Income Tax Reference No. 183 of 1999 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH --- Income-tax Reference No. 183 of 1999 Date of decision: 23.11.2010 Commissioner of Income-Tax, Chandigarh ...Petitioner Versus The Chief Electoral Officer, Haryana Chandigarh ..Respondent --- CORAM: HON'BLE MR.JUSTICE ADARSH KUMAR GOEL HON'BLE MR.JUSTICE AJAY KUMAR MITTAL ---- Present: Mr. Yogesh Putney, Senior Standing Counsel for the petitioner. Mr. Pankaj Jain, Advocate for the respondent. **** AJAY KUMAR MITTAL, J. This order shall dispose of Income Tax Reference Nos. 183 and 184 of 1999 as common question of law is involved therein. However, the facts are being extracted from ITR No.183 of 1999. Income Tax Reference No. 183 of 1999 2 At the instance of the Revenue, the Income-tax Appellate Tribunal Chandigarh Bench, Chandigarh (in short “the Tribunal”), vide order dated 15.12.1998 passed in RA Nos. 85 and 86/Chandi/98 in Income Tax Appeal Nos. 1015 and 1016/Chandi/97, relating to the assessment years 1994-95 and 1995-96, has referred the following question for the opinion of this Court: “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the transaction of preparing I-cards according to specifications laid down by the assessee is covered by the provisions of para 7(vi)(b) of CBDT circular no. 681 dated 8.3.94 and therefore did not fall within the purview of Section 194C of the I.T. Act?” The facts leading to the filing of the present reference are that the respondent-assessee made some payments to the Haryana State Electrical Development Corporation Limited (HARTRON) for preparation and supply of laminated photo identity cards. The assessee did not deduct tax at source on the said payments. The assessing officer issued show cause notice asking the assessee to explain the reasons for not doing so. The plea raised by the assessee in response to the show cause notice was that no ‘tax deduction at source’ (TDS) was made as the supply order was to be considered as supply of goods and not as a contract payment, and as such the same did not fall within the purview of Section 194C of the Act, in view of the CDBT circular No. 681 dated 8.3.94, para 7 (vi- b). After considering the reply furnished by the assessee, the Income Tax Reference No. 183 of 1999 3 Assessing Officer held that the provisions of Section 194-C of the Act were applicable and the respondent-assessee was assessee in default and liable to pay tax under Section 201 of the Act. The assessing officer also held the assessee to be liable to pay simple interest at the rate of 15% per annum, under Section 201(1A) of the Act. For the financial year 1994-95, the assessing officer computed tax at Rs. 20,13,810/- and interest at Rs. 6,60,390/- and for the financial year 1995-96, the tax computed was Rs. 78,070/- and interest at Rs. 16,510/-. Aggrieved by the order of the assessing officer, the assessee went up in appeal before the Commissioner of Income Tax (Appeals), [hereinafter referred to as “CIT(A)”]. The CIT(A), after considering the submissions made on behalf of both the sides came to the conclusion that the assessee was not entitled to the benefit of the aforesaid circular dated 8.3.1994 because this circular was held to be illegal and accordingly struck down by the Bombay High Court in the case of Advertising Agency Association of India v. CBDT (1994) 210 ITR 152 and also by Delhi High Court and Madras High Court, and, therefore, the assessee was rightly held liable to pay tax and interest for non-compliance of the provisions of Section 194C of the Act. Aggrieved by the order of the CIT(A), the assessee preferred further appeal before the Tribunal. The Tribunal allowed the appeal of the assessee. We have heard learned counsel for the parties and perused the record. Income Tax Reference No. 183 of 1999 4 The Tribunal while allowing the appeal of the assessee noticed as under: “We may have to agree with the contention of ld. D.R. that the work of preparation and supply of I-cards by HARTON is covered within the meaning of section 194C, as the case of preparation and supply of I-cards is a consolidated case of expenses on labour and raw material which has gone into production of I-cards required to be supplied by HARTON to the assessee. However, at the same time the contents of para 7(vi)(b) and (c) of circular No.681 which are still valid and binding on the departmental authorities cannot be ignored. It is clearly mentioned in sub-clause (b) of clause (vi) of para 7 that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Govt. or any other specified person and the property in such article or thing passes to the Govt. or such person only after such article or thing is delivered, the contract will be a contract for sale and outside the purview of section 194C of the Act. We feel that the transaction of preparing I-cards according to the specifications laid down by the assessee can also be said to fall within para 7(vi) of the said circular, issued by CBDT. It is also observed that the assessee had submitted before CIT(A) (pages 66-70 of the paper book) that its case squarely falls within the said Income Tax Reference No. 183 of 1999 5 paragraph (vi)(b) and it accordingly did not deduct tax at source. The said pleas of the assessee also find mention in order of CIT(A). Thus, in such a situation, we feel that where two interpretations are possible, such interpretation which favours the assessee has to be adopted having regard to the decision of the apex Court in the case of Vegetable Products Ltd. (1973) 88 I.T.R. 192. Further, the assessee acted bona fide in this case on the basis of the said belief and did not deduct tax at source. It is also observed that the tax due on payments in question in both the assessment years has been paid by the contract and, therefore, we feel that the alternative submission of the assesee that the object of provisions of section 194C read with section 191 has been met, has to be accepted. Ultimately, no loss of revenue has been caused to the Department as the tax due has been paid by one of the parties. We may also mention that the work of preparation of I-cards was a stupendous work and undertaken for the first time by various Govt. agencies on the basis of directions issued by the CEC and the Govt. agencies were obviously not very clear about their liability to deduct tax at source. On the facts and circumstances of the case, we, therefore, feel that the default, if any, is only of technical nature and that the assessee acted in bona fide belief and considering overall circumstances of the case we feel that no interest is chargeable u/s 201(A) in this case. While holding so, we have taken into Income Tax Reference No. 183 of 1999 6 account the submissions made by Ld. D.R. that this decision of ours should not be taken as laying a general principle/proposition which may set in a chain reaction in similar cases enabling the assessee not to deduct tax at source u/s 194C. We may make it clear that our decision rests on the peculiar facts of the case wherein two Govt. Departments are involved and that the same has been taken in the context of particular transactions and should not be taken as a precedent laying down a general proposition that such items of work are treated as sale of goods. Accordingly, order of CIT(A) is set aside in relation to both the assessment years under consideration.” The Tribunal held that the assessee had acted bona fide in not deducting the tax at source. It was further observed by the Tribunal that tax due for payment in question for both the assessment years had already been paid by the contractor and, therefore, alternative argument of the assessee that recourse to provisions of Section 194-C read with Section 191 of the Act was not justified as there is no loss of revenue to the Department had weight. Still further the default, if any, was only of a technical nature and in the peculiar facts of the case, wherein the two Departments of the Government were involved, the action against the assessee was not required. We are in agreement with the observations recorded by the Tribunal and dispose of the question referred, accordingly. Income Tax Reference No. 183 of 1999 7 (Ajay Kumar Mittal) Judge November 23, 2010 (Adarsh Kumar Goel) *rkmalik* Judge