BHAGABATI PRASAD BANERJEE,J. - (1.) THE Tribunal has referred the following questions of law to this Court under s. 256(1) of the IT Act, 1961 : 1. Whether on the facts and in the circumstances of he case and on a correct interpretation of s. 194C of the IT Act the Tribunal was justified in holding that considering the role of the Munshi or Sardar in the manufacture of Biri, it cannot be said that their function is akin to that of a contractor. 2. Whether on the facts and in the circumstances of he case, the Tribunal was justified in holding that the payment of wages to the Biri workers by the assessee company though Munshis did not came within the purview of s. 194C of the IT Act and consequently the assessee was not required to deduct tax under the provision of s. 194C of the IT Act from the payment made to the Munshis . 3. Whether on the facts and in the circumstances of he case, the Tribunal was justified in cancelling the penalty under s. 221 r/w s. 201(1A) of the IT Act, levied by the ITO on the assessee company ?"
(2.) THE assessment year involved in 1973-74. The facts relevant for his purpose as set out in the statement of case are as follows: The assessee is a Biri manufacturing company and paid various amount to its so-called contractors for binding Biris. According to the ITO the assessee was bound to deduct tax at source under s. 194C of the IT Act, Since no tax had been deducted by the assessee it was liable to pay interest under s. 201(1A) for which the ITO issued show-cause notices to the assessee. The assessee having failed to comply, the ITO levied interest for all the three years in question. Since the assessee failed to pay the amount of deductible tax and interest, the ITO further levied penalties equal to 10 per cent of the amounts due under s. 221 of the IT Act. The assessee went in appeals against the orders of the ITO to the CIT(A). In the first there maters, the CIT(A) was of the opinion that the position of the so-called contractors in biri manufacturing process was more or less that of Munshis who were only the agents of the manufactures. Therefore, assessee could not be penalised under s. 201(1A) of the IT Act as there was no mens rea on the part of assessee and it non-deduction of the tax on payments to these Munshis could not be said to be deliberate or contumacious. Following the same reasoning he was of the opinion that no penalty should have been levied upon the assessee under s. 221(1) and 201(1A) of the IT Act. He, there, cancelled both levy of interest and penalties. The Revenue came up in second appeal before the Tribunal and the asessee also filed its cross appeals in relation to certain finding of the CIT(1A). The Tribunal confirmed the finding of the CIT (1A). In this case the Tribunal had found that the employer found difficulty to control so many workers and, therefore, he used to engage some one as Sardar or Munshi to check up and supervise the activities of the large number of workers to avoid any difficulty while making payments to them. Considering the role of Munshi, it cannot be said that their function is aking to that of a contractor. The levy of interest was, therefore, deleted. Although, the Bench has only raised some presumption about the nature of Biri employer without looking into the contract entered into between the manufactures and the Munshis and has not expressed any opinion on the liability of the manufacturer to deduct the income-tax under s. 194C of the IT Act upon an overall consideration of the facts and circumstances of the case, we are of the opinion that there is no much for us to take a different view of the subject. In this behalf we specifically wanted to look into the exact nature of the contract between the assessee and its Munshis. This can be gathered by a letter dt. 9th May, 1978 written by the assessee's representative to the ITO. It would show that the Sardar or the Munshi was paid at a fixed rate for supervising the rolling of Biris. The rest of the wages were paid to the workers directly. Payments were made to the Munshis and, therefore, according to the assessee, it was not at all necessary to deduct tax under s. 194C. A detailed list of various payments made by the assessee to the labours and the commission to the Munshis was also produced before us. From the perusal of this letter and the chart of payment, copy of which has been placed on the file by the assessee, it would follow that what the assessee paid to the so called contractors was not actually paid to them but the labour charges for getting the Biris rolled was actually paid to the labourers though them. Naturally, a part thereof, i.e., commission was paid to these contractors. While they may well be technically called contractors, they are not really contractors in the proper sense of the terms. In other words what the Tribunal presumed in the earlier case is actual correct state of affairs as will follow from the aforesaid documents. If the assessee was actually not liable to deduct the tax under s. 194C in respect of payments made to other labourers, the question of charging any interest or levy of penalty under s. 221 would not arise. We, therefore, are prima facie of opinion that the order of the CIT(A) in question need not be disturbed. The departmental appeals accordingly fail and are hereby dismissed. The assessee's cross objections are allowed and it is held that he asessee was not liable to deduct tax at source under s. 194C at all. In this connection our attention was drawn to the Circular No. 487, dt. 8th June, 1987, issued by the CBDT in which it is provided-- "2. Board have received representations that may of the workers to whom such payments are made are entitled to the benefits of employees' provident Funds and Miscellaneous Provisions Act, 1952. Board's attention has also been drawn to the judgment of the Supreme Court dt. 25th Sept., 1985, in the Writ Petition NO. 3605 to 3609 of 1978 and Ors. in the case of P.M. Patel and Sons vs. Union of India (1985) 97 FJR 457 : AIR 1987 SC 447. In the judgment in para 3, the Supreme Court has dealt with three kinds of bidi workers : (a) Directly employed by the manufactures; (b) Employed though the medium of agency such as Munshis but the workers bring bidi to the factory for quality check and for getting their payments ; (c) The workers are engaged by the Munshis and the Munshis ensure the quality and make payments. It is held that in the types covered by category (b) above, the Bidi workers are employees entitled to the benefits of provident fund, etc. 3. In view of the above judgment, it is now further clarified that the deduction under s. 194C to be made from the payments to Munshis need not include payments to such home workers as fall in category (b) above."
(3.) IN view of the said circular payments made to Munshis or payments made to Biri worker do not come under the purview of s. 194C of the IT Act.;