1989 (2) TMI 110 - HC - Income Tax

Summary

Issues Involved:
1. Constitutionality of sections 44AC and 206C of the Income-tax Act, 1961.
2. Legislative competence of the Union to levy tax on commodities.
3. Alleged discriminatory character of the tax.

Summary:

1. Constitutionality of sections 44AC and 206C of the Income-tax Act, 1961:
The petitioners challenged the constitutionality of sections 44AC and 206C introduced by the Finance Act, 1988, arguing that the tax imposed is inflexibly fixed and not based on actual income but on the purchase price of commodities like alcoholic beverages, beedi leaves, and timber. They contended that this tax resembles a sales tax, which only the State can levy u/s article 246(3) of the Constitution read with entry 54 of List II of the VIIth Schedule. The court held that it is competent for Parliament to make fictional computation of income and tax it as such, citing various judicial decisions supporting the artificial fixation of income.

2. Legislative competence of the Union to levy tax on commodities:
The court examined whether the Union has the legislative competence to levy tax on these commodities in the manner provided by the Finance Act, 1988. It was concluded that Parliament is within its rights to deem a portion of the price of the commodity as income in the hands of the dealer. The practice of presumptive taxation was recognized as a valid anti-evasion measure, supported by fiscal theorists and historical precedents.

3. Alleged discriminatory character of the tax:
The petitioners argued that the tax is discriminatory as it targets only three specific commodities without a rational basis, violating article 14 of the Constitution. The court found that the peculiar characteristics of the liquor, beedi, and timber trades justified their selection for presumptive taxation. The court noted the historical and practical reasons for taxing these commodities differently, such as the high potential for revenue leakage and the need for stringent anti-evasion measures. The court dismissed the argument of discrimination, stating that the differential treatment of these commodities is rational and justified.

Conclusion:
The court dismissed the writ petitions, upholding the constitutionality of sections 44AC and 206C of the Income-tax Act, 1961. The legislative competence of the Union to levy the tax was affirmed, and the alleged discriminatory nature of the tax was rejected. The petitioners were advised to seek redress elsewhere, as the court found no substantial grounds to declare the provisions unconstitutional.