"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 incomes in the case of persons who take contracts for sale of liquor, scrap, forest products. etc. It has been the Department's experience that for taking such contracts, firms or assertions of persons are specifically constituted and very often not trace is left regarding them or their members after the contract has been executed. Persons have also been found to have taken contracts, firms or associations of persons are specifically constituted and very often no trace is left regarding them or their members after the contract has been executed. Persons have also been found to have taken contracts in benami names by floating undertakings or associations for short periods. Since tax is payable in the assessment years in respect of the incomes of the previous years, the time by which the incomes from such sources become assessable, such persons are not traceable. At the time of assessment in these cases, either the accounts are not available or they are grossly incorrect or incomplete . Thus, even if assessments could be made on ex parte basis, it becomes almost 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 contracts are taken are men of no means.
 With a view to combat large scale tax evasion by persons deriving income from such business, the Bill seeks to insert a new section 44AC to provide for determination of income in such cases. Taking into account the experience gained in the past regarding the ratio of profit to the sale consideration, the proposal is to provide that sixty per cent. of the amount paid or payable by such persons on sale would constitute income of the taxpayers, i.e., the buyer.


A. Sanyasi Rao And Anr. vs Government Of Andhra Pradesh And ... on 7 March, 1989

The provisions of this section will apply only to an assessee, being a buyer of any goods in the nature of alcoholic liquor for human consumption (other than Indian-made foreign liquor) or any forest produce, scrap or waste, whether industrial or non-industrial, or such other goods, as may be notified by the Central Government, at the point of first sale. The word 'seller' connotes the Central Government, State Government or any local authority or corporation or authority established by or under a Central Act or any company. The provisions of this section shall not apply to any buyer in the second or subsequent sale of such goods.
 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 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 rate of two per cent. per month or part thereof, shall be a charge upon all the assets of the seller.
 A new section 276BB provides for prosecution of a person who fails to pay the tax collected at source for a period which shall not be less than three months but which may extend up to seven years and with fine.
 These amendments will be made effective from 1 st June, 1988..."
 The Finance Minister, in his Budget Speech for 1988-89, described this as "an anti-evasion measure".
 The Bill provided that the profits and gains of purchasers of specified goods shall be deemed to be 60% of the purchase price. It also provided for collecting 20% of the purchase price at source. This provision was sought to be made applicable not only to purchasers of alcoholic liquor for human consumption (other than Indian-made foreign liquor) and forest produce, but also to purchasers of scrap and waste as well. Parliament, however, confined the operation of the said provisions only to alcoholic liquor, timber and forest produce (referred to in this judgment as "specified goods"). It also altered the percentage of profits and gains, as well as the percentage of deduction, as mentioned hereinbefore.


After the Finance Act, 1988, was passed, a Press Note was issued by the Press Information Bureau explaining sections 44AC and 206C. According to the Press Note, section 44AC is a special provision for computing profits and gains in the cases of persons engaged in the trading in specified goods. It applies only to persons "engaged in the trading in goods" specified in the section. If the goods are destroyed or lost subsequently, there would be no occasion for trading in such goods and, therefore, the tax collected under section 206C may have to be refunded on such loss being proved. On the meaning of the expression "purchase price", it says, "the purchase price for this purpose will be the cost of the commodity inclusive of any excise duty, sales tax or any other levy, whatever its nomenclature, paid for by the buyer for obtaining the goods." Purchase price will not, however, include any freight 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 arbitrarily selected the purchasers of specified goods and subjected them to grave discrimination. While the profits and gains of business of every other assessee are computed in accordance with sections 28 to 43C - which sections provide for several deductions, rebates and other advantages - the purchasers of specified goods are denied the benefit of the said provisions. Their profits and gains are assessed arbitrarily at 40% of the purchase price. Discrimination is writ large on the face of the very provision. There is no basis for presuming that every purchaser of, say, alcoholic liquor, earns an income equal to 40% of the purchase price. Some may suffer losses; some may make profit but less than 40% while some may earn profit of more than 40% . Creating a fiction to the effect that all such persons shall be deemed to have earned profits at 40% of the purchase price is plainly and manifestly arbitrary and unreasonable.
 (ii) The measure of profits and gains prescribed by section 44AC constitutes an unreasonable restriction upon the petitioners'fundamental right guaranteed by sub-clause (g) of clause (1) of article 19. It cannot be justified as "reasonable" within the meaning of clause (6) of article 19. The assessment of profits and the provision relating to collection at source practically have the effect of killing the business in these goods.


(iii) There ought to be income before tax is levied thereon. No income is derived unless the goods purchased are sold. Collecting income-tax, therefore, at the time of purchase of goods cannot be characterised as "income-tax". The goods purchased may not be sold; they may be lost or destroyed before they are sold. Taking the level of profits and gains of business to the purchase price is wholly impermissible and unreasonable. In the case of a given assessee, there may be no profits and gains at all; he may suffer loss from the said business. Yet, the impugned provisions presume a profit at the prescribed level and collect tax at the specified percentage thereon. Even assessees whose income may be below the taxable limit are not exempted from the operation of the said provisions.
 (Besides the above contentions, there has been a good amount of controversy with respect to the meaning of the words "purchase price" occurring in section 44AC, and also with respect to the interpretation to be placed upon sub-section (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-by-night" operators. It has been the experience of the Income-tax Department that persons engaged in the trading in specifed goods are an elusive type. Once the contract period is over, they become scarce. It is difficult to trace them. Very often, the business is done in the names of dummies, under fictitious names, or in the names of persons from whom nothing can be recovered. This measure was, therefore, brought in to plug loss of precious revenue. This provision is not novel one indeed. Similar provisions are already there on the statute book. The impugned provisions are not open to attack either on the ground of lack of legislative competence or on the ground of violation of any of the fundamental rights. "Purchase Price" in the case of arrack, no doubt, means only the issue price. However, in the case of Khammam and Cuddapah districts, for the excise year 1987-88, it would mean the total purchase price which may include rental and licence fee as well. Under section 206C, the amount to be deducted is tacked on to the purchase price and not to the income component thereof. In other words, in the case of purchasers of arrack, it would be 15% of the purchase price (issue price) and not 15% of 40% of the purchase price.
 Legislative competence of Parliament to enact section 44AC and section 206C :


Legislative competence of Parliament to enact section 44AC and section 206C :
 The Income-tax Act is an enactment relating to entry 82 in List I of the Seventh Schedule to the Constitution. Entry 82 empowers Parliament to make a law with respect to tax on income, other than agricultural income. The Constitution does not define the expression "income". Article 366 defines the expression "agricultural income", but not "income". The said expression has to be given its natural meaning, keeping in mind the fact that the various entries in the Seventh Schedule are legislative heads and ought to be construed liberally. The Income-tax Act no doubt defines the expression "income" in clause (24) of section 2, but that definition cannot be read back into entry 82. Even the said definition is an inclusive one and has been expanding from time to time. Several items have been brought within the definition from time to time by various amending Acts. The said definition cannot, therefore, be read as exhaustive of the meaning of the expression "income" occurring in entry 82 of List I in the Seventh Schedule. This, of course, does not mean that an amount which can, by no stretch of imagination, be called "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 , 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 a word difficult and perhaps impossible to define in any precise general formula. It is 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 possible construction according to their ordinary meaning", and that they should not be read in a narrow or restricted sense. Each general word, it was observed, should be held to extend to all ancillary or subsidiary matters which can fairly and reasonably be said to be comprehended in it. Only where there are two conflicting entries in two legislative Lists, would it be permissible to cut down the meaning of the respective entries, with a view to harmonize them. The court also considered the "ordinary, natural and grammatical meaning" of the word "income", and observed that, according to the dictionary, it means "a thing that comes in" (See Oxford Dictionary, Vol. V, p. 162; Stroud, Vol. II, pp, 14-16). In the United State of America and in Australia both of which also are English-speaking countries, the word 'income' is understood in a wide sense so as to include a capital gain. Reference may be made to - Eisner v. Macomber


as to include a capital gain. Reference may be made to - Eisner v. Macomber [1919] 252 US 189; Merchants' Loan and Trust Co. v. Smietanka [1920] 255 US 509 and United States of America v. Stewart [1940] 311 US 60 and Resch v. Federal Commissioner of Taxation [1943] 66CLR 198. In each of these cases, very wide meaning was ascribed to the word 'income' as its natural meaning..." It is on this reasoning, it was held, that capital gains constitute income and can be taxed as such and that a law providing therefor would be a law relating to tax on income.


Reference may also be made to the decision of the Supreme Court in Balaji v. ITO [1961] 43 ITR 393, which considered the validity of sub-section (3) of section 16 of the Indian Income-tax Act, 1922. Sub-clauses (i) and (ii) of clause (a) of section 16(3) provided for taxing an individual on the income of his wife or minor children ifhe carried on business in partnership with his wife, or if he admitted his minor children to the benefits of partnership. (Indeed, section 64(1)(iii) of the Income-tax Act, 1961, which no doubt, has been deleted with effect from April 1, 1989, provided that the income of a minor child of an assessee arising from the admission of the minor to the benefits of a partnership in a firm, shall be taxed in the hands of the assessee, even though the assessee himself was not a partner in that firm). The argument was that the Legislature was not competent to provide that the income of A can be taxed in the hands of B. Entry 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 in 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 made by the Income-tax Enquiry Commissioner of 1936. After referring to the general practice of the business man in this country to induct his wife and minor children as partners with a view to reduce the tax liability, the court observed (at p. 400) "when the Legislature of this country, which is assumed to know the conditions of the people and their requirements, with the awareness of this particular widespread fraudulent device in the matter of evasion of taxes, made a law to prevent the said fraud, it is difficult for this court, in the absence of any counterbalancing circumstances to hold, on the analogy drawn from American decisions, that the need for such a law is not in existence..."


Reference may also be usefully made to another decision of the Supreme Court in Navnit Lal C. Javeri v. K. K. Sen, AAC of I.T. [1965] 56 ITR 198. In this decision, the validity of section 12(1B) of the Indian Income-tax Act, 1922, was questioned. Section 12(1B) provided that a loan made to a shareholder by a private controlled company is taxable as dividend. It was recognised that merely because the loan is taxed as a dividend in the hands of a shareholder, the loan may not cease to be a loan, and that it would be open to the company to recover the loan by resorting to law. The petitioner's argument was that what is not income is being taxed as "income" and, therefore, it is beyond the legislative competence of Parliament. (The impugned provision was introduced by the Finance Act 15 of 1955). The argument was rejected in the following words (at p. 204) :


"In dealing with this point, it is necessary to consider what exactly is the denotation of the word 'income' used in the relevant entry. It is hardly necessary to emphasise that the entries in the Lists cannot be read in a narrow or restricted sense, and as observed by Gwyer C.J. in the United Provinces v. Atiqa Begum [1940] FCR 110; AIR 1941 FC 16, 'each general word should be held to extend to all ancillary or subsidiary matters which can fairly and reasonably be said to be comprehended in it'. What the entries in the lists purport to do is to confer legislative powers on the respective Legislatures in respect of areas or fields covered by the said entires; and it is an elementary rule of construction that the widest possible construction must be put upon their words. This doctrine does 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 ; Baldev Singh v. CIT and Balaji v. ITO .


It is equally relevant to notice that in Baldev Singh , the validity of section 23A of the Indian Income-tax Act, 1922, was questioned. Section 23A provided that where the Income-tax Officer is a 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 clause (a), (b) and (c) of sub-section (1)), the Income-tax Officer shall, unless he is satisfied that, having regard to the losses incurred by the company in earlier years or to the smallness of the profits made in the previous year, the payment of a dividend or a larger dividend than that declared would be unreasonable, make an order in writing that the company shall, apart from the sum determined as payable by it on the basis of the assessment under section 23, be liable to pay super-tax at the rate specified by sub-section (1) of section 23A. This section was enacted to prevent avoidance of super-tax by shareholders of a company in which the public are not substantially interested. The assesses' argument was that since the company and shareholders are distinct entities, taxing the shareholders on dividends not distributed by the company, and not received by them, cannot be justified as a tax on income received by shareholders. This argument was repelled on the ground that the obvious intention of section 23A was to prevent evasion of tax, and that entry 54 in List I of the Seventh Schedule to the 1935 Act should be read not only as authorizing the imposition of a tax, but also as authorizing an enactment which prevents the tax imposed being evaded. It was also observed that section 23A dealt with a situation where shareholders did not deliberately distribute the accumulated profits as dividend amongst themselves and, therefore, provided that these


where shareholders did not deliberately distribute the accumulated profits as dividend amongst themselves and, therefore, provided that these accumulated profits will be deemed to have been distributed to the shareholders and tax levied against them on that basis.


It is, therefore, idle to contend that the impugned provisions are not warranted by entry 82 of List I or that Parliament lacked the legislative competence to enact them Section 44AC was meant to provide for a certain category / class of assessees who are not amenable to the normal mode of assessment. Substantial public revenue was being lost every year. Hence, the said provision was made. It is a measure designed to check evasion of tax. It cannot be denied that, generally speaking, trade and business in specified goods produce income. The argument of lack of legislative competence must thus fail.
 Indeed even prior to the introduction of section 44AC, there were some provisions in the Act similar in nature to it. Section 44 provides that "notwithstanding anything to the contrary contained in 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 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 equal to seven and a half per cent. of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head 'Profits and gains of business or profession'.
 (2) The amounts referred to in sub-section (1) shall be the following, namely :-
 (i) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods shipped at any port in India; and


(ii) the amount received or deemed to be received in India by or on behalf of the assessee on account of the carriage of passengers, livestock, mail or goods, shipped art any port outside India."
 Similarly, section 44BB prescribes a social provision for computing profits and gains of the business of exploration, etc., of mineral oils, carried on by a non-resident. Sub-sections (1) and (2) of section 44BB read as follows :-
 "44 BB. Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils. - (1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, in the case of an assessee, being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used or to be used in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per sent. of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head 'Profits and gains of business or profession' :
 Provided that this sub-section shall not apply in a case where the provisions of section 42 or section 44D or section 115A or section 293 A apply for the purposes of computing profits or gains or any other income referred to in those sections.
 (2) The amounts referred to in sub-section (1) shall be the following namely :-


(a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf 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 in India; and


(b) the amounts received or deemed to be received in India by or on behalf of the assessee on account of the provision of services and facilities a 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 44 BBA 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 apllied 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 provides that any person responsible for paying any sum to any resident (contractor) for carrying out any work in pursuance of a contact, shall "at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to 2% of such sum as income-tax on income comprised therein". Section 195 provides for similar deduction in case of amount paid to non-residents. The deduction is to be made at the rates of income-tax for the time being in force.


Of course, sections 44B, 44BB, and 44BBA as also 44D are confined to non-residents carrying on business in India. Since their total world income cannot be assessed under our Act, their earnings in India are taken into account and tax is levied at a particular flat percentage without following the normal procedure applicable to ascertainment of such income. Section 194C applies to residents only. Its validity was assailed but upheld by a Bench of his court, of which one of us (Jeevan Reddy J.) was a member, in CIT v. Superintending Engineer [1985] 152 ITR 753, mainly on the ground that the said deduction is only provisional and is liable to be adjusted in the final assessment to be made in accordance with the provisions of the Act.


Yet another objection relating to the competence of Parliament to make the impugned provisions is based on the following reasoning : The Income-tax Act levies tax on income. Income arises only when the assessee sells the goods i.e., carries on business in the goods purchased by him. Tax can be levied on the profit earned by him from such sale or business, as the case may be. Levying that tax on purchase price, it is argued, cannot be characterised as tax on income and, therefore, is beyond the competence of Parliament. It is suggested that after arrack is purchased, it may be spilt, destroyed, or lost on the way; it may never be sold; the assessee may never carry on any trade or business in that commodity. More particularly, in the case of forest produce, it is argued, the timber purchased in a particular pervious year may not be sold in that year at all, with the result that no income arises from the trade or business in the said goods. In one case, the timber or other forest produce purchased in one year may be sold several years later. In another case, the goods purchased in one year may besold 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 rate 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 assesses, it adopts the purchase price as the measure of tax. As laid done by several decisions of the Federal court and the supreme court in case arising under central excise laws, "while the levy in our country has the status of a constitutional concept, the point of collection is located where the statute declares it will be" (see paragraph 14 in Union of India v. Bombay Tyre International Ltd. [1986] 59 Comp Cas 460). The following observations in the said decision are apposite (at p. 474);


"Section 3 of the Central Excises and salt Act provides for the levy of the duty of excise. It creates the charge, and defines the nature or the charge. That it is a levy on excisable goods, produced or manufactured in India, is mentioned in terms in the section Itself. Section 4 of the Act provides the measure by reference to which the charge is to be levied. The duty of excise is chargeable with reference to the value of the excissable goods and the value is defined in express terms by that section. It has long been recognized that the measure employed for assessing a tax must not be confused with the nature of the tax. In Ralla Ram v. Province of East Punjab [1948] FCR 207; AIR 1949 FC 81, the Federal court held that a tax on buildings under section 3 of the Punjab Urban Immovable Property Tax Act, 1940, measured by a percentage of the annual value of such building remained a tax on building under that Act even though the measure of annual value of a building also adopted as a measure for determining income from property under the Income-tax Act. It was pointed out that although the same standard was adopted as a measure for the two levies the levies remained separate and distinct imposts by virtue of their nature, In other words, the measure adopted could not be identified with the nature of the Tax. the distinction was observed by a special Bench of the Patna High Court in Atma Ram Budhia v, state of Bihar, , where a tax on passengers and goods was assessed as a rate on the fares and friehts payable by the owners of the motor vehicles. Atma Ram Budhiya AIR 1952 was referred to with approval by this court in Sainik Motors v. State of Rajasthan . This court, in the case repelled the contention that the levy was a though the measure of the tax is furnished by


the case repelled the contention that the levy was a though the measure of the tax is furnished by the fairs and freights, it does not cease to be a tx on a passengers and goods. The points considered by this court again in D. G. Gouse and Co. (Agents) P. Ltd. v. State of Kerala where reference was made to the measure adopted for the purpose of the levy tax of in building under the Kerala Building 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 the uniform formula for determining its capital value and for a 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 is, therefore, clear that the levy of a tax is defined by its nature while the measure of the tax may be assessed by its own standard. It is a true that the standard adopted as the measure of the levy may indicate the nature of the tax but it does not necessarily determine is. The relationship was aptly expressed by the Privy Council in RE : A Reference under the Government of Ireland Act, 1920 and Section 3 of the Finance Act (Northern Ireland), 1934 [1936] AC 352, when it said :


'........ It is the essential characteristics of the particular tax charged that is to be regarded and the nature the for machinery - often complicated - by which the tax is to be assessed is not of assistance, except in so far as it any throw light not the general character of the tax.' ....... It is apparent, therefore, that when a enacting a measure to serve as a standard for assessing the levy the Legislature need not contour it along lines which spell out the character of the levy itself. Viewed from this standpoint it is not possible to accept the contention that because the levy of excise is a levy on goods manufactured or produced the value of an accessible article must be limited to the manufacturing cost plus the manufacturing profit we are of opinion that a broader-based a standard of reference may be adopted for the purpose of determining the measure of the levy. Any standard which maintains a nexus with the essential character of the levy can be regarded as a valid basis of for assessing the measure of the levy. In our opinion the original section 4 and the new section 4 of the Central Excises and salts act satisfy this test.............."
 Applying the principle aforsaid, we are of the opinion that merely because profits and gains are assessed adopting the purchases price as the measure the tax imposed does not cease to be a tax on income. It is none the less an assessment of the profits and gains of the business carried on by the assessee in the specified goods and cannot be termed as a tax on purchased of goods.


Now, coming to the other aspect of the argument no such problem can arise in the case of alcoholic liquors other than Indian-made foreign liquors). The goods purchased in an year have to be sold in that year only. All the unsold goods have to be surrendered to the Government at he end of the year. Of course, in the case of timber and other forts produce such a situation may arise. But in our opinion the date or year of sale is irrelevant - whether it is alcoholic liquors timebr or other forts produce - for the purpose money is permissible for levying income-tax it follows that tax will be levied in the years the goods are purchased. But 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 teach 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 purchased 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 seen on illegality insaying so. It must be remembered that this is an anti-evasion measure. It is a specific provision designed to meet a secifical situations. So long as the assessee trades in or does business in the goods purchased, tax can be levied and in the circumstances it will be levied in the year in which the goods are sold. It is on this principle that section 16(3)(a)(i) and (ii) section 12(1B) and section 23A of the Income-tax Act, 1922, were sustained in Balaji's case , and Baldev


the Income-tax Act, 1922, were sustained in Balaji's case , and Baldev Singh's case . The reasoning underlying the said judgment is equally relevant here and sustains section 44AC section 206C.


Whether section 44AC and section 206C violate Art. 14 and art. 19 (1) (g) : Article 14 : It is well sellted that while the application of aritcl 14 is not excluded in the case of tax laws, a large elbow-room ought to be conceded to the Legislature in the matter of classification, selection and rate of tax/. As explained by the Supreme Court in V. Venugopala Ravi Varma Rajah v. Union of India [1969] 74 ITR 49, the equal protection clause enshrined in article 14 is not an abstract proposition. Quite often laws are enacted with a view to solve specific problems or to achive define objectives buy specific remedies. |in such a situation, absolute quality or uniformity of treatment is impposible of achiuevemnt. "Tax laws are aimed at dealing with complex problem of infinte variety necessitating adustment of several disparate elements. The court accordingly admit subject to and herence to the fundamental principle of the doctrine of equality a larger play to legislative discretion in the matter of classification. The power to classify may be exercised so as to and just the system of taxation in all proper and reasonable ways; the legislature may select persons rate for tax if the legislature does so reasonably. Protection if the equality case clauses does not predicate a mathematically precise or logically complete of sysmmetrical classification; it is not a condition of the guarantee of equal protection that all transactions properties object or person of the same genus must be affected by it or none at all. If the classification is rational the Legislature is free to chooses object of taxation, impose different rates, exempt classes of property to tax in different ways and adopt different modes of assessment. A taxing stature may contravenes article 14 of the Constitution if it seeks to impose on the same class of property, persons transaction or occupations similarly situate incidence of taxation which lead


impose on the same class of property, persons transaction or occupations similarly situate incidence of taxation which lead to obvious in equlaity. A taxing statue is not therefore exposed to attack not he ground of discrimination merely because different rates of taxation are perscribed fro different categories of persons, transactions occupations or objects.


It is for the Legislature to determine the objects on which tax a shall be levied, a and the rates thereof. The courts will not strike down an act as denying the equal protection of laws merely because other object 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 Courts in K. T. Moopil Nair v. State of Kerala, . Accroding to them the principle of the a said decision squarely governs the present case. It is, therefore, necessary to notice the facts and principle of this case in a little more detail. The Travancore-Cochin Land Tax Act, 1955, was enacted by the Kerala Legislature "to provide for the levy of a low and unifrom rate of basic tax on all lands in the State of Travancore-Cochin". Section 4 the charging section, read thus :
 "Subject to the provision of this Act, there shall be charged and levied in respect of a lands in the State, of whatever description and held under whatever tenure, a uniform rate of tax of to be called the basic tax."


The basic tax, which was prescribed at Rs. 2 per acre was payable on all lands nothwithstandffing any other law, contract, or agreement. Section 5A provided for a provisional assessment to be made later. The Act did not contain a provision for issuing notice or opportunity to he concerned landholder to make his submission before determining the tax. A uniform tax was imposed a on all lands. There was no provision for appeal. Indeed, there was no assessment of tax as such. The tax levied was payable irrespective of the quality of the land or its productive capacity and irrespective of the fact as to whether thee land yield any income or not. The petitioner who challenged the validity of the Act were governed by a Madras act which continued to govern them even after reorganization, until the impugned act come into force. The Madras act provided that the forests shall not be cut not the right in the forest produced sold, or otherwise alienated without the permission of the District Collector. A particular petitioner whose case was taken as representative of others, was deriving an income of Rs. 3,100 per year by lease of forest. The forest was assessed provisionally under section 5A of the impugned act to a tax of Rs. 50,000 per annum. Since it was na unsurveyed forest the District Collector conjectured the area of forest at 25,000 acres and on that bias determined the tax payable at Rs. 50,000. These petitioner's case was that he was being given permission to cut the forest only in instalments that this annual income was only Rs. 3,100, where as he was called upon to pay a tax of Rs. 50,000 per annum. It was also submitted that this forest had large areas of arid rocks, rivulets, a and gorges. The Supreme Court observed that ordinarily a tax on land or land revenue is assessed on the actual or potential


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 pointe out, makes no such distinction. There may be sereval types of land; a particular alnd may be arid desertcapable of yielding an income by raising a crop after a dsiproportionately large investment of labor and capital. A third type of land yields just enough to pay for the incidenatla expenses labor charges and taxes, while the fourth type of land may be making large profit because it is every fertile and capable of yieding good crops. While the fourth category it a was pointed out, would easily be able to meet the burden of tax the third one might be just able to bear the tax burden. Because the tax is not paid the very land may be so, d for realizing the demand which would make the Act confiscator in nature. It was observed (at p. 558), "there is no attempt at classification in the provisions of the Act............. It is one of those cases where the lack of classification creates inequality. It is, therefore, clearly hit by the prohibition to deny eqality before the law a contained in article 14 of the Constitution...............". It was also observed that the act constitutes an unreasonable restriction upon the right to hold property, guaranteed by article 19(1)(f), a and being a disproportionate and unreasonable imposition was not saved by clauses (6) thereof.


It is argued by learned counsel forth petitioners that section 44 A C suffers form the same vice as the Kerala act impugned in K. T. Moopil Nair's case . It is contended that a parson dealing in arrack may incur loses because of various reasons including competition illicit distillation and disturbance to law and order. Another person may make profits but it many be a small one and yet, another person may make a large the profit may be 20 %, 40 % or 60 %. There may be case where a person may be making even higher profit. Clubbing all the persons dealing in arrack all over the country into one class and determining their profit from the said business at 40 % is nothing but arbitrary, discriminatory and unreasonable. It is case where the absence of classification results in unequla treatment. It is pointed out that in the case of Khammam and Cuddapah districts for the excise years 1987-88, the Government had fixed both the purchased price as will as the selling price. While the purchased price was Rs. 35 per litre, the selling price was fixed at Rs. 38. The profit margin works out to less than 10 %. It is true that the selling price is not fixed for any of the districts for the current excise years 1987-88, nor is it fixed for any of the districts for the current excise year (1988-89), still, it is contended the determination of profit uniformly at 40 % is totally unreasonable and is confiscator in nature. Unable to bear the said additional burden, it is submitted, several contractors have already gone out of business. (The learned Government Pleader for excise too stated that during the current excise year, already about 10 % of the shops in the State have been resold on account of the inability of the original licensees to pay the rentals. He suggest that one


on account of the inability of the original licensees to pay the rentals. He suggest that one of the reasons for such large scale failure may be the provision contained in section 206 C). The grievance is that section 44 A C does not provide for a regular assessment, dispendsing sad it does, with all the provisions in sections 28 to 43 C. If an assessment is made according to law, it is argued the assessee can establish that his profits 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 206 C is sufficient to nerve 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 cores. It was not necessary it is argued to go further and make a harsh and confiscator provisions of the mature contained in section 44 A C.


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 forts produce; at any ate the petitioners' fundamental right to trade in timber and other forest produce cannot be denied. The provision made in section 44 A C determining the profit of business in these goods arbitrarily at a particular percentage to thee purchased price of is wholly unreasonable. Even if it is assumed that the said provision a were conceived in the interest of public revenue and were designed to eradicate an evil (the evasion of tax by contracts dealing the in these goods) it is raged further that the avowed purpose is achieved by section 206 C and that section 44 A C is totally unwarranted and uncalled for. Having collected the tax in advance the Department can always made a regular assessment in accordance with the relevant provisions. The tax already collected would in a overwhelming majority of cases, satisfy the tax assessed. Only in a very few cases, probably, the tax assessed may be more than the tax already collected at source. Indeed, in many of the cases, the Department may be liable to refund the tax.
 The law in this behalf's well-stated the celebrated case State of Madras v. V. G. Row, . The following observations of Patanjali Sastri C.J. have acquired the status of a classic statement (at page 200) :


"... the court should consider not only factors such as the duration and the extent of the restrictions, but also the circumstances under which and the manner in which their imposition has been athorised. It is important in this context to bear in mind that the test of reasonableness, wherever prescribed, should be applied to each individual statute impugned, and no abstract, standard, or general pattern of reasonableness can be laid down as applicable to all cases. The nature of the right alleged to have been infringed, the underlying purpose of the restrictions imposed, the extent and urgency of the evil sought to be remedied thereby, the disproportion of the imposition, the prevailing conditions at the time, should all enter into the judicial verdict. In evaluating such elusive factors and forming their own conception of what is reasonable, in all the circumstances of a given case, it is inevitable that the social philosophy and the scale of values of the judges participating in the decision should pay an important part, and the limit to their interference with legislative judgment in such cases can only be dictated by their senses of responsibility and self-restraint and the sobering reflection that the Constitution if meant not only for people of their way of thinking but for all, and that the majority of the selected 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 circusmstances, 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 person trading in the specified goods form a class, inasmuch as they are difficult to trace once the contract period is over. We accept their submission that very often these contracts are taken in the names, of dummies, in facetious, names, or in the names of faceless person, or persons, of little means. We will also accept the respondents' submission that because of the above factors, the State was losing a good amount of revenue and the there was large scale evasion by these persons. We agree fully that this situation had to be remedied. Loss of revenue had to be plugged. But the remedy should be proportionate to the evil. It should be reasonable. It should not assume the character of a confiscatory measure. It would have been enought if section 206C had been enacted and it was provided that such collection shall be subject to a regular assessment of assessment of profits and gains of business as has been done by section 44AC. The percentages referred to in section 44AC (1) could have been indicated as merely explaining and justifying the level of collection in section 206C. Once the tax is collected, bases


and justifying the level of collection in section 206C. Once the tax is collected, bases upon the purchase price of the specified goods, it is really immaterial whether the business is carried on in the names of dummies, in fictitious names, or in the names of faceless persons, or persons of on means. The tax collected is already with the State. An assessment can be made in accordance with the provisions of law. If the tax assessed is more than the tax already collected, may be there is little likelihood of such collection; but, even with these provisions, the situation is the same. There is no reason behind saying that even where a person actually less profit than the specified one, or incurs loss,, even then his profits and gains should be arbitrarily fixed at 40% of the purchase price, or that he should not be allowed to establish his real income from the said business or trade. May be these persons do not maintain the books properly; but that is not an insuperable difficulty. If the books are not properly maintained, or are suspicious or unacceptable otherwise, they can away be rejected and a best judgment assessment made. The level or profits in such trade in a given area, region or State can always be kept in mind while making a best judgment assessment and /or while determining the truth or genuineness of accounts. The existence of some honest traders even in the specified good 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


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 in other forest produce, and so on was made. In pursuance of our observation, learned standing counsel has placed before us certain material, to which we must now refer.


Before, however, we refer to the material, we may mention that the said material was produced before us along with a letter of the Commissioner of Income-tax, Andhra Pradesh-II, dated February 13, 1989, addressed to Sri. M. Suryanarayana Murthy, Advocate. The letter requested counsel to place the enclosed material before the court with a request not to quote them in our judgment, nor to reveal it in court. The ground upon which such a request was made was that they are "part of the budget documents." It was stated that the said material was being furnished only to show that there was proper application of mind before the deemed rates of profit were prescribed. It was mentioned that a similar procedure was adopted in respect of the writs filed in the Kerala High Court and that the non'ble judges of the Kerala High Court had accepted this position and the procedure requested was followed. When this letter was brought to our notice, we intimated counsel that is may not be possible for us to accept the said request. If we are not be possible for us to accept the said request. If we not to refer to the said material in our judgment, there was no point in producing the said material. It is not enough that we are subjectively satisfied. It was also not brought to our notice as to in what manner the said request was acceded to by the Kerala High Court - except the statement in the letter to that effect. We, therefore, gave a choice to learned counsel either to place the material before us without such pre-condition or request or to withdraw the said material. After obtaining further instructions, Sri, M. Suryanarayana Murthy, placed before us another letter of the Commissioner of Income-tax dated February 14, 1989, agreeing to place the material before the High Court with the only request for not reading out the names of the person mentioned in the material, in court, nor to refer to


not reading out the names of the person mentioned in the material, in court, nor to refer to the names in the judgment. This restraint, it was stated, was imposed upon the Department by the provisions of section 138 of the Income-tax Act. We agreed to this course. We informed learned standing counsel that we would not disclose the names in the court, nor would we mention those names in the judgment. Instead of names, we would refer to them as A, B, C, D, and so on. Now, we may refer to the material.


There 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 assessee, whom we shall refer to us A, B, C, D, and E, respectively. A and B are from Madras. C is form Hyderabad; D from Vijayawada and E from Raipur (Madhya Pradesh). The following figures are given :
 ------------------------------------------------------------------------
SI.  Name and      Assessment Purchase     Income      Remarks
No.  address of    year                    assessed
      the assessee
------------------------------------------------------------------------
                            Rs.              Rs.
1         A         1984-85 13,05,039       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
                                                          section 143
                                                          (1) at Rs.
                                                        20,470. After
                                                          search, disc
                                                          losed income
                                                        or Rs. 1,00,000
                                                               . 31% of
                                                           the purchase
                                                           price.
4        D   1985-86   74,52,925     37,97,219           44% of the
                                                          purchase price
5        E   1984-85  1,28,25,000   55,88,830           The assessed
                                                          figure of Rs.
                                                          55,88,830 has
                                                          been accepted
                                                          by the
                                                          assessee.
                                                          Net   profit
                                                          is  43%   of
                                                          the licence


Net   profit
                                                          is  43%   of
                                                          the licence
                                                          fees. Norma
                                                          lly, amount
                                                          of  purchase
                                                          is less than
                                                          the license
                                                          fees. Perc
                                                          entage    of
                                                          profit
                                                          will be
                                                          therefore
                                                          higher  than
                                                         43%.
------------------------------------------------------------------------


Section 2 of annexure-I mentions three cases where undisclosed profits
have been surrendered/ detected. These three persons may be referred  to
as F,G and H. Their particulars are as follows :
   ------------------------------------------------------------------------
Sl.       Name of        Concealment              Remarks
No.       assessee       detected
------------------------------------------------------------------------
Rs.
1            F           1,78,56,000        Addition of Rs. 1,67,80,000
                                            has been accepted by the
                                            assessee.
2            G             17,98,950         Commissioner  of
                                             Income-tax (Appeals) has c                                                     onfirmed the addition.                                                          (1987-88)                          3            H           15,97,030         These additions are in two
                                             different assessment
                                             years.
------------------------------------------------------------------------>

 Annexure-II mentions three cases relating to timber obtained  by  any
mode  other  than under a forest lease. We shall refer  to  these  three
assessee as I,J and K. Their particulars are as follows :
   ------------------------------------------------------------------------
Sl.       Name and       Assessment  Purchase     Income      Remarks
No.       address of     year        price        assessed
the assessee
---------------------------------------------------------------------
                           Rs.        Rs.
1           I            1987-88   3,17,450    91,270      Net
                                                             profit
                                                             28.75%
                                                             of
                                                             purchases.
2          J             1986-87   22,17,741   3,38,019     Net profit
                                                             15.24% of
                                                             purchases.
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 three assessee as L, M and N. Their particulars are as follows :
   ------------------------------------------------------------------------
Sl.          Name and      Assessment   Purchase   Income      Remarks
No.          address of    year         price      assessed
the assessee
------------------------------------------------------------------------
1              L          1983-84      14,26,360  10,06,887   Net
                                                              profit
                                                              comes  to
                                                              70% of
                                                              purchase
                                               price.
                                                          The assessee's
                                                             business is
                                                             purchase of
                                                          tendu leaves
                                                            from
                                                             Madhya
                                                             Pradesh and
                                                             Maharashtra
                                                             and sale
                                                            there of.
2           M             1987-88     9,15,700    3,81,481    Net
                                                              profit is
                                                              41% of
                                                              purchase
                                                              price.
3           N             1987-88    11,72,181    3,59,458    Net
                                                              profits
                                                              is 30% of
                                                              purchase.
------------------------------------------------------------------------


This is all the material placed before us in response to our query. We are afraid, the material placed before us is too support a measure like section 44AC. Picking out eight cases of liquor contractors from all over the country, that too of major contractors, cannot be said to be a sufficient basis for such a harsh and unusual provisions. We are aware that we are not dealing with an executive act, but with a parliamentary enactment. We are equally aware of the limitations of this court. But the fact yet remains that we must be satisfied about the reasonableness of the measure - and this can be done only by placing the relevant material before us upon which the percentages referred to in section 44AC were fixed. One would have expected a more detailed enquiry and verification. Conditions may vary from State to State; indeed, even from one area of the State to another Even in the cases referred to in annexure-I, the net profit works out to 46% in the case of assessee 'C', 44% in the case of assessee 'D' and 43% in the case of assessee 'E'. The material hardly shows that all these persons made uniform profits. The material placed before us by the petitioners discloses that for the excise year 1987-88, the Government had fixed, in the case of two districts, Khammam and Cuddapah, not only the purchases price, but also the minimum selling price. In a case where the purchase price was Rs. 35, the minimum selling price was fixed at Rs. 38. Even this margin of Rs. 3 a cannot be said to be the net profit, it is only the gross profit. Arrack licences are given by auction or tender, at the case may be Particularly, for the current excise year, it is brought to our notice, the shops were not auctioned groupwise as was being done in the privious years.


notice, the shops were not auctioned groupwise as was being done in the privious years. All the shops are stated to have been sold individual-shop-wise only. This was done with a view to eliminate and reduce the influence of big contractors, and to encourage the small dealers. Every shop was sold as a single shop. It is stated that this method of auctioning has resulted in a substantial accretion to the excise revenue of the State for this year. Can it 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 is 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 show 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 year, if any. But, in our opinion, discrimination is writ large on the very fact of section 44AC. In any event, we have the material relating to excise year 1987-88 for two of the districts in


we have the material relating to excise year 1987-88 for two of the districts in this State, i.e., Cuddapah and Khammam, where the selling price was fixed at Rs. 3 higher than the purchase price, i.e., Rs. 38 and Rs. 35, respectively, which works out to less than 10% and that too gross profit. In our opinion, these facts bring these cases squarely within the principle of the decision in K. T. Moopil Nair, . We are also of the opinion that the imposition is likely to be characterized as disproportionate and, therefore, an unreasonable restriction upon the fundamental right guaranteed by article 19 (1) (g).


In such a situation we are left with the two options. One is to strike down section 44 A C and the other is to read it down t make it consistent with the guarantees in articles 14 and 19 (1) (g). We have considered the pros and cons of both courses and have cone to the conclusion, keeping in view the overall object underlying the provisions and the language in sub-section (4) of section 206 C, that it would serve the public interest more and further the intendment of Parliament if we read down the provision of section 44 A C instead of striking it down. A syndicated hereinbefore, section 206 C serves the purpose underlying these provisions. once the tax is collected the contractor cannot run away probably, only in case where the profit is far higher than 40 % would he make himself scarce. In all other case, he would come to the Department for an assessment of his income and the re is on reason why a regular assessment should not made in his cases. In others words we would read section 44 A C as on adjunct to and as explanatory to section 206 C. On this construction, section 44 A C does not dispense with sections 28 to 43 C absolutely. The non obstante clause in section 44 A C (1), "notwithstanding anything to the contrary contained in section 28 to 43 C" would be confined to the limited purpose of sustaining the deductions provided for in sections 206 C. The level of profits and gains would be relevant only for explaining and juistitying the level of deductions provided for in section 206 C. Collection will be made at the rates specified in section 206 C and then a regular assessment will be be made like in the case of any other assessee. So far as the percentages of collection at source mentioned in section 206 C are concerned we are of the opinion that they cannot be said to be unreasonable or excessive since according


C 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 would squarely 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 be courts where a provisions 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 Right to Property Act, AIR 1941 FC 72. The expression "property" we capable of taking in agricultural lands a s will in which case it would trench a upon the field reserved or Provincial Legislature Exclusively (List II). The court referred to the presumption that a legislature must be presumed to be aware of its limitations and must also be attributed with an intention not to overstep its limits, and held accordingly that the act was never intended to and did not in fact apply to agriculatural lands. In All Saints' High School v. Govt. of A. P., , certain provisions of the A. P. Recongnised Private Educational Institution Control Act, 1975 were challenged as violating article 30. Dealing with the challenge, Kailasam J. (majority opinion) observed (at p. 1083) :
 "It is a well settled rule that in interpreting the provisions of a statute, the court will presume that the legislation was intended to be intra varies and also reasonable. The rule followed is that he section ought to be interpreted consistent with the presumption which imputes to the Legislature an intention of limiting the direct direct operation of its enactment to the extent that is permissible. Marwell on the Interpretation of Statutes, Twelfth Edition, p. 109 under the caption "Restriction of Operation" States :-


'Sometimes to keep the / Act within the limited of its scope and not to disturb the existing law beyond what he object requires, it is constured as operative between certain person, or in certain circumstance, or for certain proposes only, even though in language expresses on such circumscription of the field of operation.' ............ According to Holmes J. in Towne v. Eigner [1971] 245 US 418 ; 62 L Ed. 372, 376, a word is not crystal, transparent and unchanged; it is the skin of living though and may vary a greatly in colour and content accroding to the circumstances and the time in which it is used. Gwyer J. in Central Provinces and Berar Act [1939] FCR 18 at p. 42 held :
 'A grant of the power in general terms, standing by itself, would no doubt be construed in the wider sense; but it may be qualified by other express provisions in the same enactment, by the implication of the context, and even by the considerations arising out of what appears to be the general scheme of the Act.' To the same effect are the observation of this court in Kedar Nath Singh v. State of Bihar [1962] Supp (2) SCR 769 :


'It is well settled that in interperting an anactment the court should have regard not merely to the literal manning of the words used, but also take into consideration the antecedent history of the legislation, its purpose and the mischief it seeks to suppress. (Bengal Immunity Co. Ltd. v. State of Bihar and R. M. D. Chamarbaugwalla v. Union of India [1975] SCR 930 cited with approval).' This court has, in sereval cases, adopted the principle of reading sown the provision of the statute. The reading down of a provision of a statute puts into operation the principle that so far as it is reasonable possible to do so, the legislation should be constured as being within tits power. It is has the principle 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 a 'sense so as to deep it within power."
 To the same effect are the observation of Krihna lYER J. Bhim Singhji v. Union of India :
 ".............. reading down meaning of words with loses lexical amplitude is permissible as part of the judicial process. To sustain of a law by interpretation is the rule. To be trigger-happy in shooting at sight every suspect law is judicial legicide. Court can and must intrepret word and read their meaning so that public good is promoted and power misuse is interdicted. As Lord-Denning said : 'A judge should not be a servant of the word used. He should not be a mere mechanic in the power house of semantics.................."


This rule of reading down was applied to ataxing statute in CST v. Radhakishan . We a recongnise at the same time that this rule cannot be employed to sustain a patently void provision.
 On this aspect, we a may as well refer to the words "in the assessment made under this Act" sub-section (4) of section 206C. These words show that an assessment under the Act is still to be made even where tax is collected under section 206C. This in our opinion, is a strong indication suppoting our construction of section 44AC.
 At one stage, some significance was sought to be read into the wording of the non obstancte clause in section 44AC (1). While in some sections preceding section 44 AC, the non obstance clause reads "notwithstanding anything contained in any other provisions of this Act" (see sections 43A and 43B) the non obstance clause insection 44AC (1) and certain other sections (see sections 44B, 44BB, and 44C) reads "notwithstanding anything to the contrary contained in section 28 to 43C". However on a fuller consideration, we find it difficult to deduce any significance therefrom relevant to our purpose.


For the above reasons, we uphold the validity of section 206C. We also hold that section 44 A C is a valid piece of legislation, read in the manner indicated by us. Section 44 A C is not to be read as an independent provisions but as an adjunet to and as explanotrory to section 206 C. It does not dispense with a regular assessment altogether. After the tax is collect in the manner provided by section 206 C, a regular assessment will be made where the profits and gains of business in specified goods will be ascertained in accordance with sections 28 to 43 C.
 Meaning of the expression "Purchase price" :
 This question becomes relevant only in the case of arrack. So far as other specified goods are concerned, there is no room for any doubt about the meaning of the expression "purchase price"; it means the price at which timber or any forest produce is purchased. Indeed, in the case of timber obtained under a forest lease, the price paid for obtaining the said right is also expressly treated as purchase price. Now the controversy arises this way; Until the previous excise year 1987-88, these licenses in the state of Andhra Pradesh were auctioned in public. Before putting the shop or group of shops to auction, the minimum a 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 license.


There was also a small license fee. In short, the consideration comprised three components viz : (i) the annual rental. (ii) the issue price of the MGQ, and (iii) the license fee. However for the fist time a different system was tried out in tow districts for the previous excise year (1987-88). In Khammam and Cuddapah districts, for the said excise year, the licenses of shop were auctioned to the person who offerd to purchased the highest quantity of arrack of 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 case of other districts was RS. 8.50, the price of arrack in these districts was 30 or Rs. 35, as the case may be. |Now this figure of Rs. 30 or RS. 35, wa arrived at by aggrgatting the three previous years' rental and adding the same to the price of liquor. In short, though devised differently in effect the price of arrack in the case of the said two districts also took in the rental component. So far as the current excise year (1988-89) is concerned an altogether different system had been followed. The shops have been auctioned individaully and licenses granted to person who offered to purchased the highest quantity of arrack fro the shop the year. The issue price of arrack is fixed at Rs. 8.50 per liter. But, in addition to purchasing the quantity agreed to be purchased by him, he has also got to pay the privilege fee every month. This privilege fee is determined on the basis of the aggregate of rentals fetched for the shop for the previous three years. A small increase is effected upon the said increase and the privilege fee is fixed per litre again. There is also license fee in addition thereto.


and the privilege fee is fixed per litre again. There is also license fee in addition thereto. It would thus be evident that the system remains the same in substance. Previously; the auction was in terms of rental and now it is in terms of the quantity of arrck. But the components remain the a same,. though under a different name.


The contention of counsel forth petitioner is that the expression 'purchase price' means only the issue price and said not include the privilege fee or license fee. We find it difficult to agree. It is well settled that t' all right in regard to manufacture and sale of intoxicants vest in the State. It is open to the State to part with those right fro a consideration. The consideration for parting with the privilege of the State is neither excise duty nor license fee, but it is the price of the privilege.............. Thus reading section 17 and 23 the A. PO. Excise Act, together with the A P Excise (Lease of Right to Sell Liquor in Retail) Rules 1969, and the A P Excise (Retail Vend Special Conditions of Licensees) Rules the picture which emerges is that the privilege of selling liquor which includes the lease of the shop for an area and the license to sell liquor therein may be granted by the State by Public auction, subject to (i) payment of rental being the highest bid at the auction (it is to be noted here that rental is the rent payable in consideration of grant of lease for the said of liquor, but it is not the sole or exclusive consideration for the lease); (ii) the requirment that he licensee shall purchase arrack at the issue price; and (iii) the further requirements that the licensee shall purchase the minimum guaranteed quantity of arrack which he has to make good in cases of shortfall. The consideration for the grant of the privilege to sell liquor is not merely the rental to be paid by the lesses but also the issue price of arrck supplied, or treated a supplied in case of a shortfall which 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 ). We are of the opinion that the expression" purchase price' occurring in section


Reddy ). We are of the opinion that the expression" purchase price' occurring in section 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 a 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 defend in these two sections or in the Act. The said expression means nothing but what is referred to a consideration for the grant of the privilege to sell liquor in the decision of the supreme court aforesaid. The present system of deriving the excise revenue may be changed fro the next year. Indeed, for the previous excise year, two for districts in the state, the system was altogether different. There was one single integrated price fro arrack i.e., RS. 30 or Rs. 35 per litre. Now how can it be said that while the purchase price in the case of Khammam and Cuddapah districts for the excise year 1987-88 is Rs. 30 or Rs. 35 per litre, as the case may be, in case of all other districts it is Rs. 8.50 ? Learned standing counsel for the Revenue, appearing for the Union of India who supported the stand of the petitioner in this behalf could not explain this inconsistency and illogicality in the stand taken by the Department. (As we shall presently point out, the Income-tax Department is supporting the petitioners in this behalf). If "purchased price" means only the issue price then it should be equally so in the case of Khammam and Cuddapah districts for the excise year 1987-88. We are of the opinion that the expressions used or method "purchased price" should not depend upon the expression used or method devised for raising excise revenue


"purchased price" should not depend upon the expression used or method devised for raising excise revenue by a State Government from time to time. These sections are meant not only for Andhar Pradesh, but for the entire country. The expression cannot be understood in a different manner in each state. having regard to the excise revenue deriving system in force in that State. It must be understood in a uniform sense and the at can be done only by holding that purchase price means the consideration for the grant of privilege to sell liquor, which consideration in the State today comprises of three components namely, (i) issue price, (ii) privilege fee / annual rental and (iii) license fee. But, we are put in a strange position where both the petitioners and the respondents are at one in saying that purchased price in the case of arrack means the issue price only. ( Issue price includes cost price, excise duty and other inidental charges and is notified by the Government from time to time). A clarification issued by the Central Board of Direct Taxes, Communicated by the Commissioner of Income-tax to the petitioners, is placed 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)/27(2)/88-89d/-21-9-1988.
 To The Secretary, Andhra Pradesh Arrack Contractors' Association, Hyderabad, 3-6-369 / A 71, Himayat Nagar, Hyderabad-500 029.
 Sir, Sub : Collection of income-tax under section 206 C.
 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 206 C 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 he query put by the Secretary, A.P. Arrack Contractors' Association has been referred to the Central Board of Direct Taxes. Evidently, the clarification contained in the letter dated September 21, 1988, was supplied after receiving the clarification form the Central Board of Direct Taxes. Learned standing counsel for the Revenue says that the respondents are standing by the said clarification.
 Even in the counter-affidavit filed in W.P. No. 11636 of 1988 (sworn to by Sri M. V. R. Prasad, Commissioner of \Income-tax Andhra Pradesh-II), the following statement occurs :


"In the Press Not issued by the Central Board of Direct Taxes it has been clarified that the purchase price will be the cost of commodity inculsive of any excise duty, Sales tax or any other levy, whatever its nomenclature may be, paid by the buyer for obtaining the goods. In case of buyer of liquor the purchase price will also include the cost of bottle, label,, sealing charges, etc., However the purchase price will not inculde any consideration for the grant of exclusive privilege to vend from a particular point or points and any freight or transport charges. In the instant case, the petitioner has through auction, acquired the right to vend form a particular point or points and paid a certain amount as rent. The amounts paid as rental charges does not contain the element of profits' and also will not be taken into account for the purpose of determination of profits under section 44 A C. However any amount paid to acquire the right to receive a minimum guaranteed quantity fixed by the Excise Commissioner and guaranteed by the auction-purchaser to be lifted by him will have the element of profit embedded in it, and so will be taken into account for the purpose of determination of profits in accordance with the provisions of section 44 A.C."
 So far as the Government of Andhra Pradesh in the Excise Department is concerned, they say that they are merely agents to collect the tax on behalf of the Income-tax Departments and that they will collect such amounts as they are asked to do.


Though it is not clear form 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 purchased price in the case of arrack shall be taken into account in determining the purchase price. We make it clear that we are giving the is 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 parties before us but because of the clarification issued by the Central Board of Direst Taxes and also because of the contesting parties are at one that the clarification issued by the Central Board of Direct Taxes should be followed.
 we must also a say that in the case of Khammmam and Cuddapah districts fro the excise year 1987-88, purchase price shall be taken to be the 'issued price' as in the case of other districts for the said year. This direction is necessary to ensure equal treatment to similarly laced persons. Indeed, the respondent 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 khammama Cuddapah districts for the said excise year it means the total sale price which includes issue price and rentals.
 The extent of collection at sources under section 206 C :


Section 206 C says that the seller of specified goods shall at the time of recipe of the purchase price from the purchaser collect, in addition to purchase price, a sum equal to the percentage specified in the corresponding entry in column 3 of the Table by way of income-tax For example in the case of alcoholic liquor (for human consumption) (other than Indian made foreign liquor), the collection at source is specified at 15 %. The contention of the petitioners is that this 15 % is of the amount specified as profit and gains of the said business in section 44 A C. To be more precise, the collection at source, according to the petitioners ought to be 15 % of the 40 % of the purchase price in the case of arrack. On the other hand the contention of the respondents is that the collection at source is 15 % of the purchase price. Though at he stage of interim orders we were inmpressed by the argument of the petitioner's we are of the opinion on a fuller consideration that the construction placed by the respondents is the correct one. The relevant words in section 206 C (1) are "collect form 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." The words underlined by us are relied upon by the petitioner to say that 15 % referred to in column 3 of the Table is 15% of the income comprised in the purchase price. We are not prepared to agree In our opinion the words "on income comprised therein" are merely descriptive in nature and do not convey the meaning sought to be ascribed to them by the petitioners. We may mention that identical words occur in the other provisions as well, and attributing such a restricted meaning to them would make those provisions unworkable. By way of illustration, we


such a restricted meaning to them would make those provisions unworkable. By way of illustration, we may refer to section 194 C. Sub-section (1) of section 194 C in so far as it is relevant reads, : "any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work............ in pursuance of a contract ........ shall at the time of credit of such sum of the account of the contractor or at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier deduct an amount equal to 2 % of such sum as income-tax on income comprised therein..............." It would be evident that at the time of making payments 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 206 C (1) would be intelligible only of they are related to the purchase price. If they are related to the percentage of profits and gains specified in sections 44 A C, the level of collection of at source provided by section 206 C (1) would be becomes 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 the that percentages mentioned in column 3 and of the Table in sub-section (1) of section 206 C 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 44 A C and 206 C;
 (ii) section 206 C does not suffer form any a constitutional infirmity and is perfectly valid;
 (iii) section 44 A C is not an independents provision It does not dispense with a regular assessment inaccordancde with the provisions of the Income-tax Act, Section 44 A C is merely an adjunt to and explains the provisions in section 206 C. A regular assessment has to be made in respect of an assessee dealing in specified goods in accordance with section 28 to 43 C. Read down in this manner, section 44 A C also does not suffer from any constitutional infirmity;
 (iv) It is competent for parliament to adopt the purchase price as a 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 206 C. 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 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 44 A C and sectarian 206 C 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 the under 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 206 C is relatable to the purchase price and not to the income component of the purchase price.
 The wirt petitioners are, accordingly, disposed of in the above terms. There shall be no order is as to costs. Ineach wirt petition, advocate's fee is fixed at Rs. 75 for learned standing counsel for the Revenue and at Rs. 50 fro the learned Government Pleader for Excise.
 Learned counsel for the petitioners makes an oral request for grant of leave to appeal tot the supreme court undrsrticle 132 of the constitution on the question of competence of parliament to encat the provision in questions. Since these case involve a substantial question of law as to intrepertation of the constitution and also because it is stated that identical matters are pending before the supreme court. we are inclined to grant a certificate as prayed for. A certificate shall accordingly issued under article 132 of the Constitution.
 Learned standing counsel for the Revenue also makes as similar request, aggrived with the construction placed by us on section 44 A C. For the reasons recorded hereinabovee. a certificated shall also issue to the Revenue.


Sri Rama Krishna Rice & Groundnut ... vs State Of Andhra Pradesh And Ors. on 8 August, 1983

ORDER