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Sri Santosh Kumar Mehrotra v. Commissioner Of Incom Tax, Lucknow - INCOME TAX REFERENCE No. 70 of 1995 [2005] RD-AH 1386 (23 May 2005)


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Commissioner of Income-tax, Meerut. ....Applicant


M/s Chanan Lal Jai Ram Dass & Co., Ghaziabad. ....Respondent


Hon'ble R.K. Agrawal, J.

Hon'ble Rajes Kumar, J.

The Income Tax Appellate Tribunal, Allahabad has referred to following question of law under section 256 (1) of the Income Tax Act, 1961, (hereinafter referred to as "the Act") for opinion of this Court.

"Whether on the facts and in the circumstances of the case, the ITAT was correct in law in holding that income in the case of trading in alcoholic liquor for human consumption (other than Indian made foreign liquor) is computable u/s 44-AC of the I.T. Act @ 40% of the amount paid or payable by the buyer as purchase price, without any reference to the actual book profits, and that the remaining income from such trading was not taxable under the provisions of section 5, read with section 56, of the I.T. Act ?"

The present Reference relates to the Assessment Year 1990-91.

The brief facts are that the assessee-respondent (hereinafter referred to as "Assessee"), an AOP filed the return on 29.11.1990 declaring an income of Rs.11,94,780/-. While computing the income, the assessing officer observed that the assessee is a liquor contractor and the business of trading of alcoholic liquor carried out by the assessee is covered under the provisions of section 44-AC of the I.T.Act. From country liquor the assessee showed net profit as per profit and loss account at Rs.19,20,305 but declared the net income in the return at Rs.11,16,360/- only which was taxable under section 44 AC being 40% of the cost price and capsuling/packing charges without including Nirgam Mulaya and Excise Duty. Thus the income of Rs.8,03,945/- (19,20,305-11,16,360) actually earned by the assessee as per P&L account was not disclosed in the return of income. In respect of country liquor the assessing officer computed the difference of income returned and net profit as per P&L a/c at Rs.12,61,658/- (8,03,945+4,57,713(TDS) debited to P&L a/c ) under the provisions of section 5(1 of the I.T. Act and taxed the same as income from other sources.

On appeal, the Commissioner of Income-tax (Appeals) confirmed the said addition.

On second appeal, the Tribunal observed as under:-

"It may be mentioned that the provisions of sec.44AC which were introduced to curb the evasion of tax as a special measure in the case of trading in alcoholic liquors and certain other specified articles, override the provisions of sections 28 to 43-C for the computation and chargeability of income under the head "profits and gains of business or profession." The main purpose of the said provision was to provide for an average rate of profit to be calculated on the purchase price, notwithstanding the other provisions relating to computation of income under under the head "profits and gains of business or profession." Further it is observed from the provisions of section 56 that income of every kind which is not chargeable to income-tax under any other head of income specified in section 14 is chargeable to income-tax under the head "income from other sources." In this case the assessee had income only from the purchase and sale of country liquor and rum which could obviously be charged only under the head "profits and gains of business or profession." As such the balance of the income which has been charged to income-tax by the tax authorities under the head "income from other sources" is not correct. Further, it is observed from the provisions of section 5, which deals with the scope of total income, that the total income of any previous year of a person, who is resident, is "subject to the provisions of this Act." The definition of "total income" as given in section 2(45) also refers to the total amount referred to in section 5, computed in the manner laid down in this Act i.e. The Income-tax Act. A careful reading of all the aforementioned provisions makes it clear that the intention of the legislature was that income in the case of trading in alcoholic liquor (for human consumption other than Indian made foreign liquor) should be calculated @ 40% of the amount paid or payable by the buyer as the purchase ;price without any reference to the book profits, as once it is conceded that the book profits can be taken into account with reference to the higher income then it will be difficult not to concede that the book profits can also be taken into account where the income is a loss and that will nullify  the intention underlying the introduction of provisions of section 44AC. In view of this analysis we hold that the addition of Rs.12,61,658 as income of the appellant held by the tax authorities as assessable u/s 5 of the I.T.Act is not correct and the same is deleted."

We have heard Sri A.N.Mahajan, learned Standing Counsel for the Revenue and Sri M.A.Zaidi has filed his appearance on behalf of the assessee-respondent.

We find the said controversy was decided in the case of Union of India and another Vs. A.Sanyasi Rao and others, reported in 219 ITR 330. Apex court has held that presumption under section 44AC is only for the purpose of calculating the tax at source under section 206-C of the Act and not for the purpose of determining the taxable income. In this view, Tribunal was not justified in taking the view that the 40% of the amount payable by the assessee as purchase price is alone to be treated as net profit from the business.

We answer the question us in negative, i.e. in favour of the Revenue and against the assessee. There shall be no order as costs.




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