1996 (2) TMI 4 - SC - Income Tax

Validity of sections 44AC and 206C of the Income-tax Act, 1961 - held that sections 44AC and 206C are not hit by Article 14 of the Constitution of India

Summary

Issues Involved:
1. Legislative competence of Parliament to enact sections 44AC and 206C of the Income-tax Act, 1961.
2. Constitutional validity of sections 44AC and 206C under Articles 14 and 19(1)(g) of the Constitution of India.
3. Interpretation and application of sections 44AC and 206C of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Legislative Competence of Parliament to Enact Sections 44AC and 206C:

The Supreme Court upheld the legislative competence of Parliament to enact sections 44AC and 206C of the Income-tax Act, 1961, under Entry 82 of List I of the Seventh Schedule of the Constitution, which pertains to "Taxes on income other than agricultural income." The court emphasized that legislative entries should be interpreted broadly and liberally, including all subsidiary and ancillary matters necessary to prevent tax evasion. The court held that the provisions in question are machinery provisions intended to facilitate the collection of tax on income that is likely to accrue from specific trades where evasion was prevalent.

2. Constitutional Validity Under Articles 14 and 19(1)(g):

The court examined whether sections 44AC and 206C violated Article 14 (equality before the law) and Article 19(1)(g) (right to practice any profession or to carry on any occupation, trade, or business) of the Constitution of India. The court noted that while tax laws are subject to Article 14, the Legislature has wide discretion in matters of classification for taxation purposes. The court found that the provisions were not discriminatory, arbitrary, or irrational, as they were enacted to address specific difficulties in tax collection from certain trades known for evasion. However, the court did find that the non obstante clause in section 44AC, which denied the reliefs provided under sections 28 to 43C to particular trades, was unfair and arbitrary. The court held that such denial lacked a rational basis and violated the principle of equality.

3. Interpretation and Application of Sections 44AC and 206C:

The court analyzed the provisions of sections 44AC and 206C in detail. Section 44AC was introduced to estimate profits on a presumptive basis for certain trades, while section 206C dealt with the collection and recovery of tax at the time of purchase. The court noted that these provisions were intended to address the issue of tax evasion in trades dealing with country liquor, timber, forest produce, etc., where maintaining proper accounts was often problematic. The court agreed with the Andhra Pradesh High Court's interpretation that section 44AC should be read as an adjunct to section 206C and does not dispense with regular assessment under sections 28 to 43C. The court directed that the expression "purchase price" should be understood in the context of the specific trade and that regular assessment should be made in accordance with the provisions of the Income-tax Act.

Conclusion:

The Supreme Court upheld the legislative competence of Parliament to enact sections 44AC and 206C of the Income-tax Act, 1961. The court found that these provisions were not discriminatory or arbitrary under Article 14 but held that the non obstante clause in section 44AC, which denied the reliefs provided under sections 28 to 43C, was unfair and arbitrary. The court directed that section 44AC should be read as an adjunct to section 206C and that regular assessment should be made in accordance with sections 28 to 43C. The writ petitions, civil appeals, and special leave petitions filed by the assessees were partly allowed to this limited extent.