Tax has been collected from me at source on my purchase price as though a fixed percentage of it were my profit. Am I stuck with that figure, or can I still be assessed on my real income?
You can still be assessed on your real income. The Supreme Court upheld the validity of section 206C and held section 44AC a valid piece of legislation, but read it down: it is an adjunct to and explanatory of section 206C and does not dispense with a regular assessment. To the extent its non obstante clause shut out sections 28 to 43C for the specified trades, the provision was unreasonable, no basis having been shown for denying those traders the reliefs every other assessee gets. So tax is collected at the section 206C rates and a regular assessment follows, with profits computed under sections 28 to 43C.
Decided by the Supreme Court (Supreme Court of India - A.M. Ahmadi CJ, S.C. Sen and K.S. Paripoornan JJ; judgment by Paripoornan J) on 1996-02-13, reported as (1996) 219 ITR 330; 1996 (3) SCC 465; AIR 1996 SC 1219; (1996) 85 Taxman 321; (1996) 2 SCR 570; 1996 AIR SCW 1251. It bears on section 44AC, section 206C, section 28 of the Income Tax Act 1961, in Presumptive Taxation & Audit, Assessment & Scrutiny and TDS Defaults matters.
This is the case that fixes the relationship between a collection mechanism and the charge. It concedes a great deal to the legislature - that entry 82 of List I is to be read widely and carries incidental power to prevent evasion, that income covers what the legislature deems notionally to accrue, and that classification for taxation is judged liberally rather than meticulously - and then finds the constitutional problem in a narrower place. The Revenue's own case was that sections 44AC and 206C are machinery provisions, and the Court took it at its word: if they are machinery, there is no reason to deny these traders the computation reliefs available to everyone else, and that denial has no nexus to the object. The reading down, rather than striking down, is the model for arguing about any presumptive or collection provision that threatens to become the final word on liability.
Binding on every court and authority in India.
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A batch of writ petitions under Article 32, civil appeals and special leave petitions raised the validity of sections 44AC and 206C. Section 206C was inserted by the Finance Act 1988 with effect from 1 June 1988 and section 44AC by the Direct Tax Laws (Amendment) Act 1989 with effect from 1 April 1989. Section 44AC provided that, notwithstanding anything to the contrary in sections 28 to 43C, in the case of a buyer other than a public sector company obtaining goods by auction, tender or other mode, a stated percentage of the purchase price - forty per cent for alcoholic liquor for human consumption other than Indian made foreign liquor, thirty-five per cent for timber obtained under a forest lease and for other forest produce, fifteen per cent for timber obtained otherwise - was deemed to be the buyer's profits and gains from trading in those goods, chargeable under the head profits and gains of business or profession. It did not apply to further sales, and where the business was not exclusively in such goods and separate accounts were not maintained, expenses were to be apportioned by turnover. Section 206C required the seller to collect stated percentages from the buyer as income tax on income comprised in the amount, with an exception where the Assessing Officer certified that the goods were to be used for manufacturing, processing or producing and not for trading, and provided that amounts collected and paid over would be deemed payment of tax on the buyer's behalf, credit being given in the assessment made under the Act. Assessees challenged the provisions in several High Courts as beyond legislative competence and as violating Articles 14 and 19(1)(g). The challenges were substantially rejected, but some High Courts, including the Andhra Pradesh High Court in Sanyasi Rao's case (178 ITR 31), read section 44AC down. Both sides appealed.
On the parts of the judgment available to me, section 206C was valid and section 44AC was held a valid piece of legislation, but read as an adjunct to and explanatory of section 206C. It does not dispense with the regular assessment to be made in accordance with sections 28 to 43C, and a direction was issued to that effect. To that limited extent the writ petitions, civil appeals and special leave petitions filed by the assessees were partly allowed; in all other respects the batch was dismissed, with no order as to costs. The Court was unable to hold section 44AC read with section 206C wholly hit by Article 14. But it concurred with the Andhra Pradesh High Court that, in the absence of materials, the remedy in section 44AC was disproportionate to the mischief, so that to the extent its non obstante clause excluded sections 28 to 43C, which apply to all assessees, the provision was unreasonable. On that view the non obstante clause is confined to sustaining the deductions provided in section 206C, collections are made at the section 206C rates, and a regular assessment follows as for any other assessee.
On legislative competence, the Court held that entry 82 of List I must be construed liberally and widely, carrying with it all incidental and ancillary matters including provision to prevent evasion of tax. Income is not defined in the Constitution and is a word of the broadest connotation, as the Privy Council said in K.N. Singh and as this Court held in Navinchandra Mafatlal, where capital gains were held to be income, and in Bhagwan Das Jain, where income was held to include what one saves by using property oneself. The entry takes in profits not only actually received but income the legislature supposes notionally to have accrued. Baldeo Singh established that a taxing entry authorises not only the imposition of tax but enactments preventing its evasion, upholding on that basis the deemed dividend provision of the 1922 Act; Balaji upheld taxing an individual on the income of a wife or minor child, and Navnit Lal Javeri upheld treating a loan to a shareholder as dividend. Since sections 44AC and 206C were enacted to collect legitimate dues from traders where evasion had been experienced, collecting at the inception or an anterior stage on income bound to arise was within competence, and the provisions are akin to advance tax. On Article 14 the Court applied the settled approach that classification for taxation is to be viewed liberally and not meticulously, that a large latitude is allowed to the State, and that classification is primarily for legislative judgment; given the practical difficulties in locating persons and collecting tax in these trades, a presumptive basis of collection did not offend Article 14. The problem lay elsewhere. The Revenue itself described the provisions as machinery provisions, and if that is so there was no reason to deny these traders the reliefs in sections 28 to 43C available to all others. No plea was made that these trades are distinct for the purpose of granting those reliefs, and the denial had no nexus to the legislative object, so the non obstante clause was unfair and arbitrary and denied equality of treatment. The Court also drew support from the words in the assessment made under this Act in section 206C(4), which show that an assessment is still to be made even where tax is collected.
Section 44AC is a valid piece of legislation and is an adjunct to and explanatory to Section 206C. It does not dispense with the regular assessment.
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Handle my notice → Ask a CA on WhatsAppYou can still be assessed on your real income. The Supreme Court upheld the validity of section 206C and held section 44AC a valid piece of legislation, but read it down: it is an adjunct to and explanatory of section 206C and does not dispense with a regular assessment. To the extent its non obstante clause shut out sections 28 to 43C for the specified trades, the provision was unreasonable, no basis having been shown for denying those traders the reliefs every other assessee gets. So tax is collected at the section 206C rates and a regular assessment follows, with profits computed under sections 28 to 43C. This was decided by the Supreme Court (Supreme Court of India - A.M. Ahmadi CJ, S.C. Sen and K.S. Paripoornan JJ; judgment by Paripoornan J) and bears on section 44AC, section 206C, section 28 of the Income Tax Act 1961. It is reported as (1996) 219 ITR 330; 1996 (3) SCC 465; AIR 1996 SC 1219; (1996) 85 Taxman 321; (1996) 2 SCR 570; 1996 AIR SCW 1251. This is the case that fixes the relationship between a collection mechanism and the charge. It concedes a great deal to the legislature - that entry 82 of List I is to be read widely and carries incidental power to prevent evasion, that income covers what the legislature deems notionally to accrue, and that classification for taxation is judged liberally rather than meticulously - and then finds the constitutional problem in a narrower place. The Revenue's own case was that sections 44AC and 206C are machinery provisions, and the Court took it at its word: if they are machinery, there is no reason to deny these traders the computation reliefs available to everyone else, and that denial has no nexus to the object. The reading down, rather than striking down, is the model for arguing about any presumptive or collection provision that threatens to become the final word on liability. If it applies to you, the first step is this: Treat collection at source as a payment on account and claim credit for it in the regular assessment, not as a final discharge of liability.
A batch of writ petitions under Article 32, civil appeals and special leave petitions raised the validity of sections 44AC and 206C. Section 206C was inserted by the Finance Act 1988 with effect from 1 June 1988 and section 44AC by the Direct Tax Laws (Amendment) Act 1989 with effect from 1 April 1989. Section 44AC provided that, notwithstanding anything to the contrary in sections 28 to 43C, in the case of a buyer other than a public sector company obtaining goods by auction, tender or other mode, a stated percentage of the purchase price - forty per cent for alcoholic liquor for human consumption other than Indian made foreign liquor, thirty-five per cent for timber obtained under a forest lease and for other forest produce, fifteen per cent for timber obtained otherwise - was deemed to be the buyer's profits and gains from trading in those goods, chargeable under the head profits and gains of business or profession. It did not apply to further sales, and where the business was not exclusively in such goods and separate accounts were not maintained, expenses were to be apportioned by turnover. Section 206C required the seller to collect stated percentages from the buyer as income tax on income comprised in the amount, with an exception where the Assessing Officer certified that the goods were to be used for manufacturing, processing or producing and not for trading, and provided that amounts collected and paid over would be deemed payment of tax on the buyer's behalf, credit being given in the assessment made under the Act. Assessees challenged the provisions in several High Courts as beyond legislative competence and as violating Articles 14 and 19(1)(g). The challenges were substantially rejected, but some High Courts, including the Andhra Pradesh High Court in Sanyasi Rao's case (178 ITR 31), read section 44AC down. Both sides appealed. The matter was decided on 1996-02-13 by the Supreme Court (Supreme Court of India - A.M. Ahmadi CJ, S.C. Sen and K.S. Paripoornan JJ; judgment by Paripoornan J). On those facts the Supreme Court held as follows. On the parts of the judgment available to me, section 206C was valid and section 44AC was held a valid piece of legislation, but read as an adjunct to and explanatory of section 206C. It does not dispense with the regular assessment to be made in accordance with sections 28 to 43C, and a direction was issued to that effect. To that limited extent the writ petitions, civil appeals and special leave petitions filed by the assessees were partly allowed; in all other respects the batch was dismissed, with no order as to costs. The Court was unable to hold section 44AC read with section 206C wholly hit by Article 14. But it concurred with the Andhra Pradesh High Court that, in the absence of materials, the remedy in section 44AC was disproportionate to the mischief, so that to the extent its non obstante clause excluded sections 28 to 43C, which apply to all assessees, the provision was unreasonable. On that view the non obstante clause is confined to sustaining the deductions provided in section 206C, collections are made at the section 206C rates, and a regular assessment follows as for any other assessee.
On legislative competence, the Court held that entry 82 of List I must be construed liberally and widely, carrying with it all incidental and ancillary matters including provision to prevent evasion of tax. Income is not defined in the Constitution and is a word of the broadest connotation, as the Privy Council said in K.N. Singh and as this Court held in Navinchandra Mafatlal, where capital gains were held to be income, and in Bhagwan Das Jain, where income was held to include what one saves by using property oneself. The entry takes in profits not only actually received but income the legislature supposes notionally to have accrued. Baldeo Singh established that a taxing entry authorises not only the imposition of tax but enactments preventing its evasion, upholding on that basis the deemed dividend provision of the 1922 Act; Balaji upheld taxing an individual on the income of a wife or minor child, and Navnit Lal Javeri upheld treating a loan to a shareholder as dividend. Since sections 44AC and 206C were enacted to collect legitimate dues from traders where evasion had been experienced, collecting at the inception or an anterior stage on income bound to arise was within competence, and the provisions are akin to advance tax. On Article 14 the Court applied the settled approach that classification for taxation is to be viewed liberally and not meticulously, that a large latitude is allowed to the State, and that classification is primarily for legislative judgment; given the practical difficulties in locating persons and collecting tax in these trades, a presumptive basis of collection did not offend Article 14. The problem lay elsewhere. The Revenue itself described the provisions as machinery provisions, and if that is so there was no reason to deny these traders the reliefs in sections 28 to 43C available to all others. No plea was made that these trades are distinct for the purpose of granting those reliefs, and the denial had no nexus to the legislative object, so the non obstante clause was unfair and arbitrary and denied equality of treatment. The Court also drew support from the words in the assessment made under this Act in section 206C(4), which show that an assessment is still to be made even where tax is collected. In the words reproduced by the source cited on this page: "Section 44AC is a valid piece of legislation and is an adjunct to and explanatory to Section 206C. It does not dispense with the regular assessment."
It was decided by the Supreme Court on 1996-02-13 and is reported as (1996) 219 ITR 330; 1996 (3) SCC 465; AIR 1996 SC 1219; (1996) 85 Taxman 321; (1996) 2 SCR 570; 1996 AIR SCW 1251. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 44AC, section 206C, section 28, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. On the parts of the judgment available to me, section 206C was valid and section 44AC was held a valid piece of legislation, but read as an adjunct to and explanatory of section 206C. It does not dispense with the regular assessment to be made in accordance with sections 28 to 43C, and a direction was issued to that effect. To that limited extent the writ petitions, civil appeals and special leave petitions filed by the assessees were partly allowed; in all other respects the batch was dismissed, with no order as to costs. The Court was unable to hold section 44AC read with section 206C wholly hit by Article 14. But it concurred with the Andhra Pradesh High Court that, in the absence of materials, the remedy in section 44AC was disproportionate to the mischief, so that to the extent its non obstante clause excluded sections 28 to 43C, which apply to all assessees, the provision was unreasonable. On that view the non obstante clause is confined to sustaining the deductions provided in section 206C, collections are made at the section 206C rates, and a regular assessment follows as for any other assessee. It arises in Presumptive Taxation & Audit, Assessment & Scrutiny and TDS Defaults matters, on section 44AC, section 206C, section 28 of the Income Tax Act 1961, and was decided by Supreme Court of India - A.M. Ahmadi CJ, S.C. Sen and K.S. Paripoornan JJ; judgment by Paripoornan J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Maintain and produce accounts so that actual profits can be computed under sections 28 to 43C, since the right to a regular assessment is worthless without the material to support it. Where a business is not exclusively in the specified goods and separate accounts are not kept, expect expenses to be apportioned by turnover, and consider keeping separate accounts to avoid that. Check whether a certificate is available that stops collection at source altogether - here it lay where goods were to be used for manufacturing, processing or producing and not for trading. When challenging a machinery provision, aim at the specific clause that goes beyond collection rather than at the scheme, since the Court upheld the scheme and read down only the non obstante clause.
Still good law. A citator search returns 111 later decisions citing the judgment. The Hyderabad Tribunal in ACIT v Sri Ranganatha Traders expressly followed it, quoting the holding that section 44AC is a valid piece of legislation and an adjunct to and explanatory of section 206C which does not dispense with a regular assessment under sections 28 to 43C, and remanding for income to be determined accordingly (the order text records 12 August 1996; indiankanoon lists the decision under 31 January 2005). The Kerala High Court worked the same machinery-and-charging distinction in M.S. Hameed v Director of State Lotteries (10 November 2000), and the Delhi High Court applied the decision in District Excise Officer v ITO (21 January 2000). Nothing overruling or doubting it was found; the Authority for Advance Rulings in Timken India Ltd. (6 December 2004) held it inapplicable on the facts, which is a distinction. Section 44AC itself is spent, but the reasoning that a collection provision cannot displace the right to a regular assessment continues to be relied on. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The library had carried a second page for this same judgment at /caselaw/case/union-of-india-v-a-sanyasi-rao-section-44ac-read-down/; the two have been merged and that address now redirects here. About 16,600 characters from the middle of the judgment are not reproduced in the text I read. Missing from it are the Court's account of the several High Court decisions under appeal and, on the evidence of what surrounds the gap, part of its treatment of legislative competence. I read the statutory provisions as set out, the competence and Article 14 reasoning, the concurrence with the Andhra Pradesh High Court and the operative order. The judgment as I have it does not deal separately with the Article 19(1)(g) challenge, and does not decide how credit for tax collected is to be worked out in the regular assessment. The point about section 44AC having been omitted is from my own knowledge and was not checked here. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
On the parts of the judgment available to me, section 206C was valid and section 44AC was held a valid piece of legislation, but read as an adjunct to and explanatory of section 206C. It does not dispense with the regular assessment to be made in accordance with sections 28 to 43C, and a direction was issued to that effect. To that limited extent the writ petitions, civil appeals and special leave petitions filed by the assessees were partly allowed; in all other respects the batch was dismissed, with no order as to costs. The Court was unable to hold section 44AC read with section 206C wholly hit by Article 14. But it concurred with the Andhra Pradesh High Court that, in the absence of materials, the remedy in section 44AC was disproportionate to the mischief, so that to the extent its non obstante clause excluded sections 28 to 43C, which apply to all assessees, the provision was unreasonable. On that view the non obstante clause is confined to sustaining the deductions provided in section 206C, collections are made at the section 206C rates, and a regular assessment follows as for any other assessee.
TaxSphere, “Union of India v A. Sanyasi Rao”, https://taxnotice.vittsphere.com/caselaw/case/union-of-india-v-a-sanyasi-rao-section-44ac-read-down/ (validity last checked 2026-08-29)
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I sold scrap without collecting TCS and only got the buyers' Form 27C declarations years later. Has the officer any answer to that, and what about buyers who have already paid tax?
I did not collect TCS because I did not think what I sold was 'scrap'. The officer has levied penalty at a hundred per cent. Is a wrong but honest view a defence?
I produced the buyers' Form 27C during the assessment, and later a Form 27BA from an accountant. The officer says both are too late. Is he right?
I collected the Form 27C declarations late and filed them late with the TDS officer. Can the department still raise a TCS demand on me?
