Tax was collected from me at source on my liquor or forest produce purchases and the Department says a flat percentage of the purchase price is my profit. Can I still claim my actual business deductions?
Yes. The Supreme Court upheld section 206C and held section 44AC to be valid legislation, but read it down: section 44AC is not an independent provision, it is an adjunct to and explanatory of section 206C, and it does not dispense with a regular assessment. After tax is collected under section 206C, a regular assessment must follow in which profits and gains are computed under sections 28 to 43C. The non-obstante clause denying those reliefs to the specified trades was held unreasonable, there being no material to justify singling them out. The assessees' cases were partly allowed; in all other respects they were dismissed.
Decided by the Supreme Court (Supreme Court of India - A.M. Ahmadi CJ, K.S. Paripoornan and S.C. Sen JJ; judgment delivered 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 of the Income Tax Act 1961, in Presumptive Taxation & Audit and TDS Defaults matters.
This is the constitutional decision on collection at source in the liquor, timber and forest produce trades, and it is the source of the rule that a presumptive collection provision cannot swallow the regular assessment. Two holdings matter. On competence, the Court held that levying tax with reference to the purchase price and at an anterior stage does not change the nature of the levy: it remains a tax on income, and the standard by which tax is measured is distinct from the subject of the tax. On equality, the Court accepted the classification of these trades for collection purposes but struck at the denial of the ordinary computation reliefs, because the Revenue offered no reason why these traders alone should lose them. It is the model for arguing that a machinery provision must be read consistently with the charge.
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The batch comprised writ petitions under Article 32, civil appeals and special leave petitions, all raising the validity of sections 44AC and 206C of the Income Tax Act. Section 206C, inserted by the Finance Act 1988 with effect from 1 June 1988, required the seller to collect tax at prescribed rates from buyers of specified goods, including alcoholic liquor for human consumption, timber and other forest produce. Section 44AC, inserted by the Direct Tax Laws (Amendment) Act 1989 with effect from 1 April 1989, provided that notwithstanding anything to the contrary in sections 28 to 43C, a fixed percentage of the purchase price paid by the buyer in an auction or tender was deemed to be his profits and gains from that trade. Assessees challenged both provisions in several High Courts as beyond legislative competence and as violating Articles 14 and 19(1)(g). The challenge was substantially rejected, but some High Courts, including the Andhra Pradesh High Court in Sanyasi Rao's case, read section 44AC down. Both the assessees and the Union appealed against different parts of those decisions.
The Court upheld the validity of section 206C and held section 44AC to be a valid piece of legislation, but only as read down. Section 44AC is not to be read as an independent provision; it is an adjunct to and explanatory of section 206C, and it does not dispense with the regular assessment to be made in accordance with sections 28 to 43C. 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 rejected the attack on legislative competence, holding that what is brought to tax, though levied with reference to the purchase price and at an earlier point, is nonetheless income taxable under the Act, and it declined to hold that section 44AC read with section 206C was wholly hit by Article 14. The vice lay only in the non-obstante clause, which excluded the reliefs available to all other assessees.
On competence, the Court reasoned that trade or business produces income which can be taxed, and that these provisions were enacted to check evasion by collecting tax on income which is bound to arise, at an anterior stage. The charge is laid by the charging provisions, not by sections 44AC or 206C, which counsel for the Revenue described and the Court accepted as machinery provisions. There is a clear distinction between the subject matter of a tax and the standard by which it is measured; adopting the purchase price as the measure does not turn a tax on income into a tax on the purchase of goods. Drawing on Anglo-French Textile, the Court added that income can be regarded as embedded even at the point of purchase, and noted that obliging payment of advance tax is nothing new. On Article 14, it accepted that the practical difficulties of locating traders in these lines and collecting tax from them justified a presumptive basis of collection. But it separated collection from computation. Even on the Revenue's own case these are machinery provisions, and assessees carrying on business are similarly placed in the matter of the reliefs in sections 28 to 43C. No plea was advanced, and no material shown, to explain why traders in the specified goods alone should be denied them, so the denial had no nexus to the object and was unfair and arbitrary. Agreeing with the Andhra Pradesh High Court that the remedy was disproportionate to the mischief, the Court confined the non-obstante clause accordingly.
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, as provided in accordance with Sections 28 to 43C of the Act.
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Handle my notice → Ask a CA on WhatsAppYes. The Supreme Court upheld section 206C and held section 44AC to be valid legislation, but read it down: section 44AC is not an independent provision, it is an adjunct to and explanatory of section 206C, and it does not dispense with a regular assessment. After tax is collected under section 206C, a regular assessment must follow in which profits and gains are computed under sections 28 to 43C. The non-obstante clause denying those reliefs to the specified trades was held unreasonable, there being no material to justify singling them out. The assessees' cases were partly allowed; in all other respects they were dismissed. This was decided by the Supreme Court (Supreme Court of India - A.M. Ahmadi CJ, K.S. Paripoornan and S.C. Sen JJ; judgment delivered by Paripoornan J) and bears on section 44AC, section 206C 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 constitutional decision on collection at source in the liquor, timber and forest produce trades, and it is the source of the rule that a presumptive collection provision cannot swallow the regular assessment. Two holdings matter. On competence, the Court held that levying tax with reference to the purchase price and at an anterior stage does not change the nature of the levy: it remains a tax on income, and the standard by which tax is measured is distinct from the subject of the tax. On equality, the Court accepted the classification of these trades for collection purposes but struck at the denial of the ordinary computation reliefs, because the Revenue offered no reason why these traders alone should lose them. It is the model for arguing that a machinery provision must be read consistently with the charge. If it applies to you, the first step is this: Insist on a regular assessment in which profits are computed under sections 28 to 43C, and treat the collection at source as tax collected, not as a final determination of profit.
The batch comprised writ petitions under Article 32, civil appeals and special leave petitions, all raising the validity of sections 44AC and 206C of the Income Tax Act. Section 206C, inserted by the Finance Act 1988 with effect from 1 June 1988, required the seller to collect tax at prescribed rates from buyers of specified goods, including alcoholic liquor for human consumption, timber and other forest produce. Section 44AC, inserted by the Direct Tax Laws (Amendment) Act 1989 with effect from 1 April 1989, provided that notwithstanding anything to the contrary in sections 28 to 43C, a fixed percentage of the purchase price paid by the buyer in an auction or tender was deemed to be his profits and gains from that trade. Assessees challenged both provisions in several High Courts as beyond legislative competence and as violating Articles 14 and 19(1)(g). The challenge was substantially rejected, but some High Courts, including the Andhra Pradesh High Court in Sanyasi Rao's case, read section 44AC down. Both the assessees and the Union appealed against different parts of those decisions. The matter was decided on 1996-02-13 by the Supreme Court (Supreme Court of India - A.M. Ahmadi CJ, K.S. Paripoornan and S.C. Sen JJ; judgment delivered by Paripoornan J). On those facts the Supreme Court held as follows. The Court upheld the validity of section 206C and held section 44AC to be a valid piece of legislation, but only as read down. Section 44AC is not to be read as an independent provision; it is an adjunct to and explanatory of section 206C, and it does not dispense with the regular assessment to be made in accordance with sections 28 to 43C. 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 rejected the attack on legislative competence, holding that what is brought to tax, though levied with reference to the purchase price and at an earlier point, is nonetheless income taxable under the Act, and it declined to hold that section 44AC read with section 206C was wholly hit by Article 14. The vice lay only in the non-obstante clause, which excluded the reliefs available to all other assessees.
On competence, the Court reasoned that trade or business produces income which can be taxed, and that these provisions were enacted to check evasion by collecting tax on income which is bound to arise, at an anterior stage. The charge is laid by the charging provisions, not by sections 44AC or 206C, which counsel for the Revenue described and the Court accepted as machinery provisions. There is a clear distinction between the subject matter of a tax and the standard by which it is measured; adopting the purchase price as the measure does not turn a tax on income into a tax on the purchase of goods. Drawing on Anglo-French Textile, the Court added that income can be regarded as embedded even at the point of purchase, and noted that obliging payment of advance tax is nothing new. On Article 14, it accepted that the practical difficulties of locating traders in these lines and collecting tax from them justified a presumptive basis of collection. But it separated collection from computation. Even on the Revenue's own case these are machinery provisions, and assessees carrying on business are similarly placed in the matter of the reliefs in sections 28 to 43C. No plea was advanced, and no material shown, to explain why traders in the specified goods alone should be denied them, so the denial had no nexus to the object and was unfair and arbitrary. Agreeing with the Andhra Pradesh High Court that the remedy was disproportionate to the mischief, the Court confined the non-obstante clause accordingly. 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, as provided in accordance with Sections 28 to 43C of the Act."
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, 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. The Court upheld the validity of section 206C and held section 44AC to be a valid piece of legislation, but only as read down. Section 44AC is not to be read as an independent provision; it is an adjunct to and explanatory of section 206C, and it does not dispense with the regular assessment to be made in accordance with sections 28 to 43C. 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 rejected the attack on legislative competence, holding that what is brought to tax, though levied with reference to the purchase price and at an earlier point, is nonetheless income taxable under the Act, and it declined to hold that section 44AC read with section 206C was wholly hit by Article 14. The vice lay only in the non-obstante clause, which excluded the reliefs available to all other assessees. It arises in Presumptive Taxation & Audit and TDS Defaults matters, on section 44AC, section 206C of the Income Tax Act 1961, and was decided by Supreme Court of India - A.M. Ahmadi CJ, K.S. Paripoornan and S.C. Sen JJ; judgment delivered 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. Do not argue that a levy measured by the purchase price is outside the power to tax income; the Court rejected that squarely. When attacking a special regime as discriminatory, attack the specific incident that lacks justification - here the denial of ordinary computation reliefs - rather than the classification as a whole. Ask the Department to place on record the material said to justify differential treatment; the absence of such material decided this case.
Validity check could not be completed. Read the judgment in full; later legislative and judicial history not checked. The judgment itself notes that section 44AC was inserted in 1989 and amended in 1990, and reads it down rather than striking it down. 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 judgment decides the validity of the provisions as they then stood and does not deal with any later amendment to or omission of section 44AC. The challenge under Article 19(1)(g) is not separately dealt with in the operative reasoning reproduced in the text. The harvested text carries some OCR corruption in the extracted statutory provisions, including a garbled reproduction of section 9(1). 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.
The Court upheld the validity of section 206C and held section 44AC to be a valid piece of legislation, but only as read down. Section 44AC is not to be read as an independent provision; it is an adjunct to and explanatory of section 206C, and it does not dispense with the regular assessment to be made in accordance with sections 28 to 43C. 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 rejected the attack on legislative competence, holding that what is brought to tax, though levied with reference to the purchase price and at an earlier point, is nonetheless income taxable under the Act, and it declined to hold that section 44AC read with section 206C was wholly hit by Article 14. The vice lay only in the non-obstante clause, which excluded the reliefs available to all other assessees.
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