Income Tax Appellate Tribunal - Chandigarh
Sarkaghat Wine Traders vs Income-Tax Officer on 31 August, 1995
Equivalent citations: [1996]57ITD385(CHD)
ORDER
N.K. Agrawal, Judicial Member
1. These are two appeals by two assessees belonging to the same group and relating to the assessment year 1992-93. Since the two appeals raise a common question and the facts are also identical, these are being decided by this common order for the sake of convenience.
2. We shall first narrate the facts in each of the two cases.
3. In ITA No. 870/Chandi./94, the assessee-firm, M/s. Sarkaghat Wine Traders, consisting of seven partners, was engaged in the business of purchase and sale of country liquor and English wine. Return of income was filed declaring total income at Rs. 1,58,836. Accounting year ended on 31 st March, 1992. The assessee-firm had three licences, one relating to the Indian made foreign liquor (L-2), the second for selling country liquor on wholesale basis (L-13) and the third one for selling country liquor at the retail liquor vends (L-14).
The assessee purchased country liquor under L-13 licence from the distillery and, thereafter, the stock was transferred to self, as L-14 business. The following purchases and sales were disclosed :
Licence Purchase Sales
Rs. Rs.
L-2 78,09,512 1,22,56,766
L-13 39,26,472 42,16,343
L-14 42,15,831 1,43,22,178
The Assessing Officer noticed during the assessment proceedings that day-to-day sale vouchers as well as the sale register had not been maintained by the assessee. There was no day-to-day stock register. Certain figures were not reconciled in respect of the stock transferred from L-13 licensee business to L-14 licensee business. Therefore, Section 145(2) was held to be applicable. The Assessing Officer took the view that the system adopted by the assessee in showing the sales was not authentic and depended on the sweet will of the salesmen. Therefore, it was found that no reliance could be placed on the book version. The AO estimated the suppression of sales at Rs. 2 lakhs in respect of the sale of IMFL under L-2 licence and suppression of sales at Rs. 3 lakhs under L-14 licence. Another addition of Rs. 50,000 was made on account of suppression of peg sales.
4. The assessee went in appeal with the plea that the additions had not been made for adequate reasons. The CIT(A), however, took a different view on the ground that the income was assessable by applying the presumptive rate of profit as specified in Section 44AC of the Act. The CIT(A) took the view that the assessee had maintained a combined trading and profit and loss account in connection with the business conducted under three different licences. She took the view that the net profit shown by the assessee at Rs. 1,55,831 against total sales of about Rs. 3 crores was only too low a profit. This was a profit declared at 5%. She took the view that if the books were not complete and reliable, then Section 44AC was attracted. It was not possible to calculate the income in accordance with the provisions of Sections 28 to 43C of the Income-tax Act. It was noticed that the details of salary paid by the assessee were not available because no salary register had been maintained and the salary was recorded on the last date of the accounting period. There were no vouchers in respect of the commission paid at Rs. 73,272. The CIT(A), however, reduced the addition from Rs. 2 lakhs to Rs. 1,22,567 in respect of profit from business under L-2 licence. Addition was, however, enhanced from Rs. 3 lakhs to Rs. 15,70,590 in respect of sales under L-14 licence. It was further held that no separate addition was required to be made in respect of profit on peg sales on the ground that a higher income had been determined under L-2 and L-14 sales. The CIT(A) applied the rate of 40% on the total sales made by the assessee under L-14 licence.
5. In IT A No. 871 /Chandi/94, there are four partners in the firm and this firm also was engaged in the purchase and sale of IMFL and country liquor. Return of income had been filed declaring total income at Rs. 16,820. Here also, the firm held three licences, namely, L-2, L-13 and L-14. Stopk was obtained from the distillery under L-13 licence and then it was transferred to self under L-14 licence for retail sales. The AO did not disturb the profit shown by the assessee under L-13 licence on the ground that proviso to Section 44AC was applicable and, therefore, no addition was made. Addition of Rs. 1,10,000 was made in respect of sales under L-2 licence and second addition of Rs. 1,90,000 was made for sales under L-14 licence. The CIT(A) reduced the addition from Rs. 1,10,000 to Rs. 50,765 in respect of L-2 business of the assessee. She adopted the profit rate of 1 % on the total sales shown at Rs. 50,762 under L-2 licence. Profit from sales under L-14 licence was, however, increased from Rs. 1,90,000 to Rs. 4,46,776. Here also, profit rate of 40% was adopted on the purchase price of Rs. 11,16,942. This is how Section 44AC was applied.
6. The following purchases and sales had been shown by the assessee under different licences :--
Licence Purchases Sales
Rs. Rs.
L-2 22,57,270 50,76,562
L-13 11,76,942 11,50,074
L-14 11,30,389 46,13,632
The assessee had shown the entire stock lifted from the distillery under L-13 licence as having been transferred to self under L-14 licence. The licence fee at Rs. 57,40,000 was, however, not included in the purchases.
7. After we have given the details of purchases and sales disclosed by the two assessees before us, we shall now take up the issues raised in the two appeals. In both the appeals, different grounds have been raised in the memo of appeal originally filed before the Tribunal. Subsequently, the Id. counsel for the assessee filed revised grounds in both the appeals. Ultimately, at the time of hearing, Shri Mohan Jain, the Id. counsel for the assessee, in both the cases, informed us at the Bar that he was challenging the application of Section 44AC because that was an important legal issue and would decide the fate of his assessees. He informed us that whatever additions were made by the AO, those were not contested and, therefore, he would confine his legal arguments only to one issue and that was the application of Section 44AC to the two cases before us.
8. The Id. counsel has drawn our attention to the decision of the Andhra Pradesh High Court in the case of A. Sanyasi Rao v. Government of Andhra Pradesh [1989] 178 ITR 31. That was a case where the constitutionality of Section 44AC and Section 206C was under attack. It was held that none of the two sections offended Articles 14 and 19(1)(g) of the Constitution. It was observed by the Court that for the sake of convenience and also having regard to the difficulty in making a normal assessment in the case of a liquor dealer, the provisions contained in Section 44AC intended to adopt the purchase price as the measure of tax. Sections 44AC and 206C are anti-evasion measures. Section 44AC did not bar a regular assessment of the business income of the assessee in accordance with Sections 28 to 43C. This decision was followed by the Punjab and Haryana High Court in the case of Sat Pal & Co. v. Excise and Taxation Commissioner [1990] 185 ITR 375. It was held that instead of striking down Section 44AC, it is better to read it down as an adjunct to Sections 28 to 43C. The jurisdictional High Court also examined the applicability of Section 44AC in detail in the case of Gian Chand Ashok Kumar & Co. v. Union of India[1991] 187 ITR 188 (HP). It was held that L-13 licensees came within the purview of the proviso to Section 44AC(1)(a) of the Income-tax Act and the provisions of Section 206C and other parts of Section 44AC(1) did not apply to them.
The Id. counsel for the assessee has vehemently argued that the issue stands finally settled by the decision of the jurisdictional High Court and there was no question of income being assessed adopting the profit rate specified in Section 44AC of the Income-tax Act. Our attention has also been drawn to another decision of the Punjab and Haryana High Court in the case of K.K. Miltal & Co. v. Union of India [1993] 203 ITR 201. There also, application of Section 44AC was under examination and it was held that income-tax cannot be deducted from sales made to L-13 licensees by the distilleries under Section 206C of the Income-tax Act. The Id. counsel has argued that the CIT(A) did not take a correct view of the matter and, therefore, application of the profit rate of 40% as specified in Section 44AC was uncalled for and invalid.
9. The Id. D.R. has, in reply, submitted that neither the AO nor the CIT(A) has determined the profit in respect of sales made by the assessee under L-13 licence by applying the rate of 40%. The AO has clearly observed in his order that Section 44AC was not applicable to the assessee's sales made under L-13 licence. Similar view has been taken by the Id. CIT(A). The question precisely relates to the application of the provisions of Section 44AC to the sales made under L-14 licence. It is, therefore, stated that the j udicial pronouncements cited by the Id. counsel for the assessee were not at all relevant so far as the sales made under L-14 licence are concerned. The cases decided by the Andhra Pradesh High Court, Punjab and Haryana High Court as well as the jurisdictional High Court related to L-13 licensees. The question in the present two appeals relates to the purchases made by L-14 licensee from L-13 licensee. The CIT(A) took the view that it was not a case of sale but a case of transfer of stock by the assessee to self. Therefore, the rate of 40% was adopted to work out the profit on sales made by the assessee under L-14 licence.
10. The Id. counsel for the assessee has argued that even in a case of sale made under L-14 licence, profit could not be determined under Section 44AC of the Income-tax Act. The entire stock was received by L-14 licensee from the L-13 licensee for making sales through the retail vends. L-13 licensee acted as a stockist and handling agent. The L-13 licensee charged still head duty paid him and a surcharge to cover the transport and godown expenses. Retail surcharge was fixed by the Financial Commissioner. L-13 licensee transferred the stock for retail sale to be made under the L-14 licence. No stock was lifted by the L-14 licensee direct from the distilleries. Our attention has been drawn to Sub-section (2) of Section 44AC which reads as under:
(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 of any goods obtained under or in pursuance of the sale under Sub-section (1).
Section 44AC was enacted by the Finance Act, 1988 w.e.f. 1-4-1989 and was subsequently omitted by the Finance Act, 1992 w.e.f. 1-4-1993. Section 206C was also enacted by the Finance Act, 1988. At the time Section 44AC was omitted from the Income-tax Act, Section 206C was amended by the Finance Act, 1992 w.e.f. 1 -4-1992. After Sub-section (8), an Explanation was inserted. The word "buyer" was defined in that Explanation as under:--
Explanation.-- For the purposes of this section--
(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 o.f 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;
The Id. counsel for the assessee has submitted that as per Sub-Clause (ii) in the Explanation, the case of the assessee stood exempted. It has been made clear that in the said Explanation, the term "buyer" did not include a buyer in the further sale of goods obtained in pursuance of such sale. It is stated that the assessee in the capacity of L-14 licensee did make a purchase in the second sale from L-13 licensee. Though it may be a transfer from one account to the other or from self to self but it would definitely be called a subsequent sale in the hands of L-14 licensee. Our attention has also been drawn to the CBDT Circular No. 660 dated 15-9-1993 reproduced in 204 ITR 19 (Statutes). Para 5 of the said circular is relevant and it reads as under :--
5. It may be noted that the provisions of Sub-section (1) of Section 206C in relation to a buyer will not apply to a public sector company and to any other buyer who obtains the said goods at a second or subsequent sale of such goods. Thus, these provisions will apply only at the point of the first sale of such goods.
The Id. counsel has submitted that from the analysis made by the Board, it would be very clear that the provisions of Sub-section (1) of Section 206C will not apply to a buyer who obtains the goods at a second or subsequent sale. The provisions will apply only at the point of the first sale.
11. The Id. D.R. has, in reply, submitted that there was a combined profit and loss account maintained by the assessee and no separate sales had been shown under any of the three licences. The transfer of the stock by L-13 licensees to L-14 licensees was not an actual second sale but a mere book transfer. It is, therefore, stated that the exemption under Section 44AC(2) was not available to the assessee. For the relevant year under appeal, Section 44AC(2) was applicable. It is, therefore, contended that application of the rate of profit at 40% must be upheld.
12. We have considered the rival contentions and we are in agreement with the learned Counsel that the rate of 40%, as specified in Section 44AC, could not be applied to the case of L-14 licensee in the light of the exception created in Sub-section (2) of the said section. After Section 44AC was omitted, the provisions were incorporated to the same effect in Section 206C of the Act. We have already examined the two provisions contained in the two sections on this issue. In our view, goods received by the retail vends were in the nature of second sale from L-13 licensee. There is no evidence on record to show that L-14 licensee received any stock directly from the distillery. If any purchases had been made from the distillery, it could have been treated a case of first sale in the hands of L-l 4 licensee. Though the assessee has maintained a combined trading and profit and loss account, that would not alter the character of the transaction. We have already seen the purchases and sales declared under three different licences. Even if the sales have been shown by book entries, for all intents and purposes it is a sale from L-13 licensees to L-l4 licensee. Therefore, the case of L-l4 licensee it found to be covered under Section 44AC(2) of the Act. We, therefore, hold that the rate of 40% is not required to be made applicable to the case of L-l4 licensee. The following observations made by the Punjab and Haryana High Court in the case of Sat Pal & Co. (supra) are relevant:
...It cannot be said that every country liquor contractor was evading income-tax or was running the business in benami names and had set up fictitious firms/associations. There is no basis for assessing the profits and gains of every liquor licensee at the rate of 40 per cent of the purchase price. In the very nature of things, there may be many persons who may actually earn less profits than specified or may incur losses. In the Bill, the profits and gains were proposed to be assessed at the rate of 60% of the purchase price. It has not been explained why it was reduced to 40% in the Act.
It would be thus clear that the rate of 40% was specified for the purposes of collection of tax at source and there was no mandatory requirement to determine the income by adopting the rate of 40% in all cases. In that view of the matter, we are unable to agree with the learned CIT(A) that the rate of 40% was a mandatory requirement of law for working out the income in the case of a country liquor trader.
13. Since the Id. counsel for the assessee has stated during the course of hearing that he would not contest the additions made by the Assessing Officer while rejecting the books of account, we do not find it necessary to look into the merits of the various additions made by the Assessing Officer. We, therefore, hold that aplication of the profit rate of 40% under Section 44AC is not appropriate in the light of Sub-section (2) of that section as well as in view of the observations made by the Punjab and Haryana High Court in the case of Sat Pal & Co. (supra). Therefore, in both the appeals, the orders of the CIT(A) are quashed and those of the Assessing Officer are restored.The additions made by the Assessing Officer in both the cases are upheld.