Circular No. 433

Tax deduction at source from payments to contractors and sub-contractors in bidi manufacturing industry - Whether munshis are contractors

What this is

Circular No. 433 was issued by the Central Board of Direct Taxes on 25 September 1985. Its subject is Tax deduction at source from payments to contractors and sub-contractors in bidi manufacturing industry - Whether munshis are contractors.

What it does

Treats a munshi in the bidi manufacturing industry as a contractor, so that section 194C applies to what the manufacturer pays him. In that trade the manufacturer gives leaves, tobacco and thread to the munshi, who distributes them to workers working at home, collects the finished bidis at intervals and hands them to the manufacturer, the manufacturer paying the munshi and the munshi paying the workers, each at agreed rates. The Board relies on the definition of contractor in the Bidi and Cigar Workers (Conditions of Employment) Act, 1966, which includes a sub-contractor, agent, munshi, thekedar or sattedar. It adds that section 194C is wide enough to cover oral contracts, and that by the very nature of the munshi's functions there is an implied contract with the manufacturer, so he is a contractor although nothing is written down. Deduction is at two per cent of the sum paid, where the payer is one of the bodies listed in the section.

Why it was issued

The Board examined whether a munshi engaged by a bidi manufacturer is a contractor or an agent, and whether section 194C applies to payments made to him.

Who it reaches

Bidi manufacturers paying munshis
Munshis, thekedars and sattedars in the bidi trade
Home-based bidi workers paid through munshis
Assessing Officers examining a manufacturer's deduction defaults

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.194C	s.393, s.402

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

Tax deduction at source from payments to contractors and sub-contractors in bidi manufacturing industry - Whether munshis are contractors

1. Under section 194C, a liability is cast on any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between him and—
(a) the Central Government or any State Government; or
(b) any local authority; or
(c) any corporation established by or under a Central, State or Provincial Act ; or
(d) any company ; or
(e) any co-operative society, or
to deduct an amount equal to two per cent of such sum as income-tax on income comprised therein.
2. In the bidi manufacturing industry, generally there are three parties, the manufacturer, the munshis and the workers. The manufacturer provides the raw material, i.e., leaves, tobacco, thread, etc., to the munshis who distribute the same to the workers who work at home. At regular intervals, the munshis collect the bidies prepared by the workers and hand over the same to the manufacturer. For this work, the manufacturer pays to the munshis, who in turn, make the payment to the workers. The workers as well as munshis get their payments at the rates agreed to.
3. The Board have had occasion to examine the question whether a munshi engaged by the bidi manufacturer is a contractor or an agent and whether the provisions of section 194C would apply to the payments made to him. The Board are advised that in view of the position that the definition of the expression "contractor" in the Bidi and Cigar Workers (Condition of Employment) Act, 1966, includes sub-contractor, agent, munshi, thekedar or sattedar, the provisions of section 194C would apply in respect of payments made to munshis. It may be clarified that the provisions of section 194C are wide enough to cover oral contracts also. By the very nature of the functions performed by the munshis, there is an implied contract between the manufacturer and the munshis and consequently the munshis are contractors even though there is no written contract or agreement. As such, the provisions of section 194C would apply in respect of payments made to them.
Circular : No. 433 [F.No. 275/30/82-IT(B)], dated 25-9-1985.

What to watch

The absence of a written contract is no defence; the Board rests on an implied and oral contract.
Section 194C bites only where the payer falls within the classes the section lists, which at that time were Government, a local authority, a statutory corporation, a company and a co-operative society.
The two per cent rate is the section 194C rate as it then stood and has changed since, as has the list of payers.
The circular decides the character of the munshi's engagement for deduction purposes; it does not decide the employment status of the workers.

Where you meet it

An order under section 201 against a bidi manufacturing company for not deducting on payments to its munshis.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Circular No. 09/2012 — Section 194C of the Income-tax Act, 1961 - Deduction of TAX at Source - Payments to Contractors & Sub-contractors - Dedu 17 October 2012
Circular No. 13/2006 — Dated 13/12/2006 13 December 2006
Circular No. 6/2006 — TAX Deduction at Source - Issue of TDS Certificate under section 203 of the Income-tax Act - Cases of Truck/goods-carria 23 June 2006
Notification No. 163 — Rules/amendment Rules 17 June 2005
Circular No. 5/2002 — 1126. Clarifications on various provisions relating to tax deduction at source regarding changes introduced through Fina 30 July 2002
Circular No. 787 — 227. Guidelines regarding taxation of income of artists, entertainers, sportsmen, etc., from international/national/ loc 10 February 2000

← Circular No. 434 · Circular No. 432 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.