Holding

Section 194C, before the insertion of Explanation III, does not apply to transport contracts and the CBDT circular extending its scope to such contracts is quashed.

Summary

Birla Cement Works, a cement manufacturer, paid transport operators for carriage of its goods without deducting tax at source under Section 194C of the Income Tax Act, 1961. The Central Board of Direct Taxes (CBDT) issued a circular on 8 March 1994 extending the applicability of Section 194C to all contracts, including transport contracts, overturning earlier circulars that excluded such contracts. The High Court upheld the circular, holding that "carrying out any work" includes the transport of goods and that Explanation III to Section 194C was merely clarificatory. On appeal, the Supreme Court examined whether the pre‑1995 version of Section 194C covered transport contracts and whether Explanation III was retrospective. The Court found that, prior to the insertion of Explanation III (effective 1 July 1995), Section 194C did not apply to transport contracts and that the circular was therefore ultra vires. Consequently, the circular was quashed to the extent it related to transport contracts and the appeal was allowed.

Issues considered

Whether the expression "carrying out any work" in Section 194C includes contracts for the carriage of goods.
Whether Explanation III inserted by the Finance Act, 1995 is merely clarificatory or makes Section 194C applicable to transport contracts retrospectively.
Whether the CBDT circular dated 8 March 1994, extending Section 194C to transport contracts, is valid for the period before 1 July 1995.

Legislation cited

Income Tax Act, 1961s. 194C

Subjects

Income TaxTDSSection 194CTransport contractsStatutory interpretationCircularExplanation IIITax deduction at source

Judgment

A MIS. BIRLA CEMENT WORKS
v.
THE CENTRAL BOARD OF DIRECT TAXES AND ORS.

FEBRUARY 28, 2001

B [SP. BHARUCHA, N. SANTOSHHEGDE, YK. SABHARWAL, JJ.]

Income Tax Act, 1961--Section 194C.

Interpretation of Statute-Taxing Statute-Tivo interpretations reason-
ably possible-Amendment making Section applicable to transpot1 contracts-
c Previous circulars excluding transport contracts f1vm scope ofSPction-Circu-
lar including transpo11 contracts in scope of section for period just before
a1nendment-Circularchallenged-Held, inte1pretationfavouring assPssee and
acted upon and accepted by Revenue for long period should not be disturbed
except.for compelling reasons-No compelling reasons for holding that amend-
D ment is clarificato1y or retrospective in operation-Section before amendment
not G:PPlicable to transport contacts-Held, circular to the extent it relates to
~ranspo1t contracts quashed.

Wonls & Phrases-'Work' and 'carrying out any work'-Meaning of

E Appellant-Assessee manufactures cement which is transported
through transport operators/companies. Appellant did not deduct tax at
source from payments made by it to such transporters for the period from
1.4.1994 to 30.6.1995 and therefore, respondent initiated penalty proceed-
ings against appellant in accordance with circular dated 8.3.1994 which
p prescribes fresh guidelines regarding applicability of Section 194C of the
Income tax Act, 1961 to all types of contracts for carrying out any work
including transport contracts .

. Appellant filed \Hit petition challenging legality and validity of cir-
cular dated 8.3.1994 on the ground that Section 194C was not applicable to
G payments made to transport operators/companies as transportation of
goods is not covered by words "any work" used in the Section; that by
impugned circular CBDT has illegally withdrawn earlier circulars stating
that Section 194C is not applicable to such transactions; and that Explana-
tion III making Section 194C applicable to transport contracts from 1st
H July, 1995 was only prospective and does not cover disputed period. High
198
BIRLA CEMENT WORKS v. CENTRAL BOARD OF DIRECT TAXES 199
Court dismissed writ petition holding that expression "carrying out any A
work" would include carrying goods; and that Explanation III was merely
clarificatory. Aggrieved by the judgment of High Court, assessee has filed
the present appeal.

Appellant contended that expression "carrying out any work" in
Section 194C indicates doing something to conduct the work to completion B
or something which produces such result and by carrying goods, no work
to goods is undertaken and does not affect goods carried thereby.

Allowing the appeal, the Court

HELD : 1. There is no controversy that according to the understand- c
ing of Revenue of Section 194C of the Income-tax Act from the beginning
till issue of the impugned circular, the provision was not applicable to the
payments made in respect of transport contracts. It is not disputed that
prior to issue of the impugned circular, various circulars and clarifications
were issued by the CBDT stating that the provisions of Section 194C were D
not applicable to payments made for carriage of goods to the transport
operators. [201-H]

2. The question whether the expression "carrying out any work''
would include therein carrying of the goods or not, was not ir1 issue in
·,.; Associated Cement Co.'s case. [204-D-E] E

Associated Cement Co. Ltd. v. Commissioner of ln~ome-Ta.x and Anr.,
(1993] 201 ITR 435, explained and distinguished.

Bombay Goods Transport Association and Anr. v. Central Board of
Direct Taxes, (1994) 210 ITR 136; Calcutta Goods Tiansport Association v. F
Union of India, (1996) 219 ITR 486; VM. Salgaocar and Bros. Ltd. and Ors.
v. Income Tax Officer and Ors., (1999) 237 ITR 630, approved.

Centml Board of Direct Taxes v. Cochin Goods Transpo11 A.ssociation,
(1999) 236 ITR 993 and Ekonkar Dashmesh Transport Co. and Ors. v.,
Central Board of Direct Taxes and Anr., (1996) 219 ITR 511 overruled. G

3. Two interpretations are reasonably possible on the question whether
the contract for carrying of goods would come or not within the ambit of
the expression "carrying out any work''. One of the two possible interpre-
tations of a taxing statute, which favours the assessee and which has been H
200 SUPREME COURT REPORTS [2001] 2 S.C.R.
A acted upon and accepted hy the Revenue for a long period should not be
disturbed except for compelling reasons. There can he no doubt that if' the
only view of Section 194C had been the one retlected in the impugned
circular, then the issue of earlier circulars and acceptance and acting
thereupon by the Revenue reflecting the contrary view would _have been of
no consequence. That, however, is not the position. Further, there are no
B
compelling reasons to h'old that Explanation III inserted in Section 194C
with ·effect from Ist .July, 1995 making Section 194C applicable to trans-
port contract' also is clarificatory or retrospective in operation. [206-C-D]

Thus Section 194C before insertion of Explanation ID is not applica-
C hie to transport contracts, i.e., contracts for carriage of goods. Hence
the impugned circular to the extent it relates to transport contract' is
quashed.[206-D-EJ

CIVIL APPELLATE JURISDICTION: Civil Appeal NO. 5004 of 1997.

D From the Judgment an<l Order dated 9.4.97 of tl1e Rajasthan High Court
in D.B.C.W.P. No. 1667 of 1995.

S. Ganesh, M.L. Patodi, Praveen Kwnar for the Appellant.

E T.L.V. Iyer, Ashok K. Srivastava, S.K. Dwivedi and Ms. Sushma Suri for
the Respondents.

The Judgment of the Court was delivered by

Y.K. SABHARWAL, J. TI1e legality of circular dated 8tl1 March, 1994
F (hereinafter referred to as the ·impugned circular') issue<l by the Central
Board of Direct Taxes (CBDT) prescribing fresh guidelines regarding
the applicability of Section 194C of the Income Tax Act, 1961 (for short, 'the
Act') to the extent it relates to transport contracts, i.e., contracts for carriage
of goods, is in issue in this appeal. 'Ibe said circular, inter alia, states that
the provisions of Section 194C shall apply to all types of contracts for carrying
G out any work including transport contracts. Section 194C provides for
deduction of tax at source from payments to contractors and sub-contractors.
Section !94C was brought into existence by the Finance Act, 1972 with
effect from April I, 1972. Various amendments have been made in that
section since then but material part relevant for the present purposes reads as
H under:
BIRLA CEMENT\VORKS v. CENfRALBOARD OF DIRECT TAXES [Y.K. SABHAR\VAL, J.] 201
"Payments to contractors and sub-contractors. A

194C. (I) Any person responsible for paying any sum to any resident
(hereinafter in this section refened to as the contractor) for canying
out any work (including supply of labour for carrying out any work)
in pursuance of a contract between the contractor and_
B
(a) to (c) ...

(d) any company; or

(e)toG) ...

shall at the time of credit of such sum to the account of the contractor c
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 t\VO per cent of such sum as income-tax on income comprised
therein.''
D
Soon after inse1tion of Section 194C, a circular dated 29tl1 May, 1972
was issued, inter alia, stating that tl1e provisions of Section I 94C would apply
only in relation to "work contracts" and "labour contracts" and will not cover
contract for sale of goods. Another circular No.93 dated 26th September, 1972
was issued clarifying that the provisions of Section l 94C will not be applicable
to transport contracts. 1'his circular, inter alia, states that a transport contract E
cannot ordinarily be regarded as a "contract for canying out any work" and,
as such, no deduction in respect of income tax is required to be made fron1
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 a "works contract" and income tax will have to be deducted F
from payments made thereunder. Where, however, the element of labour pro-
vided for loading and unloading is negligible, no income tax will be deductible.
By letter dated 3rd February, 1982, in reply to a query from a transp011er,
Government of India stated that if the contracts are purely transport contracts
involving only transportation of goods entrusted for carriage to the transport
operators, provisions of Section 194C would not be applicable to such pay-
G
ments. There is no controversy that according to the understanding of Revenue
of Section 194C, right from !st April, 1972 till issue of the impugned circular,
this provision was not applicable to the payments made in respect of transport
contracts. It is not disputed that prior to issue of the impugned circular, various
circulars and clarifications were issued by the CBDT staling that the provisions H
202 SUPREME COURT REPORTS (2001] 2 S.C.R.
A of Section I 94C were not applicable to payments made for carriage of goods
to the transport operators.

TI1e appellant manufactures cement. The cement manufactnred by the
appellant is transported to different destinations through transport operators/
companies. Since the appellant did not deduct the tax at source from the
B payments made by it to the transporters under Section 194C of the Income Tax
Act, by letter dated 18th March, 1995 the Income Tax Officer required the
appellant to deduct the tax at source from such payments in accordance with
the impugned circular. According to the appellan~ no deduction of tax at source
was made from payment made to the transport operators/companies as Section
c 194C was not applicable to such transactions. It is, however, not in dispute that
the appellant has paid the income tax. TI1e question has cropped up in view of
the penalty proceedings initiated by the department against the appellant which
led to the filing of tl1e writ petition by the appellant challenging the legality
and validity of the impugned circular. The pe1iod in question is from !st April,
1994 to 30th Juue, 1995.
D
The contention urged before tl1e High Court was that Section 194C does
not apply to payments made for transport charges for carrying of goods as
transportation of goods is not covered by the words "any work" used in the
section and by the impugned circular tl1e CBDT has illegally withdrawn earlier
circulars stating tl1at Section l 94C is not applicable to such transactions. It was
E
also contended tliat Explanation III was only prospective and does not cover
the pe1iod in question, i.e., 1.4.1994 to 30.6.1996. Rejecting these contentions,
the High Court by the impugned judgment has held tliat tl1e payment to the
transporters for caniage of goods to different destinations is a payment for
work which. comes witl1in the expression "carrying out any work" and is
F covered by Section 194C and, therefore, on such transactions, tax was deduct-
ible at source. It was held that the expression "carrying out any work" would
include carrying the goods. Explanation III was held to be merely clarificato1y
and inserted in order to remove the doubts and clarify that Section 194C is
applicable to such transactions also.
G The impugned circular ca1ne to be issued because of tl1e observations
made by this Court in Associated Cement Co. lJd. v. Commissioner of Income-
Tax & Anr., (1993) 201 !TR 435. The circular states that some of the issues
raised in circular No.86 dated 29th May, 1972 and circular No.93 dated 26th
. September, 1972 need to be reviewed in the light of the judgment of this Court
H in .4.CC's case. The conclusion drawn by CBDT from this decision, as stated
BIRLA CEMENT \YORKS v. CENTRAL BOARD OF DIRECT TAXES (Y.K. SABHARWAL, J.) 203
in the impugned circular, is that this Court has held that the provisions of A
Section 194C would apply to all types of contract including transport contracts,
labour contracts, service contracts etc. In the light of this judgment, the CBDT
I decided to withdraw earlier circulars and issued fresh guidelines directing that
Section 194C shall apply to all types of contracts for canying out any work
including transport contracts. The impugned circular was made applicable with
B
effect from !st April, 1994.

lnACC's case (supra) the facts were that under the terms and conditions
of an agreement between the Associated Cement Co. Ltd. and a contractor,
the contractor was to be paid at a flat rate for loading packed cement bags
into wagons and trucks. This rate was fixed on the basis of daily basic wages,
dearness allowance etc. and clause 13 of the agreement stipulated reimburse-
c
ment by the Associated Cement Co. Ltd. to the contractor in case of certain
increase in the dearness allowance payable by the contractor to the workmen
employed by him. The company paid die contractor the amount stipulated at
a flat rate as well as amounts by way of reimbursement under clause 13. But
.... the deduction of tax at Sotll'ce made by the company under Section 194C(l) D
fell short of the deductions required to be made !hereunder. The claim of the
company was that it was not liable to deduct any amount under tht: Section.
The notices issued to the company to show cause why action should not be
taken under Sections 276B(l), 201 and 221 for short ·deduction were chal-
lenged in the writ petition filed by the company in the High Com1. TI1e writ E
petition was dismissed by the High Court. On appeal, this Court held that
Section 194C(l) had a wide impo11 and covered "any work" which could be
got ca1rie<l out through a contractor under a contract including the obtaining
of supply of labour under a contract with a contractor for carrying out any
work. The section was not confined or restricted in its application to "work
contracts". There was nothing in the language of the section which permitted F
exclusion of the amount reimbursed by the company to the contractor under
clause 13 from the sum envisaged therein. The facls of the case and obser-
vations made in ACC's case make it clear that in the said decision, this Court
was concerned with a work cruTied through a contractor under a contract
which further included obtaining supply of labour under a contract with a G
contractor for carrying out its work which would have fallen outside the
"work" bnt for its specific inclusion in the sub-section. Under these circum-
stances, it was said :

" ... 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 H
.
204 SUPREME COURT REPORTS [2001] 2 S.C.R.
A carry out a work should be confined to "works contract" as was argued
on behalf of tbe appellant. We see no reason to curtail or to cut down
tbe meaning of tbe plain words used in tbe section. "Any work" means
any work and not a "works contract", which has a special connotation
in tbe tax law. Indeed, in tbe sub-section, tbe "work" refened to therein
expressly includes supply of labom to cany out a work. It is a clear
B
indication of tbe Legislatme tbat tbe "work" in the sub-section is not
intended to be confined to or restricted to "works contract". "Work"
envisaged in the sub-section, therefore, has a wide import and covers
"auy work" which one or the other of tbe organisations specified iu tbe
sub-section can get carried out through a contractor under a contract
c and fmtber it includes obtaining by any of such organisations supply
of; labour unde~ a contract \vi th a contractor for carrying out its work
which would have fallen outside tbe "work", hut for its specific
inclusion in the sub-section."

It is evident tliat ACC's case (supra) was not in respect of transport
D contracts. The controversy therein was deduction of tax at source from pay-
ments made for loading and unloading of goods. The question whether tbe
expression "carrying o~t any work" would include therein carrying of tl1e
goods or not, was not in issue in ACC's case. 'fhat is precisely the question
in the present case. The decision in ACC's case has not been con·ectly
E understood by the CBDT. It would not be conect to come to the conclusion, x
as CBDT did, that question involved is covered by the decision in the case
of ACC.

Section l 94C was amended by tbe Finance Act, 1995 with ellcct from
!st July, 1995. Explanation III was inserted. So for relevant for present
F pmpose, the said explanation reads as under:

"Explanation lll.- For tl1e purposes of tl1is section, the expression
"work shall also include :
1
'

(a) ...
G
(b) ...

(c) caniagc of goods and passengers by any mode of transport other
than by railways;

H (d) ... "
B!RLA CEMENT WORKS''· CENTRAL BOARD OF DIRECT TAXES [Y.K. SABHARWAL, !.] 205
In view of above, ii is not in dispute that from !st July, 1995 Section A
J94C is applicable to transport contracts as well. The question, h0wever, is
+
( whether the aforesaid explanation is only clarificatory or it makes applicable
the provisions of Section I 94C to the types of contracts in ql'estion for
the first time from the date of insertion of the explanation, i.e., !st July,
1995.
B
The Rajasthan High Court in the judgment under challenge has fol-
lowed the interpretation placed on Section I 94C by Kerala High Court in
Cmtral Boaid of Di1~ct Taxes v. Cochin Goods Transpo11 Association, (1999)
236 !TR 993 and the Punjab & flaryana High Court in Ekonkar Dashmesh
Transpo1t Co. & Ors. v. Central Boa1d of Direct Taxes & Am:, (1996) 219 c
!TR 511. TI1e contrary views expressed by the High Courts of Bombay,
Calcutta, Karnataka, Gujarat, Madras, Orissa and Delhi quashing the im-
pugned circular has been dissented in the .Judgment under challenge .

...,. The key words in Section 194C are "canying out any work". Learned
counsel for the appellant conlended tliat a word or collection of words should D
fit into the structure of the sentence in which the word is used or t:ollection
of words formed. The contention is that in the context of Section 194C,
carrying out any work indicates doing something to conduct the work to
completion or something which produces such result The mere transportation
of goods by a carrier does not affect the goods carried thereby. The submission
is that by canying the goods, no \Vork to the goods is undertaken and the E
context in \:Vhich the expression "t:a1Tying out any v.-·ork" has been used, makes
il evident that it does not include in it the transportation of goods by a ca1Tier.
In Bombay Goods Transpo11 Association & Am: v. Central Boan! of Diffcl
Taxes, (1994) 210 !TR 136, the Bombay High Comt quashing the impugned
circular has held that the expression "cai1ying out any work" would not F
include can·ying of goods. In Calcutta Goods Transport Association v. Union
of India, (1996) 219 ITR 486, similar view has been expressed by the Calcutta
High Court. It has also been pointed out in this decision that the Parliamenl
had sought to bring professional services and other works within the net of
tax deduction at source. If such '\vorks" were already covered by Section
G
194C, it \vas \\'holly unnecessary for the parliament to introduce separate
statnt01y provisions in this regard and, thus, it follows that the word "work"
is to be understood in the limited sense as product or result. 'The carTying out
.....#-- of work indicates doing soinething to conduct the work to completion or an
operation which produces such result. In VM. Salgaocar & Bros. Ltd. & Or.,.
v. Income Tax Officer & Ors., (1999) 237 !TR 630, the Karnataka High Court H
206 SUPREME COURT REPORTS [2001] 2 S.C.R.
A has concurred with tl1e views expressed by the Bombay and Calcutta High
Courts. The High Courts of Gujarat, Madras, Orissa and Delhi have also
expressed similar views. On the otl1er hand, as already noticed, R~jasthan
High Court in the judgment under appeal h~s expressed the contrary view
relying upon the decision in ACC's case (supra).

B Two inteipretations are reasonably possible on the question whether the
contract for carrying of goods would come or not within the ambit of the
expression "canying out any work". One of the two possible inteipretations
of a taxing statute, which favours the assessee and which has been acted upon
and accepted by the Revenue for a long period should not be disturbed except
C for compelJing reasons. There can be no doubt that if the only view of Section
194C had been the one retlected in the impugned circular, then the issue of
earlier circulars and acceptance and acting thereupon by the Revenue reflect~
ing the contrary vie\11 would have been of no consequence. That, however,
is not the position. Further, there are uo compelling reasons to hold that
Explanation III inserted in Section 194C with effect from Isl July, 1995 is
D clarificatory or retrospective in operation. We hold Section l 94C before
insertion of Explanation lII is not applicable to transpmt contracts, i.e.,
contracts for caniage of goods.

For the afores~id reasons the appeal is allowed, the impugned circular
to the extent it relates 10 transport contraqs is quashed. The parties are left
E
to hear their own costs.

A.K.T. Appeal allowed.