1989 (3) TMI 116 - HC - Income Tax

Ruling Upholds Sections 44AC and 206C, Limits Scope and Clarifies Purchase Price Basis for Tax Collection

The HC upheld the constitutional validity of sections 44AC and 206C of the Income-tax Act, holding that Parliament is competent to adopt 'purchase price' ... Constitutional validity of sections 44AC and 206C of the Income-tax Act, 1961 - expression 'Purchase price' - Tax Deducted At Source - Profits and gains from the business of trading in alcoholic liquor, forest produce, scrap, etc. - HELD THAT:- Though it is not clear from the material placed before us as to whether the clarification issued by the Central Board of Direct Taxes can be treated as an order, instruction, or direction, within the meaning of section 119 of the Income-tax Act, We direct that so long as the said clarification issued by the Central Board of Direct Taxes stands, the purchase price in the case of arrack shall be taken to be the issue price only. In other words, the privilege fee or licence fee shall not be taken into account in determining the purchase price. We make it clear that we are giving this direction not because we are satisfied about the correctness of the interpretation placed upon the expression 'purchase price' by the Central Board of Direct Taxes or by the parties before us, but because of the clarification issued by the Central Board of Direct Taxes, and also because the contesting parties are at one that the clarification issued by the Central Board of Direct Taxes should be followed. It would be evident that at the time of making payment to the contractor, the person paying the sum cannot say or visualise how much of the said sum constitutes income in the hands of the contractor. It is indeed impossible for him to say so, it is thus clear that the said words are merely descriptive in nature. Moreover, the percentages referred to in section 206C(1) would be intelligible only if they are related to the purchase price. If they are related to the percentage of profits and gains specified in section 44AC, the level of collection at source provided by section 206C(1) would become practically meaningless. The collection would be at such a low level that it would not serve the object underlying the provision. We are, therefore, of the opinion that the percentages mentioned in column 3 of the Table in sub-section (1) of section 206C are relatable to the purchase price and not to the income. We may now summarise our conclusions: (i) Parliament was perfectly competent to enact sections 44AC and 206C ; (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 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 constitutional infirmity ; (iv) It is competent for Parliament to adopt the purchase price as measure for determining the income-tax. In this case, the purchase price is taken as a measure for the limited purpose of determining the quantum of tax to be collected under section 206C. Tax collected on specified goods will be given credit for in the year in which those goods are sold; (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 the Income-tax Department, it is directed that the expression 'purchase price' in section 44AC and section 206C shall mean, in the State of Andhra Pradesh in respect of arrack, only the 'issue price' as understood in the Andhra Pradesh Excise Act and the Rules made thereunder, now in force in this State. The true meaning and content of the expression 'purchase price' is, however, different, as explained hereinbefore ; (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. The writ petitions are, accordingly, disposed of in the above terms. Issues:1. Constitutional Validity of Sections 44AC and 206C of the Income-tax Act, 19612. Interpretation of 'Purchase Price' under Sections 44AC and 206C3. Extent of Collection at Source under Section 206CSummary:1. Constitutional Validity of Sections 44AC and 206C of the Income-tax Act, 1961:The constitutional validity of sections 44AC and 206C of the Income-tax Act, 1961, was challenged. Section 44AC determines the profits and gains of the buyer from the business of trading in certain specified goods at a given percentage of the purchase price, while Section 206C mandates the seller to collect a specified percentage of the purchase price as income-tax at the time of sale. The petitioners argued that Section 44AC is arbitrary and discriminatory, imposing an unreasonable restriction on their fundamental rights under Article 19(1)(g) and violating Article 14. They contended that the measure of profits and gains prescribed by Section 44AC is unreasonable and that tax should be levied only on actual income derived from the sale of goods, not at the time of purchase. The court upheld the legislative competence of Parliament to enact these sections, stating that the Income-tax Act is within the purview of Entry 82 in List I of the Seventh Schedule to the Constitution. The court noted that the impugned provisions are designed to tackle tax evasion by elusive traders in specified goods and do not violate the fundamental rights under Articles 14 and 19(1)(g), provided they are read in conjunction with Section 206C, allowing for regular assessment under Sections 28 to 43C of the Act.2. Interpretation of 'Purchase Price' under Sections 44AC and 206C:The term 'purchase price' was contested, particularly in the context of arrack in Andhra Pradesh. The petitioners argued that 'purchase price' should mean only the issue price and not include the privilege fee or licence fee. The court noted that the expression 'purchase price' should be understood uniformly across different states and systems of excise revenue collection. However, due to the clarification issued by the Central Board of Direct Taxes and the agreement between the parties, the court directed that in Andhra Pradesh, 'purchase price' for arrack shall mean only the issue price, excluding the privilege fee and licence fee.3. Extent of Collection at Source under Section 206C:The petitioners contended that the collection at source under Section 206C should be 15% of the income component of the purchase price, not 15% of the purchase price itself. The court rejected this argument, stating that the percentages mentioned in Section 206C(1) are related to the purchase price, not the income component. The court clarified that the words 'on income comprised therein' in Section 206C are merely descriptive and do not imply that the collection should be based on the income component of the purchase price.Conclusion:The court upheld the validity of Section 206C and read down Section 44AC to ensure it does not dispense with regular assessment under Sections 28 to 43C. The term 'purchase price' in Andhra Pradesh for arrack shall mean only the issue price, as per the clarification by the Central Board of Direct Taxes. The collection at source under Section 206C is to be 15% of the purchase price, not the income component. The writ petitions were disposed of accordingly, with no order as to costs.