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TMI Blog2024 (7) TMI 517X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - B. V. NAGARATHNA And UJJAL BHUYAN, JJ. JUDGMENT UJJAL BHUYAN, J. Heard learned counsel for the parties. 2. This appeal has been preferred against the judgment and order dated 13.03.2006 passed by the Division Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Act. Relatable to the above core issue is the question as to, whether, the High Court was justified in rejecting the challenge to the said orders made by the appellant. 4. Before attempting to answer the question(s) so framed above, it would be apposite to briefly narrate the relevant facts of the case. Mysore Sales International Limited (also referred to Mysore Sales hereinafter) is a Karnataka Government undertaking, inter alia, engaged in the business of manufacturing arrack. Mysore Sales is an assessee under the Income Tax Act. Appellant had entered the arrack trade in July, 1993 in terms of the excise laws of the State of Karnataka. Prior to 1993, there were several private bottling units in the State of Karnataka and they were manufacturing and selling arrack. Auctions were conducted periodically for the purpose of conferring lease right for retail vending of arrack. It was conducted with reference to designated areas. Successful bidders were entitled to procure arrack from the bottling units and then to sell it in retail trade within their respective allotted areas. The arrack trade is controlled by the state government. 4.1. The Karnataka Excise Act, 1965 (briefly the Exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee in terms of the Excise Act. 4.4. Successful excise contractors secure arrack from Mysore Sales and Mysore Sugar depending upon the areas allotted to them. The lease for the right to retail vend of liquor provides auctioning of such right with reference to a designated area. The retail sale price is fixed by the state government in terms of the 1967 Rules. The margin would depend upon various factors. 4.5. Section 206C was inserted in the Income Tax Act by the Finance Act, 1988 with effect from 01.06.1988. It casts an obligation on the seller of alcoholic liquor etc. of deducting tax at source (TDS) at the time of payment by the buyer . As per Explanation(a), certain persons were not included within, rather excluded from, the definition of buyer . 4.6. A circular came to be issued by the Excise Commissioner of Karnataka on 16.06.1998 to which an addendum was also issued. The circular clarified that since arrack was not obtained through auction and since the selling price of arrack was fixed by the Excise Commissioner, there was no question of recovery of TDS from the excise (liquor) vendors or contractors. 4.7. In view of the above, appellant did not deduct any TDS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. liquor contractors do not obtain any arrack in auction. They only obtain the right/licence to carry out retail vending of arrack. Therefore, such contractors are not buyers as defined in the Explanation under Section 206C of the Income Tax Act. 6.1. Learned AAG argued that what is disposed of in the auction is the retail or vending right of arrack and not auctioning of the arrack itself. The final sale of arrack is carried out by the contractors at the retail price fixed by the government. He, therefore, submits that Section 206C is not applicable to a public sector undertaking like Mysore Sales. Both Explanations (a)(ii) and (iii) clearly exclude retail vendors from the ambit and purview of buyers as defined under the Explanation. 6.2. Elaborating further, he submits that buyers falling in the above exception were exempted from paying income tax at source at the time of obtaining licence for retail vending of arrack in their respective assigned areas as per the price fixed by the state government. The auction is only regarding transferring the right or privilege which is vested in the state to the liquor contractors who would thereafter operate the retail business of vending in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. In the auction, the excise contractors are granted permits/licences for retail sale of arrack by the successful excise contractors in their allotted areas. It is thereafter that sale of arrack is affected by the excise contractors at a price fixed by the government between a minimum floor value and maximum ceiling value. Therefore, such a transaction cannot be said to be a sale or purchase through auction. 6.7. Learned counsel also submitted that the assessing officer was not conferred the jurisdiction to pass the orders under Section 206C(6) of the Income Tax Act. Jurisdiction was conferred upon the Assistant Commissioner of Income Tax (TDS)-1, Bengaluru. This contention of the appellant regarding jurisdiction was rejected by the learned Single Judge as being merely a technical one. 6.8. Learned counsel also submits that orders dated 17.01.2001 passed by the assessing officer under Section 206C(6) of the Income Tax Act were in breach of the principles of natural justice. No opportunity of hearing was given to the assessee. Without such hearing, the aforesaid orders were passed. Such orders being in violation of the principles of natural justice are void ab initio. This aspect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck) were obtained only on production of permits which were available on successful bidding in the auction. 7.3. Thus, the liquor contractors clearly came within the ambit of the meaning of buyer under Explanation(a) to Section 206C of the Income Tax Act. Therefore, Mysore Sales was under an obligation to deduct income tax at source(TDS) from the liquor contractors. Since it failed to do so, the assessing officer was fully justified in passing the orders dated 17.01.2001 under Section 206C(6) of the Income Tax Act. 7.4. Learned Single Judge had elaborately examined the entire gamut of the issues and rightly affirmed the orders dated 17.01.2001. Similarly, the Division Bench also made a threadbare examination of the entire issues and, thereafter, came to the conclusion that the assessing officer was fully justified in passing the orders dated 17.01.2001. That being the position, there is no reason why, at this stage, the concurrent findings of the assessing officer as affirmed by the Single and Division Benches of the High Court should be disturbed. As such, the civil appeal should be dismissed. 8. Submissions made by learned counsel for the parties have received the due consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (1) or to a transferee under sub-section (1A), a licence in terms of his lease. Sub-section (3) deals with determination of a lease for violation of the conditions mentioned therein. Under sub-section (4), when a lease is determined in terms of sub-section (3), the state government may direct the Deputy Commissioner to take over the right under his management and to lease it again by resale or otherwise. 9.3. Section 71 confers power on the state government to make rules to carry out the purposes of the Excise Act. 10. The Karnataka Excise (Arrack Vend Special Conditions of Licenses) Rules, 1967 (already referred to the 1967 Rules hereinabove) have been framed by the Government of Karnataka in exercise of the powers conferred by Section 71 of the Excise Act. Rule 2 of the 1967 Rules deals with selling of arrack of prescribed strength etc. by the licensee. Rule 2(1) says that every licensee licensed to vend arrack by retail sale shall sell only arrack of prescribed strength. As per sub-rule (2), no arrack except in sealed bottles or in sealed polythene sachets obtained from a warehouse or depot shall be kept for sale or sold in the licensed premises. Rule 3 provides for constructi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t may by order specify. Rule 3(3) provides that the right of retail vend of arrack shall be the exclusive right but in such districts as may be specified by the government and only bottled arrack or arrack in polythene sachet shall be sold to consumers. Rule 3A deals with grant of lease to government companies etc. As per sub-rule (1), notwithstanding anything contained in the 1969 Rules, the state government may, if it is considered expedient in the interest of government revenue or for any other reasons to be recorded in writing, grant the lease of right of retail vend of liquor in favour of any company or agency owned or controlled by the state government or a state government department on such terms and conditions as it deems fit. 11.1 Registration of excise contractors is provided for in Rule 4A. As per sub-rule (1), every application for registration as excise contractor shall be made to the Excise Commissioner in the prescribed format. After following the procedure prescribed in subrules (2) to (4), the Excise Commissioner under sub-rule (5) may register such an applicant as an excise contractor and grant a certificate of registration in the prescribed format which is not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erves more than one district, the warehouse shall be deemed to be a depot for storing bottled arrack and for supply of arrack to the person holding a licence to sell arrack in retail. Under Rule 9, the Commissioner may fix the number of warehouses, the area to be served by each of the warehouse and their location. Removal of arrack from the warehouse is provided for in Rule 16. As per subrule (1), no arrack shall be removed from the warehouse without payment of excise duty. Sub-rule (2) says that arrack shall not be issued from the warehouse or depot except in bottles or in polythene sachets of approved capacity and design. As per subrule (3), the same shall be issued from the warehouse or depot only to the persons holding a licence to sell arrack in retail. Rule 17 says that the price to be paid by the government to the distillery for the rectified spirit supplied by the distillery to the warehouse, the price to be paid by the government to the warehouse for manufacture and bottling of arrack and the price to be paid by the lessees for the right of retail vend of arrack to the government for the supply of bottled arrack shall be fixed by the Excise Commissioner from time to time w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pproval of the government. In so far the retail price is concerned, Rule 4 of the 1967 Rules says that the excise contractor can sell the arrack at a price within the range of minimum floor price and maximum ceiling price that may be fixed by the Excise Commissioner. 14. Having broadly surveyed the statutory framework of the business of arrack in the State of Karnataka, let us now deal with Section 206C of the Income Tax Act. For ready reference, the said provision is extracted hereunder: 206-C. Profits and gains from the business of trading in alcoholic liquor, forest produce, scrap, etc. (1) Every person, being a seller shall, at the time of debiting of the amount payable by the buyer to the account of the buyer or at the time of receipt of such amount from the said buyer in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, collect from the buyer of any goods of the nature specified in column (2) of the Table below, a sum equal to the percentage, specified in the corresponding entry in column (3) of the said Table, of such amount as income tax: TABLE SI. No. Nature of Goods Percentage (i) Alcoholic liquor for human consumption (other than India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cartridge tape, CD-ROM or any other computer readable media as may be specified by the Board (hereinafter referred to as the computer media) shall be deemed to be a return for the purposes of sub-section (5A) and the rules made thereunder and shall be admissible in any proceedings thereunder, without further proof of production of the original, as evidence of any contents of the original or of any fact stated therein. (5C) A return filed under sub-section (5B) shall fulfill the following conditions, namely:- (a) while receiving returns on computer media, necessary checks by scanning the documents filed on computer media will be carried out and the media will be duly authenticated by the Assessing Officer; and (b) the Assessing Officer shall also take due care to preserve the computer media by duplicating, transferring, mastering or storage without loss of data. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... society. 14.1. Sub-section (1) of Section 206C says that every person who is a seller shall collect from the buyer of the goods specified in the table, a sum equal to the percentage specified in the corresponding entry of the table. The collection is to be made at the time of debiting of the amount payable by the buyer to the account of the buyer or at the time of the receipt of such amount from the said buyer, be it in cash or by way of cheque or by way of draft etc. In so far alcoholic liquor for human consumption (other than India made foreign liquor i.e., IMFL), the amount to be collected is 10 percent. Subsection (3) provides that any person collecting such amount under sub-section (1) shall pay the said amount within 7 days of the collection to the credit of the central government or as the Central Board of Direct Taxes (CBDT) directs. Sub-section (4) clarifies that any amount so collected under Section 206C(1) and paid under sub-section (3) shall be deemed as payment of income tax on behalf of the person from whom the amount has been collected and credit shall be given to such person for the amount so collected and paid at the time of assessment proceeding for the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the definition of buyer . If the buyer is a public sector company or it has obtained the goods in further sale or if the goods are not obtained by him by way of auction and where the sale price of such goods to be sold by the buyer is fixed by or under any state enactment, then such a person would not come within the ambit of buyer as per the definition in Explanation(a). Since much emphasis has been placed on Explanation(a)(iii), we may extract the same again to understand the significance thereof: a buyer where the goods are not obtained by him by way of auction and where the sale price of such goods to be sold by the buyer is fixed by or under any State Act. Thus, Explanation(a)(iii) visualizes two conditions for a person to be excluded from the meaning of buyer as per the definition in Explanation(a). The first condition is that the goods are not obtained by him by way of auction. The second condition is that the sale price of such goods to be sold by the buyer is fixed under a state enactment. These two conditions are joined by the word and . The word and is conjunctive to mean that both the conditions must be fulfilled; it is not either of the two. Therefore, to be excluded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck 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. 15.1 In Om Parkash (supra), this Court considered the issue of tax collection at source in respect of the liquor trade under Section 206C of the Income Tax Act and as to whether a licensee who is issued a licence by the government permitting him to carry on the liquor trade would be a buyer as defined in Explanation (a) to Section 206C (11) of the Income Tax Act. This Court held that buyer would mean a person who by virtue of the payment gets a right to receive specific goods and not where he is merely allowed/permitted to carry on business in that trade. On licences issued by the government permitting the licensee to carry on liquor trade, provisions of Section 206C are not attracted as the licensee does not fall within the concept of buyer referred to in that section. This Court emphasized that a buyer has to be a buyer of goods and not merely a person who acquires a licence to carry on the business. 15.2. After the arrack is obtained in the above manner by the excise contractor, the requirement of the second condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 156 of the Income Tax Act was issued. Before passing the said order, it is seen that the assessing officer had considered Section 206C of the Income Tax Act and the reply submitted by Mysore Sales to the show cause notice issued. 18. We have already analysed the various sub-sections of Section 206C of the Income Tax Act. 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. 19. 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 p ..... 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