PETITIONER: <ORG> Vs. RESPONDENT: THE THIRD INCOME-TAX OFFICER, MADURAI DATE OF JUDGMENT28/07/1975 BENCH: <NAME>, Y.V. BENCH: <NAME>, Y.V. SARKARIA, RANJIT SINGH GUPTA, A.C. CITATION: 1975 AIR 2016 1976 SCR (1) 136 1975 SCC (2) 454 CITATOR INFO : D 1981 SC1562 (17) ACT: Constitution of India- Article 246(1)-7th Schedule List 1 Entry 82- Income-Tax ,Act 1961-Sec. 2(8), 4 & 81(i)(a)- Finance Act 1963-Sec. 2(1) (a). 2(8), 3, Part 1, First Schedule-Whether tax can exceed taxable income- Finance Act - Nature and scope of-Whether can impose fresh charge- Harshness of a taxing statute if a ground for challenge- Business income of a cooperative society doing banking- Whether additional surcharge a tax-Whether additional surcharge Can be levied on income exempted from payment of tax. HEADNOTE: The appellant is <ORG> engaged in the business of banking According to section 8 ] (i) (a) of the Income ' Tax Act , 1961, <ORG> engaged in the business of banking is not liable to pay income tax on its business income. The Finance Act , 1963, however, by section 2(i) (a), 2(8), 3, paragraph A(ii) of Part I of the First Schedule and clause of that portion of Part I called surcharge on Income Tax provides for levy of additional surcharge for the purposes of the <ORG> calculated on the amount of the residual income at the rates mentioned therein. The total income of the appellant for the assessment year 1963-64 was Rs. 10,00,098. Out of this Rs. 9,48,335 was its business income. 'The tax amounting to Rs. 23,845 was charged on Rs. 51,763 Applying the Finance Act of 1963, the residual income of the appellant was computed at Rs. 5.39,386 and a surcharge thereon was levied of Rs. 52,828 Thus, the total tax imposed on the appellant came to Rs. 76,674. The assessment order passed by the Income Tax officer levying the tax as aforesaid was challenged by the appellant in <ORG> by a Writ Petition. The main grievance of the appellant before <ORG> was that whereas its taxable income was only Rs. 51,763, a tax of Rs. 76,674 was imposed on it. The relevant provisions of the Finance Act were challenged as invalid on the ground that(i) they imposed additional surcharge on income which was exempt from tax under the provisions of the Income Tax Act and that (ii) the additional surcharge was intended as additional levy on the income tax and had no independent existence apart from it <ORG> rejected these contentions. On an appeal by certificate, dismissing the appeal, ^ HELD : 1. It is indisputable that the appellant is not required to pay income tax on the banking income. In view of section 81 . It is also not liable to pay surcharge on its business income in view of section 99(1)(v) . [139C] 2. The, grievance of the appellant that the tax levied upon it exceeds its taxable income can afford no true guide to the construction of the relevant provisions of the Income Tax Act or the Finance Act . Harshness of a taxing statute, apart from a possible challenge to it under Art. 13 of the Constitution cannot be an invalidating circumstance. But, the grievance-on this score is misconceived. It assumes what has to be examined that no part of the income exempted from Income Tax and Super Tax under the Income Tax Act can be brought to tax by a Finance Act , [140G-H] 3. The concession of the counsel for the appellant giving up challenge to the power. of the <ORG> to impose a new charge by Finance Act was Properly made. Under Art. 246(11) of the Constitution, <ORG> has the exclusive power to make laws with respect ''o any of the matters in List of the Seventh Schedule. Entry 82 in List I relates to tax on income other than agricultural income. The Income Tax Act , 1961 and the annual Finance Act s are enacted by the <ORG> in exercise of the powers conferred by Art 246(1) read with entry 82 of List I. Once the <ORG> has the legislative competence to enact a law with respect to certain subject matter, the limits of 136 that competence cannot be judged further by the form or manner in which that power is exercised. Exigencies of the Financial year determine the scope and nature of the provisions of the Finance Act . The primary purpose of the Finance Act is to describe the rates at with the Income Tax will be charged under the Income Tax Act but that does not mean that new and distinct tax cannot be charged under Finance Act . Therefore, what is not income under the Income Tax Act can be made income by the Finance Act . An exemption granted by the Income Tax A, t can be withdrawn by the Finance Act or the efficacy of that exemption may be reduced by the imposition of a new charge. [141D-E; G-H] 4. The contention of the appellant that surcharges are nothing but income tax and, therefore, expression income tax occurring in Sec. 4 and 81 of the Act includes surcharges and AS such exempted cannot be accepted. The case of the <CITATION> distinguished. There the essential point for determination was whether surcharge is additional mode or rate for charging income tax. The Court held there that it was so. The question before us is whether even if the surcharge is an additional mode or rate for charging income to the Finance Act of 1963 authorises by its terms the levy of additional surcharge on income which is exempt from income tax under the Income Tax, Act, 1961. The residual income as defined by the 1963 Finance Act is not the same as the business income of <ORG> which is exempted under see. 81. The additional surcharge is a distinct charge not dependent for its leviability on the assessee's liability to pay income tax or Super Tax. The decision of Allahabad High Court in <CITATION> over-ruled. [143D-E] 5. The additional surcharge though levied by the Finance Act 1963 independently of the Income Tax Act is but a mode of levying tax on a portion of the assessee's income computed in accordance with the definition in section 2(8) of the Finance Act 1963. [147F] ARGUMENTS For The Appellant 1. Under section 81 read with section 4 of the Income- tax Act, 1961, income tax is not payable by the appellant. <ORG>, in respect of its income from banking business. Similarly super-tax is not payable under section 99(i)(v) read with section 4 . 2. The primary purpose of the annual Finance Act s as envisaged by section 4 of the Income-tax Act is to prescribe the rates of income-tax on the total income of an assessee, and this function as contemplated by section 4 is to be "subject to the other provisions of this Act", namely, the Income-tax Act , 1961, which would include, inter alia, section 81 . 3. The history of Indian income-tax shows that surcharges by way of increase to the amount of income-tax, which are added to the basic amount, in view of article 271 of the Constitution of India, are nothing other than income- tax and a part of income-tax alone. Therefore the expression 'income-tax' in section 4 and 81 of the Income-tax Act, 1961, and section and Schedule I, Part 1 of the Finance Act , 1953, includes surcharges. 4. Section 2 of the Finance Act, 1963, and Schedule I, Part I, Paragraph A all clearly contemplate that the surcharge. special surcharge and additional surcharge are all only by way of increase of the amount of income-tax and not only partake of the character of income-tax but are actually a part of income tax. They are merely rates of income-tax. The main part of section 2(1) (a) says that "Income-tax shall be charged at the rates specified in Part I of the First Schedule" and clause (ii) of that section provides in the ease referred to therein that income-tax "shall further be increased by an additional surcharge for the purpose of the <ORG> calculated in the manner provided in the First Schedule. Similarly in Paragraph A of Part I of the First Schedule the heading to the provisions prescribing rates of surcharge is "surcharges on income-tax" in the plural. The main part in the heading also provides that "the amount of 137 income-tax... shall be increased by the aggregate of the surcharges calculated as under " Clause (c) thereafter provides for the additional surcharge for the purpose of the <ORG>. Paragraph A also therefore clearly indicates that the three surcharges are only of the same nature and that all the three surcharges are only by way of increase of the amount of income-tax; in other words part of the income-tax. Is either section 2 nor paragraph A of Part I of the First Schedule can even remotely be said to contemplate any separate levy of additional surcharge other than income-tax. 5. From the assessment order it is seen that the following have been charged only on the real taxable income of the appellant namely Rs. 51,763: (i) income tax (ii) surcharge on income tax (iii) special surcharge on income- tax (iv) super-tax and (v) surcharge on super-tax. These items have not been charged on the total income of Rs. 10,00,098, because income-tax is not payable on the balance of the total income under section 81 . The Income-tax officer has sought to impose only additional surcharge under clause (c) in respect to the total income of Rs. 10,00,098. In view of section 81 no additional surcharge is payable on the total income of Rs. 10,00,098. It is payable only on the taxable income of Rs. 51,763. 6. Section 2 read with Paragraph A Part I of Schedule I to the Finance Act merely purports to lay down the method of computation where income-tax is payable. It does not either dire thy or by implication make any amendment or modification in section 81 . 7. Section 3 of the Finance Act ]963 also applies to a stage of computation only and in regard to relief, rebate etc. It does not impose any liability or any tax. It operates only where additional surcharge is payable and not other wise, and where relief, rebate etc. is to be given from the tax payable by the assessee, e.g. deduction of tax based on life insurance premia provident fund contribution. donations to charitable institution etc. Section 81 does not provide for any such relief or rebate. 8. Section 2(8) of the Finance Act, 1963, defining "residual income" which requires deduction from the total income of income-tax, surcharge and special surcharge to ascertain residual income also does not have the effect of imposing any liability or any tax but merely provides for computation. In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied." "In a case of reasonable doubt. the construction most beneficial to the subject is to be adopted." The court will be very slow in reading an implied amendment in a tax law because there is no intendment. 9. Income-tax is one tax, not several taxes on several heads or several items of income: For the Respondent 1. It is open to the <ORG> to pass an Act relating to more than one topic or field of operation, covered by the Entries in List 1. It is not as if there must be as many Enactments as the topics which the enactment covers. 2. The legislature has a wide range of selection and freedom in appraisal not only in the subjects of taxation and the manner of taxation but also in the determination of the rate or rates applicable. If production were always to be taken into account there will have to be a settlement for every year and the tax will become a kind of income-tax. The burden of proving discrimination is always heavy and heavier still when a taxing statute is under attack. The burden is on the person complaining of discrimination. The burden is proving not possible 'inequality' but hostile 'unequal' treatment. This is more so when uniform taxes are levied. The State cannot be asked to demonstrate equality. 3. Income which is exempt from taxation is income which is assessable to tax and therefore liable to tax but tax is not imposed on account of the exemp- 138 tion. This exemption can by subsequent legislation be wholly or partially withdrawn both as regards items of income and levies imposed for the purpose of taxation. Thus where the Income-tax Act 1961 says that business income of a co- operative society will be exempt from income-tax it would be open to the <ORG> by enactment of the Finance Act of 1963 to say that this exemption shall be partially withdrawn as regards residual income and this partial exemption will operate only for the purpose of income-tax but not surcharge on residual income. The net result of the partial withdrawn of the exemption would mean that though the business income of a co-operative society will be exempt from tax the residual income which is only a part of the exempted business income could be subjected to surcharge on income- tax only. 4. Income-tax and surcharge on income-tax are two different levies though the computation of the latter is based upon a percentage of the former. The to are inclusive for the purpose of imposing tax but they are not one levy only. JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1795 of 1970.

From the Judgment and order dated the 15th October, 1968 of <ORG> in Writ Petition No. 2252 of 1965.

<NAME> and <NAME>, for the appellant. <NAME> and <NAME>, for the respondent. The Judgment of the Court was delivered by CHANDRACHUD,J.-The appellant filed a writ petition in <ORG> under Article 226 of the Constitution to challenge an assessment order dated August 22, 1963 made by the respondent, levying additional surcharge on its residual income. <ORG> dismissed the writ petition by its judgment dated October IS, 1968 but it has granted to the appellant a certificate to file an appeal to this Court under Articles 133(a) and (c) of the Constitution.

The appellant is a co-operative society engaged in the business of banking. Its total income for the assessment year 1963-64 was computed by the respondent at Rs. 10,00,098. Out of this, Rs. 9,48,335 was its business income while Rs. 51,763 was its income from other sources. Since, under section 81(i)(a) of the Income-tax Act, 1961 a co- operative society engaged in the business of banking is not liable to pay income-tax on its business income the tax amounting to Rs. 23,845.47 was charged on Rs. 51,763 only though for the purposes of rate the income was taken at Rs. 9,48,335 in view of section 110 of the Act. Applying the Finance Act, XIII of 1963, the respondent computed the residual income of the appellant at Rs. 5,39,386 and levied on it an additional surcharge of Rs. 52,828.60. Thus the total tax levied on the appellant came to Rs. 23,845.47 plus Rs. 52,828.60 i.e., Rs. 76,674.07.

The main grievance of the appellant before <ORG> was that whereas its taxable income was only Rs. 51,763, a tax of Rs. 76,674.07 was imposed on it. The relevant provisions of the Finance Act were accordingly said to be invalid as they could not subject to additional surcharge an income which was exempt from tax under the provisions of the Income-tax Act . The additional surcharge, it was contended, was intended as an additional levy on the income tax and had no independent existence apart from it. These contentions were rejected by <ORG> and hence this appeal.

Section 81 of the Income-tax Act, 1961 was deleted by the Finance Act , XX of 1967, with effect from April 1, 1968 but its provisions were incorporated by the same Finance Act in section 80P . Section 81 (i)(a) read thus:

"81. Income of co-operative societies.-Income-tax shall not be payable by a co-operative society-

(i) in respect of the profits and gains of business carried on by it, if it is-

(a) a society engaged in carrying on the business of banking or providing credit facilities to its members;"

It is indisputable that by reason of this provision, the tanking income of the appellant amounting to Rs. 9,48,335 is exempt from income tax. It is equally clear that by reason of section 99(1)(v) of the Act of 1961, the appellant is not liable to pay supertax on its business income. That section provides that where the assessee is a co-operative society, super-tax shall not be payable by it on any income in respect whereof no income-tax is payable by it by virtue of the provisions of section 81 .

The dispute really centers round the provisions of Finance Act , VIII of 1963. The provisions of that Act which are relevant for our purpose are sections 2(1)(a) , 2(8) , 3 , Paragraph A(ii) of Part I of the First Schedule, and clause

(c) of that` portion of Part 1, called `'Surcharges on Income Tax."

Section 2(1)(a) of the Finance Act, 1963 provides that:

2. Income-tax and super-tax-(1) Subject to the provisions of sub-section (2), (3), (4) and (5), for the assessment year commencing on the 1st day of April, 1963,-

(a) income-tax shall be charged at the rates specified in Part I of the First Schedule and,-

(i) in the cases to which paragraphs A,C,C and E of that Part apply, shall be increased by a surcharge for purposes of the Union and, except in the cases to which the said paragraph applies a special surcharge, calculated in either case in the manner provided therein; and

(ii) in the cases to which paragraphs A and of the aforesaid Part apply, shall further be increased by an additional surcharge for purposes of the <ORG> (hereinafter referred to as additional surcharge) calculated in the manner provided in the said Schedule;"

Section 2 (8) provides that:

For the purposes of paragraphs A and of Part I of the First Schedule, the expression "residual income" means the amount of the total income as reduced by-

(a) the amount of the capital gains, if any, included therein; and

(b) the amount of tax (exclusive of additional surcharge) which would have been chargeable on such reduced total income if it had been the total income no part of which had been exempt from tax and on no portion of which deduction of tax had been admissible under any provisions of the Income-tax Act or this Act."

Section 3 provides that:

"Notwithstanding anything contained in the provisions of Chapter VII or Chapter VIII-A or section 110 of the Income tax Act or sub-section (5) of section 2 of this Act, in calculating any relief rebate or deduction in respect of income-tax payable on the total income of an assessee which includes any income on which no income-tax is payable or in respect of which a deduction of income-tax is admissible under any of the aforesaid provisions, no account shall be taken of the additional surcharge."

The First Schedule of the Finance Act, 1963 consists of three parts out of which we are only concerned with Part I. Part I which is called "Income-tax and surcharges on income- tax" consists of Paragraphs A, B, C, and out of which we are concerned with Paragraph A only. Clause (ii) of Paragraph A prescribes rate of income-tax for incomes accruing, inter alia, to "association of persons". Since a co-operative society is an association of persons, Paragraph A of Part I would apply to the case of the appellant for`the purposes of section 2(1)(a)(ii) of the Finance Act oil 1963, though not for the purpose of bringing its exempted business income to income-tax.

That portion of Part I, Paragraph A, called "Surcharges on Income Tax" provides: "The amount of income-tax computed at the rates hereinbefore specified shall be increased by the aggregate of the surcharges calculated as under". Clause

(a) provides for a surcharge for the purposes of the <ORG> at the rates mentioned in sub-clauses (i), (ii) and (iii). Clause (b) provides for the levy of a special surcharge. Clause (c) with which we are concerned provides for the levy of "an additional surcharge for the purposes of the <ORG> calculated on the amount of the residual income" at the rates mentioned therein.

The grievance of the appellant, which appears to have been pressed before <ORG> with some earnestness, that the tax levied upon it exceeds its taxable income can afford no true guide to the construction of the relevant provisions of the Income tax Act or the Finance Act . Harshness of a taxing statute, apart from a possible challenge to it under Article 13 of the Constitution, cannot be an invalidating circumstance. But the grievance on this score is basically misconceived. It assumes, what has to be examined, that no part of the income exempted from income- tax and super-tax under the Income-tax Act can be brought to tax by a Finance Act . The total income of the appellant was computed at Rs. 10,00,098. By reason of sections 81 (i) (a) and 99 (1) (v) of the Income-tax Act , 1961 the appellant enjoys an exemption from income tax and super-tax in respect of its business income which amounts to Rs. 9,48,335. The balance, viz. Rs. 51,763 which was the appellant's income from other sources was alone taxable under the Act of 1961 and a tax of Rs. 23,845.47 was imposed on that income; The Finance Act of 1963 subjects 'residual income' to certain charges and such in come was computed, admittedly correctly, at Rs. 5,39,386. An additional surcharge of Rs. 52,828.60 was levied on the residual income. Thus on the assumption that the Finance Act , validly-and on a true interpretation, imposes the additional surcharge on residual income, the tax imposed on the appellant is Rs. 23,845.47 plus Rs. 52,828.60. The total tax of Rs. 76,674.07 thus imposed is far less than the. appellant's total taxable income arrived at by the addition of its non-business income and the residual income. That leads to the inquiry first as regards the scope of a Finance Act and then as regards the interpretation of the Finance Act of 1963.

Learned counsel for the appellant, during the course of his arguments, gave up the challenge to the power of the <ORG> to impose a new charge by a Finance Act . This concession was properly made. By Article 246(1) of the Constitution, <ORG> has the exclusive power to make laws with respect to any of the matters in List I of the Seventh Schedule. Entry 82 in List I relates to "taxes on income other than agricultural income". The Income-tax Act , 1961 and the annual Finance Act s are enacted by the <ORG> in exercise of the power conferred by Article 246(1) read with Entry 82 of List I. Once the <ORG> has the legislative competence to enact a law with respect to a certain subject-matter, the limits of that competence cannot be judged further by the form or manner in which that power is exercised. Accordingly, though it would be unconventional for the <ORG> to amend a taxing statute by incorporating the amending provision in an Act of a different pith and substance, such a course would not be un- constitutional.

Much more so can the <ORG> introduce a charging provision in a Finance Act . True, as said in <CITATION> (1), that the Income-tax Act is a permanent Act v. while the Finance Act s are passed every year and their primary purpose is to prescribe the rates at which the income-tax will be charged under the Income tax act. But that does not mean that a new and distinct charge cannot be introduced under the Finance Act . Exigencies of the Financial year determine the scope and nature of its provisions. If the <ORG> has the legislative competence to introduce a new charge of tax, it may exercise that power either by incorporating that charge in the Income-tax Act or by introducing it in the Finance Act or for the matter of that in any other Statute. The alternative in this regard is generally determined by the consideration whether the new charge is intended to be more or less of a permanent nature or whether its introduction is dictated by the financial exigencies of the particular year. Therefore, what is not 'income' under the Income-tax Act can be made 'income' by a Finance Act , an exemption granted by the Income-tax Act can be withdrawn by the Finance Act or the efficacy of that exemption may be reduced by the imposition of a new charge. Subject to constitutional limitations, additional tax revenue may be collected either by enhance the rate or by the levy of a fresh charge. The <ORG>, through the medium of a Finance Act , may as much do the one as the other. <CITATION> (1), which was affirmed by this Court in 36 I.T.R. 65. <NAME> delivering the judgment of <ORG> observed that the Finance Act s though annual Acts are not necessarily temporary Act for they may and often do contain provisions of a general character which are of a permanent operation.

<CITATION> .(2) an assessee challenged the scheme of Annuity Deposits of the ground that the <ORG> has no competence to incorporate ill the Income tax Act a provision which was substantially one relating to borrowings by <ORG> from a class of tax-payers. That scheme was introduced by Finance Act 5 of 1964 which incorporated Chapter XXII-A containing section 28-A to section 28-X in the Income tax Act, 1961. The challenge was repelled by this Court on the ground that if the parliament had the legislative competence to pass an Act for collecting Annuity Deposits from tax-payers, nothing contained in the Constitution disentitled it "as a matter of legislative arrangement to incorporate the provisions relating to borrowing from tax-payers in the Income-tax Act or any other statute".

This discussion became necessary in spite of the appellant's concession on the <ORG>'s legislative competence because for a proper understanding of the provisions of the Finance Act 1963, it is essential to appreciate that a Finance Act may not only prescribe rates but also introduce a new charge.

We will now proceed to consider the provisions of the Finance Act , 1963 under which the respondent has levied additional surcharge on the appellant's residual income. The question for consideration is whether clause (c) of the portion "Surcharges on Income Tax" occurring in Paragraph A of Part I introduces a new charge in the shape of additional surcharge so that the said charge, can be levied even on a part of the appellant's income which is exempt from income- tax and super-tax under sections 81(i)(a) and 99(1)(v) of the Act of 1961.

The history of Indian income-tax, according to appellant's counsel, shows that surcharges by way of increase in the amount of income-tax are nothing but income- tax and therefore the expression "income-tax" occurring in sections 4 and 81 of the Act of 1961 and in section 2 and the First Schedule of the Finance Act, 1963 includes surcharges. To put it differently, the argument is that the exemption granted by section 81(i)(a) extends to surcharges also as a result whereof a co-operative society engaged in the business of banking is neither liable to pay income-tax nor any of the surcharges on its business income.

<CITATION> (1) on which the appellant relies, this Court has traced the history of the concept of 'surcharge' in tax laws of our country. After considering the report of <ORG>, the provisions of the Government of India Act, 1935, the provisions of Articles 269, 270 and 271 of the Constitution and the various Finance Act s, this Court held, differing from <ORG>, that the word "income- tax" in section 2(2) of the Finance Act, 1964 includes surcharges and the additional surcharge.

This case does not touch the point before us. In that case, the assessee's income for the accounting year ending March 30, 1964 consisted mainly of his salary. Section 2(2)(a) of the Finance Act, 1964 did not by itself refer to any surcharge but it provided that in making the assessment for the assessment year commencing on April 1, 1964 the "income-tax" payable by the assessee on his salary-income shall be an amount bearing to the total amount of "income- tax" payable according to the rates applicable under the operation of the Finance Act , 1963 on his total income, the same proportion as the salary income bears t the total income. The question which arose for consideration was under the total income. The question which arose for consideration was whether the words "income-tax payable according to the rates applicable under the operation of the Finance Act , 1963" included surcharges which were leviable under the Act of 1963. The question was answered by this Court in the affirmative. As the judgment shows, "the essential point for determination" was whether surcharge is an additional mode or rate for charging income tax" (p. 351). The Court held that it was. The question before us is whether, even if the surcharger is but an additional mode or rate for charging income-tax, the Finance Act of 1963 authorises by its terms the levy of additional surcharge on income which is exempt from income-tax under the Income-tax Act , 1961 In <NAME> case the Court declined to express any opinion on the distinction made by <ORG> that surcharges are levied under the Finance Act while income tax was levied under the Income-tax Act (p. 351). In the instant case it is not disputed by the-revenue that a surcharge partakes of the essential characteristics of income-tax and is an increase in income-tax. What we have to determine is whether the Act of 1963 provides for the levy of additional surcharge.

Granting that the word "income-tax" includes surcharges, it may be arguable that the exemption from the payment of income-tax under section 81 (i) (a) of the 1961 Act would extend to surcharges. But the matter does not rest with what section 81 (i)(a) says. Even if that section were to grant an express exemption from surcharges on business income the <ORG> could take away that exemption or curtail the benefit available under it by making an appropriate provision in the Finance Act . If while legislating on a matter within its competence the <ORG> can grant an exemption, it is surely competent to it to withdraw that exemption in exercise of the self-same power.

The Finance Act , 1963, like its annual counterparts, contains provisions not only prescribing rates of taxation but making extensive and important modifications in the Income-tax Act itself. By sections 4 to 144  20 of the Act of 1963, various provisions of the income-tax Act have been amended. By these amendments, some of which are given retrospective effect, old provisions are deleted, new ones are added and indeed new concepts of taxation altogether are introduced. Such innovations fall within the legitimate scope of Finance Act s. Section 11 (14) of the Indian Finance Act , 1946 made in the amount of excess profits tax repaid under section 28 of the U.K. Finance Act, 1941, "income" for the purpose of the Indian Income tax Act and further provided that "income shall be treated for purposes of assessment to income tax and super-tax as the income of the previous year. It was held by this Court in <CITATION> (1) that section 11(14) charged the amount with a liability to tax by its own force. It was further held that the particular provision, framed as it was, applied to subsequent assessment years just as it applied to the assessment year 1946-47.

Having seen the nature and scope of Finance Act s, the specific question which we have to consider is whether, as contended by the appellant, section 2 read with Paragraph A, Part I of the First schedule of the Finance Act , 1963 merely lays down a method of computation in cases where income-tax is in fact payable or whether, as contended by the revenue, the Finance Act provides for the levy of a new and independent charge. According to the appellant, these provisions of the Finance Act do not, directly or indirectly, bring about any amendment to section 81(i)(a) of the Income-tax Act but merely prescribe that in cases where the income-tax is payable, "The amount of income tax.... shall be increased by the aggregate of the surcharges". The heading "Surcharges on income tax" under which provision is made in the Finance Act for the calculation of a surcharge, a special surcharge and an additional surcharge is also said to bear out the contention that the levy of additional surcharge on the residual income cannot be disassociated from the main charge of income-tax.

We are unable to accept this contention Article 269(1) of the Constitution provides that the duties and taxes mentioned therein shall be levied and collected by <ORG> but shall be assigned to the States in the manner provided in clause (2). Article 270(1) provides that Taxes on income other than agricultural income shall be levied and collected by <ORG> and distributed between the <ORG> and the States in the manner provided in clause (2). By Article 271 , notwithstanding anything in Articles 269 and 270, <ORG> may increase any of the duties or taxes referred to in those Articles by a surcharge for purposes of the <ORG>. Surcharges leviable under section 2(1) of the Finance Act. 1963 are relatable to Article 271 of the Constitution.

Section 2(1)(a)(ii) of that Act provides, in so far as relevant, that for the assessment year commencing on April 1, 1963 income-tax shall be charged at the rates specified in Part I of First Schedule and in cases to which Paragraph A of Part I applies, the income-tax shall further be increased by an additional surcharge for purposes of the <ORG> calculated in the manner provided in the First Schedule. `Clause (c) of Paragraph prescribes the manner in which the additional surcharge is to be calculated. It provides that additional surcharge for purposes of the <ORG> shall be calculated "on the amount of the residual income'. at the rates mentioned in that clause. Thus both the purpose and concept of the additional surcharge are different from those of income-tax. The additional surcharge is leviable exclusively for purposes of the <ORG> so that the entire proceeds of such surcharge may under Article 271 of the Constitution, from part of <ORG>. taxes and duties mentioned in Article 269(1 ), though levied and collected by the <ORG>, have to be assigned to the States in the manner provided in clause (2) of that Article. Then again, the additional surcharge levied for purposes of the <ORG> is to be calculated not on total income like the income-tax but it is to be calculated on the residual income. Section 2(8) of the Act of 1963 defines residual income as total income reduced by (a) capital gains, if any, included in that total income and (b) the amount of tax (exclusive of additional surcharge) which would have been chargeable on such reduced total income if it had been the total income no part of which had been exempt from tax and on no portion of which deduction of tax had been admissible. In order that the exemption granted to co-operative banks by section 81 (i) (a) may not lose its meaning and content, section 2(8) of the Finance Act introduces the concept of residual income on which alone the additional surcharge is payable. The residual income is not the same as the business income of a co-operative bank, which is exempt under section 81(i)(a) from income tax. For ascertaining the residual income the total income is reduced by the amount of capital gains and further by the amount of tax (other than additional surcharge) which would have been charged on such reduced total income on the assumption that the whole of it was liable to be brought to tax.

Thus in the instant case the additional surcharge is not levied on the appellant's business income of Rs. 9,48,335 which is exempt from income-tax and super-tax. It is levied on the residual] income of Rs. 5,39,386 which is arrived at after deducting Gross taxes (exclusive of additional surcharge) amounting to Rs. 4,60,712 from the assessee's gross income of Rs. 10,00,098. By section 3 of the Finance Act of 1963 no account can be taken of the additional surcharge in calculating any relief, rebate or deduction in respect of income-tax payable on the total income of an assessee which includes any income on which no income-tax is payable or in respect of which a deduction of income-tax is admissible. Section 3 , by its terms, has precedence over anything contained in Chapter VII or Chapter VIII A or in section 110 of the Income-tax Act or section 2(5) of the Finance Act itself. Additional surcharge is treated in this way as falling in a separate category.

Thus, additional surcharge is a district charge. not dependent for its leviability on the assessee's liability to pay income-tax or super-tax. Such a qualification cannot be read into section 2(1)(a)(ii) of the Act of 1963 as argued by the appellant. That section uses the language that "income-tax....shall further be increased by an additional sur-

charge", not for making the assessability to surcharge dependent upon Assessability to income tax but for the simple reason that if an assessee`s total income includes income on which no tax is payable, tax has all the same to be computed for purposes of rate Section 110 of the Income- tax Act, 1961 provides that where there is included in the total income of an assessee any income on which no income- tax is payable, the assessee shall be entitled to deduction, from the amount of income tax with which he is chargeable on his total income, of an amount equal to the income-tax calculated at the average rate of income tax on the amount on which no income-tax is payable. The income-tax computed at a certain rate is by section 2(1)(a)(ii) to be further increased by an additional surcharge for purposes of the Union. This becomes clearer still from the language of Paragraph A, under the heading ..Surcharges on Income Tax". It says: "The amount of income-tax computed at the rate hereinbefore specified shall be increased by the aggregate of the surcharges,". If the intention was to limit the liability to pay additional surcharge to income which can be brought to income tax, appropriate language could have been used to convey that simple sense.

The weakness of the appellant's contention becomes manifest when it is realised that were the contention right, the appellant would not be liable to pay additional surcharge even on that portion of its non-business income which is contained in the residual income. By the definition in section 2(8) of the Act of 1963, residual income means the total income as reduced and therefore, the non business income which is chargeable to income-tax must form a component of the residual income. Concededly, the appellant is liable to pay additional surcharge on its non-business income. This is so not because additional surcharge is payable by law on non-business income but because it is payable on residual income and residual income, by definition, includes non business income as reduced. In fact, it consists of the amount of total income as reduced by the amounts mentioned in clauses (a) and (b) of section 2(8) .

Relying on <CITATION> (1), <CITATION> (2), and <CITATION> (3), the appellant's counsel urged that income-tax is a single levy, that it is one tax and not so many taxes separately levied on several heads of income. This partly is the same argument in a different disguise that an assessee who is not liable to pay income-tax cannot be made liable to pay additional surcharge under the Finance Act , 1963. We have rejected that contention. Partly, the argument is designed to establish correlation with section 146 of the income tax Act, 1961 by which, when any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under the Act, <ORG> office has to serve upon the assessee a notice of demand in the prescribed form specifying the sum so payable. This provision presents no difficulty for, if an assessee is liable to pay additional surcharge but no income-tax or super tax, the notice of demand will mention the particular amount payable as tax due. The appellant being liable to pay tax on its non- business income and additional surcharge on its residual income, the demand notice will call for payment of the total amount due from the appellant by way of tax.

The interpretation put by us on the Finance Act , 1963 does no violence to section 4 of the Income-tax Act, 1961 under which income-tax at the rates prescribed by the Finance Act is to be charged "in accordance with, and subject to the provisions of." the Income-tax Act . The Income-tax Act exempts the assessee's business income from income tax and super-tax. The Finance Act brings to tax its residual income.

The decision of <ORG> in <CITATION> .(1) is directly in favour of the appellant and naturally, learned counsel for the appellant relies on it very strongly. But that case, in our opinion, is incorrectly decided. The learned Judges were in error in holding that section 2 of the Finance Act, 1963 does not provide for the levy of a tax other than income-tax" and that therefore additional surcharge is not payable to the extent of the income which is exempt under section 81 of the Income-tax Act. One of the difficulties which the learned Judges felt in accepting the revenue's contention was that if "the additional surcharge mentioned in the Finance Act of 1963 was not partake of the nature of income-tax it will not be possible to demand and realise it under the provisions of the income-tax Act, and the notice of demand and recovery proceedings would be vitiated on that account". The very assumption of this observation is falacious because additional surcharge indubitably partakes of the nature and essential characteristics of income-tax. It is a tax on residual income and by reason of the definition contained in section 2(8) of the Act of 1963, "residual income" would include non-business income which under the Income-tax Act is charge able to income-tax. Thus, the additional surcharge, though levied by the Finance Act , 1963 independently of the Income-tax Act , is but a mode of levying tax on a portion of the assessee's income computed in accordance with the definition in section 2(8) of the Act of 1963. Therefore, the notice of demand under section 156 of the Income-tax Act can lawfully call for the payment of amount due from an assessee by way of additional surcharge.

For these reasons, we confirm the judgment of <ORG> but in the circumstances there will be no order as to costs.

P.H.P. Appeal dismissed.


JUDGMENT <NAME>, J.

During the pendency of several petitions for winding up of the respective companies on the ground that they are unable to pay its debts (in none of which any receiver or official liquidator is appointed), it has been brought to the notice of the court that a reference under Chapter III of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as "the Act"), has been registered in respect of each of the respondent companies under section 16(1) of the Act by <ORG> ("the BIFR", in short), and the matters were adjourned on more than one occasions awaiting further steps, to be taken in view of section 22 of the Act. Counsel for the petitioners in some of the cases contended that the mere registrations of a reference under section 16(1) will not attract the applicability of 22 of the Act Counsel for the petitioners in some of the cases contended that the mere registration of a reference under section 16(1) will not attract the applicability of section 22 of the Act and and, therefor, the company petitions may be proceeded with.

As a common question as to the effect of section 22 of the Act is involved, I have heard several counsel for the petitioners and also counsel for the respondent companies who have appeared. They have also addressed arguments on the action to be taken by the court in the event section 22 is held applicable.

The points that arise for consideration are :

(a) Whether the mere proof of a reference being registered by the <ORG> under section 16(1) of the Act attracts the provisions of section 22 ?

(b) If section 22 is held applicable, its effect on these company petitions ?

The Act has received the assent of the President on January 8, 1986, and some of its Provisions were enforced from January 12, 1987, and others from May 15, 1987. Its section 2 contains a declaration and it is for giving effect to the <ORG> towards securing the directive principles specified in article 39(b) and (c) of the Constitution. According to the Objects and Reasons :

"......A need has, therefor, been felt to enact in public interest a legislation to provide for timely detection of sickness in industrial companies and for expeditious determination by a body of experts of the preventive, ameliorative, remedial and other measures that would need to be adopted with respect to such companies and for enforcement of the measures considered appropriate with utmost practicable despatch."

Section 32 gives overriding to the Act on other laws as mentioned in it. Section 26 bars the jurisdiction of civil courts in respect of any matter which <ORG> is empowered to decide under the Act, Section 31 saves certain proceedings mentioned in it. Section 36 confers power on <ORG> to make rules and in exercise of the said power, the '<ORG> for industrial and Financial Reconstruction (Secretary's powers and Duties) Rules, 1987, have been made. Section 27 of the Act empowers the <ORG> to delegate certain statutory functions. The <ORG> for Industrial and Financial Reconstruction Regulations, 1987, have been made, according to which some functions are assigned to the Secretary and Registrar. Section 3(o) of the Act defines a "sick industrial company".Chapter III which comprises sections 15 to 22 provides for references of cases to be dealt with under the Act, inquiry and the measures that may be taken by <ORG> in respect of sick industrial companies. Section 15(1) casts an obligation on the management of an industrial company which has become a sick industrial undertaking to make a reference to the <ORG> for appropriate action. Section 15(2) enables financial institutions, etc., make a similar reference. probably where the management of the company has itself not made it. Under section 16(1) of the Act, the <ORG> may make such inquiry as it deems fit for determining whether any industrial company has become a sick industrial company. As mentioned in the said provision. such an inquiry may be taken up either on receipt of a reference under section 15 or upon information received with respect to such company or upon its own knowledge. Sections 17 to 21 provide for various measures the <ORG> may adopt to revive, rehabilitate, reconstruct or take steps for winding up a sick industrial company in the circumstances mentioned in the said provisions. Section 22(1) provides for suspension of certain legal proceedings. Section 22(2) provides for some fetters on the rights of the shareholders of the sick company. Sub-section (3) enables the <ORG> to pass certain orders which may suspend the operation of the contracts, etc., entered into by the company . Sub-section (4) gives overriding effect to the passed by the <ORG> under subsection (3), and sub-section (5) provides for suspension of period of limitation for enforcement of any right or privilege during which its remedy for enforcement was suspended under this section. It is useful to extract some relevant statutory provisions, viz., "16. Inquiry into working of sick industrial companies. - (1) The <ORG> may make such inquiry as it may deem fit for determining whether any industrial company has become a sick industrial company -

(a) upon receipt of a reference with respect with to such company under section 15; or

(b) upon information received with respect to such company or upon its own knowledge as to the financial condition of the company.

(2) The board may, if it deems necessary or expedient so to do for the expeditious disposal of an inquiry under sub-section (1), require by order any operating agency to inquire into and make a report with respect to such matters as may be specified in the order.

(3) The <ORG> or, as the case may be, the operating agency shall complete its inquiry as expeditiously as possible and endeavour shall be made to complete the inquiry within days from the commencement of the inquiry.

(4) Where the Board deems it fit to make an inquiry or to cause an inquiry or to cause an inquiry to be made into any industrial company under sub-section (1) or, as the case may be, under sub-section (2), it shall appoint one of more persons to be a special director or special directors of the company for safeguarding the financial and other interests of the company...."

"22. Suspension of legal proceedings, contracts, etc., - (1) Where, in respect of an industrial company, an inquiry under section 16 is pending or any scheme referred to under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 relating to an industrial company pending, then, notwithstanding anything contained in the companies Act, 1956 or any other law or the memorandum and articles of association of the industrial company or any other instruments having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for the execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in receiver in respect there of shall lie or be proceeded with further, except with the consent of the <ORG> or, as the case may be, the appellate authority."

"31. Saving of pending proceedings. - Where a receiver or an official liquidator has been appointed in any proceeding pending immediately before the commencement of this Act, in any <ORG> for winding up of an industrial company, such proceeding shall not abate but continue in the that <ORG>."

Regulation 19 of the <ORG> for Industrial and Financial Reconstruction Regulations, 1987, empowers the Secretary or <ORG> to take necessary steps under section 16(1) where a reference is received by the <ORG> under section 15(1) or 15(2). In case any of these officers decline to register the reference, the final decision is of the Chairman on appeal. However, if there is a controversy as to whether the industrial company has become sick within the meaning of section 3(o). the <ORG> may conduct an inquiry on that aspect keeping in view the provisions of other subsections of section 16. The <ORG> consists of a chairman and members who are persons of ability, integrity and experience in these fields. The main objects of an inquiry under section 16 is to determine whether the provisions of section 3(o) apply and, therefore, it is a sick company with a view to take measures under section 16 is to determine whether the provisions of section 3(o) apply and, therefore, it is a sick company with a view to take measures under sections 17 to 20.

Point (a) : The commencement of an inquiry under section 16(1)(a) will be either consequent on a reference made by the sick industrial company itself or a financial institution named in section 15(2). In a reference under section 15(1), the company does not dispute that it is sick, and in a reference under section 15(2), the necessary material is furnished by the financial institution institution about its being a sick company. The question whether an industrial company is sick company or not has to be determined with reference to the criteria laid down in the definition under section 3(o) which is to be generally on the basis of documents available with the Register of companies, financial institutions or the company itself. Apparently, in a reference under section 15(1) and (2), there is no dispute about the applicability of section 3(o) and, therefore, the secretary or the Registrar has been given the authority to take action for registration under section 16(1)(a). In cases of refusal to register, probably due to some formal or technical defect, an appeal against it will be decided by the chairman. However, in cases where the company itself disputes the applicability of section 3(o) to it and <ORG>, on the basis of information, has reason to believe that it is applicable, an inquiry into that aspect become necessary as contemplated by section 16(1)(b) and certain provisions to help a speedy. effective and fair inquiry have been made in the other sub-sections of sections 16. after the inquiry, if it is found that section 3(o) applies, the <ORG> has to take one of the alternative measures contemplated by sections 17 to 20.

<NAME>, <NAME> learned counsel appearing for one of the petitioners contended that the mere registration of a reference under section 16(1) will not make section 22 applicable or be a ground for stopping the winding up proceedings in this court. According to him, the action of the Secretary in registering a reference is a ministerial act and it does not indicate that there has been an inquiry or any inquires pending before the <ORG>. It is contended that, unless an inquiry contemplated by any the sub-sections (2) to (4) has commenced, section 22 does not become applicable. He has fairly started that there is only one reported decision in <CITATION> ., AIR 1988 All 178;  67 Comp Cas 412 (All), which is, prima facie, against him, according to him, has not directly dealt with this question.

In view of the various provisions noticed above, the inquiry contemplated by section 16 will commence either on the receipt of a reference under section 15(1) or (2) or, on the basis of any other information received by <ORG>.These two situations are reflect in section 16(1)(a) and 16(b). In the case of references,the secretary is empowered to hold a preliminary inquiry and register it and, thereafter, the Board will make such inquiry as it considers necessary in with the alternative measures to be adopted under sections 17 to 20.

Where there is no reference and the <ORG> chooses to commence an inquiry, naturally there will be a contest by the company itself and in such cases, the <ORG> will conduct an inquiry keeping in view the provisions of the other sub-section 16. If the <ORG> comes to the conclusion that section 3(o) applies to the company in respect of which the inquiry is being held, it will then consider one of the alternative measures under sections 17 to 20. According to the scheme of the Act, after an inquiry under section 16 has commenced and it is determined that it is a sick company within the meaning of section 3(o), the proceeding will terminate only after one of the alternative measures under sections 17 to 20 are taken, In several of the cases, large amounts (the liability for which is not disputed by the respective companies) have not been paid by the companies and the respective petitioner are suffering hardship, Probably, the petitioner or other creditor can intervene at the stage of inquiry before determination of the question of applicability of section 3(o) if they dispute it and have material to show that the industrial sickness is a device to defeat the claims and pray that some transactions of the company have to be invalidated. But this is a matter which can be examined and decided only by the <ORG>. In view of the scheme of the Act, the jurisdiction of the court under the Companies Act is excluded by implication. The jurisdiction of the civil court is, however, excluded by section 26 . Therefore, the registration of a referenced by the <ORG> for Industrial and Financial Reconstruction (may be by the Secretary under the powers conferred on him) is, prima facie, proof that the inquiry before the <ORG> is pending and the <ORG> has to take further steps for taking one of the alternative measures under section 17 to 20 . Once it is shown that a reference is registered under the Act. Section 22 becomes applicable and this is how I would answer point No. (a).

Point No. (b) : The next point for consideration is the effect of section 22 on these company petitions for winding up. It was contended by several counsel for the petitioners that the matters should be adjourned from time to time awaiting the further progress before <ORG>. It is contended that this is necessary as the petitioners were not parties before <ORG> and are not like to lose the advantage of taking benefits of the extension of the period of limitation for enforcement of some of their rights in view of sections 441 to 458A of the Companies Act, etc. Section 22(1) affects only a limited class actions like winding up petitions. After it is determined that section 3(o) applies to a company, broadly, three alternatives are possible under sections 17 to 20 , viz., (a) measures to revive a company where its net worth can be increased; (b) framing a scheme; and (c) taking steps for winding up. The <ORG> is given wide powers and the petitioners can be certainly approach the <ORG> for relief during this stage. At the same time, the hardship caused to the petitioners when the companies have become sick is apparent. Till the <ORG> passes an order under section 22(3) , there is no restraint against the companies in alienating their properties and, probably, the petitioners may be able to move the <ORG>, if considered necessary. The language of section 22(1) and that of section 31 indicates that such winding up proceeding shall not be proceeded with further. The question whether they stand abated or not was not canvassed and I do not consider it appropriate to go into it a this stage in view of the order which I propose to pass. Apart form the difference in language of section 22(1) and section 31 , it is also open to the petitioners to seek and get consent of the <ORG> to continue any winding up petitions. The implication of the provisions of this new legislation pay require further examination. I, therefore, consider it appropriate to pass the following order :

(a) The management of respondent (i) shall, once in every six months, viz, on first January and first July of every calendar year, inform the respective petitioners and their counsel at the address shown in the company petition or to any other changed address which may be intimated, the progress of the case before <ORG> by registered post; (ii) shall not alienate the assets without leave of <ORG> for a period of six months;

(b) The winding up petitions are closed with liberty to the petitioners to make an application for reviving them in the event it becomes permissible by virtue of any subsequent of <ORG>.

(5) The company petitions are, accordingly, closed. No orders as to costs.


<NAME>, J.

1. These appeals arise from an order of <NAME>, J., dismissing two connected petitions, one to quash a penalty of Rs. 1,000 in lieu of confiscation of goods under Section 42 (3) (a) of the Madras General Sales Tax Act, 1959 and the other for a direction to the respondents to deliver to the appellant the goods which had been seized and confiscated while on transit at Kandaigoundan Chavadi check-post, which is the border of Coimbatore district in this State, and Calicut in the Kerala State. The learned Judge declined to accept that the said provision is invalid, and held that <CITATION> (1965) 16 S.T.C. 708, and <CITATION> (1968) 1 S.C.J. 121 : (1967) 2 I.T.J. 919 :(1968) 1 An.W.R.(S.C.) 43 : (1968)1 M.L.J , (S.C.). 43 : (1967) 20 S.T.C. 453. in which this Court held, the Supreme Court agreeing with it that Section 41 (4) was invalid,were distinguishable.

2. The lorry K. L. R. 3919, was searched by the Check-post Officer and was found to carry at the time 85 bags of which 45 contained maida, 20 atta and 20 khandasari sugar. The lorry driver, however, carried with him a sale bill and delivery note which covered only 85 bags of atta. On the ground that the lorry attempted to transport without any sale bill or delivery note for the maida and khandasari sugar and on suspicion that there was an attempt at evasion of tax, the Check-post Officer by an order dated 2nd March, 1965 confiscated the goods, but gave an option to the appellant to pay a penalty of Rs. 1,000 in lieu of confiscation of the goods. The Check-post Officer declined to accept the explanation of the appellant which was that he had purchased in Madras 85 bags of atta, 45 bags of maida and in Nellore 20 bags of khandasari sugar, he being of the view, as we said, that there was really an attempt to suppress the sales of the maida and khandasari sugar under the cloak of the sale bill and delivery note for atta only.

3. Before <NAME>, J., no attempt appears to have been made to challenge the validity of the penalty order on its merits and the learned Judge proceeded on the basis that in the exercise of writ jurisdiction the finding of the Check-post Officer that the explanation of the appellant was not acceptable could not be revised. No point about this has been made for the appellant before us. The appeals have therefore, been confined to the validity of Section 42 (3) (a) and the effect of <CITATION> (1965) 16 S.T.C. 708 and <CITATION> (1968) 1 S.C.J. 121 : (1967) 2 I.T.J. 919 : (1968) 1 An.W.R. (S.C.) 43 : (1968) 1 M.L.J. (S.C.)43 : (1968)2O S.T.C. 453 on that question.

4. <CITATION> (1965) 16 S.T.C. 708, decided by a Division Bench of this Court, to which one of us was a party, held that the Madras General Sales Tax Act was not a law of goods and a power to confiscate is not ancillary or incidental to a power to tax on sale or purchase of goods, though of course such power to tax undoubtedly included the power to make due provisions to prevent or check evasion of tax and make it unprofitable. On that view this Court struck down Section 41 (4) which provided for search and seizure from the premises of a dealer goods unaccounted for and for confiscation thereof. The section also provided for levy of penalty in lieu of such confiscation. <ORG> agreed with the conclusion of this Court as to the invalidity of Section 41 (4), but on a different ground. Clause (a) of the second proviso to Section 41 (4) which was introduced by a latter amendment, stated that in cases where the goods are taxable under this Act, in addition to the tax recoverable, a sum of money not exceeding one thousand rupees or double the amount of tax recoverable, whichever is greater, may be levied as penalty in lieu of confiscation. <ORG>, with reference to this provision, observed (at page 465):

But under Clause (a) of the second proviso the tax is ordered to be recovered even before the sale, in addition to the penalty not exceeding Rs. 1,000 or double the amount of tax recoverable whichever is greater.

Referring to the scheme of the Act, <ORG> considered that in a large majority of cases covered by the Act the tax was payable at the point of first sale in the State, and that, therefore, Clause (a) of the second proviso was clearly repugnant to the general scheme of the Act. In the words of <ORG> (at page 466):

We are, therefore, of opinion that Clause (a) of the second proviso being repugnant to the entire scheme of the Act, in so far as it provides for recovery of tax even before the first sale in this State, which is the point of time in a large majority of cases for recovery of tax, must fall on the ground of repugnancy....We therefore agree with <ORG> and strike down Sub-section (4) but for reasons different from those which commended themselves to <ORG>.

In so holding, <ORG> made it clear that it did not propose to decide the general question whether a power to confiscate goods found on search and not accounted for in the books of account of the dealer was an ancillary power necessary for the purpose of stopping evasion of tax.

5. Section 42 (3) of the Act, with which we are concerned in the appeals before us, is substantially in pari materia, if not identical, with Section 41 (4) the only difference being that unlike the latter, which provides for goods searched and seized in the premises of the dealer, which are not accounted for, the former concerns itself with goods under transport by any vehicle or boat across the check-post or barrier, and not covered by the specified documents. Except for this difference, which is quite inconsequential from the standpoint of the question of invalidity, Clause (a) of the second proviso to Section 42 (3) is word for word identical with Clause (a) of the second proviso to Section 41 (4). The separate and independent reasoning on the basis of which this <ORG> and the Supreme <ORG> struck down Section 41 (4) as invalid seems, as we think, to apply with equal force to the invalidity of Section 42 (3).

6. <NAME>, J., however, felt that there was difference between Section 41 (4) and Section 42 (3) but he did not proceed to detail the difference. As far as we are able to see, except the difference, which we mentioned, there is no other existing between the language, scheme, object and effect of the two provisions. The learned Judge having noticed the two decisions, one of this <ORG> and the other of the Supreme <ORG>, that the ratio or the principle of those decisions will not apply to the facts of the petitions before him, because, in his opinion, it had been established by the finding of the Check-post Officer that the taxable event had occurred and the transactions become exigible to tax. In such a case, the learned Judge was of opinion that there might be room to hold that the power to seize and confiscate the goods was ancillary to the power to tax and further the basis of the reasoning of the Supreme <ORG> that a power to confiscate even before the taxable event had occurred, that is to say a sale or purchase, was inconsistent with the scheme of the Act which was to charge first sales or purchases in the State, was not present here. In our opinion, the factual position in this case has or can have no bearing on the legislative competence to enact Section 41 (4) or Section 42 (3) in their present form, or the invalidity of the provisions, because they, as they exist at the moment proceed to charge the goods to tax even before a sale or purchase thereof has occurred which is repugnant to the scheme of the Act. Legislative competency to provide for confiscation of goods entirely depends on whether such a power is ancillary or incidental to a power to check evasion of tax or to make it unprofitable which is undoubtedly a part of the power to tax on sale or purchase of goods. This <ORG> held that such a power was not ancillary or incidental to the power of taxation of sale or purchase of goods. That conclusion rested entirely on the scope and ambit of Entry 54 in List II of the Constitution, not on the factual position, whether a sale or purchase had in a given case taken place. The learned Judge, as we have already mentioned, was of opinion that there might be room to hold that the power to seize and confiscate goods was ancillary to the power to tax sales, where a sale in a given case had taken place. That, we are bound to point out, was directly in conflict with the view in <CITATION> (1965) 16 S.T.C. 708, which is binding on us as well as the learned Judge. The view of this <ORG> was untouched by the Supreme <ORG> as expressly mentioned by it. Nor the fact that a sale or purchase had taken place in a given case could make any difference to the invalidity of Section 42 (3) because, that question depended on the actual language employed by the <ORG>. The vice according to the Supreme <ORG> which invalidated Section 41 (4) lay in the fact that it charged goods to tax even before the taxable event has occurred which is repugnant to the entire scheme of the Act. That repugnancy is not solved by stating that the Check-post Officer has found that there has been a sale or purchase in respect of the goods seized and confiscated.

7. Apart from what we have said, we are also unable to appreciate how the finding of the Check-post Officer that there had been a sale would at all in the present context, be relevant to Section 42 (3), proviso 2 (a). The appellant is an out of State dealer. So far as his purchase of khandasari sugar from Nellore is concerned, the transport by him has no reference to any sale or purchase, whether inter-State or intra-State, chargeable to tax in this State. It does not also appear that the sales of goods in question are subject to single point of taxation. Even so, it is nobody's case that the first sales or any sales, for that matter have been effected by the appellant. In such circumstances, two things will follow : one is if there is evasion of tax it is not on the part of the appellant. If he colluded, as the learned Judge apparently thought, that is not covered by the penal provision in Section 42 (3). Secondly it is only where the goods are chargeable to tax, so to speak, with reference to Section 42 (3), proviso 2 (a) that any occasion for seizure and confiscation of the goods can arise. That even does not appear, on the facts, to have happened. It is not any taxable event, but it is only a taxable event which is exigible to tax at the hands of the assessee and is the subject-matter of evasion, that will come within the purview of Section 42 (3). That is not the case here.

8. Before we leave this case, there is one other matter to which we would like to make reference. The learned Judge referred to <CITATION> (1967) 2 An.W.R. 71 : 19 S.T.C. 506. But this very case was noticed by <ORG> in <CITATION> (1968) 1 S.C.J. 121 : (1967) 2 I.T.J. 919 : (1968) 1 An.W.R. (S.C.) 43 : (1968) 1 M.L.J. (S.C.) 43 : (1967) 20 S.T.C. 453, and it was pointed out that the Andhra Act did not contain a provision like Section 41 (4), proviso 2 (a). That made all the difference, as <ORG> itself pointed out, because the main body of Sub-section (4) of Section 41 as was held by <ORG>, ought to be read as qualified by and in the sense of the two provisos to Section 41 (4).

9. We hold that Section 42 (3) is unconstitutional and invalid, and strike it down. The appeals are allowed with costs throughout. Counsel's fee Rs. 100 in each case. We are informed that in obedience to an interlocutory order of this Court the relative bags of maida and atta have been returned to the appellant, but 20 bags of khandasari sugar, the subject-matter of confiscation, had been sold by the department, in open market. In the circumstances, this will be taken note of and the respondents will pay the sale proceeds of the khandasari sugar to the appellant.

W.P. No. 1077 of 1968.--This petition is not opposed by the <ORG>. This is allowed but with no costs.


JUDGMENT

1. The appellant claimed either that the attachment should be set aside in its entirety, as the decree was fraudu-lently obtained or in the alternative, that the sale under the attachment should be subject to the mortgage. In either case we think that the claim is covered by Order XXI Rule 58 of the Civil Procedure Code. Rule 62 provides for the recognition of the mortgage. Rule 61 provides for the rejection of the claim. We are unable to accept Mr. <NAME>'s contention that the Code does not contemplate the rejection of a claim of a mortgagee as such; the decision in <NAME> v. <NAME> (1897) I.L.R 22 B. 640 shows, that claims founded on mortgages are as much within the rule as any other claim. The learned Counsel for the appellant has quoted no cases to the contrary : the decision <NAME> v. <NAME> (1901) I.L.R. 29 C. 25 refers to the question of possession being disturbed after sale : that has no bearing on the present question. Moreover the language of Article 11 of the Limitation Act shows that orders refusing to recognise mortgages are within the article.

2. Mr. <NAME>'s contention that as there was no investigation, the one year rule does not apply comes too late in the day. The language of Article 11 in the new Act is more comprehen-sive than that of the previous Act and that has been construed in this Court as covering orders after full investigation as well as orders passed on default. We entirely agree with these decisions. <CITATION> (1897) I.L.R 22 B. 640 and <CITATION> (1915) 31 I.C. 205.

3. The second appeal must be dismissed with costs.