (see [1994] 206 ITR (St.) 299) tax on carriage of goods cannot be levied.

13. I have considered over the matter.

14. The judgment given by the apex court in the case of Associated Cement Co. Ltd., [1993] 201 ITR 435 was in respect of loading of cement bags into wagons/trucks. It was in this context that the word “any work” was held not restricted to payment in relation to works contract. Even the circular dated May 29, 1972 (see [1973] 84 ITR (St.) 99), interpreted the provisions of the section 194C and clarified that the tax is not to be deducted under section 194C by transport contractors. It was only because of the judgment given in the case of Associated Cement Co. Ltd., [1993] 201 ITR 435 (SC) another circular dated March 8, 1994 (see [1994] 206 ITR (St.) 299) was issued by the Central Board of Direct Taxes and section 194C was held applicable only from April 1, 1994, and for such a long time, i.e, more than twenty years, the interpretation which was taken by the Department and acted upon was that the transport contractors are not liable for deduction of tax under section 194C. In the judgment of Associated Cement Co. Ltd.'s case, [1993] 201 ITR 435 (SC), the controversy was not of the transport contractors but was related to loading and unloading of goods. In Associated Cement Co. Ltd.'s case, [1993] 201 ITR 435 (SC) it was observed (page 440):

“… there is nothing in the sub-section which could make us to 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-sec-tion, 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.”

According to the interpretation of the Department which was prevalent till April 1, 1994, the transport contractors were not considered to be falling within the ambit of section 194C. Mere transportation of goods by a common carrier does not affect or result in the goods carried nor are the goods affected. The legislative intent could also be seen from the subsequent amendments.

Explanation III was inserted by the Finance Act, 1995, by which advertising and travelling agencies, etc., were included thereunder. Whether the Explanation could be considered to be explanatory so as to apply for the transaction between April 1, 1994, to June 30, 1995 ? An interpretation which had continued and acted upon for more than a decade is not to be easily deviated. Circular No. 108 dated March 20, 1973, has dealt with the service contracts not involving carrying out of any work and has specifically said that the transport contract would not be included in the purview of section 194C as transport contract cannot be regarded as contract for carrying out any “work”.

15. However, the Punjab and Haryana High Court in the case of Ekonkar Dashmesh Transport Co. v. CBDT, [1996] 219 ITR 511 has dissented with the judgment given by the Bombay High Court and the Calcutta High Court referred to above and taking into consideration the judgment in the case of Associated Cement Co. Ltd., [1993] 201 ITR 435 (SC), held that the end-pro-duct may be the work but the income derived by the contractor for “carrying out the work” is certainly covered by the provisions of section 194C.

16. In the case of Associated Cement Co. Ltd., [1993] 201 ITR 435 (SC), the contract was for loading/unloading of goods and nothing was done to the goods. It was a pure and simple hire of labour for loading and unloading of goods which was the subject-matter of the decision in Associated Cement Co. Ltd.'s case, [1993] 201 ITR 435 (SC).

17. The definition of the word “work” in various dictionaries is as under:

“In Webster's New Dictionary, ‘work’ has been defined as ‘work’, wurk, n. (O>E> weore = D. and G. werk = Ice], verk, work; akin to Goth. Waurkian to work, also to Gr. ergon, work, organon., instrument, E. organ] Exertion directed to produce or accomplish something; labor; toil; productive or operative activity; as, to make a machine do work; activity undertaken in return for payment, as in wages; that on which exertion or labor is expended a product of activity or labor; as, a literary work; needlework or embroidery; an engineering structure, as a bridge or dock; workmanship [[: as, to do good work; a task or undertaking; as, one's life's work; a deed or act.

In Encyclopaedia Britannica the word ‘work’ has been defined as work, in physics, measure of energy transfer that occurs when an object is moved over a distance by an external force at least part of which applied in the direction of the displacement. If the force is constant, work may be computed by multiplying the length of the path by the component of the force acting along the path. Work done on a body is accomplished not only by a displacement of the body as a whole from one place to another, but also, for example, by compressing a gas, by rotating a shaft, and even by causing invisible motions of the particles within a body by an external magnetic force.

In Oxford English Dictionary the word ‘work’ has been defined as something to be done, or something to do; what a person (or thing) has or had to do; occupation, employment, business, task function.”

18. From a perusal of the above definition it is evident that the word “work” has relation with the word “labour” which has to be put by a person for occupation, employment, business, task or function.

19. The word “work” refers and comprehends the activities of the workmen and not the operation in the factory or on machines. It is the physical force which has been comprehended in the word “work”. Section 194C(1) refers to carrying out of any work. If the sub-section (1) is read as a whole then it could be interpreted that it is the work of labour which is done by the contractor or he may supply the labour to do the work as a sub-contractor. Sub-section (2) of section 194C also refers to the contract for carrying out the work undertaken by the contractor or for supplying wholly or partly any labour which the contractor has undertaken to supply.

20. It is only by virtue of Explanation III added by the Finance Act, 1995, that advertising, broadcasting, telecasting, carriage of goods and passengers by any mode of transport and catering have been included. This Explanation cannot be considered procedural. The inclusive definition given by this Explanation, therefore, is to be made applicable only from July 1, 1995. Learned counsel for the petitioner in W.P No. 32004 of 1994 has placed reliance on the judgment given in the case of Advertising Agency Association of India v. CBDT, [1994] 210 ITR 152 (Bom) wherein liability of advertising agency under section 194C was not upheld by applying the judgment given in the case of Chamber of Income-tax Consultants v. CBDT, [1994] 209 ITR 660 (Bom) and Bombay Goods Transport Association v. CBDT, [1994] 210 ITR 136 (Bom). In view of the observations made in the decision referred to above, this petitioner is also entitled for the relief.

21. The petitions are accordingly allowed.