TMI Blog2003 (10) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... were conducted periodically for the purpose of conferring lease of right of retail vend of arrack. It was conducted with reference to designated areas. The successful bidders are entitled to procure arrack from the bottling units and then sell it in retail trade within their allotted area. The arrack trade is controlled by the State Government. The Karnataka Excise Act has framed several rules for appropriate enforcement of excise laws. In the year 1993, the Government discontinued private bottling units from engaging in the manufacture or bottling of arrack and instead decided as a policy to restrict those operations in the hands of the companies or agencies owned and controlled by the State Government. The petitioner-M.S.I.L and another Karnataka Government undertaking were entrusted with this taste of bottling arrack and marketing it on behalf of the State Government. The petitioner was entrusted with bottling in northern districts of the State of Karnataka. Mysore Sugar was assigned with the task in the rest of the State. According to the petitioner, the job was in the nature of works contract. An excise supervisor is stationed and the petitioner's operations in manufacturing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed orders under section 206C(6) of the Act for the years 1995-96 to 2000-2001. According to the order, the excise contractors obtained arrack by way of auction and the prices at which they can sell arrack are not fixed by or under any State Act. The petitioner finds fault with the order passed by the first respondent. The petitioner has raised several grounds in support of his case. The main ground is that section 206C is not applicable to the operation of the petitioner. With these facts and grounds the petitioner is challenging the order passed by the respondent at annexures E1 to E6 and consequent demand notices in terms of annexures F1 to F6 in these petitions. The facts in W.P. Nos. 6967 to 6972 of 2001 in brief are as under: The petitioner is a public limited company and the majority of its shares are owned by the Government of Karnataka. It is managed by a senior IAS officer appointed by the State Government. The petitioner is engaged in the manufacture of sugar and also owns a distillery for the manufacture of alcohol. The petitioner manufactures arrack for human consumption in terms of the Karnataka Excise Rules. The petitioner bottles arrack under the supervision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and makes a successful bid. The events, namely, participation of the excise contractor in the auction, becoming successful bidder thereto and the purchase of liquor by such excise contractors from the source, such as the petitioner, are all well-knit together constituting an integrated act. Therefore, in reality, there exists only a single act, namely, purchase of goods but executed in two stages: (1) granting the excise contractors by conducting an auction and issuing permits, (2) the petitioner effecting sales of liquor to the excise contractors on production of permits issued by the Excise Department. The excise contractors are not bound to sell liquor at a specific fixed price. The excise contractors are at liberty to sell the liquor at any rate between the minimum and the maximum price at which sale of liquor can be effected and this, in terms of the percentage may come to almost 56 per cent. The respondents also refer to the provisions of the Act to contend that the action of the respondents are fully justified in law. According to the respondent, the Excise Commissioner absolutely has no jurisdiction to issue any such circular interpreting the provisions of the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Union of India [1991] 187 ITR 188 (HP); Union of India v. Oni Prakash S.S. and Co. [2001] 248 ITR 105 (SC); Naresh Kumar and Co. v. Union of India [2000] 243 ITR 760 (P H). In so far as price fixation is concerned, learned counsel relies on Saraswati Industrial Syndicate Ltd. v. Union of India [1974] 2 SCC 630 and Mohd. Rajab Gujari v. State of Jammu and Kashmir [1975] 2 SCC 323. Learned counsel argues that in terms of the income-tax laws, the person who has issued the notice is incompetent and is a person who is without jurisdiction. Reliance is placed on the notification issued by the Government. Dr. Krishna, learned counsel for the other petitioner, supports Sri K.P. Kumar, learned counsel, with regard to the auction sale being independent in character. Learned counsel also says that the buyer concept is accepted but the entire articles/goods belong to Government and the petitioner only undertakes labour contract. There is already a first sale taken place and therefore, the second sale if at all cannot be subjected to rejection. Per contra, Sri. Indra Kumar, learned standing counsel took me through the history of section 44AC and the need for interpretation of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ades in view of the peculiar difficulties experienced in the past. 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", sections 44AC and 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. These provisions are akin to advance tax. 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. The court ultimately ruled that section 44AC is a valid piece of legislation and is an adjunct to and explanatory to section 206C of the Act. The Supreme Court in the very same judgment noticed as under with regard to the object of the provision: "It appears that the 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 mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmissions made by learned counsel. Law of interpretation and scope of section 206C(6): In the case on hand, elaborate arguments have been advanced with regard to the understanding of section 206C(6) of the Income-tax Act. For a proper understanding, both counsel have placed before me several case laws with regard to law and interpretation of statute. Sri K.P. Kumar, learned counsel and Dr. Krishna, learned counsel appearing for the petitioners, invited my attention to law and interpretation of statutes. According to them, the interpretation is to be in their favour to see that the interpretation has to be in conformity with the excise operation in Karnataka. On the other hand, Sri Indra Kumar, learned counsel refers to me various case laws in support of his submissions. It is well settled that Parliament intends that an enactment shall remedy a particular mischief. It is presumed, therefore, that Parliament intends the court, in construing the enactment, to endeavour to apply the remedy provided by it in such a way as to suppress that mischief. According to Sri Indra Kumar, learned counsel, the mischief of a particular trade is to be taken note of by this court in interpret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formulate a plan of Government. That aim, that policy is not drawn, like nitrogen, out of the air; it is evidenced in the language of the statute, as read in the light of other external manifestations of purpose (Some Reflections on the Reading of Statutes, 47 Columbia LR 527, at page 538 (1947)). That principle has been applied to this very Act by this court recently in Allahabad Bank v. Canara Bank [2000] 101 Comp Cas 64 (SC); [2000] 4 SCC 406. If the said principle is applied, it is clear that the provision in section 31 must be construed in such a manner that, after the Act, no suit by the bank is decided by the civil court and all such suits are decided by the Tribunal'." Again in para. 35, the court notices as under: "The court while interpreting the provision of a statute, although, is not entitled to rewrite the statute itself, is not debarred from 'ironing out the creases'. The court should always make an attempt to uphold the rules and interpret the same in such a manner which would make it workable.". Para. 36 is also relevant, which I deem it proper to quote: "It is also a well settled principle of law that an attempt should be made to give effect to each and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect sales to excise contractors who are successful bidders in the auction held by the State of Karnataka. The State of Karnataka confers the right of vend of arrack in the light of the result of the auction held for the period from June 30 of the previous year to June 30 of the next year. After acceptance of the bid, the agreements are entered into between the State and the excise contractors. In the light of the amendment to the Excise Act, they are compelled to procure their arrack from the petitioners who are the sole manufacturers in arrack in terms of excise laws. It is equally admitted before me that these petitioners do sell arrack to the excise contractors but they have not deducted tax at source at the time of sale transaction. At this stage, I must notice a somewhat interesting argument of, Dr. Krishna, learned counsel, with regard to "no sale" in the case on hand. In this connection, one has to see the pleadings. In the pleadings, it is stated that the fourth respondent as per the provisions of the Excise Rules, licenses the retail vendors of arrack to lift arrack and vend it in retail, on payment of kist to the State. The licensees are permitted to lift the arrack f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t all between the petitioner-Mysore Sugar and excise contractor. In fact, in the connected case, the petitioner M.S.I.L fairly submitted that there is a sale between the petitioner and the excise contractor. What is contended by M.S.I.L. is that notwithstanding the sale they are not liable for deduction in terms of the provisions. In these circumstances, I am not able to accept the submissions of Dr. Krishna, learned counsel, that there is no sale at all between the petitioner and the excise contractor in the given set of facts and in the absence of any factual foundation. Section 206Cis a beneficial provision meant for arresting revenue loss. After noticing large scale tax evasion in liquor trade, Parliament in its wisdom provided for deduction at source in the case of various taxpayers including certain category of dealers. Section 206C is a special provision providing for collection 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. The Table provides for 10 per cent. in the case of alcoholic liquor for human consumption. Sub-section (2) provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In this situation he must go beyond--and sometimes even against--existing orders to ensure the success of the overall battle plan. 'The responsible platoon commander will ask himself what his captain would have wanted him to do if communications should fail, and similarly judges should ask themselves, when the message imparted by a statute is unclear, what the Legislature would have wanted them to do in such a case of failed communication'." In the case on hand, the definition of buyer and seller has to be noticed for proper understanding of the case by the petitioners. These expressions have been debated, discussed, explained and argued by both counsel. The history as I narrated above would show that sections 206C and 44AC have been inserted with a laudable object of plugging the revenue loss from certain type of traders in the light of the experience of the State as with regard to those transactions. The law of interpretation as held by the Supreme Court is to achieve the object of the statute and every word in it has a meaning. The legislative intent is to be discovered from the history and the language so as to see the purpose of legislation is achieved while interpreting. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. It is not as though the sale is independent of retail right. A sale right cannot be frustrated or divided by the petitioner. The very object of right to vend itself-is to obtain arrack and thereafter, sell the same to the retailers. Therefore, it is not possible for this court to accept the hypertechnical plea of diluting the facts of "not obtaining arrack" by way of auction. Auction cannot be wiped out or erased in a transaction like this between the petitioners and the excise contractors. Auction is the foundation not only to have a right but also a subsequent consequential obtaining arrack by way of sale as a buyer in terms of laws. It is of interest to note that the real aggrieved party, namely, the excise contractors, have not chosen to plead this plea at any point of time. The petitioner strongly relies on the following judgments: (1) Saini and Co. v. Union of India [2000] 246 ITR 762 (HP) [FB]; (2) K.K. Mittal and Co. v. Union of India [1991] 187 ITR 208 (P H); (3) Ashak Kumar v. Union of India [2001] 252 ITR 200 (P H); and (4) Chandigarh Distillers and Bottlers Ltd. and Patiala Distilleries and Manufacturers Ltd. v. Union of India [2002] 253 ITR 205 (P H). Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us the amount which the petitioners pay to the wholesaler after they have obtained a permit from the Excise Department by depositing the excise duty. The amount payable would only be the price which the buyer will pay to the seller. It cannot by any stretch of reasoning include licence fee which the buyer has to pay for the licence that he has obtained. The payment of this fee is wholly unrelated to the amount to be paid at the time of purchasing country liquor from the wholesalers. Even if an L-14A licensee does not purchase any country liquor, the licence fee has nevertheless to be paid by him to the Department and it will be preposterous to suggest that income-tax should still be recovered. The licence fee is therefore, not a part of the amount payable at the time of the sale of country liquor. In this view of the matter, we have no hesitation in holding that the amount payable in section 206C of the Act does not include the licence fee which has to be paid by the licensee to the State Government. The Deputy Commissioner of Income-tax was in error in including the licence fee in the amount payable under section 206C of the Act and the Excise and Taxation Commissioner was not req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment made by the licensee by way of licence fee does not ipso facto entitle the licensee to lift the goods. For obtaining the goods mentioned in the Table, the licensee has to place an order on the manufacturer or the supplier of the said goods and it is at that point of time that section 206C would get attracted". The Supreme Court has also ruled that "the buyer has to be a buyer of goods and not merely a person who acquires a licence to carry on the business." Sri Indra Kumar, learned counsel, heavily relies on the judgment to contend that the argument of the petitioner is totally diluted or required to be rejected in the light of the clear pronouncement of the Supreme Court. The Supreme Court was considering the case of Naresh Kumar [2000] 243 ITR 760 (P H) wherein section 206C was pressed into service at the time of grant of licence. Noticing that, the Supreme Court ruled that a licence only enables to carry on trade or business. But the Supreme Court ruled that when the movement of order is placed, at that point of time section 206C is get attracted. In the case on hand, the demand is when the excise contractors have placed an order on the manufacturer, namely, the petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of auction. Therefore, the argument that obtaining arrack is totally independent of the auction cannot be accepted with the facts of this case. It is nothing but another side of the same coin. It is also necessary at this stage to notice the judgment of the English Courts in Commissioners of Customs and Excise v. Top Ten Promotions Ltd. [1969] 3 All ER 39 (HL). That was a case dealing with duty of pool betting. The court ruled that the words to be construed are like chameleons. They take their colour from their context. There are in my view certain general considerations which should guide us in determining which of their many possible shades of meaning Parliament intended the words to bear. The court also notices that there are few greater stimuli to human ingenuity that the prospect of avoiding fiscal liability. Experience shows that under this stimulus human ingenuity outreaches Parliamentary prescience. Once the transaction to be taxed has been described by reference to its legal characteristics the potential taxpayer gets to work to devise new transactions whose legal characteristics do not comply with the statutory description yet nevertheless achieve the same kind of eco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l as the words which Parliament itself has chosen. You can often appreciate the meaning of a section--get the feel of it, so to speak--without being able to translate it into other words with exactly the same meaning. At the conclusion of the argument the function of the court is to apply, not its own words, but the words of the statute to the given situation. I return, therefore, to the question: What is the true meaning of section 42 as it stands? This cannot be answered by simply looking at the words of the statute and nothing else. A statute is not passed in a vacuum, but in a framework of circumstances so as to give a remedy for a known state of affairs. To arrive at its true meaning, you should know the circumstances with reference to which the words were used: and what was the object, appearing from those circumstances, which Parliament had in view. That was emphasized by Lord Blackburn in River Wear Commissioners v. William Adamson [1877] 2 AC 743 and by the Earl of Halsbury LC in Eastman Photographic Materials Co. Ltd. v. Comptroller-General of Patents, Designs and Trade Marks [1898] AC 571 in passages which are worth reading time and again. But how are the courts to kno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as suggested by the petitioners thereby defeating the very object of the legislation in arresting tax evasion by liquor dealers in the light of the judgment of the apex court. Issue of two interpretations: Counsel argued that when two interpretations are possible, the one beneficial to subject is to be given to the petitioners. They rely on Hindustan Lever Ltd. v. Municipal Corporation of Greater Bombay. [1995] 3 SCC 716 and Mysore Minerals Ltd. v. CIT [1999] 239 ITR 775 (SC). Per contra, the respondents deny the same. Hindustan Lever Ltd. v. Municipal Corporation of Greater Bombay [1995] 3 SCC 716 ruled in para. 11 that when interpretations are reasonably possible one beneficial to the assessee is to be given. In the case on hand, in my view, there cannot be any two interpretations and there could be only one interpretation on facts and that is the interpretation of obtaining arrack by way of auction. The second judgment Mysore Minerals Ltd. v. CIT [1999] 239 ITR 775 (SC) says that interpretation has to be given while interpreting the tax notwithstanding the statute. Interpretation of statute benefit has to be given. That would depend upon the facts of each case. When ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luted. Assuming that the petitioners have made out a case then, only course open to me is to remand the matter for reconsideration. Since the parties have advanced arguments on the merits of the matter, it is unnecessary for me to give any specific findings on this issue. Even otherwise, as I mentioned earlier, power is available in terms of the Act. Fixation of retail price: I have come to a conclusion on the facts in the light of statutory principles and the laws governing that there is a buying in terms of auction. The second limb of the argument, namely, whether fixation of price by the State is also necessary in the light of the context of the applicability of section 206C in the light of exclusion of the exemption in terms of section 206C(11), Explanation. However, I deem it proper to give a finding on this issue as well since the arguments have been advanced before me. The authority also has concluded in the order in the light of the objection that prices are fixed by the Government thereby attracting section 206C of the Act. The authority has rightly ruled that the petitioners are the sellers and they have collected the tax. For the purpose of fixed price, the autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The court was considering section 3 of the Act in that case. While placing reliance on the judgments, the court has to be careful to notice the facts involved and the legal provisions providing for an interpretation on the given set of facts. No judgment can be applied without noticing the facts. The facts in those two cases do not in any way come near to this case. Sir Shadi Lal Enterprises Ltd. v. Union of India [2003] 262 ITR 166 (All) is another judgment relied on by the petitioners. A reading of the said judgment would show that retail licensees purchase liquor at the price fixed by the State and there is no negotiation in that auction. There was also a circular issued by the Commissioner with regard to no collection. That stands on a different footing. Courts cannot give a go-by to the facts in a given circumstances and only rely on certain passage in a judgment. The judgment has to be read in its entirety in the context of the facts and law for the purpose of applicability of the case law to the given set of circumstances. In the case of the Allahabad judgment in Sir Shadi Lal Enterprises Ltd. v. Union of India [2003] 262 ITR 166, the court was considering the retail p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cularly when the circular involves revenue collection. It should not be issued in mechanical manner. If need be, the Commissioner could have sought clarification of the Income-tax Commissioner. On account of this circular, certain embarrassment is caused to the petitioner. It is hoped that in future at least such lapses are avoided in the larger interest of revenue collection to the country as a whole. Such circular defeats the object of tax evasion. In so far as the petitioners are concerned, it is to be stated here that both the petitioners are large public sector undertakings. They have to apply their mind before blindly following the circular particularly in the matter of revenue collection and in the larger interest of tax evasion. At the most, these two circulars may, to a certain extent show bona fides and certainly these circulars cannot be pleaded as a legal excuse for non-recovery. A statute has a prime place and a circular cannot dilute or deface a statutory provision. (b) Observations and relief: Having come to these conclusions that all the legal contentions of the petitioners are unsustainable, I have no option but to confirm the order of the authority. But at t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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