CIVIL WRIT JURISDICTION CASE No.4112 OF 1997 -------- In the matter of an application under Article 226 of the Constitution of India. --------- 1. Advocates’ Association, Patna High Court,Patna through its President Sri Shyama Prasad Mukherjee son of late Ashutosh Mukherjee, resident of Nageshwar Colony, BoaringRoad, Patna. 2. Shri B.P. Verma, son of late J.P. Verma, resident of Shukla Colony, P.O. Hinu, Dist. Ranchi-2 .petitioners. Versus 1. Union of India, through the Secretary,Ministry of Finance Department of Economic Affairs, New Delhi. 2. Central Board of Direct Taxes, Ministry of Finance, Department Of Economic Affairs, New Delhi, though its Director (TPL) …respondents. For The Petitioners : Mr. Kali Das Chatterji, Advocate. Mr.Amlesh Kumar Verma, Advocate Mr. Raj Kishore Prasad Advocate Mr. Tej Bahadur Rai, Advocate For The Respondents :Mr. Harshwardhan Prasad, Sr. Standing Counsel Mr. Archana Sinha, Jr. Standing Counsel. P R E S E N T THE HON'BLE MR. JUSTICE SUDHIR KUMAR KATRIAR THE HON'BLE MR. JUSTICE BIRENDRA PRASAD VERMA S.K. Katriar, J This writ petition has been preferred by an Association of Lawyers as well as a lawyer, with the prayer to quash the offending portion of circular No.715, dated 8.8.1995 (Annexure-1), whereby the person(s) contemplated by section 194-J (a) of the Income Tax 1961 (hereinafter referred to as the Act), are required to deduct tax at source on the gross amount of the bill including reimbursement for actual expenses to a lawyer. The respondents have placed on record their counter affidavit and have opposed the writ petition. 2. We have perused the materials on record and 2 considered of the submissions of the learned counsel for the parties. Section 194-J of the Act obliges any person, not being an individual or Hindu Undivided family making payment for professional services, to a person carrying legal, medical, or architectural consultancy etc.,to deduct at source by way of advance income tax on the entire bill amount , including the amount of actual expenses incurred by the lawyer and reimbursement of which is made by the person making payment to the lawyer. The relevant portions of section 194-J , are reproduced herein below: [Fees for professional or technical services. 194J. (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of – (a) fees for professional services, or (b) fees for technical services [or] (c) Royalty, or (d ) any sum referred to in clause (va) of section 28] shall, at the time of credit of such sum to the account of the payee or at the time of payment therefore in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to [ten] per cent of such sum as income-tax on income comprised therein:” Section 207 is headed “Liability for payment of advance tax”, and Section 208 is headed “Conditions of liability to pay advance tax.” Section 244 of the Act is headed “ Interest on refund where no claim is needed and provides for payment of interest on the amount to be refunded by the Central Government to the assessee on the excess amount of taxes including tax deducted at source paid by him. ” 3. The Board of Direct Taxes noticed that persons 3 making payment of professional fee to lawyers were not deducting taxes at source as per the provisions of section 194-J of the Act, and there was no consistency in the method being adopted by different persons. Some were collecting the T.D.S only on the net income being paid to professionals, and others were collecting T.D.S on the gross value of the bill amount being paid to the professionals including the amount of reimbursement which he ( the professional) had spent by way of actual expenditure, for example, payment of court fee, typing charges, traveling, board and lodge expenses , etc. The Board, therefore, issued Circular No. 715, dated 8.8.1995 (Annexure-1), in an effort to clarify the provision of law for ensuring accurate & uniform compliance of the provisions of the Act. The same gives clarification on various issues relating to tax deducted at source. The portion of the circular relevant in the present context is reproduced herein below: “Question 30: Whether the deduction of tax at source under section 194 C and 194 J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses? Answer: Section 194 C and 194J refer to any sum paid. Obviously reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.” 4. The question for our consideration, therefore, is whether or not the person making the payment to lawyers has to collect the TDS in terms of section 194 J of the Act, on the gross amount of the bill including the amount of reimbursements of actual expenses, or only on the net amount of his professional fee. 4 5. The Act has been enacted by the Parliament in exercise of its legislative power in terms of entry No. 82, of List I of the Union List of the seventh Schedule to the Constitution of India. Entry 82 of the seventh schedule reads as “Taxes on income other than agricultural income”. It is evident that the entry enables the Parliament to tax the citizens and others on the income derived by them. Article 265 of the Constitution reads as follows: “265 Taxes not to be imposed save by authority of law- No tax shall be levied or collected except by authority of law.” 6. Thus it is evident that no Act of the Parliament can authorize imposition of taxes on anything other than income. Obviously, therefore, it cannot include the expenses incurred for an on behalf of the client by way of reimbursement of actual expenses which is surely on the lawyers income. In such a situation, section 194 J of the Act has to be interpreted in the light of the aforesaid legal position. Once it is clear that no tax can be realized on any flow of money other than income, no TDS can also be deducted on any flow of income which is not the lawyer‟s fee for professional service. If we liberally interpret the expression that any person, not being an individual or a Hindu Undivided family, who is responsible for paying to a resident any sum by way of fees for professional services including the amount of reimbursement, as has been canvassed on behalf of the Revenue, it would be plainly hit by the strident provisions of Article 265 of the Constitution. It will cause great injustice to lawyers if TDS is permitted to be deducted on an amount which is not his income, and is really expenditure of the 5 client. No circular of the Board can run counter to the provisions of section 194 J of the Act read in the strident back ground of Article 265 of the Constitution. 7. Learned senior standing counsel has laid considerable emphasis on the provisions of section 244 of the Act, which provides for payment of interest on refund of the excess amount including taxes deducted at source to the assessee in the manner indicated therein. He, therefore, submits that no prejudice will be caused to the lawyer because the refund shall always carry interest. The contention is stated only to be rejected. When the amount of reimbursement over actual expenses incurred by the lawyer on behalf of the client is not income of the lawyer and is not liable to income tax at the hands of the assessee, there is no question of tax deducted at source in respect of this component of the payment received by the lawyer. It is evident from a bare perusal of section 244 of the Act that payment of interest on the amount of refund shall commence within a period of three months after the order of assessment is passed. The assessee shall be deprived of his money to the extent of his TDS on the amount of reimbursement from the date of deduction till the date of conclusion of the period of three months from the date of the order of assessment . There is no provision for payment of interest on excess payment from the date of deduction. The interpretation of section 194 J suggested on behalf of the department will do injustice to the assessee. 8. Learned counsel for the petitioner rightly has relied upon the judgment of the Supreme Court in Nathpa Jhakrijt. 6 Venture v. State of Himachal Pradesh , (2000)118 Sales Tax Cases, page 307, which was a judgment with respect to the TDS under the provisions of Himachal Pradesh General Sales Tax Act, 1968. The Supreme Court has disapproved of such collection of TDS on the amount of which is not liable to tax under the Act. Paragraph no.4 of the judgment is relevant in the present context and is reproduced hereinbelow: “4. A bare perusal of the two provisions will make it clear that in either provision there is an obligation to deduct from transactions relating to works contract on bills or invoices raised by the works contractor an amount not exceeding 4 per cent or 2 per cent, as the case may be. Though the object of the provision is to meet the tax in respect of the transactions on all works contract on the valuable consideration payable for the transfer of property in goods involved in the execution of the works contract, the effect of the provision is that, irrespective of whether the sale are inter-State sales or outside sales or export sales which are outside the purview of the State Act and those transactions in respect of which no tax can be levied even in terms of the enactment itself, such deductions have to be made in the bills or invoices of the contractors. To say that if a person is not liable for payment of tax inasmuch as on completion of the assessment refund can be obtained at a later stage is no solace, as noticed in Bhawani Cotton Mills Ltd. V. State of Punjab [ 1967] 20 STC 290 (SC); [1967] 3 SCR 577. Further, there is no provision for certification of the extent of the deduction that can be made by the authority. Therefore, we must hold that arbitrary and uncanalised powers have been conferred on the concerned person to deduct up to 4 per cent from the sum payable to the works contractor irrespective whether ultimately the transaction is liable for payment to any sales tax at all. In that view of the matter, 7 we have no hesitation in rejecting the contention advanced on behalf of the State.” (Emphasis added) 9. The observations of Supreme Court that refund can be obtained at a later stage is no solace to the assessee are applicable with equal force to the present situation. 10. If we are permitted to take judicial notice of the position in the field of lawyers they are never paid interest on any part of their bill amount, neither on the professional fee nor the actual expenses. This may be considered from another angle. It is no part of the duty of the lawyer to make actual expenses on behalf of his client. It is the duty of the client to make the entire expenses, and not to burden the lawyer with the liability of expenses (with the prospect of reimbursement), which is really his. The lawyer incurs the expenses on behalf of the client by way of grace so that the work proceeds smoothly. 11. We must also notice the contention on behalf of the Revenue that strict interpretation is called for, otherwise it will liable to misuse. For example, the amount of actual expenditure is Rs. 1,000/-, and the lawyer suffixes zero then it becomes Rs. 10,000/-, In other words, in his submission, Rs. 9000/- become illegal income tax at the hands of the assessee. In his submission, it is possible situation that, with the consent of the client, Rs. 9000/- may be really the lawyers fee and by its inclusion in the amount of actual expenses, the same becomes free of income tax. We have to strain our imagination that a member of such a noble profession will engage himself in such an undesirable practice. Secondly, he will do 8 it at the risk of incurring the displeasure of his client. Thirdly, the returns are liable to scrutiny of Income Tax Department. As the old saying goes, none can befool all people for all times to come. Salmond states in his well known treatise entitled „Jurisprudence‟ that lawyers validity should not be adjudged on the basis of extremities. It will bear repetition to state that strict interpretation, as has been suggested by the Revenue, will be hit by the mandatory provision of Article 265 of the Constitution of India. In case of doubt or difficulty in interpreting or applying taxing statutes the court shall lean in favour of the assessee. 12. The interpretation given by the Central Board of Direct Taxes in the Circular No. 715, dated 8.8.1995, in so far as it concerns the petitioners, is inconsistent with the spirit of the Act in general, and section 195-J in particular, in the strident background of Article 265 of the Constitution. 13. In the result we allow this writ petition and hereby declare that persons making payment to Lawyers shall not be liable to deduct TDS on the amount of reimbursement of actual expenses initially incurred by lawyers. In the circumstances of the case, there shall bed no order as to costs. B.P. Verma, J. Patna High Court The 20th September 2010 M.Rahman(AFR) (S.K. Katriar, J) I agree. ( Birendra Prasad Verma, J ) 9