[2024] 7 S.C.R. 287 : 2024 INSC 484
The Excise Commissioner Karnataka & Anr.
v.
Mysore Sales International Ltd. & Ors.
(Civil Appeal No. 2168 of 2007)
08 July 2024
[B.V. Nagarathna and Ujjal Bhuyan,* JJ.]
Issue for Consideration
Whether provisions of Section 206C of the Income Tax Act is
applicable in respect of the appellant and whether the liquor
vendors (contractors) who bought the vending rights from the
appellant on auction, can be termed as “buyer” within the meaning
of Explanation(a) to Section 206C of the Income Tax Act or excluded
from the said definition of “buyer” as per clause (iii) of Explanation
(a) to Section 206C of the said Act. Relatable to the above core
issue is the question as to, whether, the High Court was justified
in rejecting the challenge to the said orders made by the appellant.
Headnotes†
Income Tax Act, 1961 – Explanation(a)(iii) to section 206C –
Karnataka Excise Act, 1965 – Karnataka Excise (Arrack
Vend Special Conditions of Licenses) Rules, 1967 – Rule 4 –
Karnataka Excise (Lease of the Right of Retail Vend of Liquors)
Rules, 1969 – Karnataka Excise (Manufacture and Bottling
of Arrack) Rules, 1987 – By the order dated 17.01.2001, the
assessing officer held that the appellant is a “seller” and the
liquor vendors are “buyers” in terms of Section 206C of the
Income Tax Act and hence the appellant was under a legal
obligation to collect income tax at source from the liquor
vendors (contractors) – The challenge to the said order dated
17.01.2001 was negatived first by the Single Judge and then
by the Division Bench of the High Court – Justified or not:
Held: Explanation(a)(iii) to section 206C of the Income Tax Act,
1961 visualizes two conditions for a person to be excluded from
the meaning of “buyer” as per the definition in Explanation(a) – The
first condition is that the goods are not obtained by him by way of
auction – The second condition is that the sale price of such goods
to be sold by the buyer is fixed under a state enactment – These two
* Author
288 [2024] 7 S.C.R.
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conditions are joined by the word ‘and’ – The word ‘and’ is conjunctive
to mean that both the conditions must be fulfilled; it is not either of
the two – Therefore, to be excluded from the ambit of the definition
of “buyer” as per Explanation(a)(iii), both the conditions must be
satisfied – In the instant case, Mysore Sales is the licensee for the
manufacture and bottling of arrack for specified area(s) – By a process
of auction or tender or auction-cum-tender etc., excise contractors
are shortlisted who are thereafter granted permits to vend arrack by
retail in their respective area(s) – These retail vendors i.e. excise
contractors have to procure the arrack from the warehouse or depot
maintained by Mysore Sales on payment of the issue price fixed by
the Excise Commissioner – The arrack is procured in sealed bottles
or in sealed polythene sachets – So, there are two transactions, each
distinct – The first transaction is shortlisting of excise contractors by
a process of auction etc. for the right to retail vend – The second
transaction, which is contingent upon the first transaction, is obtaining
of arrack for retail vending by the excise contractors on the strength
of the permits issued to them post successful shortlisting following
auction – Therefore, it is evidently clear that arrack is not obtained
by the excise contractors by way of auction – What is obtained by
way of auction is the right to vend the arrack on retail on the strength
of permits granted, following successful shortlisting on the basis of
auction – Thus, the first condition under clause (iii) is satisfied – Rule
4 of the 1967 Rules enables the excise contractor to sell the arrack in
retail at a price within the range of minimum floor price and maximum
ceiling price which is fixed by the Excise Commissioner – The price
of arrack to be sold in retail is not dependent on the market forces
but pre-determined within a range – Therefore, though price range
is provided for by the statute, it cannot be said that because there
is a price range providing for a minimum and a maximum, the sale
price is not fixed – The sale price is fixed by the statute but within a
particular range beyond which price, either on the higher side or on
the lower side, the arrack cannot be sold by the excise contractor in
retail – Since both the conditions as mandated under Explanation(a)
(iii) are satisfied, the excise contractors or the liquor vendors selling
arrack would not come within the ambit of “buyer” as defined under
Explanation(a) to Section 206C of the Income Tax Act – Thus, the
question framed in issue for consideration, is answered in the negative
by holding that Section 206C of the Income Tax Act is not applicable
in respect of Mysore Sales and that the liquor vendors(contractors)
who bought the vending rights from the appellant on auction cannot
be termed as “buyers” within the meaning of Explanation(a) to Section
[2024] 7 S.C.R. 289
The Excise Commissioner Karnataka & Anr. v.
Mysore Sales International Ltd. & Ors.
206C of the Income Tax Act – Thus, the High Court was not justified
in dismissing the writ petitions and consequently, the writ appeal
challenging the orders dated 17.01.2001. [Paras 14.5, 15, 15.2, 16]
Income Tax Act, 1961 – Karnataka Excise Act, 1965 – Karnataka
Excise (Arrack Vend Special Conditions of Licenses) Rules,
1967 – Karnataka Excise (Lease of the Right of Retail Vend
of Liquors) Rules, 1969 – Karnataka Excise (Manufacture and
Bottling of Arrack) Rules, 1987 – Essentials of the Principle
of Natural Justice to be followed:
Held: In the instant case, though show cause notice was issued
to the assessee to which reply was also filed, the same would
not be adequate having regard to the consequences that such
an order passed under Section 206C(6) of the Income Tax Act
would entail. Even though the statute may be silent regarding
notice and hearing, the court would read into such provision the
inherent requirement of notice and hearing before a prejudicial order
is passed – Therefore, it is held that before an order is passed
under Section 206C of the Income Tax Act, it is incumbent upon
the assessing officer to put the person concerned to notice and
afford him an adequate and reasonable opportunity of hearing,
including a personal hearing. [Para 19]
Case Law Cited
Union of India v. A. Sanyasi Rao [1996] 2 SCR 570 : (1996) 3
SCC 465; Gian Chand Ashok Kumar and Company v. Union of
India (1991) 187 ITR 188 (HP); K.K. Mittal v. Union of India (1991)
187 ITR 208 (P&H); State of Bihar v. Commissioner of Income Tax
(1993) 202 ITR 535 (PAT); M/s Naresh Kumar and Company v.
Union of India ILR (2000) 2 P&H; Saini and Company v. Union of
India (2000) 246 ITR 762 (HP); Chandigarh Distillers and Bottlers
Ltd. v. Union of India (2002) 253 ITR 205 (P&H); Union of India
v. Om Parkash S.S. and Company [2001] 1 SCR 1113 : (2001)
3 SCC 593 – referred to.
List of Acts
Income Tax Act, 1961; Karnataka Excise Act, 1965; Karnataka
Excise (Arrack Vend Special Conditions of Licenses) Rules, 1967;
Karnataka Excise (Lease of the Right of Retail Vend of Liquors)
Rules, 1969; Karnataka Excise (Manufacture and Bottling of Arrack)
Rules, 1987.
290 [2024] 7 S.C.R.
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List of Keywords
Explanation(a)(iii) to section 206C of the Income Tax Act, 1961;
Buyer as defined under Explanation(a) to Section 206C of the
Income Tax Act, 1961; Liquor vendors; Process of auction or
tender or auction-cum-tender; Retail vendors; Excise contractors;
Rule 4 of the Karnataka Excise (Arrack Vend Special Conditions
of Licenses) Rules, 1967; Principle of Natural Justice; Reasonable
opportunity of hearing.
Case Arising From
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2168 of 2007
From the Judgment and Order dated 13.03.2006 of the High Court
of Karnataka at Bangalore in WA No. 7825, 7926 and 8021 of 2003
Appearances for Parties
Avishkar Singhvi, A.A.G., V. N. Raghupathy, Vivek Kumar Singh,
Naved Ahmed, Bharat Garg, Manendra Pal Gupta, Advs. for the
Appellants.
Balbir Singh, A.S.G. Arijit Prasad, Sr. Adv., Raj Bahadur Yadav,
Mrs. Archana Pathak Dave, Anmol Chandan, Ms. Niranjna Singh,
Prashant Singh Ii, Udai Khanna, Indrajit Prasad, Vijay Nand Tripathi,
Deepak Kumar, Dr. Nanda Kishore, Rajesh Mahale, Advs. for the
Respondents.
Judgment / Order of the Supreme Court
Judgment
Ujjal Bhuyan, J.
Heard learned counsel for the parties.
2. This appeal has been preferred against the judgment and order
dated 13.03.2006 passed by the Division Bench of the High Court
of Karnataka at Bengaluru (briefly “the High Court” hereinafter)
in Writ Appeal No. 7926/2003. By the aforesaid judgment and
order, the Division Bench had dismissed the writ appeal filed by
the appellant as well as other writ appeals filed by Mysore Sales
International, State of Karnataka and Mysore Sugar Company
Limited assailing the common judgment and order dated 27.10.2003
passed by the learned Single Judge of the High Court, dismissing
[2024] 7 S.C.R. 291
The Excise Commissioner Karnataka & Anr. v.
Mysore Sales International Ltd. & Ors.
Writ Petition Nos. 6869-6874 of 2001 filed by the appellant and
other writ petitions filed by the above parties against the orders
dated 17.01.2001 passed by the Deputy Commissioner of Income
Tax (TDS)–1, Bengaluru (referred to hereinafter as “the assessing
officer” or “the revenue”) under Section 206C(6) of the Income tax
Act, 1961 (referred to hereinafter as “the Income Tax Act”) for the
assessment years 2000-2001, 1999-2000, 1998-1999, 1997-1998,
1996-1997 and 1995-1996 as well as the consequential demand
notices of even date issued under Section 156 of the Income Tax Act.
By the orders dated 17.01.2001, the assessing officer held that the
appellant is a “seller” and the liquor vendors are “buyers” in terms
of Section 206C of the Income Tax Act and hence the appellant
was under a legal obligation to collect income tax at source from
the liquor vendors (contractors) for the financial years relevant to
the aforesaid assessment years. Accordingly, the assessing officer
declared certain sums as income tax collectible at source by the
appellant which it failed to do. Therefore, the appellant was directed
to deposit the amounts so quantified as income tax deductible at
source. Further, interest was also levied on the aforesaid amounts.
This was followed by the demand notices. As noticed above, the
challenge to the said orders dated 17.01.2001 by the appellant was
negatived first by the learned Single Judge and then by the Division
Bench of the High Court.
3. The short point for consideration in this appeal is whether provisions
of Section 206C of the Income Tax Act is applicable in respect of the
appellant and whether the liquor vendors (contractors) who bought
the vending rights from the appellant on auction, can be termed as
“buyer” within the meaning of Explanation(a) to Section 206C of the
Income Tax Act or excluded from the said definition of “buyer” as
per clause (iii) of Explanation (a) to Section 206C of the said Act.
Relatable to the above core issue is the question as to, whether, the
High Court was justified in rejecting the challenge to the said orders
made by the appellant.
4. Before attempting to answer the question(s) so framed above, it
would be apposite to briefly narrate the relevant facts of the case.
Mysore Sales International Limited (also referred to “Mysore Sales”
hereinafter) is a Karnataka Government undertaking, inter alia,
engaged in the business of manufacturing arrack. Mysore Sales is
an assessee under the Income Tax Act. Appellant had entered the
292 [2024] 7 S.C.R.
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arrack trade in July, 1993 in terms of the excise laws of the State
of Karnataka. Prior to 1993, there were several private bottling units
in the State of Karnataka and they were manufacturing and selling
arrack. Auctions were conducted periodically for the purpose of
conferring lease right for retail vending of arrack. It was conducted
with reference to designated areas. Successful bidders were entitled
to procure arrack from the bottling units and then to sell it in retail
trade within their respective allotted areas. The arrack trade is
controlled by the state government.
4.1. The Karnataka Excise Act, 1965 (briefly “the Excise Act”
hereinafter) has been enacted to provide for a uniform excise
law in the State of Karnataka. Preamble to the Excise Act
says that it is expedient to provide for a uniform law relating to
production, manufacture, possession, import, export, transport,
purchase and sale of liquor and intoxicating drugs and the levy
of duties of excise thereon in the State of Karnataka and for
certain matter related thereto. Under the Excise Act, several
rules have been framed for appropriate enforcement of the
excise law. These rules, inter alia, are:
(i) The Karnataka Excise (Arrack Vend Special Conditions
of Licenses) Rules, 1967 (“the 1967 Rules” hereinafter);
(ii) The Karnataka Excise (Lease of the Right of Retail Vend of
Liquors) Rules, 1969 (briefly “the 1969 Rules” hereinafter);
(iii) The Karnataka Excise (Manufacture and Bottling of Arrack)
Rules, 1987 (“the 1987 Rules” hereinafter).
4.2. In the year 1993, the state government discontinued private
bottling units from engaging in the manufacture or bottling
of arrack and instead decided as a policy to restrict those
operations in the hands of state government companies or
undertakings, such as, Mysore Sales and Mysore Sugar
Company Limited (appellant in Civil Appeal No. 2169/2007
which was dismissed for non-prosecution by this Court on
12.10.2023). Thus, Mysore Sales and Mysore Sugar were
entrusted with the task of bottling arrack and marketing it on
behalf of the state government. Mysore Sales was entrusted
with the above task for the northern districts of the State of
Karnataka while for the rest of the state, Mysore Sugar was
[2024] 7 S.C.R. 293
The Excise Commissioner Karnataka & Anr. v.
Mysore Sales International Ltd. & Ors.
entrusted with the responsibility. It is the case of the appellant
that the job entrusted i.e. bottling of arrack and marketing it
on behalf of the state was in the nature of works contract.
4.3. Once arrack is manufactured and bottled, it becomes the
property of the State of Karnataka in as much as the property
vests with the state. The Excise Commissioner determines the
amount realizable by the appellant from the excise (liquor)
vendors or contractors taking into consideration the cost
incurred by the appellant. The excise contractors are required
to remit the requisite amount of excise duty into the state
government treasury and then secure permit on production of
which, appellant delivers arrack to them. The State of Karnataka
controls the entire operation including the amount realizable
by the assessee in terms of the Excise Act.
4.4. Successful excise contractors secure arrack from Mysore
Sales and Mysore Sugar depending upon the areas allotted to
them. The lease for the right to retail vend of liquor provides
auctioning of such right with reference to a designated area.
The retail sale price is fixed by the state government in terms
of the 1967 Rules. The margin would depend upon various
factors.
4.5. Section 206C was inserted in the Income Tax Act by the
Finance Act, 1988 with effect from 01.06.1988. It casts an
obligation on the “seller” of alcoholic liquor etc. of deducting
tax at source (TDS) at the time of payment by the “buyer”. As
per Explanation(a), certain persons were not included within,
rather excluded from, the definition of “buyer”.
4.6. A circular came to be issued by the Excise Commissioner of
Karnataka on 16.06.1998 to which an addendum was also
issued. The circular clarified that since arrack was not obtained
through auction and since the selling price of arrack was fixed
by the Excise Commissioner, there was no question of recovery
of TDS from the excise (liquor) vendors or contractors.
4.7. In view of the above, appellant did not deduct any TDS from
the liquor vendors.
4.8. Assessing officer issued notices dated 26.10.2000 calling
upon the assessee to show cause as to why it should not
294 [2024] 7 S.C.R.
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pay the requisite TDS amount which it had failed to collect
from the “buyers” i.e. the excise contractors for the financial
years relevant to the assessment years under consideration.
It appears that the assessee had submitted its reply to such
notice. Thereafter, the assessing officer passed orders dated
17.01.2001 under Section 206C(6) of the Income Tax Act for
the assessment years under consideration. As pointed out
earlier, by the aforesaid orders, the assessee was directed
to pay certain sums of money as TDS which it had failed
to collect from the liquor vendors or contractors. Following
such orders, consequential demand notices for the respective
assessment years under Section 156 of the Income Tax Act
were also issued to the assessee by the assessing officer.
4.9. Mysore Sales filed writ petitions before the High Court. While
the main contention was that Section 206C(6) of the Income
Tax Act was not applicable to it, a corollary issue raised was
that before passing the order under Section 206C(6) of the
Income Tax Act, no opportunity of hearing was given to it.
Therefore, there was violation of the principles of natural
justice. Learned Single Judge vide the judgment and order
dated 27.10.2023 dismissed the writ petitions confirming the
orders passed under Section 206C(6) of the Income Tax Act.
4.10. Thereafter, Mysore Sales and others preferred writ appeals
before the Division Bench. However, by the judgment and
order dated 13.03.2006, the writ appeals were dismissed by
affirming the orders passed by the assessing officer and also
that of the learned Single Judge.
5. Aggrieved by the aforesaid, SLP(C) No. 12524 of 2006 was preferred.
After leave was granted on 23.04.2007, the same came to be
registered as Civil Appeal No. 2168 of 2007.
6. Sh. Avishkar Singhvi, learned AAG appearing for the appellant submits
that Section 206C of the Income Tax Act is not applicable in respect
of Mysore Sales which is a public sector undertaking controlled by
the Government of Karnataka. In fact, it is a government company.
It is engaged in the manufacture of arrack. Arrack is bottled under
the supervision of the Excise Commissioner. Whatever arrack is
manufactured, the same belongs to the state government alone.
[2024] 7 S.C.R. 295
The Excise Commissioner Karnataka & Anr. v.
Mysore Sales International Ltd. & Ors.
Excise buyers i.e. liquor contractors do not obtain any arrack in
auction. They only obtain the right/licence to carry out retail vending
of arrack. Therefore, such contractors are not “buyers” as defined in
the Explanation under Section 206C of the Income Tax Act.
6.1. Learned AAG argued that what is disposed of in the auction
is the retail or vending right of arrack and not auctioning of
the arrack itself. The final sale of arrack is carried out by the
contractors at the retail price fixed by the government. He,
therefore, submits that Section 206C is not applicable to a
public sector undertaking like Mysore Sales. Both Explanations
(a)(ii) and (iii) clearly exclude retail vendors from the ambit and
purview of “buyers” as defined under the Explanation.
6.2. Elaborating further, he submits that “buyers” falling in the above
exception were exempted from paying income tax at source
at the time of obtaining licence for retail vending of arrack in
their respective assigned areas as per the price fixed by the
state government. The auction is only regarding transferring
the right or privilege which is vested in the state to the liquor
contractors who would thereafter operate the retail business
of vending in arrack. Therefore, there is no sale involved in
the auction transaction.
6.3. Assessing officer had wrongly relied upon the decision of the
Supreme Court in Union of India Vs. A. Sanyasi Rao1. In the
said decision, the constitutional validity of Section 206C of the
Income Tax Act was challenged and the same was negatived
by this Court. However, the judgment clarifies that there are
just exceptions carved out in Section 206C in which cases,
income tax is not required to be collected at source.
6.4. Learned counsel further submits that the objective behind
introduction of Section 206C in the Income Tax Act was to
ensure proper tax collection in matters relating to profits and
gains from the business of trading in alcoholic liquor etc.
However, a taxing statute has to be interpreted strictly. It cannot
be interpreted in an overly expansive and wide manner so as
1 [1996] 2 SCR 570 : (1996) 3 SCC 465
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to bring persons within the tax net who are otherwise exempted
from paying tax. Both the Single Bench and the Division Bench
had erred in adopting such an interpretation and wrongly holding
that Section 206C was applicable in respect of Mysore Sales
and since it had not deducted TDS, the same was required to
be recovered. Both the Benches had erred in taking the view
that purchase of arrack was by way of public auction only and
not in any other manner and that the “seller” (Mysore Sales)
had an obligation to collect income tax at source from such
“buyers” who would be further vending the same in retail.
6.5. Even if the view taken by the revenue and affirmed by the High
Court is accepted, it cannot be said that there was sale of arrack
by Mysore Sales to the licence holders. Such sale, if at all it
can be said so, was at the price fixed by the state government
under the Excise Act and the Rules framed thereunder. The
sale was wholly for the purpose of retail vending and not a
sale within the meaning of Section 206C of the Income Tax Act;
moreover, under the aforesaid provision, a sale must be made
to a “buyer” defined under the Explanation to Section 206C
of the Income Tax Act. As a matter of fact, it is the contention
of the appellant that there is no sale between Mysore Sales
and the excise contractors.
6.6. The revenue has wrongly taken the view that the act of auction
and purchase of arrack by the successful liquor contractors is
inextricably intertwined and is part of one collective action. In
the auction, the excise contractors are granted permits/licences
for retail sale of arrack by the successful excise contractors in
their allotted areas. It is thereafter that sale of arrack is affected
by the excise contractors at a price fixed by the government
between a minimum floor value and maximum ceiling value.
Therefore, such a transaction cannot be said to be a sale or
purchase through auction.
6.7. Learned counsel also submitted that the assessing officer
was not conferred the jurisdiction to pass the orders under
Section 206C(6) of the Income Tax Act. Jurisdiction was
conferred upon the Assistant Commissioner of Income Tax
(TDS)-1, Bengaluru. This contention of the appellant regarding
[2024] 7 S.C.R. 297
The Excise Commissioner Karnataka & Anr. v.
Mysore Sales International Ltd. & Ors.
jurisdiction was rejected by the learned Single Judge as being
merely a technical one.
6.8. Learned counsel also submits that orders dated 17.01.2001
passed by the assessing officer under Section 206C(6) of
the Income Tax Act were in breach of the principles of natural
justice. No opportunity of hearing was given to the assessee.
Without such hearing, the aforesaid orders were passed. Such
orders being in violation of the principles of natural justice are
void ab initio. This aspect was overlooked by the Single Bench
as well as by the Division Bench of the High Court.
6.9. He therefore submits that both the orders of the learned Single
Judge and the Division Bench are liable to be set aside. Orders
dated 17.01.2001 passed by the assessing officer under Section
206C(6) of the Income Tax Act for the assessment years under
consideration are also liable to be set aside and quashed. The
civil appeal may be allowed accordingly.
6.10. In support of his submissions, learned counsel for the appellant
has placed reliance on the following decisions:
(i) Gian Chand Ashok Kumar and Company Vs. Union of
India 2;
(ii) K.K. Mittal Vs. Union of India 3;
(iii) State of Bihar Vs. Commissioner of Income Tax 4;
(iv) M/s Naresh Kumar and Company Vs. Union of India 5;
(v) Saini and Company Vs. Union of India 6;
(vi) Chandigarh Distillers and Bottlers Ltd. Vs. Union of India 7;
(vii) Union of India Vs. Om Parkash S.S. and Company 8.
2 (1991) 187 ITR 188 (HP)
3 (1991) 187 ITR 208 (P&H)
4 (1993) 202 ITR 535 (PAT)
5 ILR (2000) 2 P&H
6 (2000) 246 ITR 762 (HP)
7 (2002) 253 ITR 205 (P&H)
8 [2001] 1 SCR 1113 : (2001) 3 SCC 593
298 [2024] 7 S.C.R.
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7. Learned senior counsel for the revenue at the outset submits that
the impugned order of the Division Bench of the High Court does
not suffer from any error or infirmity to warrant interference. The civil
appeal is misconceived and is, therefore, liable to be dismissed.
7.1. Learned senior counsel submits that the assessing officer had
issued notices to the assessee and had also verified relevant
materials. Thereafter, the assessing officer held that the sale
price of liquor was not fixed. What was fixed was only the range
of minimum and maximum selling price. As per the gazette
notification furnished by the Excise Department of the State
of Karnataka for the year 2000, the minimum and maximum
selling price was fixed at Rs. 55/- and Rs. 85/- per bulk litre
respectively. Nowhere did it mention that liquor had to be sold
at a specific fixed price. The contractors were at liberty to sell
the liquor at any rate between the minimum and maximum
price. There being a wide range within which the sale of liquor
could be affected, the assessing officer has rightly held that
the sale price of liquor was not fixed.
7.2. Learned senior counsel further submits that the assessing
officer was right in taking the view that the excise vendors had
obtained goods by way of auction because the goods(arrack)
were obtained only on production of permits which were
available on successful bidding in the auction.
7.3. Thus, the liquor contractors clearly came within the ambit of
the meaning of “buyer” under Explanation(a) to Section 206C
of the Income Tax Act. Therefore, Mysore Sales was under an
obligation to deduct income tax at source(TDS) from the liquor
contractors. Since it failed to do so, the assessing officer was
fully justified in passing the orders dated 17.01.2001 under
Section 206C(6) of the Income Tax Act.
7.4. Learned Single Judge had elaborately examined the entire
gamut of the issues and rightly affirmed the orders dated
17.01.2001. Similarly, the Division Bench also made a
threadbare examination of the entire issues and, thereafter,
came to the conclusion that the assessing officer was fully
justified in passing the orders dated 17.01.2001. That being the
position, there is no reason why, at this stage, the concurrent
findings of the assessing officer as affirmed by the Single and
[2024] 7 S.C.R. 299
The Excise Commissioner Karnataka & Anr. v.
Mysore Sales International Ltd. & Ors.
Division Benches of the High Court should be disturbed. As
such, the civil appeal should be dismissed.
8. Submissions made by learned counsel for the parties have received
the due consideration of the Court.
9. Before we proceed to Section 206C of the Income Tax Act, we may
have a broad overview of the excise law framework in the State of
Karnataka relevant for the purpose of the present lis. As already noted
above, the parent enactment is the Excise Act which is an Act to
provide for an uniform excise law in the State of Karnataka. It covers
the entire spectrum from production to sale of liquor and intoxicating
drugs and the levy of excise duty thereon. Section 2 defines various
words and expressions used in the Excise Act. Section 2 (2) defines the
expression “to bottle” to mean transferring liquor from a cask or other
vessel to a bottle, jar, flask, polythene sachet or similar receptacle for
the purpose of sale, whether any process of manufacture be employed
or not and includes re-bottling. “Manufacture” is defined in Section 2
(19) to include every process whether natural or artificial, by which
any fermented, spirituous or intoxicating liquor or intoxicating drug is
produced or prepared and also redistillation and every process for
the rectification of liquor. As per Section 3(1), the state government
may appoint, by notification, an officer not below the rank of Deputy
Commissioner as the Excise Commissioner in the State of Karnataka.
He shall be the chief controlling authority in all matters connected
with the administration of the Excise Act. Powers of the Excise
Commissioner are dealt with in sub-section (2) of Section 3. He shall
have the overall control of the administration of the Excise Department.
9.1. Section 17 deals with the power to grant lease of right to
manufacture etc. Sub-section (1) thereof says that the state
government may grant lease to any person on such conditions
and for such period, as it may think fit, the exclusive or other
right-
(a) of manufacturing or sale by wholesale or of both; or
(b) of selling by wholesale or by retail; or
(c) of manufacturing or supplying by wholesale, or of both
and of selling by retail,
any Indian liquor or intoxicating drug within any specified area.
300 [2024] 7 S.C.R.
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9.2. Though sub-section (1A) provides that no lease granted
under sub-section (1) shall be transferred, the proviso thereto
empowers the state government to grant permission to the
lessee to transfer the lease or a part thereof in favour of any
other person. As per sub-section (2), the licencing authority
may grant to a lessee under sub-section (1) or to a transferee
under sub-section (1A), a licence in terms of his lease. Sub-
section (3) deals with determination of a lease for violation
of the conditions mentioned therein. Under sub-section (4),
when a lease is determined in terms of sub-section (3), the
state government may direct the Deputy Commissioner to take
over the right under his management and to lease it again by
resale or otherwise.
9.3. Section 71 confers power on the state government to make
rules to carry out the purposes of the Excise Act.
10. The Karnataka Excise (Arrack Vend Special Conditions of Licenses)
Rules, 1967 (already referred to “the 1967 Rules” hereinabove)
have been framed by the Government of Karnataka in exercise of
the powers conferred by Section 71 of the Excise Act. Rule 2 of the
1967 Rules deals with selling of arrack of prescribed strength etc.
by the licensee. Rule 2(1) says that every licensee licensed to vend
arrack by retail sale shall sell only arrack of prescribed strength.
As per sub-rule (2), no arrack except in sealed bottles or in sealed
polythene sachets obtained from a warehouse or depot shall be
kept for sale or sold in the licensed premises. Rule 3 provides for
construction of counter. As per Rule 3, the licensee to vend arrack
shall construct a counter in the shop which is not more than one
metre high. Rule 4 deals with retail price. It says that subject to such
minimum and maximum price fixed by the Deputy Commissioner or
by the Excise Commissioner, the licensee may vend arrack on such
rates as he may deem fit. Heading of Rule 5 is, licensee to buy
arrack only from warehouse, etc. As per sub-rule (1), the licensee
to vend arrack by retail shall purchase the required quantity of
arrack for sale only from the warehouse or depot authorized by the
Excise Commissioner, on payment of issue price fixed by the Excise
Commissioner from time to time. This provision, being relevant, is
extracted hereunder:
[2024] 7 S.C.R. 301
The Excise Commissioner Karnataka & Anr. v.
Mysore Sales International Ltd. & Ors.
5. Licensee to buy arrack only from Warehouse, etc.: -
(1) The licensee to vend arrack by retail shall purchase
the required quantity of arrack for sale only from
the warehouse or depot authorized by the Excise
Commissioner, on payment of issue price fixed by the
Excise Commissioner from time to time.
10.1. Rule 5(2) clarifies that no arrack except in sealed bottles of the
approved sizes with the excise labels or in sealed polythene
sachets obtained from the authorized warehouse or depot shall
be sold in the licenced premises.
10.2. Rule 6 says that the consignment of arrack should be
under seal. All the consignments of arrack issued from the
warehouse or depot shall be sealed by the officer-in-charge
of the warehouse or depot in such a manner that the letters
of the seal are distinct. The licensees shall be responsible for
any breakage of seal in transit. The arrack so transported may
be packed by the licensee at his own cost for the purpose of
sale in such containers as may be approved by the Excise
Commissioner and under supervision of the officer-in-charge
of the warehouse.
11. Government of Karnataka has also framed the Karnataka Excise
(Lease of the Right of Retail Vend of Liquors) Rules, 1969 (already
referred to as “the 1969 Rules” hereinabove) exercising powers under
Section 71 of the Excise Act. As per Rule 2(c), the expression “right
of retail vend of liquors” means the lease of the right of retail vend of
liquors. Rule 3 deals with lease of retail vend. As per Rule 3(1), the
right of retail vend of liquors may be disposed of either by tender or
by auction or by tender-cum-auction or in any other manner as the
state government may by order specify. Rule 3(3) provides that the
right of retail vend of arrack shall be the exclusive right but in such
districts as may be specified by the government and only bottled
arrack or arrack in polythene sachet shall be sold to consumers. Rule
3A deals with grant of lease to government companies etc. As per
sub-rule (1), notwithstanding anything contained in the 1969 Rules,
the state government may, if it is considered expedient in the interest
of government revenue or for any other reasons to be recorded in
writing, grant the lease of right of retail vend of liquor in favour of any
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company or agency owned or controlled by the state government or
a state government department on such terms and conditions as it
deems fit.
11.1. Registration of excise contractors is provided for in Rule 4A.
As per sub-rule (1), every application for registration as excise
contractor shall be made to the Excise Commissioner in the
prescribed format. After following the procedure prescribed in
sub-rules (2) to (4), the Excise Commissioner under sub-rule
(5) may register such an applicant as an excise contractor and
grant a certificate of registration in the prescribed format which
is not transferable. Sub-rule (8) clarifies that the registration
certificate so issued shall be valid for participation in tender/
auction for the disposal of the right of retail vend of liquor for
the excise year specified in such certificate.
11.2. As per Rule 10(1), where the right of retail vend of liquor
within a district is to be disposed of by auction, the Deputy
Commissioner of that district and where the disposal of the
right is in more than a district in a Division, the Divisional
Commissioner of that Division shall hold the auction on the
date, time and place as may be notified. The procedure to be
followed in the auction is laid down in Rule 11.
12. Under Section 71 of the Excise Act, Government of Karnataka has
framed another set of rules called the Karnataka Excise (Manufacturing
and Bottling of Arrack) Rules, 1987 (already referred to as “the 1987
Rules” hereinabove). Rule 2(b) defines “arrack” to mean the spirit
manufactured by blending or reducing the spirit and includes spiced
arrack, but does not include Indian or foreign liquor. “Blending” is
defined in Rule 2(c) to mean the mixing of spirits with other spirits
of the same or different strengths. As per Rule 2(e), “commissioner”
means the Excise Commissioner. Rule 2(n) defines “warehouse” to
mean any distillery or other place where spirit is stored, blended,
matured, fortified, diluted or flavoured to produce arrack and also a
place for bottling such arrack, but does not include a manufactory
where wine or Indian liquor, beer or toddy is manufactured.
12.1. As per Rule 3(1), a licence may be granted by the Excise
Commissioner for the manufacture and bottling of arrack for
any specified area or areas. Sub-rule (2) of Rule 3 was inserted
[2024] 7 S.C.R. 303
The Excise Commissioner Karnataka & Anr. v.
Mysore Sales International Ltd. & Ors.
subsequently w.e.f. 01.07.1993. Sub-rule (2) of Rule 3 clarifies
that a licence under Rule 3 shall be issued only to a company
or agency owned or controlled by the state government or to a
state government department. This provision, being important,
is extracted as under:
3. Licence to be granted only to a company etc : -
(1) A licence shall be granted by the Commissioner,
whenever necessary for any specified area or areas
for the manufacture and bottling of arrack.
(2) The licence under this rule shall be issued only to
a company or agency owned or controlled by the state
government or to a state government department.
12.2. Rule 8 provides that in case where a warehouse serves more
than one district, the warehouse shall be deemed to be a
depot for storing bottled arrack and for supply of arrack to the
person holding a licence to sell arrack in retail. Under Rule
9, the Commissioner may fix the number of warehouses, the
area to be served by each of the warehouse and their location.
Removal of arrack from the warehouse is provided for in Rule
16. As per sub-rule (1), no arrack shall be removed from the
warehouse without payment of excise duty. Sub-rule (2) says
that arrack shall not be issued from the warehouse or depot
except in bottles or in polythene sachets of approved capacity
and design. As per sub-rule (3), the same shall be issued from
the warehouse or depot only to the persons holding a licence
to sell arrack in retail. Rule 17 says that the price to be paid by
the government to the distillery for the rectified spirit supplied
by the distillery to the warehouse, the price to be paid by the
government to the warehouse for manufacture and bottling of
arrack and the price to be paid by the lessees for the right of
retail vend of arrack to the government for the supply of bottled
arrack shall be fixed by the Excise Commissioner from time
to time with prior approval of the government. Rule 17, being
relevant, is extracted hereunder:
17. Fixation of price: -
The price to be paid by government to the
distillery for the rectified spirit supplied by the
304 [2024] 7 S.C.R.
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distillery to the warehouse, the price to be
paid by the government to the warehouse for
manufacture and bottling of arrack and the
price to be paid by the lessees for the right
of retail vend of arrack to the government for
the supply of bottled arrack shall be fixed by
the Commissioner from time to time with prior
approval of the government and the same shall
be communicated to the persons concerned.
13. From the above conspectus, we find that under Section 17 of
the Excise Act, the state government grants lease of right to any
person for manufacture etc. of liquor, arrack in this case. The
licencing authority i.e. Excise Commissioner may grant to the
lessee a licence in terms of his lease. In supplement to the above
provision, Rule 3(1) of the 1987 Rules provides that the Excise
Commissioner shall grant a licence for any specified area or areas
for the manufacture or bottling of arrack. From 01.07.1993, sub-
rule (2) of Rule 3 has come into force as per which provision the
licence under Rule 3 of the 1987 Rules shall be issued only to a
company or agency owned or controlled by the state government
or to a state government department. This is how Mysore Sales
was granted licence for manufacture and bottling of arrack. Through
a process of auction, excise contractors are shortlisted who are
thereafter granted licence or permits to vend arrack by retail in
their respective area(s). They are required to procure the arrack
from the warehouse or depot on payment of the issue price fixed
by the Excise Commissioner as per Rule 5(1) of the 1967 Rules.
Rule 2 makes it very clear that no arrack in retail vend shall be sold
except in sealed bottles or in sealed polythene sachets obtained
from either a warehouse or a depot. For such retail vending, Rule
3 of the 1967 Rules requires the excise contractor to construct a
counter in the shop. The right to retail vend of liquor is granted
either by tender or by auction or by a combined process of tender-
cum-auction etc. As per Rule 17 of the 1987 Rules, the price to
be paid by the lessee for the right of retail vend of arrack to the
government for the supply of bottled arrack shall be fixed by the
Commissioner with prior approval of the government. In so far the
retail price is concerned, Rule 4 of the 1967 Rules says that the
excise contractor can sell the arrack at a price within the range of
[2024] 7 S.C.R. 305
The Excise Commissioner Karnataka & Anr. v.
Mysore Sales International Ltd. & Ors.
minimum floor price and maximum ceiling price that may be fixed
by the Excise Commissioner.
14. Having broadly surveyed the statutory framework of the business of
arrack in the State of Karnataka, let us now deal with Section 206C
of the Income Tax Act. For ready reference, the said provision is
extracted hereunder:
206-C. Profits and gains from the business of trading
in alcoholic liquor, forest produce, scrap, etc.—(1)
Every person, being a seller shall, at the time of debiting
of the amount payable by the buyer 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:
TABLE
SI. Nature of Goods Percentage
No.
(i) Alcoholic liquor for human Ten percent
consumption (other than India-made
foreign liquor) and tendu leaves
(ii) Timber obtained under a forest lease Fifteen
percent
(iii) Timber obtained by any mode other Five percent
than under a forest lease
(iv) Any other forest produce not being Fifteen
timber or tendu leaves percent
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
utilized 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.
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(2) The power to recover tax by collection under sub-
section (1) shall be without prejudice to any other mode
of recovery.
(3) Any person collecting any amount under sub-section (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.
(5B) Notwithstanding anything contained in any other
law for the time being in force, a return filed on a floppy,
diskette, magnetic cartridge tape, CD-ROM or any other
computer readable media as may be specified by the Board
(hereinafter referred to as the computer media) shall be
deemed to be a return for the purposes of sub-section (5A)
and the rules made thereunder and shall be admissible
in any proceedings thereunder, without further proof of
[2024] 7 S.C.R. 307
The Excise Commissioner Karnataka & Anr. v.
Mysore Sales International Ltd. & Ors.
production of the original, as evidence of any contents of
the original or of any fact stated therein.
(5C) A return filed under sub-section (5B) shall fulfill the
following conditions, namely:-
(a) while receiving returns on computer media,
necessary checks by scanning the documents
filed on computer media will be carried out and
the media will be duly authenticated by the
Assessing Officer; and
(b) the Assessing Officer shall also take due care
to preserve the computer media by duplicating,
transferring, mastering or storage without loss
of data.
(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 one and one-
fourth percent 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.
(9) Where the Assessing Officer is satisfied that the total
income of the buyer justifies the collection of the tax at any
lower rate than the relevant rate specified in sub-section
(1), the Assessing Officer shall, on an application made
by the buyer in this behalf, give to him a certificate for
collection of tax at such lower rate than the relevant rate
specified in sub-section (1).
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(10) Where a certificate under sub-section (9) is given, the
person responsible for collecting the tax shall, until such
certificate is cancelled by the Assessing Officer, collect the
tax at the rates specified in such certificate.
(11) The Board may, having regard to the convenience of
assessees and the interests of revenue, by notification in
the Official Gazette, make rules specifying the cases in
which, and the circumstances under which, an application
may be made for the grant of a certificate under sub-section
(9) and the conditions subject to which such certificate may
be granted and providing for all other matters connected
therewith.
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 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;
(b) “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.
14.1. Sub-section (1) of Section 206C says that every person who
is a seller shall collect from the buyer of the goods specified
in the table, a sum equal to the percentage specified in the
corresponding entry of the table. The collection is to be made
at the time of debiting of the amount payable by the buyer to
the account of the buyer or at the time of the receipt of such
[2024] 7 S.C.R. 309
The Excise Commissioner Karnataka & Anr. v.
Mysore Sales International Ltd. & Ors.
amount from the said buyer, be it in cash or by way of cheque
or by way of draft etc. In so far alcoholic liquor for human
consumption (other than India made foreign liquor i.e., IMFL), the
amount to be collected is 10 percent. Sub-section (3) provides
that any person collecting such amount under sub-section (1)
shall pay the said amount within 7 days of the collection to the
credit of the central government or as the Central Board of
Direct Taxes (CBDT) directs. Sub-section (4) clarifies that any
amount so collected under Section 206C(1) and paid under
sub-section (3) shall be deemed as payment of income tax on
behalf of the person from whom the amount has been collected
and credit shall be given to such person for the amount so
collected and paid at the time of assessment proceeding for
the relevant assessment year. Sub-section (5) says that every
person collecting such tax shall issue a certificate to the buyer
within 10 days of debit or receipt of the amount. Sub-section
(5A) requires the person collecting tax to prepare half yearly
returns for the periods ending on 30th September and 31st March
for each financial year and submit the same in the prescribed
form before the competent income tax authority.
14.2. Sub-section (6) is relevant. Sub-section (6) says that any
person responsible for collecting the tax but fails to collect the
same shall notwithstanding such failure be liable to pay the tax
which he ought to have collected to the credit of the central
government in accordance with the provisions of sub-section
(3). Sub-section (7) deals with a situation where such tax is
not collected in which event the seller is liable to pay interest
at the prescribed rate. Sub-section (8) on the other hand deals
with a situation where the seller does not deposit the amount
even after collecting the tax. In such an event also, he would
be liable to pay interest.
14.3. That brings us to the Explanation to Section 206C of the Income
Tax Act. The Explanation defines “buyer” and “seller” for the
purposes of Section 206C. While Explanation(a) defines “buyer”,
(b) defines “seller”. As per Explanation(a), “buyer” means a
person who obtains in any sale by way of auction, tender or
by any other mode, goods of the nature specified in the table
in sub-section (1) or the right to receive any such goods but
“buyer” would not include:
310 [2024] 7 S.C.R.
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(i) a public sector company;
(ii) a buyer in the further sale of such goods obtained in
pursuance of such sale;
(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.
14.4. On the other hand, “seller” has been defined to mean 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 cooperative
society.
14.5. Adverting to the definition of “buyer”, Explanation (a) says that
a person who obtains in any sale by way of auction, tender or
by any other mode, goods of the nature specified in the table
in sub-section (1) or the right to receive any such goods is
a buyer. But as we have seen above, there is an exclusion
clause to the definition of “buyer”. If the buyer is a public sector
company or it has obtained the goods in further sale or if 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 enactment, then such a person would
not come within the ambit of “buyer” as per the definition in
Explanation(a). Since much emphasis has been placed on
Explanation(a)(iii), we may extract the same again to understand
the significance thereof: 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. Thus, Explanation(a)(iii) visualizes two conditions
for a person to be excluded from the meaning of “buyer” as
per the definition in Explanation(a). The first condition is that
the goods are not obtained by him by way of auction. The
second condition is that the sale price of such goods to be
sold by the buyer is fixed under a state enactment. These
two conditions are joined by the word ‘and’. The word ‘and’ is
conjunctive to mean that both the conditions must be fulfilled;
it is not either of the two. Therefore, to be excluded from the
ambit of the definition of “buyer” as per Explanation(a)(iii), both
the conditions must be satisfied.
[2024] 7 S.C.R. 311
The Excise Commissioner Karnataka & Anr. v.
Mysore Sales International Ltd. & Ors.
15. In view of the above, let us examine the position of an excise
contractor. In the scheme under consideration which we have
discussed above, would such an excise contractor be construed
as a “buyer” within the meaning of Explanation(a) to the Section
206C of the Income Tax Act? Going back to the Excise Act and
the rules framed thereunder, it is seen that Mysore Sales is the
licensee for the manufacture and bottling of arrack for specified
area(s). By a process of auction or tender or auction-cum-tender
etc., excise contractors are shortlisted who are thereafter granted
permits to vend arrack by retail in their respective area(s). These
retail vendors i.e. excise contractors have to procure the arrack from
the warehouse or depot maintained by Mysore Sales on payment
of the issue price fixed by the Excise Commissioner. The arrack is
procured in sealed bottles or in sealed polythene sachets. Pausing
here for a moment, what is discernible is that by a process of auction
etc., excise contractors are shortlisted. Thereafter, they are provided
permits. On the strength of the permits, they obtain arrack in bottled
condition (or in sealed polythene sachets) from the warehouse or
depot on payment of issue price fixed by the Excise Commissioner.
Such arrack either in sealed bottled condition or in sealed polythene
sachets are then sold in retail by the excise contractors in the area
or areas allotted to them. Therefore, by the process of auction etc.,
the excise contractors are only shortlisted and conferred the right to
retail vend of arrack in their respective areas. It cannot be said that
by virtue of the auction, certain quantities of arrack are purchased by
the excise contractors. Thus, at this stage there are two transactions,
each distinct. The first transaction is shortlisting of excise contractors
by a process of auction etc. for the right to retail vend. The second
transaction, which is contingent upon the first transaction, is obtaining
of arrack for retail vending by the excise contractors on the strength
of the permits issued to them post successful shortlisting following
auction. Therefore, it is evidently clear that arrack is not obtained by
the excise contractors by way of auction. What is obtained by way
of auction is the right to vend the arrack on retail on the strength
of permits granted, following successful shortlisting on the basis of
auction. Thus, the first condition under clause (iii) is satisfied.
15.1. In Om Parkash (supra), this Court considered the issue of tax
collection at source in respect of the liquor trade under Section
206C of the Income Tax Act and as to whether a licensee who
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is issued a licence by the government permitting him to carry
on the liquor trade would be a “buyer” as defined in Explanation
(a) to Section 206C (11) of the Income Tax Act. This Court
held that “buyer” would mean a person who by virtue of the
payment gets a right to receive specific goods and not where he
is merely allowed/permitted to carry on business in that trade.
On licences issued by the government permitting the licensee
to carry on liquor trade, provisions of Section 206C are not
attracted as the licensee does not fall within the concept of
“buyer” referred to in that section. This Court emphasized that
a buyer has to be a buyer of goods and not merely a person
who acquires a licence to carry on the business.
15.2. After the arrack is obtained in the above manner by the
excise contractor, the requirement of the second condition
under Explanation(a)(iii) is that he has to sell the same in the
area(s) allotted to him at the sale price fixed as per Rule 4 of
the 1967 Rules. The language of the second condition is that
the sale price of such goods to be sold by the buyer is fixed
by or under any state statute. As already noted above, Rule
4 of the 1967 Rules enables the excise contractor to sell the
arrack in retail at a price within the range of minimum floor
price and maximum ceiling price which is fixed by the Excise
Commissioner. A minimum price and a maximum price are fixed
within which range the arrack has to be sold by the excise
contractor. Thus, the price of arrack to be sold in retail is not
dependent on the market forces but pre-determined within a
range. Therefore, though price range is provided for by the
statute, it cannot be said that because there is a price range
providing for a minimum and a maximum, the sale price is
not fixed. The sale price is fixed by the statute but within a
particular range beyond which price, either on the higher side
or on the lower side, the arrack cannot be sold by the excise
contractor in retail. Therefore, the arrack is sold at a price
which is fixed statutorily under Rule 4 of the 1967 Rules and
thus the second condition stands satisfied.
16. Since both the conditions as mandated under Explanation(a)(iii)
are satisfied, the excise contractors or the liquor vendors selling
arrack would not come within the ambit of “buyer” as defined under
Explanation(a) to Section 206C of the Income Tax Act.
[2024] 7 S.C.R. 313
The Excise Commissioner Karnataka & Anr. v.
Mysore Sales International Ltd. & Ors.
17. We have perused the orders dated 17.01.2001 passed by the
assessing officer under Section 206C(6) of the Income Tax Act. From
a perusal of the said orders, more particularly the order in respect of
the assessment year 2000-2001 which is the main order passed by
the assessing officer followed in other assessment proceedings, it is
seen that the same was passed under Section 206C(6) of the Income
Tax Act. By the said order dated 17.01.2001 for the assessment
year 2000-01, the assessing officer declared that Mysore Sales had
failed to collect and deposit an amount of Rs. 3,90,57,516.00 as TDS
from the excise contractors and, therefore, directed the appellant to
deposit the said amount to the credit of the central government. That
apart, interest was also charged and levied under Section 206C(6)
following which demand notice of even date under Section 156 of
the Income Tax Act was issued. Before passing the said order, it
is seen that the assessing officer had considered Section 206C of
the Income Tax Act and the reply submitted by Mysore Sales to the
show cause notice issued.
18. We have already analysed the various sub-sections of Section 206C
of the Income Tax Act. As per sub-section (3), any person collecting
TDS under sub-section (1) shall have to pay the same to the credit of
the central government within seven days. Requirement under sub-
section (5A) is that every person collecting TDS in terms of Section
206C (1) shall prepare half yearly returns for the periods ending on
30th September and 31st March respectively for each financial year
and thereafter to submit the same before the competent assessing
officer. Sub-rule (6) mandates that if any person responsible for
collecting TDS fails to collect the same, he shall have to deposit the
said amount to the credit of the central government notwithstanding
failure to deduct TDS.
19. Though there is no express provision in sub-section (6) or any other
provision of Section 206C of the Income Tax Act regarding issuance
of notice and affording hearing to such a person before passing an
order thereunder, nonetheless, it is evident that an order passed
under Section 206C(6) of the Income Tax Act, as in the present
case, is prejudicial to the person concerned as such an order entails
adverse civil consequences. It is trite law that when an order entails
adverse civil consequences or is prejudicial to the person concerned,
it is essential that principles of natural justice are followed. In the
314 [2024] 7 S.C.R.
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instant case, though show cause notice was issued to the assessee
to which reply was also filed, the same would not be adequate having
regard to the consequences that such an order passed under Section
206C(6) of the Income Tax Act would entail. Even though the statute
may be silent regarding notice and hearing, the court would read
into such provision the inherent requirement of notice and hearing
before a prejudicial order is passed. We, therefore, hold that before
an order is passed under Section 206C of the Income Tax Act, it is
incumbent upon the assessing officer to put the person concerned
to notice and afford him an adequate and reasonable opportunity of
hearing, including a personal hearing.
20. In view of the discussions made above and the conclusions reached,
it is not necessary for us to delve into other contours of the lis. Thus,
the question framed in paragraph 3 above, is answered in the negative
by holding that Section 206C of the Income Tax Act is not applicable
in respect of Mysore Sales and that the liquor vendors(contractors)
who bought the vending rights from the appellant on auction cannot
be termed as “buyers” within the meaning of Explanation(a) to Section
206C of the Income Tax Act. We also hold that the High Court was
not justified in dismissing the writ petitions and consequently, the
writ appeal challenging the orders dated 17.01.2001.
21. Having regard to the discussions made above, we are of the view that
the appeal should be allowed. Accordingly, we pass the following order:
(i) judgment and order dated 13.03.2006 passed by
the Division Bench of the High Court of Karnataka
at Bengaluru in Writ Appeal No. 7926/2003 and
connected writ appeals, is hereby set aside;
(ii) judgment and order dated 27.10.2003 passed by the
learned Single Judge of the High Court of Karnataka
at Bengaluru in Writ Petition Nos. 6869-6874 of
2001 and other connected writ petitions, is hereby
set aside; and
(iii) orders dated 17.01.2001 passed by the Deputy
Commissioner of Income Tax (TDS)–1, Bengaluru
under Section 206C(6) of the Income Tax Act for
the assessment years 2000-2001, 1999-2000, 1998-
1999, 1997-1998, 1996-1997 and 1995-1996 as well
[2024] 7 S.C.R. 315
The Excise Commissioner Karnataka & Anr. v.
Mysore Sales International Ltd. & Ors.
as the consequential demand notices of even date
issued under Section 156 of the Income Tax Act, are
hereby set aside and quashed.
22. Civil Appeal accordingly stands allowed. However, there shall be no
order as to cost.
Result of the case: Appeal allowed.
†
Headnotes prepared by: Ankit Gyan