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Petitioner: UNION OF INDIA and another VS Respondent: A. SANYASI RAO and others
Court Name: Supreme Court of India Judge(s): S.C. Sen, A. M. Ahmadi, K. S. Paripoornan, I. S. C. Sen Title: UNION OF INDIA and another vs A. SANYASI RAO and others Case No.:Civil Appals Nos.4290 to 4394 of 1989 connected with S.L.P. (C) Nos.3944 to
JUDGMENT
Reported As: 1997 PTD 333 Result: Appeals dismissed Judgment JUDGMENT K.S. PARIPOORNAN, J.---In this batch of cases-writ petitions filed under Article 32 of the Constitution of India and civil appeals and special leave petitions filed under Article 136 of the Constitution of India-substantially similar questions arise for consideration. The matter arises under the Income Tax Act, 1961. The validity of sections 44-AC and 206-C of the Income Tax Act, 1961 (hereinafter referred to as "the Act'), is posed for consideration. Various assessees challenged the aforesaid provisions as ultra vires and beyond legislative competence and also violative of Articles 14 and 19(1)(g) of the Constitution of India in a few High Courts. Substantially, the challenge was not accepted by all the High Courts. A few High Courts have read down the provisions of section 44-AC of the Act. Dissatisfied by the same, the assessees have come up in appeal, Feeling aggrieved by the reading down of section 44-AC of the Act, the Union of India has come up in appeals. Those are covered by civil appeals. Certain other assessees have challenged the aforesaid provisions directly under Article 32 of the Constitution of India. Those are covered by writ petitions. A few assessees, feeling aggrieved by the decisions of the High Courts, have filed special leave petitions seeking leave of this Court to file appeals. Since all these three classes of cases involved consideration of the validity or otherwise of sections 44-AC and 206-C of the Act, they were heard together. Section 44-AC of the Act was inserted by the Direct Tax Laws (Amendment) Act, 1989, with effect from April 1, 1989. Section 206-C of the Act was inserted by the Finance Act, 1988, with effect from
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June 1, 1988. The above sections are reproduced hereinbelow: "44-AC. Special provisions for computing profits and gains from the business of trading in certain goods.---(1) ' ' 'Notwithstanding anything to the contrary contained in sections 28 to 43-C in the case of an assessee, being a person other than a public sector company, hereafter in this section referred to as the buyer'), obtaining in any sale by way of auction, tender or any other mode, conducted by any other person or his agent hereafter in this section referred to as 'the seller),--- (a) any goods in the nature of alcoholic liquor for human consumption other than Indian-made foreign liquor, a sum equal to forty per cent. Of the amount paid or payable by the buyer as the purchase price in respect of such goods shall be deemed to be the profits and gains of the buyer from the business of trading in such goods chargeable to tax under the head ' Profits and gains of business or profession': Provided that nothing contained in this clause shall apply to a buyer where the goods are not obtained by him by way of auction and where the sale price of such goods to be sold by the buyer is fixed by or under any State Act;" The following Explanation is being inserted by the Finance Act, 1990, with effect from April 1, 1991: "Explanation.---For the purpose of this clause, 'purchase price' means any amount by whatever name called paid or payable by the buyer to obtain in goods referred to in this clause, but shall not include the amount paid or payable by him towards the bid money in an auction, or, as the case may be, the highest accepted offer in case of tender or any other mode; (b) the right to receive any goods of the nature specified in column (2) of the table below, or such goods, as the case may be, a sum equal to the percentage, specified in the corresponding entry in column (3) of the said Table, of the amount paid or payable by the buyer in respect of the sale of such right or as the purchase price in respect of such goods shall be deemed to be the profits and gains of the buyer from the business of trading in such goods chargeable to tax under the head ' Profits and gains of business or profession'. Table SI.No. Nature of goods Percentage (1) (2) (3) (i) Timber obtained under a forest leaseThirty-five per cent. (ii) Timber obtained by any mode other than under a forest leaseFifteen per cent. (iii)Any other forest produce not being timberThirty-five per cent. (2) For the removal of doubts, it is hereby declared that the provisions of subsection (1) shall not apply to a buyer other than a buyer who obtains any goods, from any seller which is a public sector company in the further sale of any goods obtained under or in pursuance of the sale under subsection (1). (3) In a case where the business carried on by the assessee does not consist exclusively of trading in goods to which this section applied and where separate accounts are not maintained or are not available, the amount of expenses attributable to such other business shall be an amount which bears to the total expenses of the business carried on by the assessee the same proportion as the turnover of such other business bears to the total turnover of the business carried on by the assessee. Explanation.---For the purposes of this section, 'seller' means the Central Government, a State Government or any local authority or corporation or authority established by or under a Central, State or Provincial Act, or any company or firm or cooperative society.
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206-C. Profits and gains from the business of trading in alcoholic liquor, forest produce, scrap, etc.--(1) Every person being a seller referred to in section 44-AC, shall, at the time of debiting of the amount payable by the buyer referred to in that section to the account of the buyer or at the time of receipt of such amount from the said buyer in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, collect from the buyer of any goods of the nature specified in column (2) of the Table below, a sum equal to the percentage, specified in the corresponding entry in column (3) of the said Table, of such amount as incomes-tax on income comprised therein: Table SI.No. Nature of goods Percentage (1) (2) (3) (i) Alcoholic liquor for human consumption (other than Indian-made foreign liquor)Fifteen per cent.
(ii) Timber obtained under a forest lease Fifteen per cent. (iii) Timber obtained by any mode other than under a forest leaseFive per cent. (iv) Any other forest produce not being timber Fifteen per cent: Provided that where the Assessing Officer, on an application made by the buyer, gives a certificate in the prescribed form that to the best of his belief any of the goods referred to in the aforesaid Table are to be utilised for the purposes of manufacturing processing or producing Articles or things and not for trading purposes, the provisions of this subsection shall not apply so long as the certificate is in force. (2) The power to recover tax by collection under subsection (1) shall be without prejudice to any other mode of recovery. (3) Any person collecting any amount under subsection (1) shall pay within seven days the amount so collected to the credit of the Central Government or as the Board directs. (4) Any amount collected in accordance with the provisions of this section and paid under subsection (3) shall be deemed as payment of tax on behalf of the person from whom the amount has been collected and credit shall be given to him for the amount so collected on the production of the certificate furnished under subsection (5) in the assessment made under this Act for the assessm ent year for which such income is assessable. (5) Every person collecting tax in accordance with the provisions of this section shall within ten days from the date of debit or receipt of the amount furnish to the buyer to whose account such amount is debited or from whom such payment is received, a certificate to the effect that tax has been collected, and specifying the sum so collected, the rate at which the tax has been collected and such other particulars as may be prescribed. (5-A) Every person collecting tax in accordance with the provisions of this section shall prepare half-yearly returns for the period ending on 30th September and 31st March in each financial year, and deliver or cause to be delivered to the prescribed income-tax authority such returns in such form and verified in such manner and setting forth such particulars and within such time as may be prescribed. (6) Any person responsible for collecting the tax who fails to collect the tax in accordance with the provisions of this section, shall, notwithstanding such failure, be liable to pay the tax to the credit of the Central Government in accordance with the provisions of subsection (3). (7) Without prejudice to the provisions of subsection (6), if the seller does not collect the tax or after collecting the tax fails to pay it as required under this section, he shall be liable to pay simple
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interest at the rate of two per cent, per month or part thereof on the amount of such tax from the date on which such tax was collectable to the date on which the tax was actually paid. (8) Where the tax has not been paid as aforesaid, after it is collected, the amount of the tax together with the amount of simple interest thereon referred to in subsection (7) shall be a charge upon all the assets of the seller." The above new provisions enable the Revenue to estimate the profits on a "presumptive basis". It appears that the Government wanted to get over the problems in assessing income and recovering tax in the case of persons dealing in country liquor, timber, forest produce, etc. Experience revealed that a large number of persons dealing in the said commodities did not maintain any books of account or the books of account maintained by such persons were incomplete. The business of the abovementioned persons existed only for a short period--a year or two. After the period of contract or agreement, it was impossible to trace them in many cases. Many of them were found to be dealing in benami names. There was evasion on a large scale. The Government found it difficult to collect the tax due from such persons. Section 44-AC occurs in Chapter IV of the Act dealing with computation of total income. Heading-D deals with computation of profits and gains of business or profession. Section 44-AC(1) determines the profits and gains of the year from the business of trading in certain specified goods like liquor other than Indian-made foreign liquor, timber and forest produce) at a particular percentage specified therein. Section 44- AC(2) states that the above provisions shall not apply to the second or subsequent sale of such goods. Section 44-AC(3) is only a clarificatory provision. The Explanation to the section specifies the seller as Central Government, State Government, local authority, corporation, etc. Section 206- C deals with collection and recovery of tax section 206-C(1) obliges the seller of the specified goods to collect from the purchaser an amount equal to the percentage mentioned in the Table as income-tax. The goods mentioned in the Table are the very same goods mentioned in section 44- AC. Subsections (2) to (5) of section 206-C of the Act are further machinery provisions. In particular, subsection (4) provides that any amount collected under the section shall be deemed to be payment of tax on behalf of the purchaser and provides for the issuance of a certificate evidencing such payments. Section 44-AC came into from April 1, 1989. Section 206-C came into effect from June 1, 1988. The scope of the aforesaid, provisions was explained in a memorandum to the Finance Bill, 1988 see 170 ITR (St.) at pages 187-188. It is to the following effect: "25. New provisions to counteract tax evasion by liquor contractors, scrap dealers, dealers in forest products, etc.---Considerable difficulty has been felt in the past in making assessment of incomes in the case of persons who take contracts for sale of liquor, scrap, forest products, etc. It has been the Department's experience that for taking such contracts, firms or associations of persons are specifically constituted and very often no trace is left regarding them or their members after the contract has been executed. Persons have also been found to have taken contracts in benemi names by floating undertakings or associations for short periods. Since tax is payable in the assessm ent years in respect of the incomes of the previous years, the time by which the incomes from such sources become assessable, such persons are not traceable. At the time of assessment in these cases, either the accounts are not available or they are grossly incorrect or incomplete. Thus, even if assessm ents could be made on ex parte basis, it becomes almost impossible to collect the tax found due, either because it becomes difficult to establish the identity of the persons and trace them or because of the fact that the persons in whose names contracts are taken are men of no means." With a view to combat large-scale tax evasion by persons deriving income from such business, the Bill seeks to insert a new section 44-AC to provide for determination of income in such cases. Taking into account the experience gained in the past regarding the ratio of profit to the sale
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consideration the proposal is to provide that sixty per cent. Of the amount paid or payable by such persons on sale would constitute income of the taxpayers, i,e,. The buyer. The provisions of this section will apply only to an assessee, being a buyer of any goods in the nature of alcoholic liquor for human consumption other than Indian-made foreign liquor or any forest produce, scrap or waste, whether industrial or non-industrial or such other goods, as may be notified by the Central Government, State Government. The word 'seller' connotes the Central Government, at the point of first sale, any local authority or corporation or authority established by or under a Central Act or any company. The provisions of this section shall not apply to any buyer in the second or subsequent sale of such goods. This amendment will take effect from 1st April, 1989, and will, accordingly, apply to the assessment year 1989-90 and subsequent years. Further, with a view to facilitate collection of taxes from such assessee, it is proposed to introduce a new section 206-C to provide that any person, being a seller, referred to in section 44-AC, shall collect income-tax of a sum equal to twenty per cent. Of the amount paid or payable by the buyer, as increased by a surcharge for purposes of the Union calculated on the income-tax at the rates in force. Such sum is required to be collected either from the buyer at the time of debiting the said amount to the account of the buyer or at the time of the receipt of that amount from the buyer, whichever is earlier. This mode of recovery of tax shall be without prejudice to any other mode of recovery. The tax so collected by the seller shall be paid to the credit of the Central Government or as the Board directs, within seven days from the date of collection. It will be treated as tax paid on behalf of the person from whom the amount has been collected and credit shall be given for such amount in the assessm ent made under this Act on production of a certificate. The new section also'provides that if a seller does not collect or after collecting fails to pay the tax, he shall be deemed to be an assessee in default in respect of the tax and the amount of the tax together with the amount of simple interest, calculated at the rate of two per cent. Per month or part thereof, shall be a charge upon all the assets of the seller... These amendments will be made effective from 1st June, 1988." Circular No,525 see (1988) 174 ITR (St.) 56, dated November 24, 1988, and Circular No,528 see (1989) 176 ITR (St.) 154, dated December 16, 1988, issued by the Central Board of Direct Taxes, have explained the scope and ambit of section 44-AC and section 206-C of the Act. (See Law of Income Tax---Sampath Iyengar, 8th Edition, Vol. 2, page 2494 and Vol. 5, page 5139). The matter at 'issue came up for consideration before the High Courts of Andhra Pradesh, Kerala, Himachal Pradesh, Orissa, Punjab and Haryana and Patna, in different forms. The decisions therein are: (1) A. Sanyasi Rao v. Government of A.P. (1989) 178 ITR 31 (AP); (2) P. Kanhammed Kutty Haji v. Union of India (1989) 176 ITR 481 (Ker) (SB); (3) T.K. Aboobacker v. Union of India (1989) 177 ITR 358 (Ker) (DB); (4) Gian Chand Ashok Kumar & Co. v. Union of India (1991) 187 ITR 188 (HP); (5) Sri Venkateswa ra Timber Depot v. Union of India (1991) 189 ITR 741 (Orissa); (6) State of Bihar v. CIT (1993) 202 ITR 535 (Patna); (7) Ranjee Prasad Sahu v. Union of India (1993) 204 ITR 800 (Patna); (8) Madan Mohan Gupta v. Union of India (1993) 204 ITR 384 (Patna); (9) Bhagwan Singh v. Union of India (1994) 209 ITR 824 (Patna); (10) Sat Pal & Co. v. Excise and Taxation Commissioner (1990) 185 375 (P & H); (11) K.K. Mittal & Co. v. Union of India (1991) 187 ITR 208 (P & H); (12) K.K. Mittal & Co. v. Union of India (1993) 204 ITR 201 (P & H); and (13) Fairdeal Trading Co. v Union of India (1993) 203 ITR 645 (P & H).
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We should state that the legislative competence of Parliament to enact sections 44-AC and 206-C of the Act was upheld by all the High Courts. In the decisions of the Kerala High Court---P. Kunhammed Kutty Haji v. Union of India (1989) 176 ITR 481 and T.K. Aboobacker v. Union of India (1989) 177 ITR 358---the main challenge was against the legislative competence only. The challenge against the aforesaid statutory provisions on the ground of legislative competence, violation of Articles 14 and 19 of the Constitution of India and the interpretation to be placed on the provisions, directly came up before a Division Bench of the Andhra Pradesh High Court n A. Sanyasi Rao's case (1989) 178 ITR 31. In the said decision, the High Court, upholding the validity of the Act, read down section 44-AC of the Act and held that the said provision is only an adjunct to and explains the provisions of section 206-C and does not dispense with the regular assessment in accordance with the provisions of the Income-tax Act. The non obstante clause in section 44-AC was explained. The said decision was substantially followed by the Orissa and the Punjab and Haryana High Courts in the decisions reported in Sri Venkateswara Timber Depot's case (1991) 189 ITR 741 and Sat Pal & Co.'s case (1990) 185 ITR 375. In the other decisions, the context or meaning of the relevant statutory provisions alone came up for consideration. We heard H.N. Salve, Soli Sorabjee, K. Madhava Reddy and Vijay Bahuguna, Senior Advocates, and Messrs. G. Sarangan and Ranjit Kumar, Advocates, who appeared for the various assessees and also Dr.V. Gaurishankar, Senior Advocate, who appeared on behalf of the Union of India. Arguments advanced before us covered a wide range. We shall immediately state, in brief, the respective pleas put forward before us by counsel, on both the sides. It should be stated that the pleas urged by counsel on both the sides were substantially with reference to the decision of the Andhra Pradesh High Court in A. Sanyasi Rao's case (1989) 178 ITR 31 wherein, at page 73, the Court summarised the conclusion as hereunder: "(i) Parliament was perfectly competent to enact sections 44-AC and 206-C; (ii) Section 206-C does not suffer from any Constitutional infirmity and is perfectly valid; (iii) Section 44-AC is not an independent provision. It does not dispense with a regular assessment in accordance with the provisions of the Income-tax Act. Section 44-AC is merely an adjunct to and explains the provisions in section 206-C. A regular assessment has to be made in respect of an assessee dealing in specified goods in accordance with sections 28 to 43-C. Read down in this manner, section 44-AC also does not suffer from any Constitutional infirmity; (iv) It is competent for Parliament to adopt the purchase price as a measure for determining the income-tax. In this case, the purchase price is taken as a measure for the limited purpose of determining the quantum of tax to be collected under section 206-C. Tax collected on specified goods will be given credit for in the year in which those goods are sold; (v) In view of the clarification of the Central Board of Direct Taxes, communicated by the Chief Commissioner of Income-tax, Andhra Pradesh, Hyderabad, and also in view of the concession made by the Income-tax Department, it is directed that the expression 'purchase price' in section 44-AC and section 206-C shall mean, in the State of Andhra Pradesh in respect of arrack only the ' issue price as understood in the Andhra Pradesh Excise Act and the Rules made thereunder, now in force in this State. The true meaning and content. Of the expression 'purchase price' is, however, different, as explained hereinbefore; (vi) The collection at source provided by section 206-C is relatable to the purchase price and not to the income component of the purchase price." It is unnecessary to refer to the facts of individual cases in this batch of cases. Indeed, we were, in particular, referred to the broad facts in two representative cases. The first related to a dealer in liquor vide C.A. No,4198 of 1989. The appellant herein was the petitioner in Civil Writ Petition No,3947 of 1989 (Sat Pal & Co. v. Excise and Taxation Commissioner (1990) 185 ITR 375) in the High Court of Punjab and Haryana. The said
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petition was heard alongwith .a number of other similar petitions and the High Court rendered a common judgment, dated August 2, 1989 (see (1990) 185 ITR 375). The appellant (petitioner in the writ petition) is running the business of liquor contractor in the State of Haryana. Respondent No,1 auctioned the vending of country liquor for the year 1989-90 in the Camp Area of Yamuna Nagar, Damra and Harmal. The appellant was the highest bidder. The purchaser of the country liquor is required to deposit the excise duty payable in respect of the quota of liquor purchased by him in the State of Haryana. On production of the vouchers showing the deposit of excise duty the excise authority authorises the appellant to make a purchase of the country liquor from the distillery. The permit is issued to the appellant contractor thereafter. That entitles him to purchase the country liquor, transport and sell it for human consumption. The price charged by the distillery includes the price of liquor and other charges on bottling, labelling, etc. In view of section 44-AC and section 206-C of the Income Tax Act, 1961, the first respondent, on May 30, 1988, issued a Circular No,3442- BA-Z to all the distilleries in Haryana directing them to recover income tax from the buyers (like the appellant) at 15 per cent. Of the profit or gains as envisaged by section 44-AC. Thereafter, the appellant and others assailed the above circular as also the basis on which the circular aforesaid was issued, viz., section 44-AC and section 206-C of the Income-tax Act. The High Court upheld the validity of section 44-AC and section 206-C and read down section 44-AC holding that it is only an djunct to section 206-C and so read, the relief under section 28 to section 43-C will be available. The facts are highlighted in the second case which is Writ Petition (Civil) No,155 of 1989. There are five, petitioners therein. The first petitioner is a firm and petitioners Nos.2 to 5 are its partners. The firm is carrying on business as tobacco and Biri leaves merchant. It is regularly assessed to income-tax. Biri leaves are also known as "knedu/tendu leaves". It is a natural forest produce. All the State Governments have nationalised the trade in this commodity. Respective Governments sell the commodity by auction or by inviting tenders. The petitioners purchase tendu leaves from the forest departments of respective Governments and sell them to retailers or manufacturers who number to several thousands. Their plea is that they are not making any profit by the very act of purchasing the goods The petitioners pray for quashing sections 44-AC and 206-C of the Act and to quash the various assessm ent orders or demands made by the income-tax authorities. They also pray for a direction, in the nature of prohibition, from levying or collecting income-tax from the petitioners under sections 44-AC and 206-C of the Act. The submissions made before us by counsel for the assessees can be summarised thus: (i) Sections 44-AC and 206-C of the Act lack legislative competence. Section 44-AC levies a tax on purchase and by the deeming provisions, 40 per cent. Of the purchase price shall be deemed to be…
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