# UNION OF INDIA AND ANR. ETC. ETC v. A. SANY ASI RAO AND ORS. ETC. ETC

- **Citation:** [1996] 2 S.C.R. 570
- **Court:** Supreme Court of India
- **Decided:** 1996-02-13
- **Bench:** A.M. Ahmadi, S.C. Sen, K.S. Paripoornan
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/union-of-india-and-anr-etc-etc-v-a-sany-asi-rao-and-ors-etc-etc-13978
- **Pages:** 31

## Headnote

Income Tax Act. 1961-Section 44AC-Inserted by Finance Act,
198~Section 206C-Inseited by Tax Laws Amendment Act, 1989-Computation of profit or loss on presumptive basis-Validity-{Jpheld.
Constitution of India-A1t. 14-Validity of-Sections 44AC, 206C of
Income Tax Act-Held : Valid.
Constitution of India-Schedule VII-List-I Enby-82--Levy of tax at
the point of purchas~Held, a tax on income.
The Petitioners from various states challenged the validity of Section
206C of the Income Tax Act, 1961 inserted by the Finance Act, 1988 with
effect from 1.6.1988 and Section 44AC of the Income Tax Act, 1961 inserted
by the Direct Tax Laws (Amendment) Act,'1989 with effect from 1.4.89. The
E
challenge was inter alia made on the ground that aforesaid provisions were
ultra vires, beyond legislative competence and also violative of Articles 14
and 19(1) (g) of the Constitution of India. The ffjgh Court of Andhra
Pradesh upheld the validity of the Act of 1989, read down Section. 44AC
and held that the said provision is only an adjunct to and explains the
F
provisions of Section 206C and does not dispense with the regular assessment in accordance .with the provisions of the income Tax Act, 1961. The
decision of Andhra Pradesh High Court was followed by High Courts of
Orissa and Punjab & Haryana.
The assessee contended that Section 44AC and 206C of the Act of
G 1961 lack legislative ~ompetence, Section 44AC levies a tax on purchase
and by deeming provisions, tax is levied on hypothetical income and not
on real income; that the levy under Section 44AC read with Section 206C
is highly arbitrary and discriminatory; that there is no r~tionale for
discrimination; that there is no material available for adopting the perH centage fixed in Sections 44AC and 206C of the Act, and that the proviso
570
(
_,
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U.0.1. v. A.S. RAO
571
to Section 206C applies only to traders and to manufacturers which is also A
discriminatory.
The Revenue defended the competence on the ground that it is
fallacious to contend that Section 44AC levies a charge and Sections 4 and
5 of the Act are the charging sections; that income or profit is embedded
even at the point of purchase; that 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; that it is open to the
legislative, i.e. its wisdom to specify the stage and rate at which it is to be
levied and it shall not be scrutinised by the Court; that the legislation will
B
fall within Schedule VII List I Entry 82 and the sutliciency of material is C
not open to the objects that are sought to be achieved; that in case of
taxation laws, the legislature has got a wide discretion to pick and choose
persons, objects, districts etc. for legislating and it is allowed if it does so
reasonably and that the provisions are reasonable on the objects sought
to be achieved.
D
Disposing of the matters, this Court
HELD : 1. The collection of tax due from specified traders on a
"presumptive basis" does not offend Article 14 of the Constitution. Hence
Sections 44AC read with Section 206C are not wholly hit by Article 14 of E
the Constitution of India. (598-E-F]
Ram Klishna Dalmia v. Justice S.R. Tendolkar, AIR (1958) SC 538;
Khandige Sham Bhat v. Agrl. Income Tax Officer and Another, AIR (1963)
SC 591; Khyerbari Tea Co. Ltd. v. State of Assam and others, AIR (1964) SC
925; Raja Jagannath Baks.h Singh v. State of U.P., (1963] 1 SCR 220 =AIR
(1962) SC 1563; East India Tabacco Co. v. State of A.P., (1963] 1 SCR
404=AIR (1962) SC 1733;K.T. Moopil Nairv.State of Kera/a, (1961] 3 SCR
77 =AIR (1961) SC 552; The Twyford Tea Co. Ltd. and another v. The State
of Kera/a and another, AIR (1970) SC 1133 and Ganga Sugar Corporation
Ltd. v. State of U.P. and others, Air (1980) SC 286, relied on.
2. 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 acco

## Text

_Characters 0–39,900 of 70,778. This is a partial read: ask again with offset=39900 for what follows._

A
B
c
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UNION OF INDIA AND ANR. ETC. ETC.
v.
A. SANY ASI RAO AND ORS. ETC. ETC.
FEBRUARY 13, 1996
(A.M. AHMADI, CH, S.C. SEN AND K.S. PARIPOORNAN, JJ.)
Income Tax Act. 1961-Section 44AC-Inserted by Finance Act,
198~Section 206C-Inseited by Tax Laws Amendment Act, 1989-Computation of profit or loss on presumptive basis-Validity-{Jpheld.
Constitution of India-A1t. 14-Validity of-Sections 44AC, 206C of
Income Tax Act-Held : Valid.
Constitution of India-Schedule VII-List-I Enby-82--Levy of tax at
the point of purchas~Held, a tax on income.
The Petitioners from various states challenged the validity of Section
206C of the Income Tax Act, 1961 inserted by the Finance Act, 1988 with
effect from 1.6.1988 and Section 44AC of the Income Tax Act, 1961 inserted
by the Direct Tax Laws (Amendment) Act,'1989 with effect from 1.4.89. The
E
challenge was inter alia made on the ground that aforesaid provisions were
ultra vires, beyond legislative competence and also violative of Articles 14
and 19(1) (g) of the Constitution of India. The ffjgh Court of Andhra
Pradesh upheld the validity of the Act of 1989, read down Section. 44AC
and held that the said provision is only an adjunct to and explains the
F
provisions of Section 206C and does not dispense with the regular assessment in accordance .with the provisions of the income Tax Act, 1961. The
decision of Andhra Pradesh High Court was followed by High Courts of
Orissa and Punjab & Haryana.
The assessee contended that Section 44AC and 206C of the Act of
G 1961 lack legislative ~ompetence, Section 44AC levies a tax on purchase
and by deeming provisions, tax is levied on hypothetical income and not
on real income; that the levy under Section 44AC read with Section 206C
is highly arbitrary and discriminatory; that there is no r~tionale for
discrimination; that there is no material available for adopting the perH centage fixed in Sections 44AC and 206C of the Act, and that the proviso
570
(
_,
..,
U.0.1. v. A.S. RAO
571
to Section 206C applies only to traders and to manufacturers which is also A
discriminatory.
The Revenue defended the competence on the ground that it is
fallacious to contend that Section 44AC levies a charge and Sections 4 and
5 of the Act are the charging sections; that income or profit is embedded
even at the point of purchase; that 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; that it is open to the
legislative, i.e. its wisdom to specify the stage and rate at which it is to be
levied and it shall not be scrutinised by the Court; that the legislation will
B
fall within Schedule VII List I Entry 82 and the sutliciency of material is C
not open to the objects that are sought to be achieved; that in case of
taxation laws, the legislature has got a wide discretion to pick and choose
persons, objects, districts etc. for legislating and it is allowed if it does so
reasonably and that the provisions are reasonable on the objects sought
to be achieved.
D
Disposing of the matters, this Court
HELD : 1. The collection of tax due from specified traders on a
"presumptive basis" does not offend Article 14 of the Constitution. Hence
Sections 44AC read with Section 206C are not wholly hit by Article 14 of E
the Constitution of India. (598-E-F]
Ram Klishna Dalmia v. Justice S.R. Tendolkar, AIR (1958) SC 538;
Khandige Sham Bhat v. Agrl. Income Tax Officer and Another, AIR (1963)
SC 591; Khyerbari Tea Co. Ltd. v. State of Assam and others, AIR (1964) SC
925; Raja Jagannath Baks.h Singh v. State of U.P., (1963] 1 SCR 220 =AIR
(1962) SC 1563; East India Tabacco Co. v. State of A.P., (1963] 1 SCR
404=AIR (1962) SC 1733;K.T. Moopil Nairv.State of Kera/a, (1961] 3 SCR
77 =AIR (1961) SC 552; The Twyford Tea Co. Ltd. and another v. The State
of Kera/a and another, AIR (1970) SC 1133 and Ganga Sugar Corporation
Ltd. v. State of U.P. and others, Air (1980) SC 286, relied on.
2. 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.
(600-C-D]
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3. The denial of grant of relief under Sections 28 to 43C of the Act H
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572
SUPREME COURT REPORTS
(1996] 2 S.C.R.
A of 1961 to certain trades specified in Section 44AC, has no nexus to the
object sought to be achieved by the legislature. The non-obstante clause in
Section 44AC denying such releifs has no basis and unfair and arbitrary
and equality of treatment is denied to such persons, necessitating grant of
appropriate relied. The A.P. High Court was justified in its view that the
B
remedy specified by Section 44AC i.s disproportionate to the evil that
prevailed and so to that extent the non-obstante clause in Section 44AC
excluded the provisions of Sections 28 to 43C, the provisions are unreasonable. [599-B-C; 600-E]
Royappa v. State of Tamil Nadu, AIR (1974) SC 555; Maneka Gandhi
C v. Union of India, AIR (1978) SC 597 and Ajay v. Khalid, AIR (1981) SC
487, referred to.
4. The word "income" occurring in Entry 82 in List I of 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
D the authorisation to make provision to prevent evasion of tax, in any
suitable manner. [590-A-B]
S1i Ram Narain Medhi v. State of Bombay, AIR (1959) SC 459;
Calcutta Gas Company (Prop1ietary) Ltd. v. State of West Bengal and others,
E
AIR (1962) SC 1044; Banarasi Das and others v. The Wealth Tax Officer and
others, AIR (1965) SC 1387; Union of India v. Shri Harbhajan Singh Dhillon,
[1971] 2 SCC 779; Harakchand Ratanchand Banthia and others v. Union of
India. and other, [1969] 2 SCC 166; Baldeo Singh v. Commissioner of
Income-Tax, AIR (1961) SC 736 and l<hydbari Tea Co. Ltd. and another v.
State of Assam and others, AIR (1964) SC 925, relied on.
F
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5. The fact that the income is levied at a flat rate or at an earlier
stage will not in any way alter the nature of character of the levy since such
matters are completely in the realm of legislative wisdom. It is nonetheless
income liable to be taxed under the Income Tax Act. [594-D]
6. The method adopted by the legislature for collection of tax at an
anterior stage on the basis of purchase price as a measure of tax is
permissible and it will not in any way alter the nature and basis of levy
viz., that the tax imposed is a tax on income. Even at the time of purchase,
income can be said to have accrued to attract imposition of tax. It cannot
H be labelled as a tax on purchase of goods. [591-G-H; 592-A]
U.0.I. v. AS. RAO [PAPRIPOORNAN, J.]
573
KN. Singh v. CIT, 11 ITR 513 PC; Navinchandra Mafatlal v. CommisA
sioner of Income Tax, AIR (1955) SC 58; Bhagwan Das Jain v. Union of
India and others, AIR X1981) SC 907; Commissioner of Income Tax v.
Bhogilal, 25 ITR 50; Baldeo Singh v. CIT, 40 ITR 605; Balaji v. ITO, (1961)
43 ITR 393; Navnit Lal Javery v. KK Sen, 56 ITR 198 and Anglo-French
Taxtile Co. Ltd. v. CIT, 23 ITR 101 = [1953] SCR 454, referred to.
CIVIL/ORIGINAL APPELLATE JURISDICTION : Civil Appeal
Nos. 4290- 4394 of 1989 Etc. Etc.
B
From the Judgment and order dated 7.3.89 of the Andhra Pradesh
High Court in W.P. Nos. 11992, 12095-96, 12100-03, 12105, 12125, 12169, C
12183,12220, 12344, 12350, 12362, 12365, 12546, 12577, 12659, 12669, 12737,
12744, 12787, 12796, 12815, 12819, 12825-26, 12849, 12863, 12896, 12891,
12922, 12976, 12982, 13083, 13134,13178, 13219, 13227,13237, 13239, 13290,
13365, 13840, 14155, 14949, 16903, 17154, 18583, 18741, 18814, 18823, 18999,
19004, 19076,19155, 19323, 19325,19332, 19333, 19335,19433, 19435, 19524,
19540, 19621, 19673/88, 13, 31, 35, 58, 71, 72, 73, 145, 203, 263, 264, 266, D
299, 318,324,330,332,336,339,345,360,363,368,374,378,379, 385, 394,
553, 577, 643, 694, 718, 721, 722, 726 and 1007 of 1989.
H.N. Salve, Dr. V. Gaurishankar, Vijay Bahauguna, Joseph Vellapally, Dr. Debi Pal, Soli J. Sorabjee, K. Madhava Reddy, G. Sarangan, Mohan E
Jain, B.S. Chahar, Ashok Mathur, N.M. Sakmardande, S. Rajappa, Ms. A.
Subhashini, C.V.S. Rao, P. Parmeswaran, S.N. Terdol, D.K. Garg, O.C.
Mathur, Ms. Meera Mathur, S. Sukumaran, Ramesh Babu, Ejaz Maqbool,
M.D. Adkar, Ms. Priya Hingorani, Ranjit Kumar, R. Singh, Braj K. Mishra,
A. Subba Rao, Ms. Meenal\.s.hi Grover, Ranjit Kumar, C. Mukund,
Rudreshwar Singh, Ranjit Kumar, Ms. Malini Poduval, Ms. Mridula Ray F
Bhardwaj, Pradeep Aggai;wal, Sushil K. Jain, A. P. Dhamija, Vipin Gogia,
P. Mahale, B. Parthasaithi, S.K. Mehta, Mahabir Singh, S.J. Khaitan for
Khaitan & Co., Aruneshwar Gupta, T.V.S.N. Chari, K. Ram Kumar, C.
Balasubramaniam, P.R. Ramasesh, M. Veerappa, G. Narasimhulu, K.K.
Mani, Ms. S. bagga, V.G. Pragasam and AK. Sanghi for the appearing
Parties.
G
The Judgment of the Court was delivered by
PARIPOORNAN, J. In 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 H
574
SUPREME COURT REPORTS
[1996] 2 S.C.R. <
A similar questions arise for consideration. The matter arises under the
Income Tax Act. 1961. The validity of Section 44AC and 206C of the
Income Tax Act, 1961 (hereinafter referred to as 'the Act') is posed for
~onsideration. Various assessees challenged the aforesaid provisions as
ultra vires and beyond legislative competence and also violative of Articles
B
14 and 19(1)(g) of the Constitution of India in a few High Courts. Substantially, 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 assessees have come up in appeal. Feeling
aggrieved by the reading down of Section 44AC of the Act, the Union of
India has come up in appeals. Those are covered by civil appeals. Certain
C other assessees have challenged the aforesaid provisions directly under
Article 32 of the Constitution of India. Those are covered by writ petitions.
A few assessees, feeling aggrieved by the decisions of the High Courts, have
filed special leave petitions seeking leave of this Court to file appeals. Since
~l these three classes of cases involved consideration of the validity or
otherwise of Sections 44AC and 206C of the Act, they were heard together.
D
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2. Section 44AC of the Act was inserted by the Direct Tax Laws
(Amendment) Act. 1989 with effect from 1.4.1989. Section 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) Notwith standing 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 percent 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" :
'·
U.O.I. v. A.S. RAO [PAPRIPOORNAN, J.)
575
Provided that nothing contained in this clause shall apply A
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;
The folldwing explanation is being inserted by the Finance
Act, 1990 with effect from 1 April, 1991 :
B
Explanation : -
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 C
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;
(b) the right to receive any goods of the nature specified in
column (2) of the Table below, or such goods, as the case D
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 E
the business of trading in such goods chargeable to tax under
the head "Profits and gains of business or profession".
TABLE
S.No.
Nature of goods
Percentage
F
(1)
(2)
(3)
i)
Timber obtained under a forest Thirty-five per cent
lease
ii)
Timber obtained by any mode Fifteen per cent
other than under a forest lease
iii)
Any other forest produce not Thirty-five per cent
being 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
G
a buyer who obtains any goods, from any seller which is a public H
576
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SUPREME COURT REPORTS
{1996] 2 S.C.R.
sector company) in the further sale of any goods obtained under
or in pursuance of the sale under sub~section (1).
(3) In a case where the business carried on by the assessee does
not consist exclusively of trading in goods to which this section
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.
Explanation:- For the purposes of this section, "seller" means the
Central Government, a State Government or any local authority
or corporation or authority established by or under a Central, State
or Provincial Act, or any company or firm (or co-operative
society)".
"206C. Profits and gains from the business of trading in alcoholic
liquor, forest produce, scrap, etc.:- (1) Every person, being a seller
referred to in Section 44AC, shall, at the time of debiting of the
amount payable by the buyer referred to in that section to the
account of the buyer or at the time of receipt of such amount from
the said buyer in cash or by the 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-true on
income comprised therein.
TABLE
S.No.
Nature of goods
Percentage
(1)
(2)
(3)
i)
Alcoholic liquor for human Fifteen per cent
consumption (other than Indian
made foreign liquor)
ii)
Timber obtained under a forest lease Fifteen per cent
«
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U.0.1. v. AS. RAO [P APRIPOORNAN, J.]
577
ii)
Timber obtained by any mode other Five per cent
A
than under a forest lease
iii)
Any other forest produce not being Fifteen per cent
timber
Provided that where the Assessing Officer, on an application
made by the buyer, gives a certificate in the prescribed from that
to the best of his belief any of the goods ref erred to in the aforesaid
Table are to be utilised 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 force.
(2) The power to recover tax by a collection under sub-section (1)
shall be without prejudice to any other mode of recovery.
B
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(3) Any person collecting·any amount under sub-section (1) shall D
pay within seven days the amount so collected to the credit of the
Central Government or as the Board directs.
( 4) 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 E
collected and credit shall be given to hiin 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.
(5) Every person collecting tax in accordance with the provisions F
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 G
· other particulars as may be prescribed.
(SA) Every 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 Match in each financial year,
and deliver or cause to be delivered to the prescribed income-tax H
578
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SUPREME COURT REPORTS
[1996) 2 S.C.R.
authority such returns in such form and verified in such manner
and setting forth such particulars and within such time as may be
prescribed.
( 6) Any person responsible for collecting the tax who fails to collect
the tax in accordance with the provisions of this section, shall,
notwithstanding such failure, be liable to pay the tax to the credit
of the Central Government in accordance with the provisions of
sub-section (3).
(7) Without prejudice to the provisions of sub-section (6), if the
seller does not collect the tax or after collecting the tax fails to pay
it as required under this section, he shall be liable to pay simple
interest at the rate of two per cent per month or part thereof on
the amount of such tax from the date on which such tax was
collectible to the date on which the tax was actually paid.
(8) Where the tax has not been paid as aforesaid, after 1t 1s
collected, the aniount 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."
. · 3. The above new provisions enable the Revenue to estimate the
E 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
F
by such persons are incomplete. The 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. Section 44AC occurs in Chapter Vl of the Act dealing with
G computation of total income. Sub-section ( d) deals with computation of
profits and gains of business or profession. Section 44AC(i) 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
H 44AC(2) states that the above provisions shall not· apply to second or
U.0.1. v. AS. RAO [P APRIPOORNAN, J.]
579
subsequent sale of such goods. Section 44AC(3) is only a clarificatory A
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(l)
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.
4. The scope of the afpresaid 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 contractos,
scrap dealers, dealers in products, etc.
Considerable difficulty has been felt in the past in making
assessment of incomes in the case of persons who take contracts
for sale of liquor, scrap, forest products, etc. It has been the
Department's experience that for taking such contracts, firms or
associations of persons are specifically constituted and very often
no trace is left regarding them or their members after the contract
has been executed. Persons have also been found to have taken
contracts in benami names by floating undertakings or associations
for short periods. Since tax is payable in the assessment years in
respect of the incomes of the previous years, the time by which the
incomes from such sources become assessable, such persons are
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not traceable. At the time of assessment in these cases, either the G
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.
H
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SUPREME COURT REPORTS
[1996)25.C.R.)
With a 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 buyer.
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.
This amendment will take effect from 1st April, 1989, and will,
accordingly, apply to assessment year 1989-90 and subsequent
years.
Further, 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. This mode of recovery of tax shall be without
prejudice to any other mode of recovery. The tax so colleC:ted 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
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U.O.I. v. AS. RAO [P APRIPOORNAN, J.]
581
amount in the assessment made under this Act on production of A
a certificate.
The 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 B
of two per cent per month or part thereof, shall be a charge upon
all the assets of the seller.
These amendments will be made effective from 1st June, 1988."
5. 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. (See Law of Income Tax -
Sampath Iyengar, 8th edition, Vol. 2, P-2494 and Vol. 5, p. 5139).
c
6. The matter at issue. came up for consideration before the High D
Courts of Andhra Pradesh, Kerala, Himachal Pradesh, Orissa, Punjab and
Haryana and Patna, in different forms. The decisions therein are :
(1) A. Sanyasi Rao and Another v. Govemment of Andhra Pradesh
and Others, 178 ITR 31 - Andhra Pradesh.
(2) P. Kunhammed Kutty Haji and Others v. Union of India and
Others, 176 ITR 481, Single Bench - Kerala.
T.K Aboobacker and Ohers v. Union of India and Others, 177 ITR
358, Division Bench - Kerala.
(4) Gian Chand Ashok Kumar and Company and Others.v. Union
of India and Others, 187 ITR 188 - Himachal Pradesh.
(5) Sri Venkateswara Timber Depot v. Union of India and Others,
189 ITR 741 - Orissa.
·
(6) State of Bihar and Another v. Commissioner of Income Tax
and Others, 202 ITR 535 - Patna.
(7) Ramjee Prasad Sahu and Others v. Union of India and Others,
E
F
G
202 lTR 800 - Patna.
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582
A
B
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SUPREME COURT REPORTS
[1996)2 S.C~.
(8) Madan Mohan Gupta v. Union of India and Others, 204 ITR
384 - Patna.
(9) .. Bhagwan Singh and Others v. Union of India and Others, 209
ITR 824 - Patna.
(10) Sat Pal and Co. v. Excise and Taxation Commissioner and
Others, 185 ITR 375 - Punjab and Haryana.
(11) K.K. Mittal .and Co. v. Union of India and Others, 187 ITR
208 - Punjab & Haryana.
(12) K.K. Mittal and Co. v. Union of India and others, 203 ITR 201
- Punjab and Haryana ..
(13) Fairdeal Trading Co. and Others v. Union of India and· Others,
204 ITR 645 - Punjab and Haryana.
D
We 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
E 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
F
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 Depots' case 189 ITR 741
G 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
0011.siderati on.
7. We heard M/s. H.N. Salve, Soli Sorabjee, K. Madhava Reddy and
Vijay Bahuguna, Senior Advocates and M/s. G. Sarahngan and Ranjit
H Kumar, Advocates, who appeared for the ·various assessees and also Dr.
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U.0.1. v. AS. RAO [PAPRIPOORNAN,J.]
583
V. Gaurishankar, Senior Advocate, who appeared on the behalf of the A
Union of India. Arguments advanced before us covered a wide range.
8. We shall immediately state, in brief, the respective pleas put
forward before us by counsel on both sides. It should be stated that the
pleas vrged 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:
"(i) Parliament was perfectly competent to enact sections 44AC
and 206 C;
(ii) Section 206C does not suffer from any constitutional infirmity
and is perfectly valid;
B
c
(iii) Section 44AC is not an independent provision. It does not
dispense with a regular assessment in accordance with the D
provisions of the Income-tax Act.· Section 44AC is merely an
adjunct to and explains the provisions in Section 206C. A regular
assessment has to be made in respect of an assessee dealing in
specified goods in accordance with sections 28 to 43C. Read down
in this manner, section 44AC also does not suffer from any conE
stitutional infirmity;
(iv) It is competent for Parliament to adopt the purchase price as
a measure for determining the income tax. In this case, the purchase price is taken as a measure for the limited purpose of
determining the quantum of tax to collected under section 206C.
F
Tax collected on specified goods will be given credit for in the year
in which those goods are sold;
(v) In 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 G
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 underswod in the Andhra Pradesh Excise Act and the Rules
made thereunder, now in force in this State. The true meaning and H
A
B
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584
SUPREME COURT REPORTS
[1996] 2 S.C.R.
content of the expression 'purchase price' is, however, different,
as explained hereinbefore;
(vi) The collection at source provided by Section 206C is relatable
to the purchase price and not to the income component of the
purchase price."
9. It 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.
The 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
D of Haryana. Respondent No. 1 auctioned the vending of country liquor for
the year 1989- 90 in.the Camp area ofYainuna Nagar, Damra andHarmal.
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
purc.hased by him in the State of Haryana. On production of the vou<;:hers
E 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
F
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 as the basis on
G 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.
·. ·
H
The facts highlighted in the second case is. ~it petition (~iyil;N o. 155
.J
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U.0.1. v. A.S. RAO [P APRIPOORNAN, J.]
585
of 1989. There are five petitioners therein. The first petitioner is a firm and A
petitioners 2 to 5 are its in 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(fendu leaves'. It is a natural forest
produce. All the State Governments have nationalised the trade in this
commodity. Respective 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
B
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.
c
10. The submissions made before us by counsel for the assessees can D
be summarised thus: (i) 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 E
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. Here, the said principle
F
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 manufactures are left out. Similarly, persons dealing in Indian made foreign liquor G
are excluded. Under the proviso 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 H
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586
SUPREME COURT REPORTS
(1996] 2 S.C.R.
. A 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.
B
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. Similarly, there is no material to rope in traders in Tendu
leaves. The proviso to Section 206C applies only to traders and not to.
manufacturers, which again is discriminatory. Regarding persons who deal
in timber, it is only at the end of the Year, income or net profits can be
arrived at and to assume that an anterior point of time income accrues or
C is received is a far cry and is based on rto 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,. officer is made on the basis of the weight noticed
before inspection. The tendu leaves are . highly perishable and cannot be
D stocked for lortg. 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 froni 5 to
9% and the net profits may vary from 3 to 5%. Net profits cannot be said
to be made by the mere act of purchasing the goods. The goods purchased
E may be lost or destroyed or may perish by lapse of time. The relevant
aspects were never borne in mind before effecting the levy.
F
A few decisions, to support the submissions, were also brought to
our notice.
11. Dr. Gaurishankar, senior counsel, who appeared for the Revenue,
sought to defend the competence and validity of Sections 44AC and 206
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
G or profit, is embedded even at the point of purchase. On this basis, Section
44AC read with Section 206C only provides a machinery or mechanism to
tap the incoIIJ.~ which accrues and is charged under Sections 4 and 5 of the
Act. Since 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
H levied, the rate at which it is to be levied and other details .. The wisdom of
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U.0.1. v. AS. RAO (PAPRIPOORNAN, J.]
587
the legislature in these regions will not be scrutinised by the court. The A
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 B
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 Sched~le VII, List 1 Entry 82. The 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
c
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 D
provisions. The provisions are reasonable and have sufficient nexus to· the
objects that are sought to be achieved. The statutory provisions were
intended to operate in all trades where the evasion and chances of evasion
were greater than .others and due to practical experience over the years, it
was felt that the particular trades or businesses necessitated speedier
provision for recovery or collection.