Holding

Section 194C(1) mandates deduction of 2% tax on the whole sum credited or paid to a contractor for carrying out any work (including supply of labour), irrespective of the contract being a works contract or the presence of reimbursement components.

Summary

The Associated Cement Company (ACC) entered into a contract with a contractor for loading cement bags and reimbursing certain wage components. ACC paid the contractor as per the contract but did not deduct tax under Section 194C(1) of the Income Tax Act, 1961. The Income Tax Officer issued notices for non‑deduction of tax, which ACC challenged before the High Court and subsequently before the Supreme Court. ACC argued that the provision applied only to "works contracts" and that deduction should be made only on the contractor's income component, not on the entire sum including reimbursements. The Supreme Court held that the phrase "any work" in Section 194C(1) has a wide import, includes supply of labour, and is not limited to works contracts; consequently, the 2% tax must be deducted on the whole amount credited or paid to the contractor. The Court dismissed the appeal, directing ACC to comply with the deduction requirement.

Issues considered

Whether Section 194C(1) of the Income Tax Act, 1961 applies to payments made for loading cement bags and related reimbursements under a contract that is not a 'works contract'.
Whether the 2% tax deduction under Section 194C(1) is to be made on the entire sum paid to the contractor or only on the contractor's income component.
Whether amounts reimbursed to the contractor for wage differentials can be excluded from the tax deduction.

Legislation cited

Income Tax Act, 1961s. 194C(1)

Subjects

Income TaxTDSSection 194CContractorWorks contractSupply of labourDeduction at sourceStatutory interpretation

Judgment

A ASSOCIATED CEMENT COMPANY LTD.
v.
COMMISSIONER OF INCOME-TAX, BIHAR, PATNA AND ANR.

MARCH 23, 1993

B [B.P. JEEVAN REDDY AND N. VENKATACHALA, JJ.)

Income Tax Ac4 1961:

Section 194C-Sub-section (J}-Scope of-Contract between Contrac-
C tor and specified organisations for canying out "any work''-Expression "any
work" has a wide import and cannot be restricted to works contract-l'ayment
to .Contractor for canying out "any work"-Sum credited or paid to Contrac-
tor-Liability of payer to deduct two percent tax is not confined to Contractor's
income contponent.

D The appellant-Company issued a letter to its Contractor containing
the terms and conditions of a contract or loading packed cement bags from
its Packing Plants into wagons or trucks. Under Clause U there was a
stipulation that the Contractor shall be paid a sum for bis work at a flat
rate of 41 paise for each tonne of cement handled in Packing Plant No.l
and 30 paise for each tonne or cement handled in Packing Plant No.2.
E Clause 13 thereof, which contained a recital that the rate or loading in
Clause 12 had been worked· out on the basis of dally basic wages or Rs.2.35
paise, D.A. or Rs.1.21 paise and H.R.A. or Rs.O.SO palse per day per worker,
stipulated a terms or reimbursement by the appellant to the Contractor of
the difference in DA. over the amount or Rs.1.21 paise and annual incre-
F ment etc. payable from month to month to every worker by him. The
Contractor carried out his work and the appellant made payments of the
sums payable to him under the contract. But no deductions of tax were
made under Section 194C(l) of the Income Tax Act, 1961. The Income Tax
Officer served two notices - One in respect or assessment years 1973-74
G and 1974-75 and the other for 1974-75 to 1977-78 on the principal officer
of the appellant-Company to show cause as to why action should not be
taken against the appellant for non-compliance with Section 194C(l). The
. appellant filed a Writ Petition before the High Court of Patna :seeking. the
quashing of the notices but the same was dismissed.

H In appeal to this Court it was contended on behalf of the appellant
538
ASSOCIATED CEMENT CO. v. C.l.T. 539
>
that (1) the 'work' for the carrying or which the sum is required to be A
credited to the account of or paid to a Contractor under Section 194C(l)
of the Act is only a 'works contract' and hence deduction under that
sub-section could arise only to the extent where the sum credited to the
account of or paid to a Contractor for executing such 'works contract' is
~ comprised of the element of income of the Contractor; (2) that the words
'on Income comprised therein', appearing immediately aner the words'
B
deduct an amount equal to two per cent of such sum as income-tax in the
concluding part of the sub-section must be taken to mean the percentage
amount deductible on the income received by the Contractor under the
contract and not on the sum credited to the account of or paid to the
Contractor. c
---.,_ Dismissing the appeal, this Court,

Ht:LD: 1. There is nothing in sub-section (1) of Section 194C to show
that the contract to carry out a work or the contract to supply labour to
carry out a work should be confined to 'work.Ciii contract'. There is no reason D
to curtail ur to cut down the meaning of 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. 'Work' envisaged in the sub-section, therefore
has. a wide import and covers 'any work' which one or the other of the
y organisations specified in the sub-section can get carried out through a E
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, wo.uld have fallen outside the 'work', but
for its specific inclusion in the sub-section. [544 8-EI

Brij Bhushan Lal Parduman Kumar etc. v. C.l. T., Haryana, Himacha/ F
~· Pradesll and New De/h~ [1979) 2 S.C.R. 16, distinguished.

2. The words in the sub-section 'on income comprised therein' ap·
pearing immediately after the words 'deduct an amount equal to two per
cent of such sum as income tax' from their purport, cannot be understood
as the percentage amount deductible from the income of the Contractor G
'<( out of the sum credited to bis account or paid to him in pursuance of the
contract. Moreover, the concluding part of the sub-section requiring
deduction of an amount equal to two per cent of such sum as income-tax,
by use of the words 'on income comprised therein' makes it_ obvious that
the amount tqual to two per cent of the sum required to be deducted is a H
540 SUPREME COURT REPORTS (1993) 2S.C.R.
).._-
A deduction at source. Hence on the express language employed in the
sub·section, it is impossible to hold that the amount of two per cent
required to be deducted by the payer out of the sum credited to the account
of or paid to the Contractor has to be confined to his income component
out of that sum. [545 D-G]

B 2.1. There is also nothing in the Ian~ of the sub-section which
permits exclusion or an amount paid on behalf of the organisation to the
Contractor according to the terms and conditions of the contract in
reimbursement of the amount paid by him fo workers, from the sum
envisaged therein. [545 G-H, S46·A)
c CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2860(NT)
of 1979.

From the Judgment and Order dated 8.3.1979 of the Patna High
Court in Civil Writ Jurisdiction Case No.2909 of 1978. '
D
V.A. Bobde, R.F. Nariman, and Ms. Kamakshi (For Gagrat & Co.)
for the Appellant.

Dr. S. Narayan, P. Parmeswaran and Manoj Prasad for the Respon-
dents.
E
The Judgment of the Court was delivered by

VENKATACHALA, J. The short question which needs our d.ecision
in this appeal by special leave is whether a person who credits to the
account of or pays to a contractor any sum payable by any of the organisa-
F tions specified in section 194C(l) of Income Tax Act, 1961 - 'the Act' for
carrying out any work (including supply of labour for carrying out any
work) in pursuance of a contract between the contractor and the specified
organisation is liable to deduct two per cent of such sum as income tax as
required under that sub-section.
G The facts which have led to the need for our decision on the said
question, are briefly these: The Associated Cement Company Ltd., the
appellant, issued a letter dated 5th November, 1973 to Mr. S.P. Nag,
contractor, Jhinakpani Containing the terms and conditions of a contract ,·
of loading packed cement bags from its Packing Plants Nos.1 & 2 into
H wagons or trucks. Under clause 12 of those terms and conditions, there
}-

ASSOCIATED CEMENT CO. v. C.l.T. [VENKATACHALA, J.] 541
A
was a stipulation that the contractor shall be paid a sum for his work at a A
Oat rate of 41 paise for such tonne of cement handled in Packing Plant
No.l. and 30 paise for each. tonne of cement handled in Packing Plant No.2.
·clause 13 thereo~ which contained a recital that the rate of loading in
clause 12 had been worked out on the basis of daily basic wages of Rs.235
~ paise, DA. of ·Rs. 1.21 paise and H.RA. of Rs.050 paise, per day per
B
worker stipulated a term of reimbumement by the appellant-to the contract
of the difference in DA. over the amount of Rs.1.21 paise and annual
\
., ' increment etc. payable from month to month to every worker by him as
per the Second Wage Board Recommendation. As the contractor carried
out his work according to the terms and conditions in the contract during
the years 1973-74 and 1974-75, the appeUant made payments of the sums c
payable to him under clause 12 of the contract and the sums reimbursable
to him under clause 13 thereof. But the deductions made under section
194C(l} of the Act by the appeUant out of the sums paid or reimbursed to
the contractor feU short of the deductions required to be made thereunder.
As the appellant took the stand that it was not liable to deduct any amount
D
under section 194{1}, out of the sums paid on its behalf to the contractor
as per clauses 12 & 13 of the contract, the Income Tax Officer, Jamshed-
pur, served on the principal officer of the appellant a notice dated 30th
March, 1978 to show cause as to why action should not be taken against
the appellant under sections 276B{l}, 281 and 221 of the Act in respect of
y assessment years 1973-74 and 1974-75 for short deductions out of the sums E
paid to contractor without observing the requirement of section 194C(l}
of the Act. Another notice dated 8th May, 1978 .relating to the assessment
years 1974-75 to 1977-78 of a similar nature, was also served on the
principal officer of the appellant. The appellant, although impugned both
the said notices in a Writ Petition filed under Articles 226 and 227 of the
F
Constitution before the High Court of Judicature at Patna, that Writ
- '1'._
Petition was dismissed by the High Court by its order dated 8th March,
1979. The appellant has, therefore, filed this appeal by special leave before
this Court seeking the quashing of the notices which it' had unsuccessfully
impugned before the High Court, in its Writ Petition.
G
It was argued by Mr. VA. Bobde, the learned senior counsel appear-
ing for the appellant, thai the amount deductible under section 194C(l}
out of the sums credited to the account of or paid to a contractor would
arise only when such sums are paid, on account of a contractor executing
a works contract, that is, a contract which produces a tangible property. H
542 SUPREME COURT REPORTS [1993] 2 S.C.R.

A According to him, the 'work' for the the carrying of which the sum is
required to be credited to the account of or paid to a contractor under
section 194C(l) of the Act is only a 'works contract' and hence deduction
under that sub-section could arise only to the extent where the sum
credited to the account of or paid to a contractor for executing such 'works
contract' is comprised of the element of income (profit) of the contractor,
B as held by this Court in Brij Bhushan Lal Parduman Kumar etc. v. Com-
missioner of Income Tax, Haryana, Himachal Pradesh and New .Delhi-Ill,
[1979] 2SCR16 and not otherwise. It was also'his argument that the words
in the sub-section 'on income comprised therein', appearing immediately
after the words 'deduct an amount equal to two per cent of such sum as
C income-tax' found in the concluding part of that sub-section, must be taken
to mean the percentage amount deductible on the income received by the
contractor umter the contract and not on the sum credited to the account
of or paid to the contractor in pursuance of the contract. These arguments -~
were, however, strongly refuted by Dr. S. Narayan, the learned counsel for
D the Revenue. It is how, the question mentioned at the outset needs our
decision.

Section 194C{l) of the Income Tax Act on the proper construction
of which the decision on the aforesaid question should necessarily rest,
runs thus:
E
'194C(l}. Any person responsible for paying any sum to y
any resident (hereafter in this section referred to as the
contractor) for carrying out any work (including supply of
fabour for carrying out any work) in pursuance of a
contract between the contractor and -
F
(a) the Central Government or any State Government; or

(b) any local authority; or

(c) any corporation established by or under a Central,
G State or Provincial Act; or

(d) any company; or

(e) any co-operative society; or

H (f) any authority, constituted in India by or under any law,
ASSOCIATED CEMENT CO. v. C.l.T. [VENKATACHALA, J.] 543

engaged either for the purpose of dealing with and A
satisfying the need for housing accommodation or for
the purpose of planning, development or improvement.
of cities, towns and villages, or for both; or

(g) any society registered under the Societies Registration
Act, 1860 (21 of 1860) or under any law corresponding B
to that Act in force in any part of India; or

(h) any trust; or

(i) any University established or incorporated by or under
a Central, State or Provincial Act and an institution
c
declared to be a University under section 3 of the
University Grants Commission Act, 1956 (3 of 19~),

shall, at the time of credit of such sum to the account of
the contractor or at the time of payment thereof in cash D
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-taJ< on income comprised
therein."

y No ambiguity is found in the language employed in the sub-section. What E
is contained in •.he sub-section, as appears from its plain reading and.
analysis, admit of the following formulations:

(1) A contract maybe entered into between the contractor
and any of the organisations specified in the sub-section.
F
(2) Contract in Formulation - 1 could not only .be for
carrying out any work but elso for supply of labour for
carrying out any work.

(3) Any person responsible for paying any sum to a G
contractor in pursuance of the contract in Formulations 1
and 2, could credit that sum to his account or make its
payment to him in any other manner.

(4) But, when the person referred to in Formulation-3
either credits the sum referred to therein to the account H
544 SUPREME COURT REPORTS [1993) 2 S.C.R.

A of or pays it to the contractor, he shall deduct out of that
sum an amount equal to two per cent as income-tax on
income comprised therein.

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 .~·
B 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 worl\;,should be confined to 'works contract' as was argued
C on behalf of the appellant. We see no reason to curtail or to cut down the
meaning of plain words used in the Section. "Any work' means any work
and n'lt a 'wcirks-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 legislature
D that the 'work' in sub-section is not intended to be confined to or restricted
to 'works contract'. 'Work' envisaged in the sub-section, therefore, has wide
import and covers 'any work' which one or the other of the organisations
specified in thr. sub-seciion 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
E work which, would have fallen outside the 'work', but for its specific y
inclusion in the sub-section.

In Brij Bhushan (supra) this Court was concerned with the question
whether the cost of materials supplied by the Government for being used
F in execution of works is liable to be taken into consideration while estimat-
ing the income or profits of a contractor. That question was answered by
this Court, thus:

"It is true that ordinarily when a works contract is put
through or completed by a contrar· r the income or
G profits derived by the contractor from such coniract is
determined on the value of the contract as a whole and
cannot be determined by considering several items that go
to form such value of the contract but in our view where
certain stores/material is supplied at fixed rates by the
H Department to the Contractor solely for being used or
ASSOCIATED CEMENT CO. v. C.l.T. [VENKATACHALA, J.] 545
J,.,
fJXed or incorporated in the works undertaken on terms A
and conditions mentioned above, the real total value of
the entire contract would be the value minus the cost of
such stores/material so supplied Therefore, since no ele-
ment of profit was involved in the turnover represented
by the cost of stores/material supplied by the M.E.S. to
the assessee firms, the income or profits derived by the
B
assessee firms from such contracts will have to be deter-
mined on the basis of the value of ihe contracts repre-
sented by the cash payments received by the assessee firms
from the M.E.S. Department exclusive to the cost of the
material/stores received for being used, fJXed or incor- c
porated in the works undertaken by them."
>...
(

The above decision cannot be of any help to the appellant for it does
not lay down that the percentage amount deductible under section 194C(l)
should be out of the income of the contractor from the sum or sums D
credited to the account of or paid to him. The words in the sub-section 'on
income comprised therein' appearing immediately after the words 'deduct
an amount equal to two per cent of such sum as income-tax' from their
purport, cannot be understood as the percentage amount deductible from
. the income of the contractor out of the sum credited to his account or paid
y to him in pursuance of the contract. Moreove~, the concluding part of the E
sub-section requiring deduction of an amount equal to two per cent of such
sum as income-tax, by use of the words 'on income comprised therein'
makes it obvious that the amount equal to two per cent of the sum required
to be deducted is a deduction at source. Indeed, it is neither possible nor
permissible to the payer to determine what part of the amount paid by him F
to the contractor constitutes the income of the latter. It is not also possible
to think that the Parliamer · could have intended to cast such impossible
burden upon the payer nor could· it be attributed with the intention of
enacting such an impractical and unworkable provision. Hence, on the
express language employed in the sub-section, it is impossible to hold that
the amount of two per cent required to be deducted by the payer out of ·G
the sum credited to the account of or paid to the contractor has to be
confined to his income component, out of that sum. There is also nothing
in the language of the sub-section which permits exclusion of an amount
paid on behalf of the organisation to the contractor according to clause 13
of the terms and conditions of the contract in reimbursement of the amount H
546 SUPREME COURT REPORTS (1993) 2 S.C.R.

A paid by him to workers, from the sum envisaged therein, as was suggested
on behalf of the appellant.

For the foregoing reasons, our decision on the question under con-
sideration, is held in the affirmative and in favour of the Revenue.

B In the result, this appeaJ fails and is dismissed directing the appellant
to pay the costs of the respondent - the Revenue in this appeal. Advocate's
fee is fixeci at Rs3,000.

T.N.A. Appeal dismissed.