TMI Blog1989 (3) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the Finance Act, 1988. Section 206C was given effect to on and from June 1, 1988, and section 44AC from April 1, 1989. These two sections read as follows: 206C. Profits and gains from the business of trading in alcoholic liquor, forest produce, scrap, etc.-(1) Every person, being a seller referred to in section 44AC, shall, at the time of debiting of the amount payable by the buyer referred to in that section to the account of the buyer or at the time of receipt of such amount from the said buyer in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, collect 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, of such amount as income-tax on income comprised therein. TABLE S. No (1) Nature of goods (2) Percentage (3) (i) Alcoholic liquor for human consumption (other than Indian made foreign liquor) Fifteen per cent (ii) Timber obtained under a forest leas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to pay simple interest at the rate of two per cent. per month or part thereof on the amount of such tax from the date on which such tax was collectable to the date on which the tax was actually paid. (8) Where the tax has not been paid as aforesaid, after it is collected, the amount of the tax together with the amount of simple interest thereon referred to in sub-section (7) shall be a charge upon all the assets of the seller. 44AC. Special provision for computing profits and gains from the business of trading in certain goods.-(1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an assessee, being a person other than a public sector company (hereafter in this section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits and gains of business or profession at a given percentage of the purchase price. Sub-section (1) begins with a non obstante clause, notwithstanding anything to the contrary contained in sections 28 to 43C . According to the sub-section, the profits and gains of a purchaser of goods in the nature of alcoholic liquor for human consumption (other than Indianmade foreign liquor) shall be deemed to be a sum equal to 40% of the amount paid or payable by him therefor, i.e., of the purchase price. Similarly, in the case of a purchaser of timber obtained under a forest lease, the profits and gains are deemed to be 35% of the purchase price. In the case of timber obtained by any mode other than under a forest lease, it is 15%, while in the case of purchase of any other forest produce, not being timber, the profits and gains are deemed to be 35%. Sub-section (2) clarifies that the rule incorporated in sub-section (1) shall not apply to second or subsequent sales of such goods. Sub-section (3) is also clarificatory in nature. It says, where the business carried on by an assessee does not consist exclusively of trading in goods to which this section applies and where separate ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection. The certificate should contain such particulars as may be prescribed. Sub-section (4) says that any amount collected under section 206C shall be deemed to be payment of tax on behalf of the purchaser. It provides further that credit shall be given to him for the amount so collected on the production of the certificate furnished under sub-section (5) in the assessment made under this Act for the assessment year for which such income is assessable. Sub-sections (6), (7) and (8) are not relevant for our purposes. Section 44AC is brought into effect from April 1, 1989 (assessment year 1989-90). Read with section 4, it means that the profits and gains of the assessee from the business of trading in specified goods for the previous year relevant to assessment year 1989-90, shall be computed in accordance with the said provision. It is for this reason that section 206C was given effect to with effect from June 1, 1988. The memorandum explaining the provisions in the Finance Bill, 1988, sets out the reasons for which, and the objects to achieve which, these provisions were inserted. Paragraph 25 of the Memorandum reads thus (see [1988] 170 ITR (St.) 187 ) : New pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This amendment will take effect from April 1, 1989, and will, accordingly, apply to assessment year 1989-90 and subsequent years. Further, with a view to facilitate collection of taxes from such assessees, it is proposed to introduce a new section 206C to provide that 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 the 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 cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or transportation charges. In the case of buyers of liquor, the purchase price will include cost of bottle, label and sealing charges, etc. It clarifies that the deductions provided by Chapter VI-A of the Income-tax Act would be permissible from the profit determined under section 44AC. Soon after June 1, 1988, the sellers of specified goods started calling upon the purchasers to deposit an additional amount in terms of section 206 by way of income-tax in addition to the purchase price. They refused to sell the said goods unless such amount was deposited. A batch of writ petitions was immediately filed questioning the provisions. They were admitted and certain interim orders made. The petitioners are not only purchasers of alcoholic liquor (other than Indian made foreign liquor) which in this State means purchasers of arrack, but also purchasers of timber and other forest produce. Sarvasri Y. Ratnakar, N. V. Ranganadhan, R. Venugopal Reddy, Sarangan, M. R. K. Chowdary, V. Rajagopala Reddy, Lakshma Reddy and T. Raghunatha Reddy assailed the validity of the impugned provisions on the following grounds : (i) Section 44AC is an arbitrary and discriminatory provision. It has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection (1) of section 206C. It may be appropriate to refer to these contentions as well). (iv) In the case of arrack, purchase price means issue price only. It does not take in the privilege fee or licence fee. The interim order of this court construing purchase price as inclusive of privilege fee and licence fee requires reconsideration ; and (v) The amount to be collected at source under section 206C is related to the income component of the purchase price, to wit, in the case of alcoholic liquor for human consumption, it is 15% of 40% of the purchase price and not 15% of the purchase price. This is evident from the words on income comprised therein , occurring in sub-section (1) of section 206C. On the other hand, Sri M. Suryanarayana Murthy, learned standing counsel for the Income-tax Department, who appeared for the Union of India in these matters, disputed the correctness of the contentions urged by the petitioners. According to him, both sections 44AC and 206C are perfectly valid pieces of legislation enacted to meet a particular situation. They are intended to tackle tax evasion by those who may be called fly-bynight operators. It has been the experience of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d income can be treated as income and taxed as such by Parliament. It must have some characteristics of income, as broadly understood. So long as the amount taxed as income can rationally be called income as generally understood, it is competent for Parliament to call it income and levy tax thereon. In Navinchandra Mafatlal v. CIT [1954] 26 ITR 758 (SC), it was observed by the Supreme Court that the expression income has not acquired any particular meaning by reason of any legislative practice . Reference was made to the observations of Lord Wright in Kamakhya Narain Singh v. CIT [1943] 11 ITR 513 that the word 'income', it is true, is word difficult and perhaps impossible to define in any precise general formula. It is a word of the broadest connotation . He opined that it would be wrong to interpret the word income occurring in entry 54 of List I of the Seventh Schedule to the Government of India Act, 1935 (corresponding to entry 82), in the light of any supposed English legislative practice, or, for that matter, in the light of legislative practice in any other country. It was observed that the entries in the Seventh Schedule must be given the widest poss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... try 54 of List I of the Seventh Schedule to the 1935 Act, it was argued, does not empower the Legislature to do so. Only the income of a person can be taxed in his hands, but not the income of another person. This argument was rejected holding that Entries in the Lists are not powers but are only fields of legislation, and that widest import and significance must be given to the language used by Parliament in the various entries . Reliance was placed upon an earlier decision of the Supreme Court in Baldev Singh v. CIT [1960] 40 ITR 605, where it was held (at p. 397 of 43 ITR) : So entry 54 should be read not only as authorising the imposition of a tax but also as authorising an enactment which prevents the tax imposed being evaded. If it were not to be so read, then the admitted power to tax a person on his own income might often be made infructuous by ingenious contrivances. The court then referred to the normal practice in this country where a husband or a father nominally takes his wife or minor son in partnership with him so as to reduce his tax burden. This was held to be a device to meet which the impugned provisions were made on the basis of the recommendations ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not, however, mean that Parliament can choose to tax as income an item which, in no rational sense, can be regarded as a citizen's income. The item taxed should rationally be capable of being considered as the income of a citizen. But in considering the question as to whether a particular item in the hands of a citizen can be regarded as his income or not, it would be in- appropriate to apply the tests traditionally prescribed by the Income-tax Act as such. The Court reaffirmed the principles enunciated in Navinchandra Mafatlal v. CIT [1954] 26 ITR 758 (SC) ; Baldev Singh v. CIT [1960] 40 ITR 605 (SC) and Balaji v. ITO [1961] 43 ITR 393 (SC). It is equally relevant to notice that in Baldev Singh [1960] 40 ITR 605 (SC), the validity of section 23A of the Indian Income-tax Act, 1922, was questioned. Section 23A provided that where the Income-tax Officer is satisfied that in respect of any previous year, the profits and gains distributed as dividend by any company within the twelve months immediately following the expiry of that previous year are less than 60% of the total income of the company of that previous year (as reduced by the amounts specified in clauses (a), (b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of this Act relating to the computation of income chargeable under the head 'Interest on securities', 'Income from house property', 'Capital gains' or 'Income from other sources', or in section 199 or in sections 28 to 43A, the profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a co-operative society, shall be computed in accordance with the rules contained in the First Schedule . The First Schedule to the Act contains rules prescribing the mode in which the profits of life insurance business and other insurance businesses are to be determined, where it is carried on by a resident and where it is carried on by a non-resident . Section 44B prescribes a special provision for computing profits and gains of shipping business carried on by a non-resident. It reads as follows : 44B. Special provision for computing profits and gains of shipping business in the case of non-residents.-(1) Notwithstanding anything to the contrary contained in sections 28 to 43A, in the case of an assessee, being a non-resident, engaged in the business of operation of ships, a sum eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived or deemed to be received in India by or on behalf of the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used or to be used in the prospecting for, or extraction or production of, mineral oils outside India. Explanation. For the purposes of this section- (i) 'plant' includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the said business ; (ii) 'mineral oil' includes petroleum and natural gas. Section 44BBA prescribes a special provision for computing profits and gains of business of operation of aircraft carried on by a non-resident. The provision is similar to section 44BB with the difference that the percentage in this case is 10, as against 7 1/2 in section 44B. Even with respect to deduction, a special rule is evolved and applied in specified cases. Section 44D places a ceiling on the deductions to be allowed in the case of foreign companies. According to it, the deductions to be allowed shall not exceed 20% of the income by way of royalty or fees for technical service received. Section 194C provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the goods purchased in one year may be sold over several subsequent years. But, according to section 44AC, income is presumed in the year of purchase and not in the year or years of sale. This, it is argued, is contrary to the entire scheme of the Income-tax Act. Under the Income-tax Act, each assessment year is a unit by itself. Several assessment years cannot be clubbed into one unit, nor can a comprehensive or single assessment be made in respect of several assessment years, it is argued. In our opinion, this argument lacks substance. Section 44AC clearly indicates that the profits and gains meant by it are the profits and gains of the business of trading in specified goods. This is evident not only from the marginal note given to the section, but also from the words from the business of trading in such goods , occurring in clauses (a) and (b) of sub-section (1) thereof. Tax is undoubtedly on the business income. For the sake of convenience and also having regard to the difficulty in making a normal assessment in the case of such assessees, it adopts the purchase price as the measure of tax. As laid down by several decisions of the Federal Court and the Supreme Court in ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered by this court again in D. G. Gouse and Co. (Agents) P. Ltd. v. State of Kerala [1980] 1 SCR 804 ; AIR 1980 SC 271, where reference was made to the measure adopted for the purpose of the levy of tax on buildings under the Kerala Buildings Tax Act. The court examined the different modes available to the Legislature for measuring the levy, and upheld the action of the Legislature in linking the levy with the annual value of the building and prescribing a uniform formula for determining its capital value and for calculating the tax. In the course of its judgment, the court cited with approval a passage from Seervai's Constitutional Law of India, Second Edition, Vol. 2, at page 1258 : 'Another principle for reconciling apparently conflicting tax entries follows from the fact that a tax has two elements : the person, thing or activity on which the tax is imposed, and the amount of the tax. The amount may be measured in many ways ; but decided cases establish a clear distinction between the subject-matter of a tax and the standard by which the amount of tax is measured. These two elements are described as the subject of a tax and the measure of a tax.' It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produce, such a situation may arise. But, in our opinion, the date or year of sale is irrelevant-whether it is alcoholic liquors, timber or other forest produce-for the purposes of section 44AC. Once we hold that adopting the measure of purchase money is permissible for levying income-tax, it follows that tax will be levied in the year the goods are purchased. Be that as it may, this aspect becomes academic in view of our conclusion (being recorded hereinafter) that section 44AC does not bar a regular assessment of the business income of the assessee in accordance with sections 28 to 43C. There is no violation of the principle that each year of assessment is a unit by itself. The only departure is that the tax collected under section 206C(1) at the time of the purchase of goods will be given credit for in the year in which those goods are sold. Until such sale, the tax collected will be held over. This is what sub-section (4) of section 206C says and we see no illegality in saying so. It must be remembered that this is an anti-evasion measure. It is a specific provision designed to meet a specific situation. So long as the assessee trades in or does business in the goods purchased, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... article 14 of the Constitution if it seeks to impose on the same class of property, persons, transactions or occupations similarly situate, incidence of taxation, which leads to obvious inequality. A taxing statute is not, therefore, exposed to attack on the ground of discrimination merely because different rates of taxation are prescribed for different categories of persons, transactions, occupations or objects. It is for the Legislature to determine the objects on which tax shall be levied, and the rates thereof. The courts will not strike down an Act as denying the equal protection of laws merely because other objects could have been, but are not, taxed by the Legislature . . . This statement of law, in our opinion, encapsules the law on the subject. It is unnecessary to multiply the authorities. Learned counsel for the petitioners, however, placed strong reliance upon the decision of the Supreme Court in K. T. Moopil Nair v. State of Kerala, AIR 1961 SC 552. According to them, the principle of the said decision squarely governs the present case. It is, therefore, necessary to notice the facts and principles of this case in a little more detail. The TravancoreCochin Lan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, and gorges. The Supreme Court observed that ordinarily a tax on land or land revenue is assessed on the actual or potential productivity of the land sought to be taxed, and that the tax has reference to the income actually made, or which could have been made with due diligence. But the impugned Act, it was pointed out, makes no such distinction. There may be several types of land : a particular land may be and desert yielding no income ; the second one does not yield any income, but may be capable of yielding an income by raising a crop after a disproportionately large investment of labour and capital. A third type of land yields just enough to pay for the incidental expenses, labour charges and taxes, while the fourth type of land may be making large profits because it is very fertile and capable of yielding good crops. While the fourth category, it was pointed out, would easily be able to meet the burden of tax, the third one might be just able to bear the tax, while the first and second categories would not be able to bear the tax burden. Because the tax is not paid, the very land may be sold for realizing the demand, which would make the Act confiscatory in nature. It was ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the provisions contained in section 206C). The grievance is that section 44AC does not provide for a regular assessment, dispensing, as it does, with all the provisions in sections 28 to 43C. If an assessment is made according to law, it is argued, the assessee can establish that his profit is very much less than 40%, or that he has actually suffered losses. Even if the said provisions are based upon the premise that these contractors are, what may be called fly-by-night operators, not easy to locate, the provision contained in section 206C is sufficient to serve the purpose. Fifteen per cent. of the purchase price is collected in the case of arrack contractors. This amount would be lying with the Government. A regular assessment can always be made in the normal course. It was not necessary, it is argued, to go further and make a harsh and confiscatory provision of the nature contained in section 44AC. Article 19(1)(g) : It is argued by the petitioners that they have a fundamental right to carry on the business-whether in arrack or in forest produce ; at any rate, the petitioners' fundamental right to trade in timber and other forest produce cannot be denied. The provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... restraint and the sobering reflection that the Constitution is meant not only for people of their way of thinking but for all, and that the majority of the elected representatives of the people have, in authorising the imposition of the restrictions, considered them to be reasonable. We find it difficult to say that the submissions of learned counsel for the petitioners based upon articles 14 and 19(1)(g) are without substance. Literally read, section 44AC brings about a legislative assessment of the profits and gains of persons trading in specified goods. The normally applicable provisions, sections 28 to 43C, are dispensed with altogether. It is declared that the profits and gains of every person from the said business, irrespective of his circumstances, volume of business, finance, expenditure or other attendant matters, shall be deemed to be the specified percentage of the purchase price. All that remains to be done thereafter is to find out whether any of the deductions provided by Chapter VI-A are to be allowed and then make an assessment. We may agree with the respondents that the persons trading in the specified goods form a class, inasmuch as they are difficult to tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onest traders even in the specified goods cannot be ruled out. It is in these circumstances that we called upon Sri. M. Suryanarayana Murthy, learned standing counsel appearing for the Union of India, to place before us the material on the basis of which the percentages referred to in the Bill and the various percentages referred to in the sections as enacted, are determined. This was done, inasmuch as, in the counter-affidavit filed by the Union of India, it was not explained on what basis the profits and gains of business in the specified goods were assessed at 60% uniformly at the stage of the Bill, nor was it clear on what basis this percentage was altered to the several different percentages mentioned in section 44AC. It may be remembered that at the stage of the Bill, the percentage of profits and gains from the business was fixed at 60% of the purchase price and 20% of the purchase price was sought to be collected at the time of sale of these goods. The sections as enacted, however, prescribe different and lower percentages in both the sections. We also wanted to know on what basis the distinction between persons trading in arrack, persons trading in timber, persons trading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Now, we may refer to the material. Three annexures are furnished to us. Annexure-I mentions cases relating to country liquor . Annexure-I is in two parts. The first part mentions the names of five assessees, whom we shall refer to as A, B, C, D, and E, respectively. A and B are from Madras. C is from Hyderabad ; D from Vijayawada and E from Raipur (Madhya Pradesh). The following figures are given : Sl. No. Name and address of the assessee Assessment year Purchase price Income assessed Remarks Rs. Rs. 1. A 1984-85 13,05,309 6,07,980 The net profit works out to 46% of the purchase price. 2. B 1984-85 80,87,371 87,58,150 3. C 1985-86 3,22,513 1,00,000 Assessed under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 3. K 1985-86 15,86,061 1,92,270 Net profit 12.12% of purchase price. Annexure-III mentions three cases-relating to any other forest produce not being timber . We shall refer to these three assessees as L, M and N. Their particulars are as follows : Sl. No. Name and address of the assessed Assessment year Purchase price Income assessed Remarks Rs. Rs. 1. L 1983-84 14,26,360 10,06,887 Net profit comes to 70% of purchase price. The assessees business is purchase of tendu leaves from Madhya Pradesh and Maharashtra and sale thereof. 2. M 1987-88 9,15,700 3,81,481 Net profit is 41% of purchase price. 3. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Can it be said that the several thousands of arrack licensees all over the State- indeed their number may run into a couple of lakhs-uniformly make profit at 40% or thereabout ? There may be some who may make profit at that rate ; but it is difficult to believe that all of them would be earning at the rate of 40% or near about. If there were material to show that the profits of these persons generally range between, say, 35% to 45% or even 30% to 50%, the fixation at 40% could have been said to be reasonable. Firstly, there is no adequate verification ; secondly, even the material placed before us shows that the profit ranges between 31% and 110% in the case of arrack. In the case of purchase of timber, other than under a forest lease, only three cases are looked into. Here the profits range from 12% to 28% ; (Section 44AC fixes the profits in such a case at 15%). In the case of forest produce other than timber again only three cases are taken, and the profits range from 30% to 70% (Section 44AC fixes the profits in this category at 35%). It is true that none of the petitioners have disclosed their precise profits for the preceding years, if any. But, in our opinion, discriminatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source, mentioned in section 206C, are concerned, we are of the opinion that they cannot be said to be unreasonable or excessive, since, according to our construction, they would be only tentative collections, subject to a final assessment. In such a situation, the reasoning given by this court in CIT v. Superintending Engineer [1985] 152 ITR 753 (AP) would squarely apply. If the tax assessed is found to be less than the amount collected, the balance would be refunded to the assessee. The excess collection, if any, in such a case would be only temporary, and for a short period, and would be refunded. We may mention that the theory of reading down is a rule of interpretation resorted to by courts where a provision, read literally, seems to offend a fundamental right or falls outside the competence of the particular Legislature. This was resorted to as far back as 1941 in In re Hindu Women's Rights to Property Act, AIR 1941 FC 72. The expression property was capable of taking in agricultural lands as well, in which case it would trench upon the field reserved for Provincial Legislatures exclusively (List II). The court referred to the presumption that a Legislature must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, its purpose and the mischief it seeks to suppress. (Bengal Immunity Co. Ltd. v. State of Bihar [1955] 2 SCR 603 and R. M. D. Chamarbaugwalla v. Union of India [1957] SCR 930 cited with approval).' This court has, in several cases, adopted the principle of reading down the provisions of the statute. The reading down of a provision of a statute puts into operation the principle that so far as it is reasonably possible to do so, the legislation should be construed as being within its power. It has the principal effect that where an Act is expressed in language of a generality which makes it capable, if read literally, of applying to matters beyond the relevant legislative power, the court will construe it in a more limited sense so as to keep it within power. To the same effect are the observations of Krishna Iyer J. in Bhim Singhji v. Union of India, AIR 1981 SC 234, 242 : . . . reading down meanings of words with loose lexical amplitude is permissible as part of the judicial process. To sustain a law by interpretation is the rule. To be trigger-happy in shooting at sight every suspect law is judicial legicide. Courts can and must interpret words and read their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted as purchase price. Now, the controversy arises this way : Until the previous excise year 1987-88, these licences in the State of Andhra Pradesh were auctioned in public. Before putting the shop or group of shops to auction, the minimum quota of arrack which the licensee will have to lift during that year, was specified. Even if he failed to lift a part of the quota or whole of the quota, he would still be liable to pay the issue price of the said minimum guaranteed quota. The person who offered to pay the highest rental for the month/year was given the licence. There was also a small licence fee. In short, the consideration comprised three components, viz : (i) the annual rental, (ii) the issue price of the MGQ, and (iii) the licence fee. However, for the first time, a different system was tried out in two districts for the previous excise year (1987-88). In Khammam and Cuddapah districts, for the said excise year, the licences of shops were auctioned to the person who offered to purchase the highest quantity of arrack for the year. But he had to purchase arrack at a price which was far higher than the issue price in the case of other districts. While the issue price in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction (it is to be noted here that rental is the rent payable in consideration of grant of lease for the sale of liquor, but it is not the sole or exclusive consideration for the lease) ; (ii) the the requirement that the licensee shall purchase arrack at the issue price and (iii) the further requirement that the licensee shall purchase the minimum guaranteed quantity of arrack which he has to make good in case of shortfall. The consideration for the grant of the privilege to sell liquor is not merely the rental to be paid by the lessee but also the issue price of arrack supplied, or treated as supplied in case of shortfall which is also to be paid by the lessee/licensee (vide paragraph 8 in the decision of Supreme Court in State of A. P. v. Y. Prabhakar Reddy, AIR 1987 SC 933). We are of the opinion that the expression purchase price occurring in sections 44AC and 206C should be understood in its ordinary and natural sense, uninfluenced by the particular system in force in a given State and/or in a given year. In a given State, the excise revenue may be collected in a particular manner and in a different manner in another State. The expression purchase price is not defined in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laced before us, which reads as follows GOVERNMENT OF INDIA OFFICE OF THE CHIEF COMMISSIONER OF INCOME-TAX, ANDHRA PRADESH, HYDERABAD. Ref. No. CC/LC (Tech)127(2)188-89 dl- 21-9-1988. To The Secretary, Andhra Pradesh Arrack Contractors' Association, Hyderabad, 3-6-369/A71, Himayat Nagar, Hyderabad-500 029. Sir, Sub : Collection of income-tax under section 206C. ------------ Kindly refer to your letter dated 19-8-1988 addressed to the Chief Commissioner of Income-tax, Andhra Pradesh, Hyderabad. I have been directed to inform you that the provisions of section 206C would be applicable only to the issue price and for this purpose, the privilege fee is not to be included. Yours faithfully, Sd./- (P. Agarwal), Deputy Commissioner of Income-tax (Tech.) O/o Chief Commissioner of Income-tax, Andhra Pradesh, Hyderabad. . . This letter, it may be remembered, was written in continuation of the letter dated August 19, 1988, wherein the Chief Commissioner of Income- tax stated that the query put by the Secretary, A. P. Arrack Contractors' Association, has been referred to the Central Board of Direct Taxes. Evidently, the clarifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vilege 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. We must also say that in the case of Khammam and Cuddapah districts, for the excise year 1987-88, purchase price shall be taken to be the issue price as in the case of other districts for the said year. This direction is necessary to ensure equal treatment to similarly placed persons. Indeed, the respondents are guilty of inconsistency when they say that while in the case of other districts, purchase price means only the issue price, in the case of Khammam and Cuddapah districts, for the said excise year, it means the total sale price, which includes issue price and rentals. The extent of collection at source under section 206C: Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum as income-tax on income comprised therein . 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 component of the purchase price. 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 perfectl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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