1. Dispute over obligation to collect tax at source under Section 206C, Income Tax Act, regarding sale of alcoholic liquor to retail vendors obtaining vending rights via auction. (Para 2 , 4 )
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2024 Supreme(SC) 548
SUPREME COURT OF INDIA
B.V. NAGARATHNA, UJJAL BHUYAN, JJ.
The Excise Commissioner Karnataka & Anr. – Appellants
Versus
Mysore Sales International Ltd. & Ors. – Respondents
Civil Appeal No. 2168 of 2007
Decided on : 08-07-2024
Important Points
The court held that liquor vendors are not 'buyers' under Section 206C of the Income Tax Act, thus exempting the appellant from TDS obligations.
Subject
Taxation Law - Income Tax
Act Referred
EXCISE ACT: S.71
INCOME TAX ACT: S.156, S.206(c)
KARNATAKA EXCISE ARRACK VEND SPECIAL CONDITIONS OF LICENSES RULES: R.2, R.2(1), R.3, R.4, R.5(1)
KARNATAKA EXCISE MANUFACTURE AND BOTTLING OF ARRACK RULES: R.17, R.3(1)
INCOME TAX ACT: S.156, S.206(c)
KARNATAKA EXCISE ARRACK VEND SPECIAL CONDITIONS OF LICENSES RULES: R.2, R.2(1), R.3, R.4, R.5(1)
KARNATAKA EXCISE MANUFACTURE AND BOTTLING OF ARRACK RULES: R.17, R.3(1)
Headnote
(A) Income Tax Act, 1961 - Section 206C(6) - Applicability of provisions regarding tax collection at source from liquor vendors - The appellant, a public sector undertaking, contended that it was not obligated to collect TDS from liquor vendors as they do not qualify as 'buyers' under the Act. The court held that the vendors, who obtained vending rights through auction, are excluded from the definition of 'buyer' as per Explanation(a)(iii) of Section 206C. The High Court's dismissal of the writ petitions challenging the assessing officer's orders was found unjustified. (Paras 3, 20, 21)
(B) Natural Justice - Requirement of notice and hearing - The court emphasized that orders under Section 206C(6) entail adverse civil consequences, necessitating adherence to principles of natural justice, including providing an opportunity for hearing. (Paras 19, 20)
Facts of the case:
The appellant, engaged in the manufacture of arrack, was directed by the assessing officer to collect TDS from liquor vendors, which it failed to do. The High Court upheld the assessing officer's orders, leading to the appeal.
Findings of Court:
The court found that the liquor vendors are not 'buyers' under Section 206C and that the assessing officer's orders were issued without following natural justice principles.
Issues: The main issues were whether the provisions of Section 206C apply to the appellant and whether the liquor vendors can be classified as 'buyers.'
Ratio Decidendi: The court ruled that both conditions for exclusion from the definition of 'buyer' were satisfied, thus the vendors are not subject to TDS collection. The court also mandated adherence to natural justice principles before passing adverse orders.
Result: Appeal allowed; orders of the High Court and assessing officer set aside.
(B) Natural Justice - Requirement of notice and hearing - The court emphasized that orders under Section 206C(6) entail adverse civil consequences, necessitating adherence to principles of natural justice, including providing an opportunity for hearing. (Paras 19, 20)
Facts of the case:
The appellant, engaged in the manufacture of arrack, was directed by the assessing officer to collect TDS from liquor vendors, which it failed to do. The High Court upheld the assessing officer's orders, leading to the appeal.
Findings of Court:
The court found that the liquor vendors are not 'buyers' under Section 206C and that the assessing officer's orders were issued without following natural justice principles.
Issues: The main issues were whether the provisions of Section 206C apply to the appellant and whether the liquor vendors can be classified as 'buyers.'
Ratio Decidendi: The court ruled that both conditions for exclusion from the definition of 'buyer' were satisfied, thus the vendors are not subject to TDS collection. The court also mandated adherence to natural justice principles before passing adverse orders.
Result: Appeal allowed; orders of the High Court and assessing officer set aside.
Legal Category Hierarchy
Advocates appeared:
For the Appellant(s) : Mr. Avishkar Singhvi, A.A.G. Mr. V. N. Raghupathy, AOR Mr. Vivek Kumar Singh, Adv. Mr. Naved Ahmed, Adv. Mr. Shubham Kumar, Adv.
For the Respondent(s): Dr. Nanda Kishore, AOR Mr. C Kranthi Kumar, Adv. Mr. Sabarish Subramanian, Adv. Mr. Danish Saifi, Adv. Mr. Raj Bahadur Yadav, AOR Mr. Rajesh Mahale, AOR
For the Appellant(s) : Mr. Avishkar Singhvi, A.A.G. Mr. V. N. Raghupathy, AOR Mr. Vivek Kumar Singh, Adv. Mr. Naved Ahmed, Adv. Mr. Shubham Kumar, Adv.
For the Respondent(s): Dr. Nanda Kishore, AOR Mr. C Kranthi Kumar, Adv. Mr. Sabarish Subramanian, Adv. Mr. Danish Saifi, Adv. Mr. Raj Bahadur Yadav, AOR Mr. Rajesh Mahale, AOR
Table of Contents
2. Whether retail vendors obtaining vending rights via auction are buyers under Section 206C, Income Tax Act, and whether failure to provide a hearing violates natural justice. (Para 6 , 7 )
3. Analysis of the two-step process of auctioning vending rights versus procuring liquor and the statutory nature of price fixation under the state excise rules. (Para 9 , 10 , 11 , 12 , 13 , 14 , 17 , 18 )
4. A person is not a buyer under Section 206C if liquor is not obtained by auction and the sale price is statutorily fixed. (Para 15 , 16 , 19 )
5. Appeal allowed; orders of the assessing officer and the High Court regarding tax collection at source and consequential demand notices set aside and quashed. (Para 20 , 21 , 22 )
6. When is a person excluded from the definition of buyer under Explanation (a)(iii) to Section 206C of the Income Tax Act?
A person is excluded if two conjunctive conditions are met: the goods are not obtained by the person via auction, and the sale price of such goods to be sold by the buyer is fixed by or under a State Act. (Para 15 , 16 )
7. Does the auction of a right to retail vend liquor constitute obtaining the liquor itself by way of auction for the purposes of Section 206C?
No. The auction is for shortlisting contractors and conferring the right to retail vend. The actual procurement of liquor occurs subsequently via permits at a fixed price, meaning the liquor is not obtained by auction. (Para 15 )
8. Is a personal hearing mandatory before passing an order under Section 206C(6) of the Income Tax Act?
Yes. Because an order under Section 206C(6) entails adverse civil consequences and is prejudicial, the principles of natural justice require the assessing officer to provide a reasonable opportunity for a personal hearing, even if the statute is silent. (Para 19 )
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 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 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, manu
