Supreme Court of India
UNION OF INDIA AND ANR. ETC. ETC.versusA. SANYASI RAO AND ORS. ETC. ETC.
- Citation
- 1996 INSC 235
- Decided
- 13 February 1996
- Disposal
- Disposed off
- Bench
- A M AHMADI
Holding
Sections 44AC and 206C are valid, within Parliament’s competence, do not offend Article 14, and Section 44AC is an adjunct to Section 206C; however, the non‑obstante clause denying reliefs under Sections 28‑43C is unreasonable and is read down.
Summary
The Supreme Court examined the validity of Sections 44AC and 206C of the Income‑Tax Act, 1961, which allow tax to be levied on a presumptive basis on traders of specified goods. Petitioners argued that the provisions were ultra‑violes, beyond Parliament’s competence under Schedule VII, Entry 82, and violated Articles 14 and 19(1)(g) of the Constitution by being arbitrary and discriminatory, especially the non‑obstante clause that denied reliefs under Sections 28‑43C. The Court held that Parliament was competent to enact the provisions, that the purchase‑price basis is a permissible legislative device for measuring income, and that the provisions do not offend Article 14. Section 44AC was read as an adjunct to Section 206C and does not dispense with a regular assessment, but the non‑obstante clause that excluded the reliefs of Sections 28‑43C was found unreasonable and was read down. Consequently, the writ petitions and appeals were partly allowed, while the rest of the batch was dismissed.
Issues considered
- The legislative competence of Parliament to enact Sections 44AC and 206C under Schedule VII, List I, Entry 82
- Whether the provisions violate Article 14 of the Constitution by being arbitrary or discriminatory
- Whether the provisions violate Article 19(1)(g) – freedom to carry on trade, business or profession
- Whether Section 44AC is an independent charging provision or merely an adjunct to Section 206C
- The validity of the non‑obstante clause in Section 44AC that bars reliefs under Sections 28‑43C
Legislation cited
- Constitution of Indias. Article 14, s. Article 19(1)(g), s. Schedule VII List I Entry 82
- Direct Tax Laws (Amendment) Act, 1989
- Finance Act, 1988
- Income Tax Act, 1961s. 206C, s. 28-43C, s. 4, s. 44AC, s. 5, s. 9
Subjects
Presumptive taxationLegislative competenceArticle 14Article 19(1)(g)DiscriminationNon‑obstante clauseIncome tax on purchase priceSchedule VII Entry 82Tax collection machineryAdvance tax
Judgment
(
A UNION OF INDIA AND ANR. ETC. ETC.
v.
A. SANYASI RAO AND ORS. ETC. ETC.
FEBRUARY 13, 1996
B (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-Com-
putation of profit or loss on presumptive basis-Validity-{Jpheld.
c
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.
D
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
provisions of Section 206C and does not dispense with the regular assess-
F
ment 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 per-
H 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 B
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
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 F
(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.
G
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]
3. The denial of grant of relief under Sections 28 to 43C of the Act H
(
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
remedy specified by Section 44AC i.s disproportionate to the evil that
B prevailed and so to that extent the non-obstante clause in Section 44AC
excluded the provisions of Sections 28 to 43C, the provisions are un-
reasonable. [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
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]
G 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. Commis- A
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.
B
CIVIL/ORIGINAL APPELLATE JURISDICTION : Civil Appeal
Nos. 4290- 4394 of 1989 Etc. Etc.
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 Vellapal-
ly, 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
14 and 19(1)(g) of the Constitution of India in a few High Courts. Substan-
B tially, 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. Dis-
satisfied 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
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 :-
E
"44AC. Special provision for computing profits and gains from the
· business of trading in certain goods :- (1) Notwith standing any-
thing 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
F 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
G 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
H 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
G
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
a buyer who obtains any goods, from any seller which is a public H
«
I
\
l
576 SUPREME COURT REPORTS {1996] 2 S.C.R.
A 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
B available, the amount of expenses attributable to such other busi-
ness 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.
c
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)".
D
"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
E 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
F income comprised therein.
TABLE
S.No. Nature of goods Percentage
G (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
H
U.0.1. v. AS. RAO [PAPRIPOORNAN, 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 B
made by the buyer, gives a certificate in the prescribed from that
to the best of his belief any of the goods referred to in the aforesaid
Table are to be utilised for the purposes of manufacturing, process-
ing 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. c
(2) The power to recover tax by a collection under sub-section (1)
shall be without prejudice to any other mode of recovery.
(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 SUPREME COURT REPORTS [1996) 2 S.C.R.
A 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,
B 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
c 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.
D (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 [PAPRIPOORNAN, 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. Sec-
tion 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
B
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. c
Section 206C came into effect from 1.6.1988.
4. The scope of the afpresaid provisions was explained in a memoran-
dum to Finance Bill, 1988 (see 170 ITR Statutes p. 187- 88). It is to the
following effect :-
D
"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 E
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 F
contracts in benami names by floating undertakings or associations
for short periods. Since tax is payable in the assessment years in
respect of the incomes of the previous years, the time by which the
incomes from such sources become assessable, such persons are
not traceable. At the time of assessment in these cases, either the G
accounts are not available or they are grossly incorrect or incom-
plete. 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
/
580 SUPREME COURT REPORTS [1996)25.C.R.)
A 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
B
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
c human consumption (other than Indian-made foreign liquor) or
any forest produce, scrap or waste, whether industrial or non-in-
dustrial, 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
D 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
E 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
F 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,
G 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
H the amount has been collected and credit shall be given for such
;
.-
'
_L
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
c
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).
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.
E
(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.
F
(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. ·
G
(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,
202 lTR 800 - Patna. H
~
582 SUPREME COURT REPORTS [1996)2 S.C~.
A (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.
B (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.
c (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.
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 B
(supra), wherein, at page 73, the Court summarised the conclusion as
hereunder:
"(i) Parliament was perfectly competent to enact sections 44AC
and 206 C; c
(ii) Section 206C does not suffer from any constitutional infirmity
and is perfectly valid;
(iii) Section 44AC is not an independent provision. It does not
dispense with a regular assessment in accordance with the 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 con- E
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 pur-
chase 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
.J
\
584 SUPREME COURT REPORTS [1996] 2 S.C.R.
A 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."
B
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.
c 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
--
charges on bottling, labelling, etc. In view of Section 44AC and Section
F 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
H
44AC and Section 206C and read down section 44AC holding that it is only
an adjunct to Section 206C and so read, the relief under Section 28 to
Section 43C will be available. ·. ·
The facts highlighted in the second case is. ~it petition (~iyil;N o. 155
--
\ ..
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
B
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 c
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.
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
tax is a tax on income and not on expenditure or purchase. Levy under E
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 F
the measure of levy are different in taxing statutes. Here, 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 manufac-
tures 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
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.
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
B 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, under-
weight 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.
A few decisions, to support the submissions, were also brought to
our notice.
F 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
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 c
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 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 E
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 chose persons, objects, districts, etc. for legislating.
The power of the legislature to classify or select certain objects or persons F
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 G
could be seen from the legislative history on the object and the objects
sought to be achieved.
12. briefly, the rival pleas urged before us involve consideration of
two main points : H
f
"\
588 Sl]PREME COURT REPORTS [1996] 2·S.C.R.
A (A) Legislative Competence of Parliament to enact Sections 44AC
and 206C of the Act.
(B) 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)
B
We should also bear in mind the principles of law laid down by this Court
regarding the following aspects :
1. The principles to be borne-in-mind in construing legislative lists;
c 2. The true import of the word 'income' occurring in schedule VII
List 1 Entry 82; and
3. The extent of applicability of Article 14 of the Constitution to
tax laws.
D We will take up the first point regarding legislative competence. As
per Schedule VII List I Entry 82, Parliament can legislate on the following
subject:
"Taxes on income other than agricultural income".
E
As held by a Constitution Bench of this Court in Sri Ram Ram Narain
Medhi v. 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. v. State
F of West Bengal and Others, AIR [1962] SC 1044 at p.1049and Banarasi Das
and Others v. The Wealth Tax Officer and Others, AIR (1965] SC 1387. In
Union of India v. Shri Harbhajan Singh Dhillon, [1971) 2 SCC 779 at p.792,
the Court quoted its earlier decision in Harakchand Ratanchand Banthia
. and Others v. Union of India and Others (1969] 2 sc;c 166, wherein it was
G held thus:
".... The entries in the three Lists ate only legislative heads or fields
of legislatiQI)., they demarcate the area over which the appropriate
Legislatures can operate."
H (emphasis supplied)
U.0.I. v. A.S. RAO [P APRIPOORNAN, J.] 589
Again in Baldeo Singh v. Commissioner of Income-Tax, [AIR] 1961 A
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 B
legislative entries have to be read in a ve1y wide manner and so as
to include all subsidiary and ancill01y 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
c
by ingenious contrivances. Experience has shown that attempts to
evade the tax are often made:" (paragraph 20)
(emphasis supplied)
In Khyerbali Tea Co. Ltd. and Another v. State of Assam and D
Others AIR [1964) SC 925 at p.935 the Constitution Bench ob-
served 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 E
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 seens 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 const1Ued; it must include the F
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 presclibe 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 G
-. 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) H
590 SUPREME COURT REPORTS [1996) 2 S.C.R.
A ·The above decisions establish that the word 'income' occurring in
Entry 82 in List I of the Seventh Sch~dule 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 authorisation to make
provision to prevent evasion of tax, in any suitable manner. Bearing the
above principles in mind, we have to examine further whether collecting
B 'tax' as enjoined in Sections 44AC and 206C of the Act at the time of
'purchase of goods' can be justified as 'income tax' ? .
13. The Constitution does not define the expression 'income'. In KN.
Singh v. CIT, 11 ITR 513 PC, it was observed that the word 'income', it is
C 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 v. Commissioner of Income Tax, AIR [1955) SC 58, the question
that arose for consideration was whether 'capital gains' constituted
'i~come'. This Court considered the ordinary, natural and grammatical
D 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 g~ins
and held that capital gains constituted 'income'. It was observed that the
entries in the Seventh Schedule should be given widest possible construc-
E tion according to their Ordinary meaning. Similarly, in Bhagwan Das Jain
v. 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
F 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 v. Bhooilal, 25 ITR 50. The entry will take within its fold any
profits or gains not only actually received, but also income which is sup-
posed by the legislature to have notionally accrued. What can be converted
G into income will also come within its fold. In Baldeo Singh v. CIT, 40 ITR
605, this Court held that 'Entry 54 should be read not only as authorising
the imposition of tax, but also as auth01ising an enactment which prevents
the tax imposed being evaded. If it were not to be so read, then the
authorised power to tax a person on his own income might often be made
H infructuou~ by ingenious contrivances'. The Court upheld the validity of
U.0.1. v. A.S. RAO [P APRIPOORNAN, J.J 591
Section 23A of Income Tax Act, 1922 holding that it dealt with a situation A
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 v. !TO, (1961) 43
ITR 393, upholding the validity of Section 16(3) of the Income Tax Act, B
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 v. KK 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 C
as dividend (income). We have seen that the object in enacting Sections
44AC and 1206C 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 D
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 E
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 others similar provisions in the Act. We should state that they F
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 the tax and the standard by which the amount of tax is measured.
Having regard to the past difficulties in making a normal assessment and · G
collection in the case of certain categories of assessees, for convenience
sake, the legislature has chosen to make appropriate provision for collec-
tion 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 H
592 SUPREME COURT REPORTS [1996] 2 S.C.R.
--- )
A way alter the nature and basis of levy viz. that the tax imposed is a tax on
income. It cannot be labelled as a tax on purchase of goods.
14. We are further of the view that the basis of a charge relating to
income tax is laid down in Sections 4 1o 9 of the Income Tax Act, 1961.
Section 4 is the charging section. Income tax is levied in respect of the total
B income of the previous year of every person. Section 5 deals with the scope
of total income. Section 6 deals with the residence in India. Section 7 deals
with the income deemed to be received. Section 8 deals with dividend
income. Section 9 deals with the income deemed to accrue or arise in India.
Section 9(1) is to the following effect :
c
"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 form any business connection in India, or through
D or from any property in India, or though or from any asset
or source of income in India, or through the transfer of a
capital asset situate in India.
Explanation : For the purposes of this clause -
E (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
canied out in India :
F
(b) in 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;
G (c) in the case of non-resident, being a person engagep 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
H views in india for transmission out of India;
l U.O.I. v. AS. RAO [PAPRIPOORNAN, J.] 593
(d) in the case of a non-resident being : A
(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
B
(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 which are
confined to the shooting of any cinematograph film in India."
c
(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 connec- D
tion" occured 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. v. 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. The
assessee had appointed another Limited company in Madras as its con- E
stituted 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 F
Court held that the assessee company had a business connection in British
India, within the meaning of Section 42 and a portion of the profits of the
non-resident attributable to the purchase of cotton in British India could
be apportioned under Section 42(3). The receipt of income or realisation
for profits should not be confused with the idea of accrual of profits. The G
-, factual sale fixes the time and place of receipt only. Several places com-
mencing from the buying of raw materials and ending with the production
-- ·of finishied 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 pur-
chased with contributes substantially to the ultimate profit which is realised H
~<
f
594 SUPREME COURT REPORTS [1996] 2 S.C.R.
A 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
B the time of purchase, income can be said to have accrued to attract
imposition of tax.
15. Counsel for the Revenue, Dr. Gaurishankar, vehemently con-
tended before us that Se,ction 44AC read with Section 206C are only
C machinery provisions and not charging sections. We see force in this plea.
The charge for th~ 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 ~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 ~f legislative wisdom. We hold that.
D 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.
16. The only other question that remains for consideration is,
E 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
F 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. There is no material to show as to why
particular trades or business alone were chosen for such discritninatory
treatment.
G
17. It is true that :Article 14 of the Constitution of India applies to.
tax laws as well. The off quoted decision of this Court in Ram Krishna
Dalmia v. Justice S.P:. Tendolkar, AIR (1958) SC 538 has laid down the
content of Article 14 and the circumstances in which a law ~ay be hit by
H Article 14 of the Constitution of India. As stated in Khaf!d_ige Sham Bhat
U.0.1. v. AS. RAO (P APRIPOORNAN, J.] 595
v. Agri Income-tax Officer and another, AIR (1963) SC 591 - A
"......... 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 B
classify is of "wide range and flexibility" so that it can adjust its
'l system of taxation in all proper and reasonable ways."
Similarly, in Khverb01i Tea Co.'s case AIR (1964) SC 925 at p. 941, the
Court held thus : c
"........ 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 D
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". Willis on 'Con-
stitutional Law' p. 587. This approach has been approved by this
E
Court in the case of East India Tabacco Co. v. State of A.P., (1963)
1 SCR 404 at p. 409 : AIR (1962) SC 1733 at p. 1735.
It is, of course, true that the validity of tax laws can be ques-
tioned in the light of the provisions of Articles 14, 19 and Article F
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 G
a necessary attribute of sovereignty and in that sense it is a power
-- of paramount Character. In what cases a taxing statute can be
struck dowrt as being unconstitutional is illustrated by the decision
of this Court in KT. Moopil Nair v. State of Kera/a, {1961] 3 SCR
77: AIR (1961) SC 552. In that case, a careful examination of the H
(
f
/
596 SUPREME COURT REPORTS [1996) 2 S.C.R.
A 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 rig/us of the
citizens, conferred unbridled power on the appropriate authorities,
introduced unconstitutional discrimination and in consequence,
amounted to a colourable exercise of legislative power. It is in
B
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)
c The above prmciple has been re-stated by a Constitution Bench in Twyford
Tea Co. Ltd. and Another v. The State of Kera/a and Another, AIR 1970 SC
1133 thus:
"........ These principles have been stated earlier but are often
D ignored when the question of the application of Article 14 arises.
One principle on which our Courts (as indeed the Supreme Court
in the United States) have always acted, is nowhere better stated
than by Willis in his "Constitutional Law" page 587. This is how he
put it:
E "A 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 f9r taxation if it does so
reasonably............ The Supreme Court has been practical and
has pennitted a very wide latitude in classification for taxation."
·1
F 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:
"If a State can validly pick and choose one commodity for
taxation and that is not open to attack under Article 14, the
G
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
-.
'
H also in the determination of the rate of rates applicable ....... "
U.0.1. v. A.S. RAO (P APRIPOORNAN, J.] 597
(emphasis supplied) A
We should also bi'! in mind the principles laid down in a more recent
decision in Ganga Sugar C01poration Ltd. v. 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 B
forensic misuse, despite the Dalmia decision has given the impres-
sion 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 C
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 pur-
chase 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 in consequential to D
build a case of discrimination or is blamable on the old machinery.
Neither 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.
Practical considerations of the Administration, traditional practices E
in the Trade, other economic pros a~d 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 snap and the measure may
meet with its funeral.
F
Even so, taxing statutes have enjoyed more judicial indulgence.
This 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 G
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 H
598 SUPREME COURT REPORTS [1996] 2 S.C.R.
A case - Mwthy Match Works Case :
"....... Even so, a large latitude is allowed to the State for clas-
sification upon a reasonable basis and what is reasonable is a
question of practical details and a vmiety offactors which the cowt
will be reluctant and perhaps ill-equipped to investigate. In this
B 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
c 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
D
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,
E if the legislature in its wisdom though 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
F 14 of the Constitution of India.
18. 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 (Sec-
tions 44AC and 206C) are only "machinery provisions". If so, why should
G the normal reliefs afforded to all assesses be denied to such traders? Prima
facie, all assessees similarly placed under the lnccme 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
H trade or business, it should be shown to have some basis and fair and
U.O.I. v. AS. RAO (PAPRIPOORNAN, J.] 599
rational. It has not been shown as to why the persons carrying on business A
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-
B
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 v. State of Tamil
Nadu, AIR (1974) SC 555, Menak Gandhi v. Union of India, AIR 1978 SC
597, Ajay v. Khalid, AIR (1981) SC 487 and other cases). c
19. 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 D
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 hand 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. E
The Court concluded thus :
"....... The non-obstante clause in Section 44AC(l), "not-
withstanding 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 F
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."
G
(emphasis supplied)
The Court further held thus :
"On this aspect, we may as well refer to the words "in the
assessment made under this Act" in sub-section (4) of Section H
600 SUPREME COURT REPORTS (1996] 2 S.C.R .
A . 206C. These words show that an assessment under the Act is still to
be made even where tax is collected under Section 206C. This, in
our opinion, is a strong indication supporting our construction of
Section 44AC.
xxx xxx xxx xxx
B
.......... 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
c 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."
D (emphasis supplied)
20. We perused the aforesaid judgment of the Andhra Pradesh High
Court
l
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
E non-obstante clause in Section 44AC excluded the provisions of Sections
28 to 43C (applicable to all assessees), the provisions are unreasonable,~e
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
F 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. In all other respects, the batch of cases
shall stand dismissed. In the circumstances of the case, there shall be no
G order as to cos~s.
V.M. Matters disposed of.
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