Union of India & Anr Vs. A.Sanyasi Rao
& Ors,  INSC 245 (13 February 1996)
K.S.(J) Paripoornan, K.S.(J) Ahmadi A.M. (Cj) Sen, S.C. (J) Paripoornan,J., J.
1996 AIR 1219 1996 SCC (3) 465 JT 1996 (2) 425 1996 SCALE (2)280
(C) Nos. 3944-4087/92. Civil Appeal Nos. 2849/89. 4198/89. SLP (C) Nos.
13148/89, 2222-26/91, Writ Petition (C) Nos. 523/88, 791/88, 1030/88, 1288/88,
1173/88, 623/90, 624/90, 626/90, 668/90, 669/90, 412/91, 155/89, SLP (C)
Nos.10772/94, 11244-11250/94, 11253-11255/94 and 14253-60/91)
this batch of cases - writ petitions filed under Article 32 of the Constitution
of India and civil appeals and special leave petitions filed under Article 136
of the Constitution of India - substantially similar questions arise for
consideration. The matter arises under the Income Tax Act, 1961. The validity
of Sections 44AC and 206C of the Income Tax Act, 1961 (hereinafter referred to
as `the Act') is posed for consideration. Various assesses challenged the
aforesaid provisions as ultra vires and beyond legislative competence and also violative
of Articles 14 and 19(1)(g) of the Constitution of India in a few High Courts.
the challenge was not accepted by all the High Courts. A few High Courts have
read down the provisions of Section 44AC of the Act. Dissatisfied by the same, the
assesses 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.
other assesses have challenged the aforesaid provisions directly under Article
32 of the Constitution of India. Those are covered by writ petitions. A few
assesses, 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 1.4.1989.
206C of the Act was inserted by the Finance Act, 1988 with effect from
1.6.1988. The above sections are re- produced herein below:- "44AC.
Special provision 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 this section referred to as the buyer),
obtaining in any sale by way of auction, tender or any other mode, conducted by
any other person or his agent (hereafter in this section referred to as the
seller).-- (a) any goods in the nature of alcoholic liquor for human consumption
(other than Indian-made foreign liquor), a sum equal to forty per cent of the
amount paid or payable by the buyer as the purchase price in respect of such
goods shall be deemed to be the profits and gains of the buyer from the
business of trading in such goods chargeable to tax under the head
"Profits and gains of business or profession":
that nothing contained in this clause shall apply to 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;
following explanation is being inserted by the Finance Act, 1990 with effect
from 1 April, 1991:
For the purpose of this clause, `purchase price' means any amount (by whatever
name called) paid or payable by the buyer to obtain the goods referred to in
this clause, but shall not include the amount paid or payable by him towards
the bid money in an auction, or, as the case may be, the highest accepted offer
in case of tender or any other mode;
the right to receive any goods of the nature specified in column (2) of the
Table below, or such goods, as the case may be, a sum equal to the percentage,
specified in the corresponding entry in column (3) of the said Table, of the
amount paid or payable by the buyer in respect of the sale of such right or as
the purchase price in respect of such goods shall be deemed to be the profits
and gains of the buyer from the business of trading in such goods chargeable to
tax under the head "Profits and gains of business or profession".
---------------------------------------- S.No. Nature of goods percentage
---------------------------------------- (1) (2) (3)
---------------------------------------- i) Timber obtained under Thirty-five a
forest lease per cent ii) Timber obtained by Fifteen any mode other per cent
than under a forest lease iii)Any other forest Thirty-five produce not being
per cent timber ---------------------------------------- (2) For the removal of
doubts, it is hereby declared that the provisions of sub-section (1) shall not
apply to a buyer (other than a buyer who obtains any goods, from any seller
which is a public sector company) in the further sale of any goods obtained
under or in pursuance of the sale under sub- section (1).
a case where the business carried on by the assessee does not consist
exclusively of trading in goods to which this section applies 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.
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)".
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 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 on income comprised therein.
S.No. Nature of goods percentage ------------------------------------------------------
(1) (2) (3) ------------------------------------------------------- i)
Alcoholic liquor for human Fifteen consumption (other than per cent Indian made
foreign liquor) ii) Timber obtained under a Fifteen forest lease per cent iii)
Timber obtained by any Five mode other than under per cent a forest lease iv)
Any other forest produce Fifteen not being timber per cent
_______________________________________________________ Provided that where the
Assessing Officer, on an application made by the buyer, gives a certificate in
the prescribed form that to the best of his belief any of the goods referred to
in the aforesaid Table are to be utilized for the purposes of manufacturing,
processing or producing articles or things and not for trading purposes, the
provisions of this sub-section shall not apply so long as the certificate is in
The power to recover tax by a collection under sub-section (1) shall be without
prejudice to any other mode of recovery.
Any person collecting any amount under sub-section (1) shall pay within seven
days the amount so collected to the credit of the Central Government or as the
Any amount collected in accordance with the provisions of this section and paid
under sub- section (3) shall be deemed as payment of tax on behalf of the
person from whom the amount has been collected and credit shall be given to him
for the amount so collected on the production of the certificate furnished
under sub- section (5) in the assessment made under this Act for the assessment
year for which such income is assessable.
Every person collecting tax in accordance with the provisions of this section
shall within ten days from the date of debit or receipt of the amount furnish
to the buyer to whose account such amount is debited or from whom such payment
is received, a certificate to the effect that tax has been collected and
specifying the sum so collected, the rate at which the tax has been collected
and such other particulars as may be prescribed.
person collecting tax in accordance with the provisions of this section shall
prepare 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
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).
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 collectible to the date on which the tax was actually paid.
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 the assets of the seller."
above new provisions enable the Revenue to estimate the profits on a
"presumptive basis". It appears that Government wanted to get over
the problems in assessing income and recovering tax in the case of persons
dealing in country liquor, timber, forest produce, etc. Experience revealed
that a large number of persons dealing in the said commodities did not maintain
any books of account or the books of account maintained by such persons are
business of the above mentioned persons existed only for a short period -- a
year or two. After the period of contract or agreement, it was impossible to
trace them in many cases. Many of them were found to be dealing in benami
names. There was evasion on a large scale. Government found it difficult to
collect the tax due from such persons.
44AC occurs in Chapter VI of the Act dealing with computation of total income.
Sub-section (d) deals with computation of profits and gains of business or
44AC(1) determines the profits and gains of the year from the business of
trading in certain specified goods like liquor (other than Indian made foreign
liquor, timber and forest produce) at a particular percentage specified
therein. Section 44AC(2) states that the above provisions shall not apply to
second or subsequent sale of such goods.
44AC(3) is only a classificatory provision. The explanation to the section
specifies the seller as Central Government, State Government, Local Authority,
Corporation, etc. Section 206-C deals with collection and recovery of tax.
Section 206C(1) obliges the seller of the specified goods to collect from the
purchaser an amount equal to the percentage mentioned in the Table as income
tax. The goods mentioned in the Table are the very same goods mentioned in
Section 44AC. Sub-sections (2) to (5) of
Section 206C of the Act are further machinery provisions. In particular, sub-
section (4) provides that any amount collected under the section shall be
deemed to be payment of tax on behalf of the purchaser and provides for the
issuance of a certificate evidencing such payments. Section 44AC came into
force from 1.4.1989. Section 206C came into effect from 1.6.1988.
scope of the aforesaid provisions was explained in a memorandum to Finance
Bill, 1988 (see 170 ITR Statutes, p.187-88). It is to the following effect:-
"New provisions to counteract tax evasion by liquor contractors, scrap
dealers, dealers in products, etc.
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.
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 persons in whose names contracts are taken are men
of no means.
view to combat large- scale tax evasion by persons deriving income from such
businesses, the Bill seeks to insert a new section 44AC to provide for
determination of income in such cases. Taking into account the experience
gained in the past regarding the ratio of profit to the sale consideration the
proposal is to provide that sixty per cent of the amount paid or payable by
such persons on sale would constitute income of the tax payers, i.e., the
provisions of this section will apply only to an assessee, being a buyer of any
goods in the nature of alcoholic liquor for human consumption (other than
Indian-made foreign liquor) or any forest produce, scrap or waste, whether
industrial or non- industrial, or such other goods, as may be notified by the
Central Government, at the point of first sale. The word "seller"
connotes the Central Government, State Government or any local authority or
corporation or authority established by or under a Central Act or any company.
The provisions of this section shall not apply to any buyer in the second or
subsequent sale of such goods.
amendment will take effect from 1st April, 1989, and will, accordingly, apply to assessment year 1989-90
and subsequent years.
with a view to facilitate collection of taxes from such assessees, it is
proposed to introduce a new section 206C to provide that any person, being a
seller, referred to in section 44AC, shall collect income-tax of a sum equal to
twenty per cent of the amount paid or payable by the buyer, as increased by a
surcharge for purposes of the Union calculated on the income-tax at the rates
in force. Such sum is required to be collected either from the buyer at the time
of debiting the said amount to the account of the buyer or at the time of the
receipt of that amount from the buyer, whichever is earlier.
mode of recovery of tax shall be without prejudice to any other mode of
recovery. The tax so collected by the seller shall be paid to the credit of the
Central Government or as the Board directs, within seven days from the date of
collection. It will be treated as tax paid on behalf of the person from whom
the amount has been collected and credit shall be given for such amount in the
assessment made under this Act on production of a certificate.
new section also provides 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.
amendments will be made effective from 1st June. 1988."
Circular No. 525 dated 24.11.1988 and Circular No. 528 dated 16.12.1988, issued
by C.B.D.T., have explained the scope and ambit of Section 44AC and Section
206C of the Act.
Law of Income Tax - Sampath Iyengar, 8th edition, Vol.2, p. 2494 and Vol. 5,
matter at issue came up for consideration before the High Courts of Andhra
Pradesh, Kerala, Himachal Pradesh, Orissa, Punjab and Haryana and Patna, in
decisions therein are:
Sanyasi Rao and another v. Government of Andhra Pradesh and others (178 ITR 31)
- Andhra Pradesh.
Kunhammed Kutty Haji and others v. Union of India and others (176 ITR 481) -
Single Bench - Kerala.
T.K. Aboobacker and others v. Union of India and others (177 ITR 358) - Division
Bench - Kerala.
Chand Ashok Kumar and Company and others v. Union of India and others (187 ITR
188) - Himachal Pradesh.
Sri Venkateswara Timber Depot v. Union of India and others (189 ITR 741) - Orissa.
State of Bihar and another v. Commissioner of
Income Tax and others (202 ITR 535) - Patna.
Prasad Sahu and others v. Union of India and others (202 ITR 800) - Patna.
Mohan Gupta v. Union of India and others (204 ITR 384) - Patna.
Singh and others v. Union of India and others (209 ITR 824) - Patna.
Sat Pal and Co. v. Excise and Taxation Commissioner and others (185 ITR 375) -
Punjab and Haryana.
K.K. Mittal and Co. v. Union of India and others (187 ITR 208) - Punjab & Haryana.
K.K. Mittal and Co. v. Union of India and others (203 ITR 201) - Punjab & Haryana.
Trading Co. and others v. Union of India and others (204 ITR 645) - Punjab
should state that the legislative competence of Parliament to enact Sections
44AC and 206C of the Act was upheld by all the High Courts. In the decisions of
the Kerala High Court - 176 ITR 481 and 177 ITR 358 - the main challenge was
against the legislative competence only. The challenge against the aforesaid
statutory provisions on the ground of legislative competence, violation of
Articles 14 and 19 of the Constitution of India and the interpretation to be
placed on the provisions, directly came up before a Division Bench of the
Andhra Pradesh High Court in A. Sanyasi Rao's case (178 ITR 31). In the said
decision, the High Court, upholding the validity of the Act, read down Section
44AC of the Act and held that the said provision is only an adjunct to and
explains the provisions of Section 206C and does not dispense with the regular
assessment in accordance with the provisions of the Income Tax Act. The non-obstante
clause in Section 44AC was explained. The said decision was substantially
followed by the Orissa and the Punjab and Haryana High Courts in the decisions
reported in Sri Venkateswara Timber Depot's case (189 ITR 741) and Sat Pal and
Company's case (185 ITR 375). In the other decisions, the content or meaning of
the relevant statutory provisions alone came up for consideration.
heard M/s. H.N. Salve, Soli Sorabjee, K. Madhava Reddy and Vijay Bahuguna,
Senior Advocates and M/s. G. Sarangan and Ranjit Kumar, Advocates, who appeared
for the various assessees and also Dr. V. Gaurishankar, Senior Advocate, who
appeared on behalf of the Union of India.
advanced before us covered a wide range.
shall immediately state, in brief, the respective pleas put forward before us
by counsel on both sides. It should be stated that the pleas urged by counsel
on both sides were substantially with reference to the decision of the Andhra
Pradesh High Court in A. Sanyasi Rao's case (supra), wherein, at page 73, the
Court summarised the conclusion as hereunder:
Parliament was perfectly competent to enact sections 44AC and 206 C;
Section 206C does not suffer from any constitutional infirmity and is perfectly
Section 44AC is not an independent provision.
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.
down in this manner, section 44AC also does not suffer from any constitutional
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 for the limited purpose of determining the quantum of tax to be
collected under section 206C. Tax collected on specified goods will be given
credit for in the year in which those goods are sold;
view of the clarification of the Central Board of Direct Taxes, communicated by
the Chief Commissioner of Income-tax, Andhra Pradesh, Hyderabad, and also in view
of the concession made by the Income-tax Department, it is directed that the
expression purchase price in section 44AC and section 206C shall mean, in the
State of Andhra Pradesh in respect of arrack only the `issue price' as
understood in the Andhra Pradesh Excise Act and the Rules made thereunder, now
in force in this State. The true meaning and content of the expression
`purchase price' is, however, different, as explained hereinbefore;
The collection at source provided by Section 206C is relatable to the purchase
price and not to the income component of the purchase price."
is unnecessary to refer to the facts of individual cases in this batch of
cases. Indeed, we were, in particular, referred to the broad facts in two
representative cases. The first related to a dealer in liquor vide C.A. 4198 of 1989.
appellant herein was the petitioner in Civil Writ Petition No. 3947/89 in the
High Court of Punjab and Haryana. The said petition was heard along with a
number of other similar petitions and the High Court rendered a common judgment
dated 2.8.1989. The appellant (petitioner in the writ petition) is running the
business of liquor contractor in the State of Haryana. Respondent No. 1 auctioned the vending of country liquor
for the year 1989-90 in the Camp area of Yamuna Nagar, Damra and Harmal. The
appellant was the highest bidder. The purchaser of country liquor is required
to deposit the excise duty payable in respect of the quota of liquor purchased
by him in the State of Haryana. On production of the vouchers
showing the deposit of excise duty the Excise authority authorises the
appellant to make a purchase of the country liquor from the distillery. The
permit is issued to the appellant contractor thereafter. That entitles him to
purchase the country liquor, transport and sell it for human consumption. The
price charged by the distillery includes the price 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 30th of May, 1988, issued a
circular No. 3442-BA-2 to all the distilleries in Haryana directing them to
recover income-tax from the buyers (like the appellant) 15% 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.
highlighted in the second case is writ petition (civil) No. 155 of 1989. There
are five petitioners therein. The first petitioner is a firm and petitioners 2
to 5 are its partners. The firm is carrying on business as tobacco and bari leaves merchant. It is regularly assessed to income
tax. Bari leaves are also known as `Kendu/Tendu
leaves'. It is a natural forest produce. All the State Governments have nationalised
the trade in this commodity.
Governments sell the commodity by auction or by inviting tenders. The
petitioners purchase Tendu leaves from the forest departments of respective
Governments and sell them to retailers or manufacturers who number to several
thousands. Their plea is that they are not making any profit by the very act of
purchasing the goods. The petitioners pray for quashing Sections 44AC and 206C
of the Act and to quash the various assessment orders or demands made by the
income-tax authorities. They also pray for a direction, in the nature of
prohibition, from levying or collecting income-tax from the petitioners under
Sections 44AC and 206C of the Act.
The submissions made before us by counsel for the assessees can be summarised
thus; (1) Sections 44AC and 206C of the Act lack legislative competence.
Section 44AC levies a tax on purchase and by deeming provisions, 40% of the
purchase price shall be deemed to be the income. The section is a camouflage.
The section proceeds on the assumption that persons in particular trades are
evaders or do not keep accounts. Income tax is a tax on income and not on
expenditure or purchase. Levy under Section 44AC is one on "purchase"
and no income accrues or is received at that stage. Moreover, tax is levied on
hypothetical income and not on real income. Ordinarily, in taxation statutes,
legislative fiction is adopted to prevent evasion where devices are employed.
In those cases, there is income, but the person to be taxed is shifted. The
imposition of charge and the measure of levy are different in taxing statutes.
the said principle has been totally ignored; and (ii) the levy under Section
44AC read with Section 206C is highly arbitrary and discriminatory. Wholesale
dealers of country liquor alone are picked up. The retailers, processors and
manufacturers are left out. Similarly, persons dealing in Indian made foreign
liquor are excluded. Under the provide to Section 44AC, auction purchasers are
excluded. The same persons are conducting trade in country liquor, both
wholesale and retail. There is no rationale for the discrimination. The
exclusion of a buyer from a non-public sector undertaking under Section 44AC is
equally unjustified. In the case of auction purchasers, as soon as the hammer
falls, income is said to accrue. This is too artificial. 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 (supra) is too fragile to sustain the levy as valid,
and so, the Court was constrained to read down the section.
there is no material to rope in traders in Tendu leaves. The provide to Section
206C applies only to traders and not to manufacturers, which again is
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 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 Bari
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 and cannot be stocked for long. After delivery, at the time of
physical weighment, underweight is often noticed. The hazards in selling the
leaves to retailers are very many and in the overall picture, the gross profits
may vary from 5 to 9% and the net profits may vary from 3 to 5%.
profits cannot be said to be made by the mere act of purchasing the goods. The
goods purchased may be lost or destroyed or may perish by lapse of time. The
relevant aspects were never borne in mind before effecting the levy.
decisions, to support the submissions, were also brought to our notice.
Dr. Gaurishankar, senior counsel, who appeared for the Revenue, sought to
defend the competence and validity of Sections 44AC and 206C thus: (i) Sections
4 and 5 of the Act are the charging sections. It is fallacious to contend that
Section 44AC levies a charge. Section 44AC read with Section 206C is only a
machinery provision. It is evident that income or profit, is embedded even at
the point of purchase.
this basis, Section 44AC read with Section 206C only provides a machinery or
mechanism to tap the income which accrues and is charged under Sections 4 and 5
of the Act.
the legislative measure is only a machinery provision, it is open to the
legislature in its wisdom to specify the stage at which it is to be levied, the
rate at which it is to be levied and other details. The wisdom of the
legislature in these regions will not be scrutinized by the court. The power of
the legislature in enacting a taxation statute is of very wide import. Though
many more items were included in the original bill, at the time of final
enactment, the statutory provisions were made applicable only to few items and
the percentage fixed for the computation was lower. The attack against the legislative
competence is without substance. The impugned levy of income tax is not open to
objection. The assumption that Sections 44AC and 206C are charging provisions
is unsustainable. The legislation will fall within Schedule VII, List 1 Entry
relevant entry therein (taxes on income other than agricultural income) should
be liberally construed. There were sufficient materials before Parliament to
hold that due to very many causes, income from certain trades could not be
brought to tax and there was large scale evasion. The sufficiency of the
material in that regard is not open to scrutiny by 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.
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 pre-dominant 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 greater latitude to the discretion of the
legislature. It has been invariably held by this Court that in tax matters, the
State is allowed to pick and choose districts, objects, persons, methods and
even rates for taxation, if it does so reasonably. The provisions attacked in
this case are reasonable, as could be seen from the legislative history on the
object and the objects sought to be achieved.
Briefly, the rival pleas urged before us involve consideration of two main
Legislative Competence of Parliament to enact Sections 44AC and 206C of the
Whether the aforesaid provisions are arbitrary and irrational violating Article
14 of the Constitution of India. (The plea based on Article 19(1)(g) was not
urged) We should also bear in mind the principles of law laid down by this
Court regarding the following aspects:-
principles to be borne-in- mind in construing legislative lists;
true import of the word income occurring in Schedule VII List 1 Entry 82; and
extent of applicability of Article 14 of the Constitution to tax laws.
will take up the first point regarding legislative competence. As per Schedule
VII List 1 Entry 82, Parliament can legislate on the following subject:-
"Taxes on income other than agricultural income".
held by a Constitution Bench of this Court in Sri Ram Ram Narain Medhi vs.
State of Bombay (AIR 1959 SC 459), the heads of legislation in the lists should
not be construed in a narrow and pedantic sense, but should be given a large
and liberal interpretation. To similar effect are the decisions of this Court
in Calcutta Gas Company (Proprietary) Ltd. vs. State of West Bengal and others (AIR 1962 SC 1044 at
p.1049) and Banarasi Das and others vs. The Wealth Tax Officer and others (AIR
1965 SC 1387). In Union of India vs. Shri Harbhajan Singh Dhillon (1971 (2) SCC
779 at p.792), the Court quoted its earlier decision in Harakchand Ratanchand Banthia
and others vs. Union of India and others (1969 (2) SCC 166), wherein it was
held thus:- ".... The entries in the three Lists are only legislative
heads or fields of legislation, they demarcate the area over which the
appropriate Legislatures can operate." (emphasis supplied) Again in Baldeo
Singh vs. Commissioner of Income-Tax (AIR 1961 SC 736), the Court held thus:-
"....Under entry 54 a law could of course be passed imposing a tax on a
person on his own income. It is not disputed 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 wide
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 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. Experience has shown that
attempts to evade the tax are often made." (paragraph 20) (emphasis
supplied) In Khyerbari Tea Co. Ltd. and another vs. State of Assam and others
(AIR 1964 SC 925 at p. 935) the Constitution Bench observed thus:
It is hardly necessary to emphasise that Entries in 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 power is conferred on the Legislature to levy a
tax, that power itself must be widely construed; it must include the power to
impose a tax and select the articles or commodities for the exercise of such
power; it must likewise include the power to fix the rate and prescribe the
machinery for the recovery of the tax. This power also gives jurisdiction to
the Legislature to make such provision as, in its opinion, would be necessary
to prevent the evasion of the tax. In imposing taxes, the legislature can also
appoint authorities for collecting taxes and may prescribe the procedure for
determining the amount of taxes payable by any individual; all these provisions
are subsidiary to the main power to levy a tax........" (paragraph 19) (emphasis
supplied) The above decisions establish that the word 'income' occurring in
Entry 82 in List I of the Seventh Schedule should be construed liberally and in
a very wide manner and the power to legislate will take in all incidental and
ancillary matters including the authorization to make provision to prevent
evasion of tax, in any suitable manner.
the above principles in mind, we have to examine further whether collecting
'tax' as enjoined in Sections 44AC and 206C of the Act at the time of purchase
of goods can be justified as income tax?
The Constitution does not define the expression 'income'. In K.N. Singh vs. CIT
(11 ITR 513 PC), it was observed that the word 'income', it is true, is a word
difficult and perhaps impossible to define in any precise general formula. It
is a word of broadest connotation. In Navinchandra Mafatlal vs. Commissioner of
Income Tax (AIR 1955 SC 58), the question that arose for consideration was
whether capital gains constituted 'income'. This Court considered the ordinary,
natural and grammatical meaning of the word 'income' which means, "a thing
that comes in" and in the English speaking countries, United States of
America and Australia, the word 'income' is understood in a wide sense to
include capital gains and held that capital gains constituted 'income'. It was
observed that the entries in the Seventh Schedule should be given widest
possible construction according to their ordinary meaning. Similarly, in Bhagwan
Das Jain vs. Union of India and others (AIR 1981 SC 907), this Court held that
the word 'income' 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 Commissioner of Income Tax vs. Bhogilal (25 ITR
50). 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
nationally accrued. What can be converted into income will also come within its
fold. In Baldeo Singh vs. CIT (40 ITR 605), this Court held that Entry 54
should be read not only as authorising the imposition of tax, but also as authorising
an enactment which prevents the tax imposed being evaded. If it were not to be
so read, then the authorized 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 Income Tax Act, 1922 holding that it dealt with
a situation where share holders of a company did not deliberately distribute
the accumulated profits as dividend amongst themselves and in order to prevent
such evasion, the accumulated profits were deemed to be dividend to the
shareholders and brought to tax. Later, in Balaji vs. ITO (1961 (43) ITR 393),
upholding the validity of Section 16(3) of the Income Tax Act, 1922, the Court
held that an individual can be taxed on the income of his wife or minor
children. In other words, the income of A can be taxed in the hand of B.
Similarly, in Navnit Lal Javeri vs. K.K. Sen (56 ITR 198), Section 12B of the
Income Tax Act, 1922 was upheld which provided that a loan made to a share
holder by a private controlled company is taxable as dividend (income). We have
seen that the object in enacting Sections 44AC and 206C was to enable the
Revenue to collect the legitimate dues of the State from the persons carrying
on particular trades in view of the peculiar difficulties experienced in the
past and the measure was so enacted to check evasion of substantial revenue due
to the State. It is a matter of common knowledge that trade or business
produces or results in income which can be brought to tax. In order to prevent
evasion of tax legitimately due on such 'income', Section 44AC and Section 206C
were enacted, so as to facilitate the collection of tax on that income which is
bound to arise or accrue, at the very inception itself or at an anterior stage
and considered in the said perspective, it is idle to contend that the
aforesaid statutory provisions lack legislative competence. After all, the
statutory provisions obliging to pay "advance tax" is not anything
new and the impugned provisions are akin to that, Counsel for the Revenue
brought to our notice Sections 44B, 44BB, 44BBA and 44D and contended that
there are other similar provisions in the Act. We should state that they relate
to non-residents carrying on business in India and are not much relevant in
construing Sections 44AC and 206C of the Act. In this context, we should bear
in mind that there is a clear distinction between the subject matter of a tax
and the standard by which the amount of tax is measured. Having regard to the
past difficulties in making a normal assessment and collection in the case of
certain categories of assessees, for convenience sake, the legislature has
chosen to make 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.
cannot be labelled as a tax on purchase of goods.
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
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.
9(1) is to the following effect:- "Income deemed to accrue or arise in
India -- (1) The following income 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 through or from any property in India, or
through or from any asset or source of income in India, or through the transfer
of a capital asset situate in India. which are confined to the shooting of any
cinematograph film in India." (emphasis supplied) The crucial words in
Section 9(1) to the effect "that all income accruing or arising, whether
directly or indirectly through or from any business connection" occurred
in Section 42 of the Income Tax Act, 1922 as well. The said section came up for
consideration before this Court in Anglo-French Textile Co. Ltd. vs. CIT (23
ITR 101 = 1953 SCR 454). The facts in that case are as follows : The assessee,
a company incorporated in the United Kingdom, owned a spinning and weaving
factory at Pondicherry in French India.
had appointed another limited company in Madras as its constituted agent for
the purpose of its business in British India. During the relevant year of
account, no sales of yarn or cloth manufactured by the assessee-company were effected
in British India, but all the purchases of cotton required for the factory 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 Explanation :- For the purposes of this
clause -- (a) in the case of a business of which all the operations are not
carried out in India, the income of the business deemed under this clause to
accrue or arise In India shall be only such part of the income as is reasonably
attributable to the operations carried out in India;
the case of a non-resident, no income shall be deemed to accrue or arise in
India to him through or from operations which are confined to the purchase of
goods in India for the purpose of export;
the case of a non-resident, being a person engaged in the business of running a
news agency or of publishing newspapers, magazines or journals, no income shall
be deemed to accrue or arise in India to him through or from activities which
are confined to the collection of news and views in India for transmission out
the case of a non-resident being:- (1) an individual who is not a citizen of
India; or (2) a firm which does not have any partner who is a citizen of India
or who is resident in India; or (3) a company which does not have any
shareholder who is a citizen of India or who is resident in India, no income
shall be deemed to accrue or arise in India to such individual, firm or company
through or from operations under Section 42(3). The receipt of income or
realization of profits should not be confused with the idea of actual 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,
the Court held that income accrued where the raw material is systematically
purchased which contributes substantially to the ultimate profit which is
realized 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 accrue even at the point of purchase. In other
words, in such cases, income (profit) is embedded even at the time of purchase.
Viewed in this perspective also, we have no doubt that even at the time of
purchase, income can be said to have accrued to strict imposition of tax.
Counsel for the Revenue, Dr. Gaurishankar, vehemently contended before us that
Section 44AC read with Section 206C are only machinery provisions and not
charging sections. We see force in this plea. The charge for the levy of the
income that accrued or arose is laid by the charging sections viz. Sections 5
to 9 and not by virtue of Section 44AC or Section 206C. The fact that the
income is levied at a flat rate or at an earlier stage will not in any way
alter the nature or character of the levy since such matters are completely in
the realm of legislative wisdom. We hold that what is brought to tax, though
levied with reference to the purchase price and at an earlier point is
nonetheless income liable to be taxed under the Income Tax Act. We repel the
plea by the assessees to the contrary.
The only other question that remains for consideration is, whether Sections
44AC and 206C are in any way hit by Article 14 of the Constitution of India.
The whole section is attacked as discriminatory in having selected certain
businesses or trades for hostile treatment. Among others, it was urged that the
fixing of specified percentage of the purchase price of the income without
allowing normal business expenditure is also arbitrary and irrational. In other
words, the non-obstante clause in Section 44AC is attacked as irrational and
persons doing business in particular trade or business alone have been
arbitrarily dealt with and denied the relief, for no ostensible reason.
is no material to show as to why particular trades or businesses alone were
chosen for such discriminatory treatment.
is true that Article 14 of the Constitution of India applies to tax laws as
well. The off doubted decision of this Court in Ram Krishna Dalmia vs. Justice
S.R. Tendolkar (AIR 1958 SC 538) has laid down the content of Article 14 and
the circumstances in which a law may be hit by Article 14 of the Constitution
of India. As stated in Khandige Sham Bhat vs. Agri Income-tax Officer and
another (AIR 1963 SC 591) -- "..... in the application of the principles,
the courts, in view of the inherent complexity of 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. s case (AIR
1964 SC 925 at p.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. (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 matters, 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".
on Constitutional Law p.587.
approach has been approved by this Court in the case of East India Tobacco Co.
vs. State of A.P.(1963-1 SCR 404 at p.409 : AIR 1962 SC 1733 at p. 1735).
of course, true that the validity of tax laws can be questioned in the light of
the provisions of Articles 14, 19 and Article 301 if the said tax directly and
immediately imposes a restriction on the freedom of trade; but the power
conferred on this Court to strike down a taxing statute if it contravenes the
provisions of Articles 14, 19 or 301 has to be exercised with circumspection,
bearing in mind that the power of the State to levy taxes for the purpose of
governance and for carrying out its welfare activities is a necessary attribute
of sovereignty and in that sense it is a power of paramount character.
what cases a taxing statute can be struck down as being unconstitutional is
illustrated by the decision of this Court in K.T. Moopil Nair v. State of Kerala
(1961-3 SCR 77: AIR 1961 SC 552).
that case, a careful examination of the scheme of the relevant provisions of
the Travancore-Cochin Land Tax Act (No. 15 of 1955) satisfied this Court that
the said Act imposed unreasonable restrictions on the fundamental rights of the
citizens, conferred unbridled power on the appropriate authorities, introduced
unconstitutional discrimination and in consequence, amounted to a colorable
exercise of legislative power. It is in regard to such a taxing statute which can
properly be regarded as purely confiscatory that the power of the Court can be
legitimately invoked and exercised........" (emphasis supplied) The above
principle has been re-stated by a Constitution Bench in The Twyford Tea Co.
Ltd. and another vs. The State of Kerala and another (AIR 1970 SC 1133) thus:-
"...... These principles have been stated earlier but are often ignored
when the question of the application of Article 14 arises.
principle on which our Courts (as indeed the Supreme Court in the United
States) have always acted, is however better stated than by Willis in his
"Constitutional Law" page 587. This is how he put it :
State does not have to tax everything in order to tax something. It is allowed
to pick and choose districts, objects, persons, methods and even rates for
taxation if it does so reasonably.... The Supreme Court has been practical and
has permitted a very wide latitude in classification for taxation." This
principle was approved by this Court in East Indian Tobacco Co. v. State of
A.P. (1963 (1) SCR 404 at p. 410 = AIR 1962 SC 1733 at p.1735). Applying it,
the Court observed :
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. vs. State of U.P. and others (AIR 1980 SC 286), wherein it was
held thus:- "Article 14, a great right by any canon, by its promiscuous
forensic misuse, despite the Dalmia decision 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,
the range of variation being of the order of 8 to 10 per cent and yet a uniform
levy by weight on these unequals is sanctioned by the Act. Price of cane is
commanded as the only permissible criterion for purchase tax. The whole case is
given away by the very circumstance that, substantially, the sucrose content is
the same for sugarcane in the State, the marginal difference being too
inconsequential to build a case of discrimination or is blamable on the old
in intent nor in effect is there any discriminatory treatment discernible to
the constitutional eye. Price is surely a safe guide but other methods are not
necessarily vocational. It depends.
considerations of the Administration, traditional practices in the Trade, other
economic pros and cons enter the verdict but, after a judicial generosity is
extended to the legislative wisdom, if there is writ on the statute perversity,
madness in the method or gross disparity, judicial credulity may shape and the
measure may meet with its funeral.
so, taxing statutes have enjoyed more judicial indulgence.
Court has uniformly held that the classification for taxation and the
application of Article 14, in that context, must be viewed liberally not
meticulously. We must always remember that while the executive and legislative
branches are subject to judicial restraint, "the only check upon our
exercise of power is our own sense of self- restraint"." (emphasis
supplied) The Court also quoted the following observations contained in the
earlier case - Murthy Match Works Case:
so, a large latitude is allowed to the State for classification upon a
reasonable basis and what is reasonable is a question of practical details and
a variety of factors which the court will be reluctant and perhaps ill-
equipped to investigate. In this imperfect world perfection even in grouping is
an ambition hardly even accomplished. In this context, we have to remember the
relationship between the legislative and judicial departments of government in
the determination of the validity of classification. Of course, in the last
analysis courts possess the power to pronounce on the constitutionality of the
acts of the other branches whether a classification is based upon substantial
differences 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 Revenue, the provisions (Sections 44AC and
206C) are only "machinery provisions". If so, why should the normal reliefs
afforded to all assessees be denied to such traders? Prima facie, all assesses
similarly placed under the Income Tax Act are entitled to equal treatment. In
the matter of granting various reliefs provided under Sections 28 to 43C, the assessees
carrying on business are similarly placed and should there be a law, negativing
such valuable reliefs to a particular trade or business, it should be shown to
have some basis and fair and rational. It has not been shown as to why the
persons carrying on business in the particular goods specified in Section 44AC
are denied the reliefs available to others. No plea is put forward by Revenue
that these trades are distinct and different even for the grant of reliefs
under Sections 28 to 43C of the Act. The denial of such reliefs to trades
specified in Section 44AC, available to other assessees, has no nexus to the
object sought to be achieved by the legislature. To this extent it appears to
us that the non-obstante clause in Section 44AC denying such reliefs has no
basis and so unfair and arbitrary and equality of treatment is denied to such
persons, necessitating grant of appropriate relief (see Royappa vs. State of
Tamil Nadu : AIR 1974 SC 555, Maneka Gandhi vs. Union of India : AIR 1978 SC
597, Ajay vs. Khalid : AIR 1981 SC 487 and other cases).
When the matter came up before the Andhra Pradesh High Court in Sanyasi Rao's
case (178 ITR 31), it was sought to be contended that selection of particular
trades or business for differential treatment by denying reliefs provided by
Sections 28 to 43C is based on material. This aspect was dealt with by the
Andhra Pradesh High Court in 178 ITR 31 at pp. 59 to 67. The Court referred to
in detail to the rival pleas advanced on this score and the materials placed
before it by the Revenue to sustain the measure as a reasonable one and felt
that the remedy formulated to undo the mischief or harm is not proportionate to
the evil that came to light and in this view, discrimination is writ large on
the very face of Section 44AC. The Court concluded thus:- ".... The non-obstante
clause in Section 44AC(1), "notwithstanding anything to the contrary
contained in Sections 28 to 43C" would be confined to the limited purpose
of sustaining the deductions provided for in Section 206C. The level of profits
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 rates
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
this aspect, we may as well refer to the words "in the assessment made
under this Act" in sub-section (4) of Section 206C.
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.
xxx .....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 to
43C." (emphasis supplied)
perused the aforesaid judgment of the Andhra Pradesh High Court with care and
we hold that in view of the absence of materials, the Court was justified in
its view that the remedy specified by section 44AC is disproportionate to the
evil that prevailed and so to the extent the non-obstante clause in Section
44AC excluded the provisions of Sections 28 to 43C (applicable to all assessees),
the provisions are unreasonable. We concur with the aforesaid conclusion of the
Andhra Pradesh High Court on this aspect and hold that Section 44AC is a valid
piece of legislation and is an adjunct to and explanatory to Section 206C. It
does not dispense with the regular assessment, as provided in accordance with
Sections 28 to 43C of the Act. A direction will issue to that effect and to this
limited extent the writ petitions, civil appeals and the special leave
petitions filed by the assessees shall stand partly allowed.
other respects, the batch of cases shall stand dismissed. In the circumstances
of the case, there shall be no order as to costs.