2024 (7) TMI 517 - SC - Income Tax

Applicability of Section 206C - Collection of tax at source - liquor vendors (contractors) who bought the vending rights from the appellant on auction - Determination of Profits and gains from the business of trading in alcoholic liquor, forest produce, scrap, etc. - such liquor vendors can be termed as buyer within the meaning of Explanation(a) to Section 206C or excluded from the said definition of buyer as per clause (iii) of Explanation (a) to Section 206C? - HELD THAT - By the process of auction etc., the excise contractors are only shortlisted and conferred the right to retail vend of arrack in their respective areas. It cannot be said that by virtue of the auction, certain quantities of arrack are purchased by the excise contractors. Thus, at this stage there are two transactions, each distinct. The first transaction is shortlisting of excise contractors by a process of auction etc. for the right to retail vend. The second transaction, which is contingent upon the first transaction, is obtaining of arrack for retail vending by the excise contractors on the strength of the permits issued to them post successful shortlisting following auction. Therefore, it is evidently clear that arrack is not obtained by the excise contractors by way of auction. What is obtained by way of auction is the right to vend the arrack on retail on the strength of permits granted, following successful shortlisting on the basis of auction. Thus, the first condition under clause (iii) is satisfied After the arrack is obtained in the above manner by the excise contractor, the requirement of the second condition under Explanation(a)(iii) is that he has to sell the same in the area(s) allotted to him at the sale price fixed as per Rule 4 of the 1967 Rules. The language of the second condition is that the sale price of such goods to be sold by the buyer is fixed by or under any state statute. As already noted above, Rule 4 of the 1967 Rules enables the excise contractor to sell the arrack in retail at a price within the range of minimum floor price and maximum ceiling price which is fixed by the Excise Commissioner. The sale price is fixed by the statute but within a particular range beyond which price, either on the higher side or on the lower side, the arrack cannot be sold by the excise contractor in retail. Therefore, the arrack is sold at a price which is fixed statutorily under Rule 4 of the 1967 Rules and thus the second condition stands satisfied. Since both the conditions as mandated under Explanation(a)(iii) are satisfied, the excise contractors or the liquor vendors selling arrack would not come within the ambit of buyer as defined under Explanation(a) to Section 206C of the Income Tax Act. AO declared that Mysore Sales had failed to collect and deposit an amount as TDS from the excise contractors - As per sub-section (3), any person collecting TDS under sub-section (1) shall have to pay the same to the credit of the central government within seven days. Requirement under sub-section (5A) is that every person collecting TDS in terms of Section 206C (1) shall prepare half yearly returns for the periods ending on 30th September and 31st March respectively for each financial year and thereafter to submit the same before the competent assessing officer. Sub-rule (6) mandates that if any person responsible for collecting TDS fails to collect the same, he shall have to deposit the said amount to the credit of the central government notwithstanding failure to deduct TDS. Though there is no express provision in sub-section (6) or any other provision of Section 206C of the Income Tax Act regarding issuance of notice and affording hearing to such a person before passing an order thereunder, nonetheless, it is evident that an order passed under Section 206C(6) of the Income Tax Act, as in the present case, is prejudicial to the person concerned as such an order entails adverse civil consequences. It is trite law that when an order entails adverse civil consequences or is prejudicial to the person concerned, it is essential that principles of natural justice are followed. In the instant case, though show cause notice was issued to the assessee to which reply was also filed, the same would not be adequate having regard to the consequences that such an order passed under Section 206C(6) of the Income Tax Act would entail. Even though the statute may be silent regarding notice and hearing, the court would read into such provision the inherent requirement of notice and hearing before a prejudicial order is passed. We, therefore, hold that before an order is passed under Section 206C of the Income Tax Act, it is incumbent upon the assessing officer to put the person concerned to notice and afford him an adequate and reasonable opportunity of hearing, including a personal hearing. Thus, the question framed in paragraph 3 above, is answered in the negative by holding that Section 206C of the Income Tax Act is not applicable in respect of Mysore Sales and that the liquor vendors(contractors) who bought the vending rights from the appellant on auction cannot be termed as buyers within the meaning of Explanation(a) to Section 206C of the Income Tax Act. We also hold that the High Court was not justified in dismissing the writ petitions and consequently, the writ appeal challenging the orders.

Summary

Issues Involved:
1. Applicability of Section 206C of the Income Tax Act to the appellant.
2. Definition and classification of "buyer" under Explanation(a) to Section 206C.
3. Justification of the High Court in rejecting the challenge to the orders made by the appellant.
4. Jurisdiction of the assessing officer.
5. Violation of principles of natural justice.

Issue-wise Detailed Analysis:

1. Applicability of Section 206C of the Income Tax Act to the Appellant:
The core issue was whether the provisions of Section 206C of the Income Tax Act were applicable to the appellant, Mysore Sales International Limited, which is a Karnataka Government undertaking engaged in the business of manufacturing arrack. The assessing officer had held that the appellant was a "seller" and the liquor vendors were "buyers" under Section 206C, thus obligating the appellant to collect income tax at source (TDS) from the liquor vendors. The appellant argued that it was a public sector undertaking and that the liquor vendors did not obtain arrack through auction but only obtained the right to retail vend arrack, making Section 206C inapplicable.

2. Definition and Classification of "Buyer" under Explanation(a) to Section 206C:
The definition of "buyer" under Explanation(a) to Section 206C was crucial. The appellant contended that the liquor vendors did not qualify as "buyers" because they did not obtain arrack through auction, and the sale price of arrack was fixed by the Excise Commissioner, thus falling under the exclusion clause in Explanation(a)(iii). The Court found that the excise contractors were only shortlisted through auction for the right to retail vend and did not obtain arrack through auction. The sale price of arrack was fixed within a statutory range, satisfying both conditions under Explanation(a)(iii), thus excluding the liquor vendors from the definition of "buyer."

3. Justification of the High Court in Rejecting the Challenge to the Orders Made by the Appellant:
The High Court had dismissed the writ petitions and writ appeals filed by the appellant, affirming the orders of the assessing officer. The Supreme Court found that the High Court erred in its interpretation of Section 206C and the definition of "buyer." The High Court's decision was set aside as it was not justified in dismissing the appellant's challenge.

4. Jurisdiction of the Assessing Officer:
The appellant argued that the assessing officer did not have the jurisdiction to pass the orders under Section 206C(6) of the Income Tax Act, as jurisdiction was conferred upon the Assistant Commissioner of Income Tax (TDS)-1, Bengaluru. The Single Judge had rejected this contention as a technicality. The Supreme Court did not delve deeply into this issue, focusing instead on the applicability of Section 206C and the definition of "buyer."

5. Violation of Principles of Natural Justice:
The appellant contended that the orders dated 17.01.2001 were passed in violation of the principles of natural justice as no adequate opportunity of hearing was given. The Supreme Court held that even though the statute may be silent on the requirement of notice and hearing, principles of natural justice must be followed when an order entails adverse civil consequences. The Court emphasized the necessity of notice and a reasonable opportunity of hearing before passing an order under Section 206C(6).

Conclusion:
The Supreme Court allowed the appeal, setting aside the judgments of the Division Bench and the Single Judge of the High Court, as well as the orders dated 17.01.2001 passed by the Deputy Commissioner of Income Tax (TDS)-1 under Section 206C(6) of the Income Tax Act. The Court held that Section 206C was not applicable to Mysore Sales and that the liquor vendors could not be termed as "buyers" within the meaning of Explanation(a) to Section 206C. The appeal was allowed without any order as to costs.