1109. Decision of the Supreme Court in Brij Bhushan’s case - Whether permits, in respect of composite works contract, deduction of tax at source at 2 per cent on net payment (after excluding cost of materials supplied by Government) - Whether para 1(5) of Circular No. 86, dated 29-5-1972 requires modification
Circular No. 295 was issued by the Central Board of Direct Taxes on 6 March 1981. Its subject is 1109. Decision of the Supreme Court in Brij Bhushan’s case - Whether permits, in respect of composite works contract, deduction of tax at source at 2 per cent on net payment (after excluding cost of materials supplied by Government) - Whether para 1(5) of Circular No. 86, dated 29-5-1972 requires modification.
Refuses to change the rule that deduction under section 194C on a composite works contract is on the gross payment, including the cost of materials supplied by the Government or other specified person. Paragraph 1(5) of Circular No. 86 dated 29 May 1972 had said that whether deduction is on gross or net payment depends on the terms of the particular contract and the conduct of the parties, and that where a contractor undertakes to build, say, a building or a dam and the Government supplies all or some of the materials at a stipulated price, the deduction relates to the gross payment without excluding the cost of materials. Representations sought a change after the Supreme Court's decision in Brij Bhushan Lal Parduman Kumar. The Board answers that that decision is about how income is computed and not about the construction of section 194C, and quotes the Patna High Court in Associated Cement Co. Ltd., which distinguished it on the ground that section 194C(1) requires deduction not from the contractor's profits but from the total payment made to him for doing the work. Paragraph 1(5) therefore stands, and tax continues to be deducted at 2 per cent on gross payments including the cost of materials supplied.
Several representations were received after the Supreme Court's decision seeking modification of the earlier circular so that deduction could be made on the net payment.
1109. Decision of the Supreme Court in Brij Bhushan’s case - Whether permits, in respect of composite works contract, deduction of tax at source at 2 per cent on net payment (after excluding cost of materials supplied by Government) - Whether para 1(5) of Circular No. 86, dated 29-5-1972 requires modification
1. Pursuant to the decision of the Supreme Court in Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524, several representations were received seeking modification of para 1(5) of Board’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-19721 to permit, in respect of composite works contract, e.g., work and labour, tax deduction at 2 per cent under section 194C on the net payment, i.e., after excluding the cost of materials supplied by the Government or any other specified person.
2. In para 1(5 ) of the Board’s said circular, it was inter alia, explained that the question of the tax deduction under section 194C with reference to the gross payment due to the contractor or the net payment was essentially to be decided in the light of the terms of the particular contract and the conduct of the parties thereto. It was also stated that where the contractor had undertaken to construct a building or a dam, e.g., a composite works contract, and the Government or the other specified person had undertaken to supply all or any of the materials necessary for the work at stipulated price, the deduction would have to be related to the gross payment without excluding the cost of the materials.
3. The decision of the Supreme Court in Brij Bhushan Lal’s case (supra) is on the manner of computing the income and is not on the interpretation of section 194C. The point at issue has been dealt with by the Patna High Court in Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. On page 449 of the report, while referring to Brij Bhushan Lal’s case (supra), their Lordships of the Patna High Court observed as under :
"...In this case [Brij Bhushan Lal’s case] the question that fell for consideration was whether in the execution of a work the cost of materials supplied by the Government for executing the work, could be taken into consideration, while estimating the profits of a contractor. In the facts of that case, it was held that in cases of ‘lump sum contracts’ where in substance and in reality stores and materials supplied to the contractor by the department were fixed or incorporated into the work, the cost of such stores and materials could not be included in the turnover of the contractor as there was not even a theoretical possibility of any profit being made by the contractor from such stores or materials. This case has no bearing on the facts of the case before us, because under section 194C(1) deduction has not to be made from profits made by the contractor, but from the total payment made to the contractor for doing any work."
4. In view of the foregoing para 1(5) of the Board’s circular referred to in para 1 above, does not require any modification and tax would continue to be deducted at source at 2 per cent on gross payments, i.e., including cost of material supplied by the Government or any other specified person.
Circular : No. 295 [F.No. 275/56/79-IT (B)], dated 6-3-1981.
A short deduction order against a Government department that deducted only on the labour element of a running account bill.
Source: the Income Tax Department’s own published text — its page for this instrument.
