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1996 Supreme(P&H) 1462
PUNJAB & HARYANA HIGH COURT
Ashok Bhan and N.K.Agrawal JJ.
Rakesh Raj And Associates
Versus
Central Board Of Direct Taxes
Civil Writ Petition No. 6375 of 1994,6731 of 1994,
Decided On : SEPTEMBER 23, 1996
The CBDT's power to issue directions under Section 119 of the Act is limited to the proper administration of the Act and cannot be used to interfere with the discretion of the Deputy Commissioner (Appeals) or the Commissioner (Appeals) in the exercise of their appellate functions.
Headnote:
INCOME TAX - DEDUCTION OF TAX AT SOURCE - SECTION 194C - APPLICABILITY - CIRCULAR NO. 681 DATED MARCH 8, 1994 ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES - VALIDITY - CHALLENGED - HELD, CIRCULAR IS BEYOND THE SCOPE OF SECTION 119 AND THE RESULT OF MISREADING OF SECTION 194C OF THE ACT.
Fact of the Case:
The petitioners, a partnership firm engaged in the profession as Chartered Accountants and an advocate, challenged the validity of Circular No. 681 dated March 8, 1994, issued by the Central Board of Direct Taxes (CBDT), which made professionals liable to pay tax at the rate of two per cent. of the remuneration payable to them by the party engaging them for professional services. The petitioners argued that the circular was issued in excessive exercise of the CBDT's powers under Section 119 of the Income-tax Act, 1961 (the Act).
Finding of the Court:
The court held that the impugned circular was beyond the scope of Section 119 and the result of misreading of Section 194C of the Act. The court noted that the CBDT had earlier taken a different view about the applicability of Section 194C while issuing directions in its two circulars dated May 29, 1972, and September 26, 1972, but, later on, giving an erroneous and misconceived interpretation to the observations of the Supreme Court in Associated Cement Co. Ltd.'s case [1993] 201 ITR 455, the CBDT issued unsustainable and illegal directions (Circular No. 681 dated March 8, 1994).
Issues: 1. Whether Circular No. 681 dated March 8, 1994, issued by the CBDT, is valid? 2. Whether the CBDT has the power to issue such a circular under Section 119 of the Act?
Ratio Decidendi: 1. The court held that the CBDT's power to issue directions under Section 119 of the Act is limited to the proper administration of the Act and cannot be used to interfere with the discretion of the Deputy Commissioner (Appeals) or the Commissioner (Appeals) in the exercise of their appellate functions. 2. The court further held that the impugned circular was based on an erroneous interpretation of the Supreme Court's decision in Associated Cement Co. Ltd.'s case [1993] 201 ITR 455, which did not deal with the issue of whether professionals are liable to pay tax at source under Section 194C of the Act.
Final Decision: The court quashed the impugned Circular No. 681 dated March 8, 1994.
N.K.Agrawal, J.
1. These are two petitions (C. W. Ps. Nos. 6375 and 6731 of 1994), filed in public interest and also in the exercise of the petitioners own rights, seeking the quashing of Circular No. 681 (see [1994] 206 ITR (St.) 299), dated March 8, 1994, issued by respondent No. 1, Central Board of Direct Taxes (for short, "the Board"). The petitioner in C. W. P. No. 6375 of 1994 is a partnership firm engaged in the profession as Chartered Accountants at Faridabad (Haryana). The petitioner; Shri Sanjay Bansal, is an advocate in C. W. P. No. 6731 of 1994.
2. The circular in question has been challenged on the ground that the persons rendering services as lawyers, chartered accountants, physicians, surgeons, engineers, architects, consultants, etc., have been wrongly made liable to pay tax at the rate of two per cent. of the remuneration payable to them by the party engaging them for professional services. It is alleged that the said circular has been issued by the Board in excessive exercise of its powers conferred by Section 190 of the Income-tax Act, 1961 (for short, "the Act"). The persons and parties paying remuneration to the professionals, like lawyers, chartered accountants, etc., are required to deduct income-tax at the rate of two per cent. from the total amount of remuneration credited to the account of, or paid to, the payee by way of remuneration. The Board has, while issuing the said circular, taken the plea that the professionals rendering services to the individuals or the parties are covered for the purposes of deduction of income-tax at source within the meaning of Section 194C of the Act.
3. Section 194C was inserted in the Act by the Finance Act of 1972, with effect from April 1, 1972. It required a person responsible for paying any sum to any resident (referred to as "the contractor") for carrying out any work in pursuance of a contract (sic). The marginal heading of Section 194C is "payments to contractors and sub-contractors". The person crediting any sum to the account of the contractor or making any payment in cash or by cheque or draft or by any other mode is required to deduct an amount equal to one per cent. in case of advertising and, in any other case, two per cent. of the amount as income-tax.
4. The Board has issued the said circular, dated March 8, 1994, in the exercise of its powers under Section 119 of the Act. Sub-section (1) of Section 119 reads as under :
"119. (1) The Board may, from time to time, issue such orders, instructions and directions to other income-tax authorities as it may deem fit for the proper administration of this Act, and such authorities and all other persons employed in the execution of this Act shall observe and follow such orders, instructions and directions of the Board : Provided that no such orders, instructions, or directions shall be issued - (a) so as to require any income-tax authority to make a particular assessment or to dispose of a particular case in a particular manner ; or
(b) so as to interfere with the discretion of the Deputy Commissioner (Appeals) or the Commissioner (Appeals) in the exercise of his appellate functions."
5. The aforesaid provision empowering the Board to issue instructions and directions was enacted so as to facilitate proper administration of the Act. Therefore, the power to issue direction or any instruction is to be exercised only for carrying out the proper administration of the Act and nothing more.
6. The Board has issued Circular No. 681, dated March 8, 1994 (reproduced in [1994] 206 ITR (St.) 299), after withdrawing the earlier circulars, explaining the applicability of Section 194C of the Act. The reasons for the issuance of the new circular have been given in paragraphs 4 and 5 of the circular, which read as under ([1994] 206 ITR (St.) 299) :
" 4. Some of the issues raised in the abovementioned circulars need to be reviewed in the light of the judgment dated March 23, 1993, delivered by the Supreme Court of India i
