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2003 Supreme(Kar) 892
Karnataka High Court
Mysore Sales International Ltd - Appellant
Versus
Deputy Commissioner of Income Tax (TDS-1) - Respondent
Decided On : 10-27-03
The buyers of arrack are not excluded under Explanation to Sec. 206c (6) of the Act in as much as the buyers do obtain arrack through auction warranting deduction at source.
Headnote:
Whether the buyers of arrack are excluded under Explanation to Sec. 206c (6) of the Act in as much as the buyers do not obtain arrack through auction warranting any deduction at source.
Fact of the Case:
The petitioners are public limited companies and majority of their shares are owned by the Government of Karnataka. They are engaged in the manufacture of sugar and also own a distillery for the manufacture of alcohol. The petitioners manufacture arrack for human consumption in terms of the Karnataka Excise Rules. The petitioners bottle arrack under the supervision of the 4th respondent. Raw materials for arrack, that is rectified spirit, is lifted by the petitioner from distilleries as per the permit issued by the 4th respondent. The arrack, when manufactured belongs to the 5th respondent. The 4th respondent fixes the cost incurred by the petitioner inclusive of the cost of rectified spirit and conversion charges. Licencees are permitted to lift the arrack from the petitioner and the petitioner is only a job worker for the 5th respondent.
Finding of the Court:
The Court held that the buyers of arrack are not excluded under Explanation to Sec. 206c (6) of the Act in as much as the buyers do obtain arrack through auction warranting deduction at source. The Court ruled that the auction and the subsequent sale cannot be divided for the purpose of Sec. 206c. The Court further held that the excise contractors have no option but to obtain arrack only from the petitioners. The Court also held that the arguments of the petitioners are to be rejected in the light of well accepted principles of interpretation of statue and in the light of the object being to eliminate the mischief of tax evasion.
Issues: 1. Whether the buyers of arrack are excluded under Explanation to Sec. 206c (6) of the Act in as much as the buyers do not obtain arrack through auction warranting any deduction at source. 2. Whether the interpretation of Sec. 206c (6) of the Income Tax Act is in conformity with the excise operation in Karnataka.
Ratio Decidendi: 1. The Court held that the auction and the subsequent sale cannot be divided for the purpose of Sec. 206c. 2. The Court further held that the excise contractors have no option but to obtain arrack only from the petitioners. 3. The Court also held that the arguments of the petitioners are to be rejected in the light of well accepted principles of interpretation of statue and in the light of the object being to eliminate the mischief of tax evasion.
Final Decision: The Court dismissed the petitions filed by the petitioners.
( 2 ) FACTS are as under: the petitioner-Mysore Sales International Ltd. , is a Karnataka Government Undertaking and is engaged in manufacture of arrack. The petitioner is covered by the provisions of the Income Tax Act (for short the Act ). The petitioner entered the arrack trade from 1. 7. 1993 in terms of the excise laws. 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 of right of retail vend of arrack. It was conducted with reference to designed areas. The successful bidders are entitled to procure arrack from the bottling units and then sell it in retail trade within their allotted area. The arrack trade is controlled by the State Government. The Karnataka Excise Act has framed several rules for appropriate enforcement of excise laws. In the year 1993, the Government discontinued private bottling units from engaging in the manufacture or bottling units from engaging in the manufacturing or bottling of arrack and instead decided as a Policy to restrict those operations in the hands of companies or agencies owned and controlled by the State Government. The petitioner-MSIL and another Karnataka Government Undertaking were entrusted with this task of bottling arrack and marketing it on behalf of the State Government. The petitioner was entrusted with bottling in northern districts of the State of Karnataka, My Sugar was assigned with the task in the rest of the State. According to the petitioner, the job was in the nature of works Contract. An Excise Supervisor is stationed and the petitioners operations in manufacturing and bottling arrack when manufactured belongs to the State of Karnataka so much so the property therein vests with the State. The 4th respondent, Excise Commissioner determines the amount realizable by the petitioner from the Excise Contractors in terms of the Cost incurred by the petitioner. The Excise Contractors were to remit the requisite amount of excise duty into the State Government Treasury and then secure permit on production of which the petitioner delivers arrack to them. The State of Karnataka, according to the petition averments controls the entire operation including the amount realizable by the petitioner in terms of the Act.
( 3 ) THE successful excise contractors would secure arrack from the petitioner depending upon the area. The Lease of Right of Retail Vend of Liquors provides auctioning of a right of retail vend of liquor with reference to a designated area. The retail sale price is fixed by the Government in terms of the Arrack Vend Special Conditions of Licenses Rules. The margin would depend upon various factors. The Income Tax provision provides for deduction of Income Tax at source. In view of large scale tax evasion, Section 206c came to be inserted in to Chapter XVII providing for tax collection at source along with Sec. 44ac into Chapter III, the latter providing for estimation of profit on a presumptive basis. These provisions were inserted by Finance Act, with effect from 1. 4. 1989. In so far as liquor is concerned, the petitioner is to collect from the buyer of liquor a sum equivalent to 10% of the price of the liquor and make it over to the Central Government. A Circular came to be issued by the excise Commissioner in this regard in terms of Annexure A. Addendum was issued in terms of Annexure B. Explanation was inserted to Sec. 206c of the Act. According to the petition averments, obligation there under to collect tax at source did not arise at all in the petitioners case in as much as the petitioner was not selling arrack to the excise contractors in or by way of or pursuant to any auction whatever. The petitioner carried on its operation under the directions of the 4th respondent.
( 4 ) THE first respondent issued a notic
