2005 (1) TMI 78 - HC - Income Tax

Whether collection of tax at source under section 206C on the price of liquor shall include excise duty paid for purchase of liquor? - Deduction at source is the best way of recovery of tax and protect the recovery. However, if some excess payment is made, the same can be refunded after the order of final assessment is passed. We, therefore, answer the reference in the affirmative in favour of the Revenue and hold that the purchase price will include the excise duty paid by the buyer.

Summary

Issues Involved:
- Whether the collection of tax at source under section 206C of the Income-tax Act on the price of liquor shall include excise duty paid for the purchase of liquor.

Detailed Analysis:

1. Legal Question:
The primary legal question addressed is whether the collection of tax at source under section 206C of the Income-tax Act on the price of liquor should include the excise duty paid for the purchase of liquor.

2. Petitioner's Argument:
Counsel for the petitioner argued that the cost of liquor should not include excise duty but only the cost price of the liquor. They relied on previous judgments, including Vinod Kumar Rathore v. Union of India and Ashok Kumar v. Union of India, which were followed in Harvansh and Sons v. Union of India [2004] 266 ITR 364 (MP). According to the petitioner, under section 206C, tax at source should be deducted only on the cost price, excluding excise duty.

3. Respondent's Argument:
Counsel for the respondent-Department contended that the previous judgments did not correctly interpret section 206C of the Act. They cited the apex court's decision in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148, which overruled an earlier judgment and held that excise duty paid by the purchaser is part of the consideration for the sale and should be included in the turnover of the manufacturer. The respondent also referenced Hindustan Sugar Mills Ltd. v. State of Rajasthan [1979] 43 STC 13, where it was held that freight formed part of the "sale price" and was includible in the turnover.

4. Section 206C of the Income-tax Act:
The court reproduced section 206C, which mandates the collection of tax at source by the seller from the buyer of specified goods, including alcoholic liquor for human consumption. The section defines "buyer" and "seller" and outlines the procedure for tax collection, payment, and filing of returns.

5. Previous Judgments and Circulars:
The court examined earlier judgments, including the two-judge Bench decision in McDowell and Co. Ltd. v. CTO [1977] 39 STC 151, which was overruled by a five-judge Bench in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148. The latter judgment clarified that excise duty is part of the sale consideration and should be included in the turnover. The court also considered Union of India v. Om Prakash S.S. and Co. [2001] 248 ITR 105 (SC), which interpreted the term "buyer" in section 206C.

6. Finance Minister's Letter vs. Circular No. 585:
The court noted that the earlier judgment in Ashok Kumar relied on a letter from the Finance Minister, which suggested that tax should be collected only on the cost of liquor excluding excise duty. However, the court pointed out that this letter did not have statutory force unless the Act was amended. The court also highlighted Circular No. 585, dated November 27, 1990, which clarified that the purchase price for the purposes of section 206C includes excise duty.

7. Conclusion:
The court concluded that the letter from the Finance Minister does not override the statutory provisions of the Act. The purchaser must pay the cost of liquor, including excise duty, and tax should be collected on the actual price paid by the buyer, inclusive of excise duty. If excess tax is collected, it can be refunded after the final assessment. The court held that the judgments in Ashok Kumar, Vinod Kumar Rathore, and Harvansh & Sons [2004] 266 ITR 364 (MP) did not lay down the correct law. The court answered the reference in the affirmative in favor of the Revenue, holding that the purchase price includes the excise duty paid by the buyer.

8. Final Decision:
The petition was directed to be placed before the regular Bench for its decision on merit.