Court upholds legislative competence but strikes down Section 44AC as unconstitutional, opts for reading down instead

The court held that Parliament had the legislative competence to enact Sections 44AC and 206C of the Income-tax Act. However, Section 44AC was found to be in violation of Articles 14 and 19(1)(g) of the Constitution due to arbitrariness and unreasonable restrictions. Despite this, the court chose not to strike down Section 44AC but instead read it down as an adjunct to Section 206C, requiring regular assessments in accordance with specific provisions. The petitions were allowed, with no order as to costs.

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Issues Involved:
1. Legislative competence.
2. Violation of Article 14 of the Constitution.
3. Violation of Article 19(1)(g) of the Constitution.

Issue-wise Detailed Analysis:

Legislative Competence:
The petitioners contended that Parliament lacked legislative competence to enact Section 44AC of the Income-tax Act, 1961, as it did not pertain to "taxes on income" under entry 82 in List I of Schedule VII to the Constitution. They argued that the section taxed presumptive income rather than actual income. The court examined whether the legislation fell within the scope of entry 82 and concluded that the concept of "income" includes not only actual receipts but also presumptive income. The court noted that the power to tax includes ancillary and subsidiary matters, and the legislative intent was to combat tax evasion by deeming a portion of the purchase price as income. Thus, the enactment of Section 44AC was within Parliament's legislative competence.

Violation of Article 14:
The petitioners argued that Section 44AC was discriminatory and arbitrary, violating Article 14 of the Constitution. The court referred to the memorandum explaining the Finance Bill of 1988, which justified the special provisions for traders in alcoholic liquor and forest produce due to difficulties in tracing them after contract periods. The classification was deemed rational as it aimed to combat tax evasion by "fly-by-night operators." However, the court found that the fixed rates of presumptive income were arbitrary, as they did not reflect the actual profit margins of traders. The court cited precedents indicating that arbitrariness in legislation violates Article 14. Consequently, the court held that Section 44AC was arbitrary and violated Article 14.

Violation of Article 19(1)(g):
The petitioners contended that the rates fixed by Section 44AC were confiscatory and imposed unreasonable restrictions on the freedom to carry on trade or business, violating Article 19(1)(g) of the Constitution. The court noted that the fixed rates of presumptive income were disproportionate to the actual profits of traders, making the section confiscatory. The court referred to precedents indicating that unreasonable restrictions on trade or business violate Article 19(1)(g). The court concluded that Section 44AC imposed an unreasonable restriction on the freedom to carry on trade or business and was thus violative of Article 19(1)(g).

Reading Down of Section 44AC:
Despite finding Section 44AC violative of Articles 14 and 19(1)(g), the court chose not to strike it down. Instead, the court adopted the approach of the Andhra Pradesh High Court and read down the provision. The court held that Section 44AC should be read as an adjunct to and explanatory of Section 206C, meaning that a regular assessment must be made in accordance with Sections 28 to 43C of the Income-tax Act. This reading down ensured that the non obstante clause of Section 44AC would not be operative, addressing the arbitrariness and unreasonable restriction concerns.

Conclusion:
1. Parliament was within its competence to enact Sections 44AC and 206C.
2. Section 44AC is violative of Articles 14 and 19(1)(g) of the Constitution.
3. Section 44AC is read down to be an adjunct to and explanatory of Section 206C, requiring regular assessment in accordance with Sections 28 to 43C.

The petitions were allowed accordingly, with no order as to costs.

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