Section 194-C of the Income-tax Act, 1961, is not applicable to contracts for mere carriage of goods which do not include any other services like loading or unloading and are not in anyway connected with any "work" to be performed by the carrier.

JUDGMENT - Dr.B.P. SARAF, J.:---This writ petition filed by the Bombay Goods Transport Association and its Honorary General Secretary raises an important question as to whether a contract for mere carriage of goods which does not include any other services like loading or unloading and is not in anyway connected with any "work" to be performed by the carrier can be said to be a contract for carrying out any work within the meaning of section 194-C of the Income-tax Act, 1961. Though section 194-C is in the statute book right from 1st April, 1972 there was no controversy about the fact that payments made to transport contractors do not fall within the purview of the said section. The controversy has arisen recently with the issuance of circular by the Central Board of Direct Taxes ("CBDT") being Circular No. 681 of 8th March, 1994. The uncontroverted position is that prior to the issuance of the above circular there were circulars and clarifications from the CBDT to the effect that section 194-C was not applicable to payments made for carriage of goods to the transport operators.

2. For a proper appreciation of the controversy, it may be expedient to set out some of the provisions of the Act, the relevant circulars and guidelines issued by the Central Board of Direct Taxes from time to time after coming into force of section 194-C and during the last two decades of its operation. Section 194-C of the Act provides for deduction of tax at source from payments to contractors and sub-contractors. The said section, as far as relevant, 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) 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 an amount equal to one per cent of such sum as income-tax on income comprised therein.

(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, its 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-opearative society.

....."

Soon after the enactment of the above section 194-C, a circular was issued by the Deputy Secretary to the Government of India being Circular No. 86 dated 29th May, 1972 to explain the broad effect of the provision. In this circular it was clearly stated that deduction of income-ta

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