TMI Blog1990 (9) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... ection referred to as the buyer), obtaining in any 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 consumption (other than Indian-made foreign liquor), a sum equal to forty per cent. 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 head "Profits and gains of business or profession": Provided that nothing contained in this clause shall apply to 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 ; (b) the right to receive any goods of the nature specified in column (2) of the Table below, or such goods, as the case 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 as the purchase price in respect of such goods sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber obtained by any mode other than Five per cent. under a forest lease (iv) Any other forest produce not being timber Fifteen per cent. Provided that where the Assessing Officer, on an application made by the buyer, gives a certificate in the prescribed form 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, processing 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. (2) The power to recover tax by 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 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 collected and credit shall be given to him for the amount so collected on the production of the certificate furnished under sub-section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely upheld with the result that the writ appeals were dismissed. The judgment of the Andhra Pradesh High Court was rendered in A. Sanyasi Rao v. Govt. of A. P. [1989] 178 ITR 31, by a Division Bench of that High Court upholding the legislative competence but opining that section 44AC was violative of articles 14 and 19(1)(g) of the Constitution. Despite this, instead of striking down section 44AC, the same was read down to make it consistent with articles 14 and 19(1)(g) of the Constitution. Lengthy arguments have been advanced before us on behalf of the assessee by Mr. Mahanti, Mr. Roy and Mr. Agrawal pleading, as a last resort, to accept the views put forward by the Andhra Pradesh High Court; whereas learned standing counsel, duly assisted by Mr. Rathod, submits that the view taken by the Kerala High Court merits our acceptance. Though two other High Courts of the country, namely, Karnataka and Gujarat, had occasion to note these provisions in Vishal Enterprises v. Union of India [1988] 174 ITR 548 and R. Laxmichand and Co. v. Union of India [1990] 184 ITR 376, respectively, they did not examine the validity of these sections. Let us now deal with the points of attack raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in view. It is contended by learned counsel for the assessees that what is sought to be taxed by section 44AC is not income at all as understood by the Act. In this connection, we may bear in mind that the effort to define "income" has eluded the Legislature as well as the law-interpreters. The speech of Lord MacNaghten where he has said "Income-tax, My Lords, if I may say so, with respect, is a tax on income", is a classic example of what the law-interpreters have to say about their inability in defining income. In so far as its definition in the Act is concerned, we are referred to section 2(24) which has given an inclusive definition of "income" but, which, according to counsel, reflects the legislative mind as to what it is prepared to regard as income. We have been then taken through various sections of the Act, to wit, sections 4, 5, 14, 28, 29, 37 and 40. The idea of this exercise is to bring home the point that, for an income to be taxed under the Act, the same must at least accrue or arise. It is further contended that, for any income to be chargeable under the head "Profits and gains of business or profession", of which section 44AC speaks of, there must be carrying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtion of the purchase price as income will not snap the nexus with income mentioned in the entry. In view of what has been stated above, we are satisfied that the enactment of section 44AC and for that matter of section 206C was within the legislative competence of Parliament. The first submission of learned counsel for the assessee is, therefore, rejected. Article 14 and section 44AC : The attack on this section on the anvil of article 14 is on two grounds : (i) it is discriminatory, and (ii) the provision is arbitrary. In so far as the selection of the two types of traders before us, namely, those who trade in alcoholic liquor for human consumption and timber or other forest produce is concerned, we may refer to the memorandum explaining the provisions of the Finance Bill of 1988 which set out the reason for which and the objects to achieve which these provisions were inserted. Paragraph 25 of the memorandum reads thus : "New provisions to counteract tax evasion by liquor contractors, scrap dealers, dealers in forest products, etc. 25. Considerable difficulty has been felt in the past in making assessment of income in the case of persons who take contracts for sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat any person, being a seller, referred to in section 44AC, shall 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 receipt of that amount from the buyer, whichever is earlier. This mode of recovery of tax shall be without prejudice to any other mode of recovery. The tax so collected 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 the amount has been collected and credit shall be given for such amount in the assessment made under this Act on production of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l-India phenomenon. It was also noticed that, by the time the income become taxable at the hands of such persons, they are not traceable. Experience has been that, at the time of assessment in these cases, either the accounts are not available or they are grossly incorrect or incomplete. Even if assessments could be made on such persons on ex parte basis, it almost becomes 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 the contracts are taken are men of no means. As the framers of the law have utilised their all-India experience and the same being that most of the traders of the type at hand being what are known as "fly-by-night-operators" in the taxman's colloquium, special treatment was necessary to compute profits and gains from the business of trading in the goods mentioned in section 44AC. As the law permits large elbow room from classification in the taxing statute and as it is not possible to plug the loopholes of tax evasion in all the sectors at one time and as, in order to tax something, it is not necessary to tax everything, we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accept lower percentage of profit than that statutorily fixed by section 44AC, if so found in the course of regular assessment. It was replied that it would not be possible to accept any figure lower than the one statutorily fixed though, according to learned standing counsel, if an assessee were to return a higher rate of profit than one statutorily fixed, the same would be acceptable to the Department. The question relating to higher rate of profit was posed by learned counsel for the assessees having known from the decision of the Andhra Pradesh High Court that the profit had been to the extent of even 110% in the case of arrack there. According to us, if in the course of assessment higher figures can be accepted, the lower figures should be considered and accepted if otherwise convincing. We, however, entertain doubts as to the stand taken by learned standing counsel on this aspect of the question because, according to us, what is statutorily fixed cannot be given a go by in either case due to anything returned by the assessee. From the materials made available to us and on the basis of what was disclosed to the Andhra Pradesh High Court in A. Sanyasi Rao v. Government of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1)(g) of the Constitution, is the submission on behalf of the petitioners. It is contended that, even if a particular trader were to incur loss while dealing with the commodities in question, he shall have to pay income-tax at the specified rates though the word "income" has been accepted to include loss, vide CIT v. J. H. Gotla [1985] 156 ITR 323 (SC). By referring to the case of assessees who were earlier taxed on the timber trade at the rate of 4 to 5 per cent., but who would now be assessed at the rate of 35 per cent., it is submitted that the section is confiscatory and has put unreasonable restriction on the freedom to carry on trade or business. Reference has been made in this connection to Kunnathat Thathunni Moopil Nair v. State of Kerala, AIR 1961 SC 552. In so far as Moopil Nair's case, AIR 1961 SC 552, is concerned, it is contended by learned standing counsel that the ratio of that decision can have no application inasmuch as what had happened there was that the tax liability of Rs. 54,000 was fastened on the forest owner though he was making an income of Rs. 3,100 per year out of the forests. It was, therefore, stated that, unless the petitioner was very much enamou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to this decision shows that this observation was made in the context of fixation of price. It is trite to say that business is undertaken to earn profit, but if the taxing provision be such that it robs the businessmen of the possibility of earning any profit, such an impost has to be regarded as an unreasonable restriction on the freedom to carry on trade or business. It is lastly contended by learned standing counsel that, if the rate of profit as fixed by section 44AC be on the high side, the appeal has to be to the Legislature and not to the court. In this context, he draws our attention to the view expressed by the learned single judge of the Kerala High Court in Kunhammed [1989] 176 ITR 481, 496. No doubt, this court or for that matter, any court cannot lower the profit rate fixed by section 44AC, but it can definitely examine the question whether fixation of rate of profit has eroded the fundamental right to carry on trade or business to such an extent that the same is regarded as violative of article 19(1)(g) of the Constitution. There is some debate before us as to whether courts can go into the question of legislative wisdom. This question has been posed because of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tries Ltd. v. CIT [1986] 159 ITR 646 (Mad). As to the second reason, it is appropriate to say that, on this count, the Department can well ask for acceptance of the Kerala view which has upheld the validity of both the sections. Thus, nothing turns on the view taken by the Andhra Pradesh High Court on this count. Of course, the rule of interpretation that, if two views be reasonably possible, the one favourable to the assessee should be accepted, remains. Keeping in view all the above, we would state that section 44AC has to be regarded as violative of article 19(1)(g) of the Constitution. Reading down of section 44AC : The further question is as to the approach to be adopted regarding the ultimate order to be passed. In this connection, we may refer to what is stated in K. P. Varghese [1981] 131 ITR 597 (SC) that it is a well settled rule of interpretation that the court should, as far as possible, avoid that construction which attributes irrationality to the Legislature, and courts must obviously prefer a construction which renders the statutory provision constitutionally valid rather than that which makes it void. The question is whether anything can be done by this court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beyond the relevant legislative power, the court will construe it in a more limited sense so as to keep it within power. " The Andhra Pradesh High Court thereafter noted the decisions rendered in Bhim Singhji (Maharao Saheb Shri) v. Union of India, AIR 1981 SC 234, and CST v. Radhakishan [1979] 118 ITR 534 (SC). The reading down by the Andhra Pradesh High Court was to the extent that section 44AC shall be read not as an independent provision but as an adjunct to and as explanatory to section 206C ; and that it does not dispense with a regular assessment altogether with the result that, after the tax is collected in the manner provided by section 206C, a regular assessment would be made where the profits and gains of business in the goods in question will be ascertained in accordance with sections 28 to 43C. The reading down was resorted to by the Andhra Pradesh High Court having come to the view that section 206C serves the purpose which the Legislature had in mind, i.e., to take care of tax evasion. It was observed that once tax is collected at the source as visualised by section 206C, the contractor cannot run away ; probably only in cases where the profit is higher than 40 per ..... X X X X Extracts X X X X X X X X Extracts X X X X
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