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TMI Blog1989 (2) TMI 110X X X X Extracts X X X X X X X X Extracts X X X X ..... orest reserves. The tax is really not on income, but on the purchase price ; the tax really partakes of the character of a sales tax ; sales tax cannot be levied, assessed or collected by the Union ; that is a field open only to the State ; that is the effect of article 246(3) of the Constitution read with entry 54 of List II of the VIIth Schedule dealing with tax on sale and entry 8 dealing with intoxicating liquors. The tax is levied on an artificial assumption, and is, therefore, not linked with a tax on real income. It is quite possible that any of the ventures may culminate in calamitous end and a massive loss. How could then the Legislature alter the actual and factual situation, create a fiction, name it as income and levy the tax ? query the petitioners. In a sense, the question raised is about the competence-legislative competence-of the Union, to levy the tax on these commodities in the manner provided by the Finance Act, 1988. Yet another area in which the constitutionality is assailed, is the alleged discriminatory character of the tax. They contend : In the modern world, many are the articles of daily use and which are dealt with daily. Some are essential. Some are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Kanchanbai [1970] 77 ITR 123 (SC) (126)). In a sense, the practice can be traced back even to the earlier decisions in Shaw Wallace and Co. v. CIT [1932] 6 ITC 178 and Navinchandra Mafatlal v. CIT [1954] 26 ITR 758 (SC). Later decisions also are available illustrating the principles. Gross receipts, without giving deduction for expenditure, being treated as income was upheld in Travancore Rubber and Tea Co. Ltd. v. State of Kerala [1963] 48 ITR 102 (SC). Legal principles laid on similar lines are discernible from the decision in Punjab Distilling Industries Ltd. v. CIT [965] 57 ITR 1 (SC). It is unnecessary to refer to the multiplicity of decisions on the point when the proposition is clear enough. It would then be sufficient to hold that irrespective of the actual receipt of an income or the factual situation in relation to the real income, it would be competent for Parliament to make fictional computation of the income and tax it as such. True, there have been extreme instances where attempts at taxation of receipts which had no connection with an income or income-earning activity, have been stifled by court decisions. Judicial thoughts in that area, and in that strain, can p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... servations about the loopholes and bestowed excruciating thoughts on the best ways to plug such holes. The long experience of the tax administrators revealed that in relation to some articles, evasion was easy. It was not merely a case of moonlighters as that term as is now referred to in taxation parlance. (A moonlighter is a person who has considerable income, some from known and disclosed sources and some substantial portion from undisclosed sources). Certain businesses have witnessed "fly-by-night" operators, as referred to in the taxman's colloquium. In other words, there are businesses where accounts are hardly kept; where, even if accounts are kept, the opportunities for manipulations are vast and wide. Businesses are there, where, as soon as income is amassed, the income earner could vanish mysteriously giving the slip even to the watching tax-gatherer. There are businesses where a common alibi could be easily employed or where any one could be an easily available name-lender. Such trades, therefore, rightly, needed stringent and corrective approaches and additional vigilant watch. It was Richard Musgrave who championed this device of presumptive taxation, in his well-kno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mes" of the same date. The court is not directly concerned with the morality or hardship of the impost. Hardships could be there in any system of tax. That is essentially for Parliament to be concerned about. Even as a self-serving measure, Parliament may adopt a policy which would subserve the exaction of maximum benefit without killing the Golden goose. In a sense, Parliament has reacted to the grievance of hardship in relation to some matters. There had been a considerable, if not drastic, reduction in the rates as regards timber as is evident from the Direct Tax Laws (Amendment) Bill, 1988, which is intended to effect far reaching amendments to the existing provisions. A basic objective of treating certain specific types of business for such presumptive taxation, is the peculiar characteristic of the income earner, engaged in those types of business having expansive opportunities to defeat the Revenue by manipulative operations. A presumptive taxation can thus be a substantial anti-evasion measure. The system has other merits also to its credit. The objective of the taxation under attack is gatherable from the following passage occurring in the Budget Speech for the year 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... book "Excise Systems". He had pointed out how they had been used at the time of the Han Dynasty in China and during the Mauryan period in India. By the 16th and 17th centuries, excise duties on alcohol became prominent in Europe. Those duties were a major source of tax revenue for the English Government in the 19th century. It is unnecessary to survey the theoretical aspects of the rationale for special taxes on alcohol. A very illuminating article is available in 1983 British Law Review, at page 370, "The Rationale for Special Taxes on Alcohol : A Critique" by John W. O' Hagan. He had separately dealt with the two broader reasons in economics literature for special taxes on alcohol : (1) the role as revenue raisers, (2) their control function, i.e., correcting for market imperfections. One distinct advantage in relation to excise duties on alcohol was the advantage of its being a secure source of revenue. Theoretically, it has been computed that a person, on the average industrial wage and who drinks four pints a day on average, would pay 7.6 per cent. of his total income on alcohol excise duties alone. The ultimate conclusion is that revenue raising is the main reason for alcoho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion in relation to the peculiarities of the liquor trade would lead to the conclusion that the exercise of presumptive taxation in relation to the liquor trade is a perfectly permissible constitutional operation. The validity of the tax as introduced by section 44AC could not then be doubted, disputed or denied by a court of law. A subsidiary contention has been raised of a vicious discrimination practised, exempting the Indian made foreign liquors. The sub-classification between the various types of liquors could be noticed from very early times. As O'Hagan observed : "The burden of tax varied depending on what beverage type was consumed. .. " (emphasis supplied). (See The Rationale for Special Taxes on Alcohol : A Critique, 1983 British Tax Review, page 370 at 371). The Budget introduced in the House of Commons in 1882, increased the duties on beer, while wine was left untouched. (See the Autobiography of Sir Edward Clarke, page 239). There are very many reasons inferable in relation to the firm grip Parliament made on foreign liquors, arrack and toddy. If revenue reasons are the more appealing ones for the imposition of presumptive taxation on alcohol, then the statis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at aping her. The amusing scene is described thus : "And it remains a source of amusement to the Queen that many people who would prefer a large scotch or a brandy always choose sherry at her parties : 'What a lot of sherry drinkers!' she says, holding her glass of tonic water elegantly." However, when she visited one of her Commonwealth countries: "The Queen was offered and courageously accepted a drink of the local brew-'kava'-in a coconut shell, . . . " The French have perhaps a justified arrogance about their wines. connoissuer, however, cautioned: "There is nothing so fattening as champagne ; and however little brandy or whisky may be put into big glasses, the soda water that accompanies it is inclined to disturb the digestion, swell the figure, and ruin the complexion. The American seems to be proud of "the only American invention as perfect as a sonnet." History has recorded about drunkards of bewildering capacity : "Sydney Carton, that idealist and most unpromising of men, was Stryver's great ally. What the two drank together, between Hilary term and Michaelmas, might have floated a king's ship." The ill-effects of excessive indulgence in drink were attem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by Richard Musgrave ? Why should beedi leaves be perilously brought near a fiery type of taxation-is the further contention to be considered. The contention has been raised by persons and firms dealing in tobacco leaves, but who have no involvement in manufacturing processes. Here again, a brief survey of the antecedents of the commodity may be of great utility. It was indeed, a long time ago, that habituated and attractive smoking became fashionable in parlours and drawing rooms. The big brothers of beedi, like the cigars of Havana or the cigarette stuffed with superior tobacco (of the unroasted and roasted varieties) may be left out of examination in this context. Some geographical facts and historical transactions in relation to beedi leaves are available even from the decisions of the Supreme Court when it dealt with legal and constitutional issues connected with that trade. The tendu leaves cases decided by the Supreme Court in the context of constitutional guarantees (which are important landmarks in the interpretation of the freedom of trade), mostly came from the States of Orissa, Gujarat and Madhya Pradesh. The long stretches of forest where beedi leaves are grown, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orphaned condition of the timber in the forest has continued relevance even in present times. Some of the timber merchants of even earlier periods, rightly earned notoriety for themselves. That was the saga of the destruction attempted in the Burmese forests and elsewhere about which much literature is available now. (Passages from reports and books would considerably add to the prolixity and is not, therefore, attempted.) Long before environmentalists came into the field and the environmental movement became a forceful Organisation, the timber contractors had their bounteous opportunities for foul play with the nation's wealth and the people's wealth. This matter had been noted in one of the early decisions of the Madras High Court in Sivasubramanya v. Secretary of State for India in Council [1886] ILR 9 Mad 285. Even when specific statutory provisions were made for preservation of large areas of private forests, timber used to be pirated recklessly and forests denuded mercilessly. Permits which used to be obtained for clearing up the forests were saddled with solemn stipulations : sometimes regeneration of the clear-felled area ; sometimes assurances that only selective fellin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on behalf of the respondents. A decision applicable to the whole of the Indian Union cannot be based on the figures of a few individual assessees or a few selected areas. It is to be on an appraisal of all available information obtained from every part of the country. The Union Government, as noted earlier, is seen to have undertaken considerable exercises before it had brought in to force the enactment in question. The Direct Tax Laws (Amendment) Bill, 1988, referred to earlier, is evidence enough of a continued exercise of mind by the authorities concerned. If adjustments are called for, they have to be made, not by the court, but by Parliament. Some cautions have been given by Richard Musgrave himself while attempting presumptive taxation. There is no reason to assume that if moved with convincing and supportive data, the authorities would not realistically react to reasonable grievances. In sense, the Finance Minister's speech, the Notes on Clauses of the Bill, the press communique of the Central Board of Direct Taxes-all furnish enough indication about the approach and attitude of the Government. It is sufficient to note that those approaches do not present a closed mind nor a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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