B.L Hansaria, C.J:— A presumptive and promptive tax has been imposed on persons who “fly-by-night”. This has been done by inserting sections 44AC and 206C in the Income-tax Act, 1961 (hereinafter called ‘the Act’) by the Finance Act, 1988. The drawing of the tax net tighter on these types of persons as “antievasion measure”, as described by the Finance Minister in his Budget speech, has been assailed in this batch of writ petition on three counts: (1) lack of legislative competence; (2) violation of Article 14 of the Constitution and (3) violation of Article 19(1)(g) of the Constitution.
2. Let the two sections under attack be noticed at the outset. Section 44AC reads as below:—
“44AC. (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an assessee, being a person other than a public sector company (hereafter in this section referred to as the buyer), obtaining in any sale by way of auction, tender or any other mode, conducted by any other person or his agent (hereafter in this section referred to as the seller),—
(a) any goods in the nature of alcoholic liquor for human consumption (other than Indian-made foreign liquor), a sum equal to forty per cent of the amount paid or payable by the buyer as the purchase price in respect of such goods shall be deemed to be the profits and gains of the buyer from the business of trading in such goods chargeable of tax under the head ‘profits and gains of business or profession’;
Provided that nothing contained in this clause shall apply to a buyer where the goods are not obtained by him by way of auction and where the sale price of such goods to be sold by the buyer is fixed by or under any State Act;
(b) the right to receive any goods of the nature specified in column (2) of the Table below, or such goods, as the case may be, a sum equal to the peicentage, specified in the corresponding entry in column (3) of the said Table, of the amount paid or payable by the buyer in respect of the sale of such right or as the purchase price in respect of such goods shall be deemed to be the profits and gains of the buyer from the business of trading in such goods chargeable to tax under the head ‘profits and gains of business or profession’.
S. No. Nature of goods percentage (1) (2) (3) (i) Timber obtained under a forest lease Thirty-five per cent (ii) Timber obtained by any mode other than under a forest lease Fifteen percent (iii) Any other forest produce not being timber. Thirty-five per cent
(2) For the removal of doubts, it is hereby declared that the provisions of sub-section (1) shall not apply to a buyer (other than a buyer who obtains any goods, from any seller which is a public sector company) in the further sale or any goods obtained under or in pursuance of the sale under sub-section (1).
(3) In a case where the business carried on by the ass-essee does not consist exclusively of trading in goods to which this section applies and where separate accounts are not maintained or are not available, the amount of expenses attributable to such other business shall be an amount which bears to the total expenses of the business carried on by the assessee the same proportion as the turnover of such other business bears to the total turnover of the business carried on by the assessee.
Explanation For the purposes of this section, ‘seller’ means the Central Government, a State Government or any local authority or corporation or authority established by or under a Central, State or Provincial Act, or any company or firm or co-operative society.”
3. We may now note section 206C:—
“206C.(1) Every person, being a seller referred to in section 44AC, shall, at the time of debiting of the amount payable by the buyer referred to in that section to the account of the buyer or at the time of receipt of such amount from the said buyer in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, collect from the buyer of any goods of the nature specified in column (2) of the Table below, a sum equal to the percentage, specified in the corresponding entry in column (3) of the said Table, of such amount as income-tax on income comprised therein.
S. No. Nature of goods Percentage (1) (2) (3) (i) Alcoholic liquor for human consumption (other than Indian-made foreign liquor) Fifteen per cent (iii) Timber obtained under a forest lease Fifteen per cent (iii) Timber obtained by any mode other than under a forest lease Five per cent (iv) Any other forest produce not being timber Fifteen per cent
Provided that where the Assessing Officer, on an application made by the buyer, gives a certificate in the prescribed form that to the best of his belief any of the goods referred to in the aforesaid Table are to be utilised for the purposes of manufacturing, processing or producing articles or things and not for trading purposes, the provisions of this sub-section shall not apply so long as the certificate is in force.
(2) The power to recover tax by collection under subsection (1) shall be without prejudice to any other mode of recovery.
(3) Any person collecting any amount under subsection (1) shall pay within seven days the amount so collected to the credit of the Central Government or as the Board directs.
(4) Any amount collected in accordance with the provisions of this section and paid under sub-section (3) shall be deemed as payment of tax on behalf of the person from whom the amount has been collected and credit shall be given to him for the amount so collected on the production of the certificate furnished under sub-section (5) in the assessment made under this Act for the assessment year for which such income is assessable.
(5) Every person collecting tax in accordance with the provisions of this section shall within ten days from the date of debit or receipt of the amount furnish to the buyer to whose account such amount is debited or from whom such payment is received, a certificate to the effect that tax has been collected, and specifying the sum so collected, the rate at which the tax has been collected and such other particulars as may be prescribed.
(5A) Every person collecting tax in accordance with the provisions of this section shall prepare half yearly returns for the period ending on 30th September and 31st March in each financial year, and deliver or cause to be delivered to the prescribed income-tax authority such returns in such form and verified in such manner and setting forth such particulars and within such time as may be prescribed.
(6) Any person responsible for collecting the tax who fails to collect the tax in accordance with the provisions of this section, shall, notwithstanding such failure, be liable to pay the tax to the credit of the Central Government in accordance with the provisions of sub-section (3).
(7) Without prejudice to the provisions of sub-section (6), if the seller does not collect the tax or after collecting the tax fails to pay it as required under this section, he shall be liable to pay simple interest at the rate of two per cent per month or part thereof on the amount of such tax from the date on which such tax was collectible to the date on which the tax was actually paid.
(8) Where the tax has not been paid as aforesaid after it is collected, the amount of the tax together with the amount of simple interest thereon referred to in sub-section (7) shall be a charge upon all the assets of the seller.”
4. The validity of these sections had been assailed by the traders before the High Courts of Kerala and Andhra Pradesh. In the Kerala High Court, the matter was first dealt in Kunhammed Kutty Haji v. Union Of India, (1989) 176 I.T.R 481, by a learned single Judge of that Court upholding the validity of the two sections under attack. Writ appeals were preferred against this judgment in Aboobacker v. Union Of India, (1989) 177 I.T.R 358, wherein the principle challenge was to the legislative competence which was ultimately upheld with the result that the writ appeals were dismissed. The judgment of the Andhra Pradesh High Court was rendered in A. Sanyasi Rao v. Govt, of A.P, (1989) 178 I.T.R 31, by a Division Bench of that High Court upholding the legislative competence but opining that section 44AC was violative of Articles 14 and 19(1)(g) of the Constitution. Despite this, instead of striking down section 44AC, the same was read down to make it consistent with Articles 14 and 19(1)(g) of the Constitution.
5. Lengthy arguments have been advanced before us on behalf of the assessee by Mr. Mahanti, Mr. Roy and Mr. Agrawal pleading as a last resort to accept the views put forward by the Andhra Pradesh High Court; whereas the learned Standing Counsel duly assisted by Mr. Ratho submits that the view taken by the Kerala High Court merits our acceptance. Though two other High Courts of the country, namely, Karnataka and Gujarat, had occasion to note these provisions in Vishal Enterprises v. Union of India, (1988) 174 I.T.R 548, and R. Laxmichand v. Union of India, (1990) 184 I.T.R 376, respectively, they did not examine the validity of these sections.
6. Let us now deal with the points of attack raised by the petitioners seriatim.
LEGISLATIVE INCOMPETENCE:
The enactment being relatable to Entry 82 in List I of Schedule VII to the Constitution which reads “Taxes on income other than agricultural income”, the contention is that what is sought to be taxed by force of section 44AC is not income and as such the Parliament lacks legislative competence to enact section 44AC. In this connection reference has been made to Queen v. Burak, 1877 B (3) A.C 889, wherein it was stated that when a question arises whether the prescribed limits had been exceeded by the Legislature, the established Courts of Justice must of necessity determine that question; and the only way in which they can properly do so, is by looking to the terms of the instrument by which, affirmatively, the legislative powers were created, and by which, negatively, they are restricted. If what has been done is legislation, within the general scope of the affirmative words which give the power, and if it violates no express condition or restriction by which that power is limited, it is not for any Court of Justice to inquire further, or to enlarge constructively those conditions and restrictions.
4.1 It has, therefore, to be seen whether the legislation at hand is within the affirmative words of the entry and then to see whether the power has been restricted negatively by any other provision of the Constitution. As to this, it may be pointed out that the affirmative words are “taxes on income” and it, therefore, merits examination as to whether what has been provided for in section 44AC is a tax on income or not. No violation of other express condition or restriction has been brought to our notice.
4.2 It is also worthwhile to point out in this connection, as stated in Bhagwan Dass v. Union of India, (1981) 2 SCC 135 : A.I.R 1981 S.C 907, that the entries finding place in Schedule VII to the Constitution should not be read in a narrow or restricted sense and each and every subject mentioned in the entries should be read as including within its scope all ancillary and subsidiary matters which can fairly and reasonably be comprehended in it. It was further pointed out that the words in the Constitution conferring legislative power should receive a liberal construction and should be interpreted in their widest amplitude.
4.3 Let the question of legislative competence be examined keeping the aforesaid legal proposition in view. It is contended by the learned counsel for the assessees that what is sought to be taxed by section 44-AC is not income at all as understood by the Act. In this connection we may bear in mind that the effort to define ‘income’ has eluded the Legislature as well as the law-interpreters. The speech of Lord Mc Naughten where he has said ‘Income-tax’. My Lords, if I may say so, with respect, is a tax on income”, is a classic example of what the law-interpreters have to say about their inability in defining income. In so far as the definition in the Act is concernd, we are referred to section 2(24) which has given an inclusive definition of income but, which, according to the counsel reflects the legislative mind as to what it is prepared to regard as income. We have been then taken through various sections of the Act, to wit, sections 4, 5, 14, 28, 29, 37 and 40. The idea of this exercise is to bring home the point that for an income to be taxed under the Act, the same must at least accrue or arise. It is further contended that for any income to be chargeable under the head “profits and gains of business or profession”, of which section 44-AC speaks of, there must be carrying of business and there must be receipt of income. The emphasis is that presumptive income cannot be income as understood by Entry 82 of List-I. We are referred to C.I.T v. Shaw Wallace & Co., A.I.R 1932 P.C 138, in which acquisition of solatium was not regarded as income taxable under the Act. In this connection reference is also made to K.P Varghese v. I.T.O, (1981) 4 SCC 173 : A.I.R 1981 S.C 1922, in which it was stated that under Entry 82, Parliament cannot “choose to tax as income an item which in no rational sense can be regarded as a citizen's income or even receipt/’
4.4 To meet these challenges, learned Standing Counsel has referred to the decision of the Apex Court in Bhagwan Dass (supra) wherein it was stated in paragraph 14 that the expression ‘income’ includes not merely what is received or what comes in by exploiting the use of a property but also what the saves by using it oneself. It was further Stated that “that which can be converted into income can be reasonably regarded as giving rise to income.” Relying on this decision, it is contended that even presumptive income or the possibility of receiving income by way of future profit or gain can as well be an income as understood by the Act inasmuch as the stock-in-trade which is purchased can be converted in future to an income. It is also urged that the conception of presumptive income has not been introduced for the first time by section 44-AC inasmuch as sections 44-B and 44-BB which found place in the statute book by virtue of the Finance Acts of 1975 and 1987 had also dealt with presumptive incomes.
4.5 We have duly considered the rival submissions and, according to us, the conception of income about which Entry 82 speaks of must embrace within its fold any profit or gain not only actually received but also income which is supposed by the Legislature to have notionally accrued or which is likely to accrue. Resort to fiction is always permissible where it is necessary to deal with a device avoiding legitimate tax. Since the tax is only on the traders, it is presumed by the legislature that a certain percentage of the purchase price will be treated as income. What the trader purchases is of course for re-sale in business and, on re-sale, it will normally be presumed that a sum larger than the purchase price paid by the assessee will be realised and, therefore, deeming a portion of the purchase price as income will not snap the nexus with income mentioned in the entry.
4.6 In view of what has been stated above, we are satisfied that the enactment of section 44-AC and for that matter of section 206-C was within the legislative competence of the Parliament. The first submission of the learned counsel for the assessee is, therefore, rejected.
7. ARTICLE 14 AND SECTION 44-AC:
The attack on this section on the envil of Article 14 is on two grounds I (i) It is discriminatory, and (ii) the provision is arbitrary.
5.1 In so far as the selection of the two types of traders before us, namely, those who trade in alcoholic liquor for human consumption and timber or other forest produce is concerned, we may refer to the memorandum explaining the provisions in the Finance Bill of 1988 which set out the reason for which and the objects to achieve which these provisions were inserted. Paragraph 25 of the Memorandum reads thus:—
“New provisions to counteract tax evasion by liquor contractors, scrap dealers, dealers in forest products, etc.-25. Considerable difficulty has been felt in the past in making assessment of 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 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 previsous years, the time by which the income 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 44-AC 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.
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 assesses, it is proposed to introduce a new section 206-C to provide that any person, being a seller, referred to in section 44-AC, 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 or debiting the said amount to the account of the buyer or at the time of receipt of that amount from the buyer, whichever is earlier. This mode of recovery of tax shall be without prejudice to any other mode of recovery. The tax so collected by the seller shall be paid to the credit of the Central Government or as the Board directs, within seven days from the date of collection. It will be treated as tax paid on behalf of the person from whom the amount has been collected and credit shall be given for such amount in the assessment made under the Act on production of a certificate.
The new section also provides that if a sailer 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 or the seller.
A new section 276-B 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 1st June, 1988………”
The aforesaid extract from the memorandum clearly brings out the rationals of making a special provision for the traders with whom we are concerned. These traders form a class inasmuch as it is difficult to trace them once the contract period is over. We accept this submission advance on behalf of the Revenue that very often these contracts are taken in the names of dummies, in fictitious names or in the names of faceless persons or persons of little means, because of which the State was losing a good amount of revenue and there was large scale evasion by these persons. Apparently, this situation had to be remedied and loss of revenue had to be plugged.
5.2 It is well known that a large elbow room is provided regarding classification in taxing statutes. As stated in Venugopala v. Unitin of India, (1969) 74 I.T.R 49, if the classification is rational, the Legislature is free to choose objects of taxation, impose different rates, exempt classes of property from taxation, subject different classes of property to tax in different ways and adopt different modes of assessment. It has been stated in a recent decision by the Apex Court rendered in Shashikant Laxman Kale v. Union of India, (1990) 185 I.T.R 104 (S.C), that the latitude for classification in a taxing statute is much greater and, in order to tax something, it is not necessary to tax everything. It was further observed in this decision that for the limited purpose of appreciating the background and the antecedent factual matrix leading to the legislation, it is permissible to look into the Statement of Objects and Reasons of the Bill which actuated the step to provide a remedy for the then existing malady. Of course, a catch-phrase cannot be used as a camouflage in this context.
5.3 The learned Standing Counsel urges that section 44AC was enacted after the Department had experienced that there was large scale of evasion of tax by persons who take contracts for sale of liquor, forest produce, etc.. This was found as an all-India phenomenon. It was also noticed that by the time the income becomes taxable at the hands of such persons, they are not traceable. Experience had been that at the time of assessment in these cases either the accounts are not available or they are grossly incorrect oc incomplete. Even if assessments could be made on such persons on ex parte basis, it almost becomes impossible to collect the tax found due either because it becomes difficult to establish the identity of the persons and trace them or because of the fact that the persons in whose names the contracts are taken are men of no means.
5.4 As the framers of law have utilised their all-India experience and the same being that most of the traders of the tvpe at hand being what are known as ‘fly-by-night-operators” in the Taxman's collequium, special treatment was necessary to compute profits and gains from the business of trading in the goods mentioned in section 44AC. As the law permits large elbow room of classification in the taxing statute and as it is not possible to plug the loopholes of tax evasion in all the sectors at one time and as in order to tax something it is not necessary to tax everything, we are satisfied about the reasonableness of the classification introduced by section 44AC.
5.5 This is, however, not all what the learned counsel for the assesses have to say quo-Article 14. According to them, this Article is attracted if an action, be it legislative, is absolutely arbitrary. It is contended that the rates of presumptive income fixed by section 44AC are highly arbitrary without any material on record to satisfy the mind of the Court about the soundness of the same. Though no figure was made available to this Court by the Department, some were made available to the Andhra Pradesh High Court and on the basis of what was disclosed therein, it is contended for the petitioners that the profit varied between 31% and 110% in case of arrack whereas section 44AC has fixed the percentage at 40 in case of liquor. It is urged that this fixation is highly arbitrary. Similar arguments have been advanced regarding fixation of rate of profit for forest produce other than timber which is 35% as per section 44AC whereas the figures made available to Andhra Pradesh High Court show that the profit range was between 30 to 70 per cent. In so far as the cases at hand are concerned, it has been submitted that there are cases where timber trader profit was earlier assessed at the rate of 4 to 5 per cent whereas they shall now be assessed at the rate of 35 per cent. All this is arbitrary, contend the learned counsel for the petitioners.
5.6 In meeting the attack on the ground of arbitrariness, it has been submitted by the learned Standing Counsel that we may not go by the figures made available either to the Andhra Pradesh High Court or by some of the writ petitioners before this Court inasmuch as we are concerned with an all-India statute and so we should go by all-India experience. It is urged that the Legislature itself had lowered the rates of profit from what was proposed in the Bill. This shows awareness of the representatives of the people to the difficulty and hardship which might have been caused to the traders at hand because of fixation of high rate of profit in the Bill. There is nothing arbitrary in the fixation of the rates as done in section 44 AC, submit the two counsel for the Revenue.
5.7 After the point relating to arbitrariness was raised, a question was asked to the learned Standing Counsel as to whether it would be permissible under the scheme of the two sections to accept lower percentage of profit that that statutorily fixed by section 44AC, if so found in the course of regular assessment. It was replied that it would not be possible to accept any figure lower than the one statutorily fixed though, according to the learned Standing Counsel, if an assessee was to return higher rate of profit than one statutorily fixed, the same would be acceptable to the Department. The question relating to higher rate of profit was posed by the learned counsel for the assessees having known from the decision of the Andhra Pradesh High Court that the profit had been to the extent of even 110% in case of arrack there.
5.8 According to us, if in course of assessment higher figures can be accepted, the lower figures should be considered and accepted if otherwise convincing. We, however, entertain doubt as to the stand taken by the learned Standing Counsel on this aspect of the question because, according to us, what is statutorily fixed cannot be given a go-bye in either case due to anything returned by the assessee.
5.9 From the materials made available to us and on the basis of what was disclosed to the Andhra Pradesh High Court in A. Sanyasi Rao v. Govt, of A.P, (1989) 178 I.T.R 31 (A.P), we are of the opinion that arbitrariness is writ large on the face of section 44AC. The question, therefore, is if there is arbitrariness in a statute, can that be struck down on the envil of Article 14. As to this, there does not seem to be much doubt after the decision of the Apex Court in S.P Hoyappa v. State of Tamilnadu, (1974) 4 SCC 3 : A.I.R 1974 S.C 555, wherein it has been stated thus:—
“…From a positivistic point of view, equality is antithetic to arbitrariness. In fact, equlity and arbitrariness are sworn enemies; one belongs to the rule of law in a Republic while the other, to the whim and caprice of an absolute monarch. Where an act is arbitrary, it is implicit in it that it is unequal both according to political logic and constitutional law and is therefore violative of Article 14,………”
5.10 The above case was cited with approval in Maneka Gandhi v. Union of India, (1978) 1 SCC 248 : A.I.R 1978 S.C 597, in paragraph 56 of which it was stated that:—
“Article 14 strikes arbitrariness in State action and ensures fairness and equality of treatment. The principle of reasonableness, which legally as well as philosophically, is an essential element of equality or non-arbitrariness pervades Article 14 like a brooding omnipresence…”
5.11 Similar view was expressed in R.D Shetty v. The International Airport Authority, (1979) 3 SCC 489 : A.I.R 1979 S.C 1628 (Pr. 21) and in Ajay Hasia v. Khalid Mu jib, (1981) 1 SCC 722 : A.I.R 1981 S.C 487 (Pr. 16). Reference may also be made to a recent decision in Neelima Misra v. Hminder Kaur, (1990) 2 SCC 746 : A.I.R 1990 S.C 1402, in paragraph 29 of which it has been stated that:
“…Any such illegal, irrational or arbitrary action or decision, whether in the nature of a legislative, administrative or qussi judicial exercise of power is liable to be quashed being violative of Art. 14 of the Constitution”
5. 12. In the aforesaid premises, we would hold that section 44AC of the Act being arbitrary in nature in having fixed non-sustainable and arbitrary rates of profit arising out of the trades in question is violative of Article 14 of the Constitution.
8. ARTICLE 19(1)(g) & SECTIONS 44AC AND 206C:
The rates fixed by section 44 AC are confiscatory and the same have imposed unreasonable restriction on the freedom to carry on trade or business and as such this section is violative of Article 19(1)(g) of the Constitution, is the submission on behalf of the petitioners. It is contended that even if a particular trader were to incur loss while dealing with the commodities in question shall have to pay income tax at the specified rates though the word ‘income’ has been accepted to include loss vide C.I.T v. J.H Cotla, (1985) 156 I.T.R 323 (S.C). By referring to the case of assessees who were earlier taxed on the timber trade at the rate of 4 to 5 per cent who would now be assessed at the rate of 35 per cent, it is submitted that the section is confiscatory and has put unreasonable restriction on the freedom to carry on trade or business. Reference has been made in this connection to K.T Moopil Nair v. State of Kerala, A.I.R 1961 S.C 552.
6.1 In so far as Moopil Nair is concerned, it is contended by the learned Standing Counsel that the ratio of that decision can have no application inasmuch as what had happened there was that the tax liability of Rs. 54,000/- was fastened on the forest owner though he was making an income of Rs. 3,100/- per year out of the forests. It was, therefore, stated that unless the petitioner was very enamoured of the property and of the right to held it, he will not be in a position to pay the deficit of Rs. 51,000/- every year in respect of the forests and the legal consequences of his making a default will be that the money will be realised by the coercive processes of law, and one could easily imagine that the property may be sold at auction and may not fetch even the amount for the realisation of which it may be proposed to be sold at public auction. It is because of this that the levy was regarded as clearly confiscatory in character and effect. The Andhra Pradesh High Court in Sanyasi Rao (supra) accepted the contention of the assessees that the cases squarely fell within the principle of Moopil Nair having noted that in some districts the selling price of arrack was fixed at Rs. 38/- whereas the purchase price was Rs. 35/-. The selling price was thus higher by less than 10 per cent whereas the section contemplates profit of 40 per cent. Before us there are assessees who are dealing in forest produce not being timber and who were taxed at the net income of 4 to 5 per cent whereas now they shall be assessed at the rate of 35 per cent. This impost has definitely to be regarded as unreasonable restriction in carrying on trade or business.
6.2 Learned Standing Counsel, however, contends that the diminution of profit cannot be regarded to be an unreasonable restriction and refers in this connection to Shaik Madar v. State of Andhra Pradesh, (1972) 4 SCC 635 : A.I.R 1972 S.C 1804 (see Pr. 12). No doubt, dimimution of profit by itself may not be an unreasonable restriction, but then if the impost be highly disproportionate to the income, the same has to be regarded as unreasonable restriction. Learned counsel further urges that larger public interest has to give place to the fundamental rights of individual, vide Municipal Ccrporation, Ahmedabad v. Jan Mohammed, (1986) 3 SCC 20 : A.I.R 1986 S.C 1205. As to this also, we would observe that no doubt that Article 19(6) of the Constitution permits imposition of restriction in public interest. But then, restriction has to be reasonable. The further submission of the learned Standing Counsel in this context is that it is not necessary for the taxing statute to ensure reasonable profit to traders and refers in this connection to Prag Ice Oil Mills v. Union of India, (1978) 3 SCC 459 : A.I.R 1978 S.C 1296. A reference to this decision shows that this observation was made in the context of fixation of price. It is trite to say that business is undertaken to earn profit, but if the taxing provision be such which robs the businessmen of the possibility of earning any profit, such an impost has to be regarded as unreasonable restriction on the freedom to cany on trade or business. It is lastly contended by the learned Standing Counsel that if the rate of profit as fixed by section 44AC be on the high side, the appeal has to be to the Legislature and not to the Court. In this context he draws our attention to the view expressed by the learned single Judge of the Kerala High Court in Janhammed at page 496 of (1989) 176 I.T.R No doubt this Court or for that matter any Court cannot lower down the profit rate fixed by section 44AC, but it can definitely examine the question whether fixation of rate of profit has eroded the fundamental right to carry on trade or business to such an extent that the same is regarded as violative of Article 19(1)(g) of the Constitution.
6.3 There is some debate before us as to whether Courts can go into the question of legislative wisdom. This question has been posed because of the fixation of rate of profit by section 44AC. It is contended by the learned Standing Counsel that fighting of evasion of taxes being high in the priority of fiscal policy, any measure taken by the Legislature in its wisdom may not be interfered with by the Courts. As to this, it is submitted by Mr. Mahanti that even if this be the question of policy, it is for the Judges to decide the soundness of the same. In this connection reference is made to the statement of Lord Denning, W.R, in Dutton v. Bognor Regis Urban District Council, (1972) 1 Q.B 373, that Judges have to decide the question of policy according to its reason (See pages 390 and 397). We may also refer with profit to A.L Kalra v. Project & Equipment Corporation of India Ltd., (1984) 3 SCC 316 : A.I.R 1984 S.C 1361, wherein it was stated in paragraph 18—
“…Wisdom of the legislative policy may not be open to judicial review, but when the wisdom takes the concrete form of law, the same must stand the test of being in tune with the fundamental rights and if it trenches upon any of the fundamental rights, it is void as ordained by Article 13.”
6.4 Keeping in view all that has been stated above, we are of the opinion that the legislative policy of fixing the rate of profit as has been done in section 44AC has to be regarded as in the nature of unreasonable restriction in cases of some of the assessees who are before us.
6.5 The Andhra Pradesh with Court having held that section 44AC violates Articles 14 and 19(1)(g) of the Constitution, it is submitted before us by the learned counsel for the assessees that the same view should be accepted by us for two reasons. First, the same is favourable to the assessees and as per the accepted rule of interpretation of a taxing statute, if there be two reasonable views, one favourable to the assessee has to be accepted as per Ambika Silk Mill v. C.I.T, (1952) 22 I.T.R 58 (Bom. and C.I.T v. Vegetable Products Ltd., (1973) 88 I.T.R 192 (S.C). Another reason advanced is that the Income-tax Act being an all-India statute, the view propounded by one High Court of the country should be accepted by the other High Court. This is on the logic that there is necessity of uniformity of construction in all-India statute. This is what was stated in Maneklal Chunilal c & Sons v. C.I.T, (1953) 24 I.T.R 375 (Bom.), Dalmia Dadri Cement v. C.I.T, (1980) 125 I.T.R 425 (Delhi), and Sundaram Industries Ltd. v. C.I.T, (1986) 159 I.T.R 646 (Mad.)-As to the second reason, it is appropriate to say that on this count the Department can well ask for acceptance of the Kerala view which has upheld the validity of both the sections. Thus, nothing turns on the view taken by the Andhra Pradesh High Court on this count. Of course, the rule of interpretation that if two views be reasonable possible, one favourable to the assessee should be accepted, remains.
6.6 Keeping in view all the above, we would state that section 44AC has to be regarded as violative of Article 19(1)(g) of the Constitution.
9. READING DOWN OF SECTION 44AC:
The further question is as to the approach to be adopted regarding the ultimate order to be passed. In this connection, we may refer to what is stated in K.V Varghese (supra) that it is a well settled rule of interpretation that the Court should as far as possible avoid that construction which attributes irrationality to the Legislature, and Court must obviously prefer a construction which renders the statutory provision constitutionally valid rather than that which makes it void. Question is whether anything can be done by this Court to uphold the validity of section 44AC though, as it is, it is violative of Articles 14 and 19(1)(g) of the Constitution. The Andhra Pradesh High Court found a way out and the same was to read down the provision. It was mentioned by the Division Bench that the theory of reading down is a rule of interpretation resorted to by the Court where a provision, read literally, seems to offend a fundamental right, or falls outside the competence of the particular Legislature. This rule was resorted to as far back as 1941. In re Hindu Women's Rights to Property Act, A.I.R 1941 P.C 72. Reference was made about the same principle in All Saints High School v. Govt, of Andhra Pradesh, (1980) 2 SCC 478 : A.I.R 1980 S.C 1042, wherein certain provisions of the A.P Recognised Private Educational Institutions Control Act, 1975 were challenged as violatirg Article 30 of the Constitution. Dealing with the challenge, Kailasam, J. observed in para 111:
“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 vires and also reasonable. The rule followed is that the section ought to be interpreted consistent with the presumption which imputes to the legislature an intention of limiting the direct operation of its enactment to the extent that is permissible.”
10. Reference was then made to Maxwell on Interpretation of Statutes, 12th Edition, P. 109; Bidie v. Gen. Accident, Fire and Life Assurance Corpn., (1948) 2 All E.R 995; to the observation of Holmes, J. in Towne v. Signer, (1917) 245 U.S 418; 62 L.Ed 372, 376; to what was stated by Gwyer, J. in Central Provinces Barer Act, (1939) F.C.R 18; and finally to the observation of the Apex Court in Kedar Nath Singh v. State of Bihar, (1962) Supp. (2) S.C.R 769; and it was then stated as follows:—
“This Court has in several cases adopted the principle of reading down the provisions of the Statute. The reading down of a provision of a statute puts into operation the principle that so for as it is reasonably possible to do so, the legislation should be construed as being within its power. It has the principal effect that where an Act is expressed in language of a generality which makes it capable, if read literally of applying to matters beyond the relevant legislative power, the Court will construe it in a more limited sense so as to keep it within power.”
11. The Andhra Pradesh High Court thereafter noted the decisions rendered in Bhim Singhji v. Union of India, (1981) 1 SCC 166 : A.I.R 1981 S.C 234, and C.S.T v. Radhakishan, (1979) 118 I.T.R 534 (S.C). The reading down by the Andhra Pradesh High Court was to the extent that section 44AC shall be read not as an independent provision but as an adjunct to and as explanatory to section 206C; and that it does not dispense with regular assessment altogether with the result that after the tax is collected in the manner provided by section 206C, a regular assessment would be made where the profit and gain of business in goods in question will be ascertained in accordance with sections 28 to 43C. The reading down was resorted to by the Andhra Pradesh High Court having come to the view that section 206C serves the purpose which the Legislature had in mind, i.e, to take care of tax evasion. It was observed that once tax is collected at the source as visualised by section 206C, the contractor cannot run away; probably only in cases where the profit is higher than 40 per cent (in case of liquor traders) would he make himself scarce. In all other cases, he would come to the Department for assessment of his income and there is no reason, according to the Court, as to why regular assessment should not be made in his case. It was, therefore, opined that the overall object underlying the provision would be subserved by section 206C. Therefore, section 44AC was read as adjunct to and explanatory to section 206C. We would also adopt the same view and read down section 44AC accordingly, as this reading down takes care of all the complaints made by the assessees inasmuch, as if during the course of regular assessment it would be found that any particular assessee has not earned the profit at the rate specified in section 44AC, the same shall be duly taken care of. Section 44AC would, therefore, cease to be arbitrary and would not be unreasonably restrictive of the freedom to carry on trade or business. We summerise our conclusions as below;
(1) Parliament was within its competence to enact sections 44AC and 206C.
(2) Section 44AC is violative of Articles 14 and 19(1)(g) of the Constitution.
(3) Despite this, we do not strike down section 44AC but read it down to state that it is merely an adjunct to and explanatory to the provision in section 206C with the result that a regular assessment has to be made in respect of the assessees in accordance with section 28 to 43C, i.e, the non-obatante clause of section 44AC shall not be operative.
12. The petitions ate allowed accordingly. There shall be no order as to costs.
Smt. A.K Padhi, J.:— I agree.
13. Ordered accordingly.
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