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TMI Blog1996 (2) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... by the same, the assessees have come up in appeal. Feeling aggrieved by the reading down of section 44AC 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 44AC and 206C of the Act, they were heard together. Section 44AC of the Act was inserted by the Direct Tax Laws (Amendment) Act, 1989, with effect from April 1, 1989. Section 206C of the Act was inserted by the Finance Act, 1988, with effect from June 1, 1988. The above sections are reproduced hereinbelow : 44AC. 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 43C in the case of an assessee, being a person other than a public sector company (hereafter in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s obtained under or in pursuance of the sale under sub-section (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 co-operative society." " 206C. 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 44AC, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pare 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 sub-section (3). (7) Without prejudice to the provisions of sub-section (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 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 sub-section (7) shall be a charge upon all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 benami names by floating undertakings or associations for short periods. Since tax is payable in the assessment 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 assessments 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 person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovides 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, dated November 24, 1988, and Circular No. 528, dated December 16, 1988, issued by the Central Board of Direct Taxes, have explained the scope and ambit of section 44AC and section 206C 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. Kunhammed 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 and Co. v. Union of India [199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 44AC and 206C ; (ii) Section 206C does not suffer from any constitutional infirmity and is perfectly valid ; (iii) Section 44AC is not an independent provision. It does not dispense with a regular assessment in accordance with the provisions of the Income-tax Act. Section 44AC is merely an adjunct to and explains the provisions in section 206C. A regular assessment has to be made in respect of an assessee dealing in specified goods in accordance with sections 28 to 43C. Read down in this manner, section 44AC 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of liquor and other charges on bottling, labelling, etc. In view of section 44AC and section 206C 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 44AC. Thereafter, the appellant and others assailed the above circular as also the basis on which the circular aforesaid was issued, viz., section 44AC and section 206C of the Income-tax Act. The High Court upheld the validity of section 44AC and section 206C and read down section 44AC holding that it is only an adjunct to section 206C and so read, the relief under section 28 to section 43C 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 " kendu/tendu leaves ". It is a natural forest produce. All the Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial. The above aspect will highlight that the relevant provisions are wholly arbitrary in nature. They are discriminatory also. Further, there is no material available for adopting the percentage fixed in sections 44AC and 206C of the Act. The material relied on in A. Sanyasi Rao's case [1989] 178 ITR 31 (AP) is too fragile to sustain the levy as valid, and so, the court was constrained to read down the section. Similarly, there is no material to rope in traders in tendu leaves. The proviso to section 206C applies only to traders and not to manufacturers, which again is discriminatory. Regarding persons who deal in timber, it is only at the end of the year, income or net profits can be arrived at and to assume that at an anterior point of time income accrues or is received is a far cry and is based on no material. It is the plea of the petitioners, who purchase biri leaves (kendu or tendu leaves), that the trade in the aforesaid commodity is a hazardous one. The leaves are sold in bags weighing 60 kg. and the intending purchasers are allowed to inspect the goods, Thereafter, offer is made on the basis of the weight noticed before inspection. The tendu leaves are highly perishable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard is not open to scrutiny by the court. All that is envisaged in the impugned statutory provisions is only an estimated (income-tax) " advance tax " ; (ii) since it came to light that the income from certain trades could not be properly brought to tax, the Legislature enacted the instant machinery provisions. The provisions are reasonable and have sufficient nexus to the objects that are sought to be achieved. The statutory provisions were intended to operate in all trades where the evasion and chances of evasion were greater than others and due to practical experience over the years, it was felt that the particular trades or businesses necessitated speedier provision for recovery or collection. It is in this perspective only, trades in particular commodities, wherein evasion was predominant and called for appropriate machinery to secure the payment of tax, the legislation was enacted. In the case of taxation laws, the Legislature has got a wide discretion to pick and choose persons, objects, districts, etc., for legislating. The power of the Legislature to classify or select certain objects or persons to which the law will apply is of great magnitude. The court permits a gre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sputed that under that entry a law could also be passed to prevent a person from evading the tax payable on his own income. As is well-known the legislative entries have to be read in a very vide manner and so as to include all subsidiary and ancillary matters. So entry 54 should be read not only as authorising the imposition of a tax but also as authorising an enactment which prevents the tax imposed evaded. If it were not to be so read, then the admitted power to tax a person on his own income might often be made infructuous by ingenious contrivances. Experience has shown that attempts to evade the tax are often made." (paragraph 20) (emphasis supplied). In Khyerbari Tea Co. Ltd. v. State of Assam, AIR 1964 SC 925 at page 935, the Constitution Bench observed thus : " It is hardly necessary to emphasise that entries in the three Lists in the Seventh Schedule which confer legislative competence on the respective Legislatures to deal with the topics covered by them must receive the widest possible interpretation ; and so it would be unreasonable to read in the entry any limitation of the kind which Mr. Pathak's argument seems to postulate. Besides, it is well-settled that when a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e " in Schedule VII, List I, entry 82, should be interpreted in its widest amplitude. It was further observed that even in its ordinary economic sense, the expression " income " includes not merely what is received or what comes in by exploiting the use of a property, but also what one saves by using it oneself. That which can be converted into income can be reasonably regarded as giving rise to income. See also CIT v. Bhogilal Laherchand [1954] 25 ITR 50 (SC). The entry will take within its fold any profits or gains not only actually received, but also income which is supposed by the Legislature to have notionally accrued. What can be converted into income will also come within its fold. In Sardar Baldev Singh v. CIT [1960] 40 ITR 605 (SC), this court held that " entry 54 should be read not only as authorising the imposition of a tax, but also as authorising an enactment which prevents the tax imposed being evaded. If it were not to be so read, then the admitted power to tax a person on his own income might often be made infructuous by ingenious contrivances ". The court upheld the validity of section 23A of the Indian Income-tax Act, 1922, holding that it dealt with a situation w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke appropriate provision for collection of tax at an anterior stage by adopting the purchase price as the measure of tax. In our view, this is permissible and the standard by which the amount of tax is measured, being the purchase price, will not in any way alter the nature and basis of levy, viz., that the tax imposed is a tax on income. It cannot be labelled as a tax on purchase of goods. We are further of the view that the basis of a charge relating to income-tax is laid down in sections 4 to 9 of the Income-tax Act, 1961. Section 4 is the charging section. Income-tax is levied in respect of the total income of the previous year of every person. Section 5 deals with the scope of total income. Section 6 deals with the residence in India. Section 7 deals with the income deemed to be received. Section 8 deals with dividend income. Section 9 deals with the income deemed to accrue or arise in India. Section 9(1) is to the following effect : " Income deemed to accrue arise in India. --- (1) The following incomes shall be deemed to accrue or arise in India-- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or throu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y at Pondicherry were made by the agents in British India and no purchases were made through any other agency. The court held that the assessee-company had a business connection in British India, within the meaning of section 42 and a portion of the profits of the non-resident attributable to the purchase of cotton in British India could be apportioned under section 42(3). The receipt of income or realisation of profits should not be confused with the idea of accrual of profits. The factual sale fixes the time and place of receipt only. Several places commencing from the buying of raw materials and ending with the production of finished products and the sale thereof will in different proportions point out where the income accrued or arose. It is in this perspective, that the court held that income accrued where the raw material is systematically purchased and which contributes substantially to the ultimate profit which is realised on the sale of the end-product. We understand the ratio of the decision, as highlighting the principle that even operations which are confined to the purchase of goods might constitute a business connection and the profits on sales might be deemed to accr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fiscal adjustment of diverse elements, permit a larger discretion to the Legislature in the matter of classification, so long it adheres to the fundamental principles underlying the said doctrine. The power of the Legislature to classify is of ' wide range and flexibility ' so that it can adjust its system of taxation in all proper and reasonable ways. Similarly, in Khyerbari Tea Co. Ltd.'s case, AIR 1964 SC 925, at page 941, the court held thus : " ... the Legislature which is competent to levy a tax must inevitably be given full freedom to determine which articles should be taxed, in what manner and at what rate vide Raja Jagannath Baksh Singh v. State of U. P. [1962] 46 ITR 169 ; [1963] 1 SCR 220 ; AIR 1962 SC 1563. It would be idle to contend that a State must tax everything in order to tax something. In tax matter's, ' the State is allowed to pick and choose districts, objects, persons, methods and even rates for taxation if it does so reasonably. The Supreme Court of the United States of America has been practical and has permitted a very wide latitude in classification for taxation '. Willis on ' Constitutional Law ', page 587. This approach has been approved by this court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. v. State a A. P. [1963] 1 SCR 404 at page 410 ; AIR 1962 SC 1733 at page 1735. Applying it, the court observed : ' If a State can validly pick and choose one commodity for taxation and that is not open to attack under article 14, the same result must follow when the State picks out one category of goods and subjects it to taxation.' This indicates a wide range of selection and freedom in appraisal not only in the objects of taxation and the manner of taxation but also in the determination of the rate or rates applicable ...... (emphasis supplied). We should also bear in mind the principles laid down in a more recent decision in Ganga Sugar Corporation Ltd. v. State of U. P. [1980] 45 STC 36 ; AIR 1980 SC 286, wherein it was held thus (at page 48 of 45 STC and at page 296 of AIR 1980 SC) : Article 14, a great right by any canon, by its promiscuous forensic misuse, despite the Dalmia decision, AIR 1958 SC 538, has given the impression of being the last sanctuary of losing litigants. In the present case, the levy which is uniform on all sugarcane purchases, is attacked as ultra vires, on the score that the sucrose content of various consignments may vary from place to place, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fferences or is arbitrary, fanciful and consequently illegal. At the same time, the question of classification is primarily for legislative judgment and ordinarily does not become a judicial question. A power to classify being extremely broad and based on diverse considerations of executive pragmatism, the judicature cannot rush in where even the Legislature warily treads." Considered in the light of the practical difficulties envisaged by the Revenue to locate the persons and to collect the tax due in certain trades, if the Legislature in its wisdom thought that it will facilitate the collection of the tax due from such specified traders on a " presumptive basis ", there is nothing in the said legislative measure to offend article 14 of the Constitution. In the light of the legal principles stated above, we are unable to hold that section 44AC read with section 206C is wholly hit by article 14 of the Constitution of India. However, the denial of relief provided by sections 28 to 43C to the particular businesses or trades dealt with in section 44AC calls for a different consideration. Even according to the Revenue, the provisions (sections 44AC and 206C) are only " machinery prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its and gains would be relevant only for explaining and justifying the level of deductions provided for in section 206C. Collections will be made at the rate ; specified in section 206C and then a regular assessment will be made like in the case of any other assessee." (emphasis supplied). The court further held thus (page 67) : " On this aspect, we may as well refer to the words ' in the assessment made under this Act ' in sub-section (4) of section 206C. These words show that an assessment under the Act is still to be made even where tax is collected under section 206C. This, in our opinion, is a strong indication supporting our construction of section 44AC.... We uphold the validity of section 206C. We also hold that section 44AC is a valid piece of legislation, read in the manner indicated by us. Section 44AC is not to be read as an independent provision but as an adjunct to and as explanatory to section 206C. It does not dispense with a regular assessment altogether. After the tax is collected in the manner provided by section 206C, a regular assessment will be made where the profits and gains of business in specified goods will be ascertained in accordance with sections 28 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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