Venkatachala, J. - (1.) The short question which needs our decision 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 organisations specified in S. 194C(1) 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.
(2.) 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 dt. 5th Nov., 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 and 2 into wagons or trucks. Under clause 12 of those terms and conditions, there was a stipulation that the contractor shall be paid a sum for his work at a flat rate of 41 paise for each tonne of cement handled in Packing Plant No. 1 and 30 paise for each tonne of cement handled in Packing Plant No. 2. Clause 13 thereof, 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. 2.35 paise, D. A. of Rs. 1.21 paise and H.R.A. of Re. 0.50 paise, per day per worker stipulated a term of -reimbursement by the appellant to the contractor of the difference in D. A. 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 appellant made payments of the sum payable to him under clause 12 of the contract and the sums reimbursable to him under clause 13 thereof. But the deductions made under S. 194C(1) of the Act by the appellant out of the sums paid or reimbursed to the contractor fell short of the deductions required to be made thereunder. As the appellant took the stand that it was not liable to deduct any amount under S. 194C(1), out of the sums paid on its behalf to the contractor as per clauses 12 and 13 of the contract, the Income-tax Officer, Jamshedpur, served on the principal officer of the appellant a notice dt. 30th Mar., 1978 to show cause as to why action should not be taken against the appellant under Ss. 276B(1), 281 and 221 of the Act in respect of assessment years 1973-74 and 1974-75 for short deductions out of the sums paid to contractor without observing the requirement of S. 194C(1) of the Act, Another notice dt. 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 Arts. 226 and 227 of the Constitution before the High Court of Judicature at Patna, that Writ Petition was dismissed by the High Court by its order dt. 8th Mar., 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.
(3.) It was argued by Mr. V. A. Bobde, the learned senior counsel appearing for the appellant, that the amount deductible under S. 194C(1) 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. According to him, the 'work' for the carrying of which the sum is required to be credited to the account of or paid to a contractor under S. 194C(1) of the Act is only a 'works contract' and hence deduction under 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, as held by this Court in Brij Bhushan Lal Parduman Kumar v. Commr. of Income-tax, Haryana, Himachal Pradesh and New Delhi-III, (1979) 2 SCR 16 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 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 under 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 the Revenue. It is how, the question mentioned at the outset needs our decision.;