The Hindu Business Line : Curb the zest for litigation

Time and again, concern is expressed about the pendency of cases/appeals before the courts, but practically nothing is being done to reduce their numbers.

The Income-Tax (I-T) department is an important litigant before High Courts and the Supreme Court. But it hardly withdraws pending appeals or concedes issues which get settled by the apex court’s decisions.

The Bombay High Court’s decision in the East India Hotels Ltd (2009 179 Taxman 17 Bombay) case establishes this conclusion beyond doubt.

Section 194C of the I-T Act, 1961 provides for tax deduction at source from payments to contractors/sub-contractors. This section is attracted in cases of carrying out “any work” (including supply of labour) on payment. The phrase ‘any work’ has not been defined in the I-T Act.

Decision misinterpreted

The Supreme Court, in Associated Cement Co. Ltd vs CIT (1994 201 ITR 435 SC), held that the words ‘any work’ in Section 194C means ‘any work’ and not necessarily a ‘works contract’.

The CBDT, misinterpreting this decision, issued Circular No. 681 (dated March 8, 1994), and advised the field officers that Section 194C shall apply to all types of contracts — transport, service , advertising, broadcasting/telecasting, labour, material and works — for carrying out any work. The field officers interpreted this Circular to mean that in the matter of engagement of professionals also, such as lawyers, doctors, engineers and CAs, tax is to be deducted at source in making payments to them.

Such interpretation created an uproar and a number of writ petitions were filed before the High Courts, where the Circular was declared invalid.

The Bombay High Court, in the Chamber of Income-tax Consultants vs CBDT (1994 209 ITR 660) case, held that the Circular No. 681 is illegal to the extent it holds that the tax is to be deducted from the amounts payable to lawyers, chartered accountants, etc., towards their professional fees.

According to the court, if the Revenue’s contention is accepted, a solicitor or advocate on record will have to be described as a ‘contractor’ and the counsel briefed by him as a ‘sub-contractor’. An interpretation which leads to such a ridiculous result cannot be proper interpretation of the section.

Scope enlarged

The issue was taken to the Supreme Court in the case of a transport contract in the Birla Cement Works (2001 249 ITR 216) case, where the court decided that Circular No. 681 would apply to payments for carrying out the work, such as constructing buildings or dams, laying of roads, airfields or railway lines, erection or installation of plant and machinery, etc. In all these contracts, the execution of the contract by a contractor/sub-contractor results in production of the desired object or accomplishing the task under the contract.

The CBDT, after such decisions, settled the issue by adding an Explanation to Section 194C effective from July 1, 1995, which enlarged the scope of the work to include advertising; broadcasting and telecasting, including production of programmes for such broadcasting or telecasting; carriage of goods and passengers by any mode of transport other than by railways; and catering.

East India Hotels Ltd too had filed a writ petition in 1994 (2104 of 1994) in whose case, Section 194C was invoked in respect of services rendered by the hotel to its guests, such as house keeping, facility of restaurants, bank counters, beauty saloons, etc. The assessing officer (AO) decided that persons staying in hotel should deduct income-tax at source while making payment for room occupancy and make use of the aforesaid services. Obviously, the issue raised became in-fructuous after developments enumerated earlier, but the I-T department, instead of conceding the prayer in the writ petition, contested it vehemently before the High Court, which decided the petition in favour of the hotel.

The I-T department needs to review all pending appeals after the apex court renders a decision which it accepts, and withdraw all pending matters covered by the decision. This will not only substantially reduce pendency of cases before the courts but would provide much needed relief to the assessees like the East India Hotels Ltd.

(The author is former chairman of CBDT.)