Circular No. 502

1111. Whether provisions of section 194C are applicable to work executed under National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP)

What this is

Circular No. 502 was issued by the Central Board of Direct Taxes on 27 January 1988. Its subject is 1111. Whether provisions of section 194C are applicable to work executed under National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP).

What it does

Holds that section 194C does not apply to payments for works executed under the National Rural Employment Programme and the Rural Landless Employment Guarantee Programme. Section 194C bites only where there is a contract with a specified agency, deduction being 2 per cent on payment to a contractor and 1 per cent on a contractor's payment to a sub-contractor, with nothing to deduct where the contract consideration does not exceed Rs. 10,000. Under both programmes the work is done through Panchayati Raj institutions and voluntary organisations under the State Governments' supervision, with wages paid partly in foodgrains and partly in cash, and both schemes expressly ban the employment of contractors or middlemen. There being no contract between the village committee or voluntary agency and the State Government, the sine qua non of section 194C is missing.

Why it was issued

References were received from certain quarters asking whether section 194C applied to payments for works under these two rural employment programmes.

Who it reaches

District Rural Development Agencies and State Governments disbursing under these programmes
Panchayati Raj institutions executing the works
Voluntary organisations implementing project works
Assessing Officers in the tax deducted at source charges

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.

1111. Whether provisions of section 194C are applicable to work executed under National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP)
1. References have been received from certain quarters about the applicability of the provisions of section 194C to the payments made in respect of the works executed under the National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP).
2. According to the provisions of section 194C, any person responsible for paying any sum to any contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the amount of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. Similarly, when a contractor makes payment to a sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of any contract the consideration of which does not exceed Rs. 10,000.
3. According to the NREP Scheme, at the district level the entire work relating to planning, co-ordination, supervision and monitoring of implementation of the programme will be the responsibility of the District Rural Agencies. In the implementation of the programme, the Panchayati Raj institutions are actively involved. Voluntary organisations are also involved in such implementation. The wages under this programme are paid partly in foodgrains and partly in cash. There is a specific ban on employment of contractors for the execution of the work under the programme.
4. According to the RLEGP Scheme while preparing the work project, the State Government will indicate the implementing agencies for each project. There can be different implementing agencies for different work projects in a State. The projects can be entrusted to voluntary organisations/Panchayati Raj institutions also for implementation. The State Government will have the overall responsibility for planning, supervision and monitoring of the projects taken up under this programme. The wages under this programme are to be paid partly in foodgrains and partly in cash. This programme also specifically bans the employment of contractors for execution of work. It has been specifically laid down in the guidelines for implementation of RLEGP that the voluntary organisations should ensure that no contractors or middlemen or any such intermediary agencies are engaged in the execution of work.
5. Thus, it is clear that the programmes under the NREP and RLEGP are executed with the participation of the people and the Panchayati Raj institutions under the active supervision of the State Governments in conformity with the guidelines framed by the Central Government. There is no contract between the village committee/voluntary agencies and the State Governments, which is sine qua non for attracting the provisions of section 194C. Moreover, these schemes specifically ban the employment of contractors/middlemen for the execution of the work undertaken under these schemes.
6. In view of the foregoing, the provisions of section 194C are not attracted in the case of payments made in respect of works executed under these programmes.
Circular : No. 502 [F.No. 385/49/86-IT(B)], dated 27-1-1988.

What to watch

The reasoning turns on the absence of a contract and the scheme ban on contractors; a payment actually made to a contractor would not be saved by this circular.
It is confined to these two named programmes, not to rural works generally.
The rates and the Rs. 10,000 threshold recited are those of section 194C as it then stood.
Both programmes have long since been replaced by later employment schemes, so the circular speaks to the years those programmes ran.

Where you meet it

In a section 201 proceeding against a district agency or a village body for not deducting on programme works, and in an old survey of a State department's deduction compliance.

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. 503 · Circular No. 501 →

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.