ORDER
M.A.A. Khan, Judicial Member
1. The assessee is in appeal from the order of DC(Appeals) Jodhpur, on the following points, viz.:
(1) Disallowance of expenses under Section 44AC(3) of IT Act.
2. The assessee is a HUF (SP) deriving income from purchases and sale of timber. The ITO noted that on total turn-over of Rs. 12,5 1,642 the assessee had claimed expenses at Rs. 1,79,804. He further noted that the assessee had made purchases to the tune of Rs. 2.32,891 from Government’s Forest Department. Since the assessee had declared g.p. rate of 17 per cent on total sales, the ITO worked the sale price of the goods purchased from Government at Rs. 2,72,482 which came to 22 per cent of the gross turn-over. Consequently he disallowed proportionate expenses of Rs. 39,555. The disallowance was confirmed in appeal.
3. Relying on CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 (SC), CIT v. Indian Bank Ltd. [1965] 56 ITR 77 (SC), CIT v. Bhopal Sugar Industries Ltd. [1970] 78 ITR 209 (MP) and Addl. CIT v. Nizam Sugar Factory [1981] 127 ITR 423 (AP), A. Sanyasi Rao v. Government of Andhra Pradesh [1989] 178 ITR 31, Sri Venkateswara Timber Depot v. Union of lndia [1991] 189 ITR 741 and Sat Pal & Co. v. Excise & Taxation Commissioner [1990] 185 ITR 375 (Punj. & Har.) the learned counsel for the assessee urged that the provisions of Section 44AC(3) read with Section 206(C) were not applicable to the case of the assessee inasmuch as the assessee was carrying on one indivisible business, it was an assessment under Section 143(3) and not under Section 144, wherein compliance of Section 44AC may be obligatory. It was also submitted that the correct construction of provisions of Section 44AC(3) does not dispense with the application of Sections 28 to 43 absolutely. In this respect the speech of Finance Minister at the time of insertion of the provisions of Section 44AC was also referred to. Reference was also made to Andhra Pradesh High Court decision in A. Sanyasi Rao’s case (supra) and the guidance given by Chartered Accountants Institute contained in The Chartered Accountants Volume XXXVIII No. 5 November 1989. It was finally submitted that the non obstante Clause of Section 44AC would be confined to the limited purpose of sustaining the deduction provided in Section 206C.
4. On the other hand the learned Departmental Representative relied upon P. Kunhammed Kutty Haji v. Union of India [1989] 176 ITR 491 (Ker.), T. K. Aboobacker v. Union of India [1989] 177 ITR 358 and R. Laxmichand & Co. v. Union of India [1990] 184 ITR 376 and also on the Commentary of Chaturvedi and Pithasaria at page 1916 and submitted that the language of Section 44AC (3) was quite clear and unambiguous. It was contended that the virus has also been upheld in the cited cases and, therefore, the order under appeal called for no interference.
5. Sections 44AC and 206C were inserted by Finance Act, 1988 w.e.f. 1-4-1989 and 1-6-1988 respectively. Section 44AC makes special provision for computing profits and gains from the business of trading in certain specified goods, under the head “Profit and gains of business or profession”. It starts with a non obstante Clause “notwithstanding anything to the contrary contained in Sections 28 to 43C”. According to Sub-section (1) of Section 44AC in the case of purchase of timber, obtained under a forest lease, the profit and gains are deemed to be 35 per cent of the purchase price, while in the case of timber obtained by any mode other than under a forest lease, it is 15 per cent. Sub-section (3) of Section 44AC, which is relevant for our purpose, says when the business carried on by an assessee does not consist exclusively of trading in goods to which Section 44AC applies and where separate accounts have not been maintained or are not available, the amount of expenses attributable to such other business shall be equal to the proportion the turn-over of such other business bears to the total turn-over of the business of the assessee.
6. At first sight it would appear that the provisions contained in Section 44AC are oppressive and violative of articles 14 and 19 of the Constitution. The normally applicable provisions contained in Sections 28 to 43C have been dispensed with altogether and it has been laid down that the profits and gains of every person from the business specified in Section 44AC, irrespective of his circumstances, volume of business, finance expenditure or other attendant matters, shall be deemed to be the specified percentage of the purchase price. Under such circumstances Mr. Singhvi is right when he says that the compliance of the provisions contained in Section 44AC should be deemed directory and not obligatory because in the situation mentioned above the Courts must be having the power to strike down Section 44AC. But on a study of the cases cited at (sic). I find that the Courts have opted ‘to read down (sic) provisions of Section 44AC in order to make it consistent with the guarantees in articles 14 & 19(1)(g) of the Constitution. The theory of “reading down” is a rule of interpretation resorted to by courts where a provision, read literally, seems to offend a fundamental right or falls outside the competence of the particular Legislature. Reading down meanings of words with loose lexical amplitude is permissible as part of the judicial process.
7. The effect of applying the rule of “reading down” would necessarily be that Section 44AC need not be struck down but it should be read not as an independent provision but as an adjunct to and as explanatory to Section 206(C). On such construction Section 44AC would not dispense with Sections 28 to 43C absolutely. The non obstante Clause in Section 44AC(1) “notwithstanding anything to the contrary contained in Sections 28 to 43C” would then be confined to the limited purpose of sustaining the deduction provided for in Section 206C. The level of profits and gains would be relevant only as explaining and justifying the level of deductions provided in Section 206C. Collections will be made at the rates specified in Section 206C and then a regular assessment will be made like in the case of any other assessee.
8. Now coming to the question of deciding the grounds raised in this appeal, I find that ground Nos. 1 & 2(a), 2(b) & 2(c) question the disallowance made by applying the provisions of Section 44AC(3). I have held above, that the provisions of Section 44AC shall have to be read as adjunct to and explanatory to Section 206(C) and that after collection of taxes at rates specified in Section 206C a regular assessment would be required to be made like in the case of any other assessee. In view of this opinion of the Tribunal the issue involved in this appeal-would be required to be sent back to the ITO. But on going through the plea of the assessee made in ground No. 2(c), which no doubt was not sought to be argued and pressed at the hearing, I find that the grievance of the assessee, in substance, is against disallowance of expenses at Rs. 39,555 instead of at Rs. 38,478. The difference in expenses claimed and expenses allowed is thus quite negligible insofar as tax effect is concerned. I, therefore, do not feel inclined to send the case to the ITO for that purpose. I would, therefore, accept assessee’s contention and direct the ITO to disallow expenses of Rs. 38,478 only under Section 44AC(3) and modify his assessment order accordingly. Ground nos. 1 & 2(a), 2(b) and 2(c) are decided in that manner.
(2) Disallowance of Rs. 3000
9. An addition of Rs. 3,000 in the sales-tax paid timber account was made on the ground that stock register and quantitative details were not maintained and the g.p. rate declared in this account was also low.
10. Mr. Singhvi urged that purchases and sales were fully vouched and the same g.p. could not have been maintained for all the years. I, however, find that in the sale bills complete details of goods sold i.e., size, kind, width etc. had not been given and in the absence of daily stock register and quantitative details the sales bills as they were, could not have been of much help in arriving at correct profit of the business and correct valuation of the closing stock. The ITO thus had reasons to make addition of Rs. 3000 in this account. The addition is confirmed.
11. In the result, the appeal is partly allowed.