Sir Shadi Lal Enterprises Ltd. Vs. Union of India (Uoi) and ors. - Court Judgment

M. Katju, J.

1. Heard learned counsel for the parties.

2. This writ petition has been filed against the order dated March 22, 2002, passed by the Income-tax Officer, TDS, Muzaffarnagar, annexure 6, to the writ petition and the order dated May 7, 2002, annexure 12, to the writ petition passed by the Commissioner of Income-tax, Muzaffarnagar.

3. The petitioner is a company and incorporated under the Companies Act. It has distilleries at Shamli, Muzaffarnagar and at Pilkhani, district Saharanpur under licences granted by the U. P. excise authorities for manufacturing of potable alcohol.

4. In the excise year 2001-2002, the U.P. Excise Commissioner in exercise of powers under Section 41 of the U. P. Excise Act framed rules for opening of wholesale shops of country liquor known as the U. P. Excise (Settlement of Wholesale Shop of Country Liquor) Rules, 2001 vide annexure 2 to the petition. As regards retail licences, the U. P. Excise (Settlement of Licenses for Retail Sale of Country Liquor) Rules, 2001, provided for grant of licence on the terms and conditions mentioned in the rules. True copy of the Retail Rules has been annexed as annexure 1 to the writ petition.

5. According to the revised policy, a distillery, which wanted to sell its country liquor in any district of Uttar Pradesh, has to obtain a wholesale license known as CL-2A. The petitioner has obtained wholesale licences and has opened CL-2A depots in various districts of Uttar Pradesh. A true copy of the Wholesale Rules has been annexed as annexure 2 to the writ petition. Similarly, a retailer has to obtain a licence in Form No. CL-5C. A retailer licensee can sell the liquor at its retail outlets, only at prices fixed by the State. The supply of country spirit from the distilleries to the wholesale shop of the petitioner is covered by PD-25 pass and all the sales had to be recorded in Part III of WSI Register on day-to-day basis. The country liquor is to be supplied in bottles or pouches having security hologram approved and supplied by the Excise Commissioner only to persons holding licences for retail sale of country liquor. The distilleries therefore supply country liquor to the retailers holding a valid licence at a price fixed by the State, and the retailer has to sell at a price fixed by the U. P. Government.

6. Under the Country Liquor Rules, 2001, licences to retailers are granted by inviting applications from eligible candidates, and the District Level Committee comprising of the Collector as the chairman processes the applications. The selection of licensees is done by draw of public lotteries as contemplated under Rule 10 of the U. P. Excise Rules. Under Rule 16 the maximum retail price of country liquor is fixed by the Excise Commissioner with the approval of the State Government and the prices are printed on the pouches as well as labels of the bottles of the country liquor. In exercise of power under Rule 16 the Excise Commissioner, U. P., had fixed the retail price of the bottles and the poly pouches by notification dated March 16, 2001, and subsequent notification dated October 20, 2001, vide annexure 3 to the writ petition.

7. While fixing the maximum sale price for wholesale, the excise duty component of Rs. 60/BL has been considered which comes to Rs. 12 per pouch of 200 ml. Under the rules the retailer has to pay to the wholesaler the cost price and tax, excise duty and cess. The Income-tax Department cannot recover TCS on the excise duty component. True copy of the notification dated March 31, 2001, has been annexed as annexure 4 to the writ petition.

8. In paragraph 13 of the writ petition it is alleged that the excise duty which is payable to the State of U. P. as the price for a privilege cannot constitute income or profits of the retailers or wholesalers. The cost price and excise duty are charged separately and are mentioned in the sale invoices. Wholesale price fixed by the Government virtually becomes the minimum sale price of country liquor for the retail licencee. Thus, for a retail licensee both the minimum and maximum prices are fixed and the scope for bargain is small with regard to consumers. In paragraph 16 of the writ petition it is alleged that the retail licensees have to fulfill the eligibility conditions and are selected by the District Committee and are identifiable, and hence they cannot evade payment of income-tax. The Chief Secretary, U. P., by letter dated March 30, 2002, to the Finance Secretary, Government of India, with a copy to the Chairman, Central Board of Direct Taxes, New Delhi, has clarified that the State has fixed the prices at all levels (wholesale and retail) and has requested for a clarification for purpose of Clause (a)(iii) of Section 206C of the Income-tax Act vide annexure 5 to the writ petition. The expression sale price and retail price has been defined in Section 4A of the Central Excise Act and Rule 2(r) of the Standard of Weights and Measures Act (Packaged Commodities) Rules, 1977, which has been quoted in paragraph 17 of the petition.

9. By the impugned order dated March 22, 2002, the Income-tax Officer (TDS), Muzaffarnagar, has held that the provisions of Section 206C apply to the assessee and it is a defaulter for not collecting tax under that section. The petitioner had been directed to pay a sum of Rs. 8,77,89,674 as income-tax collectible and surcharge thereon vide annexure 6 to the writ petition. The said authority has also issued show cause notices to the petitioner dated April 30, 2002, and May 2, 2002, requiring him to submit details of sales of country liquor effected for the balance period not covered in the order dated March 22, 2002, and he has demanded as to why interest not be charged. True copies of the notices dated April 30, 2002, and May 2, 2002, have been annexed as annexure 7 to the writ petition.

10. In paragraph 23 of the petition it is stated that the order directing the petitioner to collect tax at source from the payments received from the buyer is wholly unjustified and is a clear case of non-application of mind to the provisions of Section 206C of the Income-tax Act, It is alleged that the petitioner is under no legal obligation to collect tax from the buyer as the buyer has not obtained the goods by way of auction and further the sale price of such goods to be sold by the buyer has been fixed by the Excise Commissioner, Uttar Pradesh, in exercise of statutory powers conferred upon him under the statutory rules framed under Section 41 with the approval of the State Government.

11. Section 206C of the Income-tax Act has been quoted in paragraph 24 of the writ petition. The Explanation to the provisions defines the word 'buyer' as follows :

'(a) 'buyer' means a person who obtains in any sale, by way of auction, tender or any other mode, goods of the nature specified in the Table in Sub-section (1) or the right to receive any such goods but does not include,--

(i) a public sector company ;

(ii) a buyer in the further sale of such goods obtained in pursuance of such sale ; or

(iii) 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.'

12. It may be mentioned that prior to the insertion of the above Explanation to Section 206C with effect from April 1, 1992, there was a provision in Section 44AC(1)(a) which was in identical terms. The memorandum explaining the reasons for insertion of the provisions of Section 44AC and Section 206C are stated in [1988] 170 ITR 187. The Central Board of Direct Taxes has also explained the purpose and context for the insertion of the provisions of Section 44AC and Section 206C of the Act in its circular dated December 16, 1988 (see ), vide annexure 8 to the writ petition. The provisions of Section 44AC and Section 206C were introduced for working out the profits on presumptive basis in certain cases to get over the problem being faced in assessing the income and recovering the taxes in the case of persons trading in country liquor, etc. When Section 44AC was inserted in the year 1988, the proviso to Section 44AC(1)(a) was not there. This provision was inserted in the year 1989 with effect from April 1, 1989, and the effect of the newly inserted provision was explained by the Central Board of Direct Taxes by its circular dated May 4, 1990 (see [1990] 184 ITR 91), annexure 9, to the writ petition. It was noted by the Central Board of Direct Taxes that contracts for sale of liquor are not given by auction or any similar mode but licences to sell the liquor are issued to contractors by the State Government. Since the purchase and sale price has been fixed there is little scope for tax evasion. Hence, the application of the presumptive profit operated very harshly in such cases. To remove this hardship, the Amending Act, 1989, has amended Section 44AC to provide that the provisions for the application of the rate of presumptive profit would not apply in a case where the liquor is not obtained by the buyer by way of auction and where the sale price of such liquor to be sold by the buyer is fixed by or under any State Act. These provisions were considered by the Full Bench of the Himachal Pradesh High Court in Saini and Co. v. Union of India , and it was observed that a person covered by the proviso to Section 44AC cannot be said to be a buyer and, hence, no tax can be collected at source in respect of liquor obtained by him from distilleries. In our opinion the same principle and analogy will apply to Section 206C. The Himachal Pradesh High Court also followed the decision of the Punjab and Haryana High Court in K.K. Mittal and Co. v. Union of India , against which SLP was dismissed by the Supreme Court, and in K.K. Mittal and Co. v. Union of India . The Punjab and Haryana High Court in Chandigarh Distillers and Bottlers Ltd. v. Union of India and the Himachal Pradesh High Court in Saini and Co. v. Union of India has also followed the same view.

13. Aggrieved by the order of the Income-tax Officer (TDS) dated March 22, 2002, the petitioner filed a revision under Section 264 of the Income-tax Act before the Commissioner of Income-tax which was dismissed by order dated May 7, 2002, vide annexure 12, to the writ petition.

14. In the order dated May 7, 2002, it has been held by the Commissioner of Income-tax that the judgments of the Himachal Pradesh and Punjab and Haryana High Court relied on by the petitioner are not applicable since in those cases it was held that the wholesalers are not buyers and in the case of the petitioner there are no wholesalers between the distillery and the retailers, since the distilleries are selling liquor directly to the retailers. It has been alleged by learned counsel for the petitioner that the impugned order of the Commissioner of Income-tax has failed to appreciate that as per Sub-clause (iii) to the Explanation to Section 206C the petitioner is not a buyer since the sale price of the goods to be sold by him is fixed under the State Act. The petitioner has also relied on various decisions referred to in paragraphs 37, 38 and 44 of the writ petition.

15. A counter affidavit has been filed and we have perused the same.

16. In paragraph 3 it is stated that retail licensees purchase liquor at negotiated prices and only the maximum retail price has been fixed by the State. The respondents have denied that they cannot recover the tax deducted at source from the petitioner. In paragraph 13 of the same it is stated that there is no bar against issue of CL-5C licences to persons who are permanent residents of other districts in U. P. or of other states of the Union of India. In all likelihood, if such outsider does not get a licence in a subsequent year, he will shift to his own native State. In such circumstances it will not be possible to get the return of income from him by the income-tax authorities of the particular district in which he carried on the business of retail sale of country liquor. It is alleged that in case, there is no collection of tax at source, such persons may not file the income-tax returns resulting in a situation in which Government dues, which are payable by such persons may not easily be realised. In paragraph 14 of the same it is alleged that it has been observed that the retailers are selling country liquors at different prices. The maximum sale price is not the only price, which can be charged from the consumer and a lower price can be charged. As regards the challenge to the jurisdiction of the Income-tax Officer (TDS), Muzaffarnagar, the respondents have refuted the same in paragraph 15 of the counter affidavit.

17. In paragraph 22 of the same the respondents have sought to distinguish the decision in Saini and Co. v. Union of India , since that decision was delivered in the case of petitioners holding 'L-13' licences who purchased liquor from distilleries and sold it to retailers, whereas in the present case there is no stockist and distilleries are selling liquor directly to the retailers from their depots. The case of K.K. Mittal and Co. is sought to be distinguished on the ground that the petitioners in that case were retail vendors who had obtained country liquor licences in an auction, and the maximum and minimum price were both fixed in each size of the bottles. In the present case, it is alleged that the quantity of the liquor is not fixed and it need not be sold by the retailer at a fixed price. The other decisions, referred to by the petitioner have been similarly sought to be distinguished.

18. A rejoinder affidavit has also been filed.

19. In paragraph 4 of the same it is stated that the retail licensee purchases liquor at the price fixed by the State Government and there is no negotiation in that auction. It is further held that not even a single sale has been effected by the petitioner at a price lower than the maximum retail price fixed for sale to be effected to the retail licensee under orders of the State Government/ Excise Commissioner. In paragraph 8 of the same it is stated that the maximum retail price fixed has been declared to be the sale price referable to in the Explanation to Section 206C of the Income-tax Act by the circular dated June 27, 2002, vide annexure RA-1, to the rejoinder affidavit. In paragraph 12 of the same it is stated that retail licences are granted to persons who have a solvency certificate in their favour, which specifically records their permanent address, the property possessed by them, etc., and such retail licensee has also to deposit security money, hence it is wholly misconceived on the part of the respondents to suggest that the retail licensees may evade payment of income-tax. At any event the question has now officially been decided by a circular of the Ministry of Finance dated June 27, 2002, which is binding on the income-tax authorities. Hence, the question as to whether the retail licensees were selling liquor at a price lower than the maximum retail price has lost all relevance.

20. In our opinion after the circular of the Central Board of Direct Taxes dated June 27, 2002, the controversy in this case really does not survive since under that circular the maximum retail price is treated to be the sale price as envisaged by Sub-clause (iii) of Clause (a) of the Explanation to Section 206C which has come into effect from March 16, 2001, i.e., the date on which the notification for fixing the maximum retail price of country liquor for the State of Uttar Pradesh was issued.

21. In Collector of Central Excise v. Dhiren Chemical Industries : [2002]254ITR554(SC) it has been held that the circulars of the Department are binding on the tax authorities. In paragraph 11 of that judgment the Supreme Court has said that even if the court has taken a different interpretation yet the interpretation of the Central Board in its circular shall be binding on the Revenue. Although that decision was under the Central Excise Act in our opinion it will also apply to the circulars issued by the Central Board of Direct Taxes under Section 119 of the Income-tax Act.

22. Hence in view of the circular dated June 27, 2002, this writ petition is allowed. The impugned orders dated March 22, 2002, and May 7, 2002, annexures 6 and 12 to the writ petition are quashed. The respondents are restrained from realising any amount in pursuance of the impugned orders.