1996 (2) TMI 4 - SC - Income Tax

Sections 44AC and 206C upheld as constitutional presumptive tax and collection measures, not violating Articles 14 or 19(1)(g)

Union of India And Others Versus A. Sanyasi Rao And Others

The SC upheld the validity of sections 44AC and 206C of the Income-tax Act, holding they are within legislative competence and not violative of Articles ... Validity of sections 44AC and 206C of the Income-tax Act, 1961 - ultra vires and beyond legislative competence and also violative of articles 14 and 19(1)(g) of the Constitution of India - profits on a 'presumptive basis' - HELD THAT:- Section 44AC occurs in Chapter IV of the Act dealing with computation of total income. Heading-D deals with computation of profits and gains of business or profession. Section 44AC(1) determines the profits and gains of the year from the business of trading in certain specified goods like liquor (other than Indian-made foreign liquor, timber and forest produce) at a particular percentage specified therein. Section 44AC(2) states that the above provisions shall not apply to the second or subsequent sale of such goods. Section 44AC(3) is only a clarificatory provision. The Explanation to the section specifies the seller as Central Government, State Government, local authority, corporation, etc. Section 206C deals with collection and recovery of tax. Section 206C(1) obliges the seller of the specified goods to collect from the purchaser an amount equal to the percentage mentioned in the Table as income-tax. The goods mentioned in the Table are the very same goods mentioned in section 44AC. Sub-sections (2) to (5) of section 206C of the Act are further machinery provisions. In particular, sub-section (4) provides that any amount collected under the section shall be deemed to be payment of tax on behalf of the purchaser and provides for the issuance of a certificate evidencing such payments. Section 44AC came into force from April 1, 1989. Section 206C came into effect from June 1, 1988. We have seen that the object in enacting sections 44AC and 206C was to enable the Revenue to collect the legitimate dues of the State from the persons carrying on particular trades in view of the peculiar difficulties experienced in the past and the measure was so enacted to check evasion of substantial revenue due to the State. It is a matter of common knowledge that trade or business produces or results in income which can be brought to tax. In order to prevent evasion of tax legitimately due on such ' income ', section 44AC and section 206C were enacted, so as to facilitate the collection of tax on that income which is bound to arise or accrue, at the very inception itself or at an anterior stage and considered in the said perspective, it is idle to contend that the aforesaid statutory provisions lack legislative competence. After all, the statutory provisions obliging to pay ' advance tax ' is not anything new and the impugned provisions are akin to that. Counsel for the Revenue brought to our notice sections 44B, 44BB, 44BBA and 44D and contended that there are other similar provisions in the Act. We should state that they relate to non-residents carrying on business in India and are not much relevant in construing sections 44AC and 206C of the Act. In this context, we should bear in mind that there is a clear distinction between the subject-matter of a tax and the standard by which the amount of tax is measured. Having regard to the past difficulties in making a normal assessment and collection in the case of certain categories of assessees, for convenience' sake, the Legislature has chosen to make appropriate provision for collection of tax at an anterior stage by adopting the purchase price as the measure of tax. In our view, this is permissible and the standard by which the amount of tax is measured, being the purchase price, will not in any way alter the nature and basis of levy, viz., that the tax imposed is a tax on income. It cannot be labelled as a tax on purchase of goods. Section 4 is the charging section. Income-tax is levied in respect of the total income of the previous year of every person. Section 5 deals with the scope of total income. Section 6 deals with the residence in India. Section 7 deals with the income deemed to be received. Section 8 deals with dividend income. Section 9 deals with the income deemed to accrue or arise in India. The factual sale fixes the time and place of receipt only. Several places commencing from the buying of raw materials and ending with the production of finished products and the sale thereof will in different proportions point out where the income accrued or arose. It is in this perspective, that the court held that income accrued where the raw material is systematically purchased and which contributes substantially to the ultimate profit which is realised on the sale of the end-product. We understand the ratio of the decision, as highlighting the principle that even operations which are confined to the purchase of goods might constitute a business connection and the profits on sales might be deemed to accrue even at the point of purchase. In other words, in such cases, income (profit) is embedded even at the time of purchase. Viewed in this perspective also, we have no doubt that even at the time of purchase, income can be said to have accrued to attract imposition of tax. Considered in the light of the practical difficulties envisaged by the Revenue to locate the persons and to collect the tax due in certain trades, if the Legislature in its wisdom thought that it will facilitate the collection of the tax due from such specified traders on a ' presumptive basis ', there is nothing in the said legislative measure to offend article 14 of the Constitution. In the light of the legal principles stated above, we are unable to hold that section 44AC read with section 206C is wholly hit by article 14 of the Constitution of India. Issues Involved:1. Legislative competence of Parliament to enact sections 44AC and 206C of the Income-tax Act, 1961.2. Constitutional validity of sections 44AC and 206C under Articles 14 and 19(1)(g) of the Constitution of India.3. Interpretation and application of sections 44AC and 206C of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Legislative Competence of Parliament to Enact Sections 44AC and 206C:The Supreme Court upheld the legislative competence of Parliament to enact sections 44AC and 206C of the Income-tax Act, 1961, under Entry 82 of List I of the Seventh Schedule of the Constitution, which pertains to 'Taxes on income other than agricultural income.' The court emphasized that legislative entries should be interpreted broadly and liberally, including all subsidiary and ancillary matters necessary to prevent tax evasion. The court held that the provisions in question are machinery provisions intended to facilitate the collection of tax on income that is likely to accrue from specific trades where evasion was prevalent.2. Constitutional Validity Under Articles 14 and 19(1)(g):The court examined whether sections 44AC and 206C violated Article 14 (equality before the law) and Article 19(1)(g) (right to practice any profession or to carry on any occupation, trade, or business) of the Constitution of India. The court noted that while tax laws are subject to Article 14, the Legislature has wide discretion in matters of classification for taxation purposes. The court found that the provisions were not discriminatory, arbitrary, or irrational, as they were enacted to address specific difficulties in tax collection from certain trades known for evasion. However, the court did find that the non obstante clause in section 44AC, which denied the reliefs provided under sections 28 to 43C to particular trades, was unfair and arbitrary. The court held that such denial lacked a rational basis and violated the principle of equality.3. Interpretation and Application of Sections 44AC and 206C:The court analyzed the provisions of sections 44AC and 206C in detail. Section 44AC was introduced to estimate profits on a presumptive basis for certain trades, while section 206C dealt with the collection and recovery of tax at the time of purchase. The court noted that these provisions were intended to address the issue of tax evasion in trades dealing with country liquor, timber, forest produce, etc., where maintaining proper accounts was often problematic. The court agreed with the Andhra Pradesh High Court's interpretation that section 44AC should be read as an adjunct to section 206C and does not dispense with regular assessment under sections 28 to 43C. The court directed that the expression 'purchase price' should be understood in the context of the specific trade and that regular assessment should be made in accordance with the provisions of the Income-tax Act.Conclusion:The Supreme Court upheld the legislative competence of Parliament to enact sections 44AC and 206C of the Income-tax Act, 1961. The court found that these provisions were not discriminatory or arbitrary under Article 14 but held that the non obstante clause in section 44AC, which denied the reliefs provided under sections 28 to 43C, was unfair and arbitrary. The court directed that section 44AC should be read as an adjunct to section 206C and that regular assessment should be made in accordance with sections 28 to 43C. The writ petitions, civil appeals, and special leave petitions filed by the assessees were partly allowed to this limited extent.