Circular No. 487-Income Tax dated 8-6-1987

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

1. Under File No. 275/30/82-IT(B), dated 25-9-1985, a Circular No. 433 [Clarification 1] was issued clarifying that the provi­sions of section 194C would apply in respect of payments made to munshis and that would apply to payments under oral contracts also. The payments to munshis which would be hit by the provi­sions of section 194C covered not only the payments to them for raw material but also the payments to the workers.
2. Board have received representations that many 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 dated 25th September, 1985, in the Writ Peti­tions Nos. 3605 to 3609 of 1978 and others in the case of P.M. Patel & Sons v. Union of India [1985] 67 FJR 457. In the judgment in para 3, the Supreme Court has dealt with three kinds of bidi workers :

(a)   directly employed by the manufacturers;

(b)   employed through 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 deductions under section 194C to be made from the pay­ments to munshis need not include payments to such home workers as fall in category (b) above.

Circular : No. 487 [F.No. 275/34/86-IT(B)], dated 8-6-1987.