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Income Tax Appellate Tribunal, IN THE INCOME TAX APPELLATE TRIBUNAL,
Before: SHRI MEMBER & LAXMI PRASAD SAHULAXMI PRASAD SAHULAXMI PRASAD SAHU
IN THE INCOME TAX APPELLATE TRIBUNAL, IN THE INCOME TAX APPELLATE TRIBUNAL, IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK BEFORE SHRI BEFORE SHRI CHANDRA MOHAN GARG, JUDICIALMEMBER MEMBER AND LAXMI PRASAD SAHU, ACCOUNTANT MEMBER LAXMI PRASAD SAHU, ACCOUNTANT MEMBER LAXMI PRASAD SAHU, ACCOUNTANT MEMBER ITA No.130/CTK/2018 Assessment Year :2014-2015 Odisha State Beverage Corpn Odisha State Beverage Corpn Vs. ACIT, ACIT, Corporate Corporate Circle Circle-1(2), Ltd., 2nd floor, Fortune Towers, floor, Fortune Towers, Chandrasekharpur, Chandrasekharpur, Chandrasekharpur Chandrasekharpur Bhubaneswar. PAN/GIR No.AAACO 6507 H AAACO 6507 H (Appellant) (Appellant .. ( Respondent Respondent) Assessee by : Shri Ved Jain, AR Revenue by : ShriS.M.Keshkamat, CIT, DR , DR Date of Hearing : 20 /08/ 2019 Date of Pronouncement :04/10/ 201 / 2019 O R D E R Per C.M.Garg,JM C.M.Garg,JM This is an appeal filed by the assessee against the order of the This is an appeal filed by the assessee against the order of the This is an appeal filed by the assessee against the order of the CIT(A),1, Bhubaneswar CIT(A),1, Bhubaneswar dated 8.1.2018 for the assessment year for the assessment year 2014-15.
Grounds of appeal raised are as under: Grounds of appeal raised are as under:
“ 1. On the facts and circumstances of the case, the order passed On the facts and circumstances of the case, the order passed On the facts and circumstances of the case, the order passed by the learned CIT(A) is bad, both in the eye of law and on the facts. by the learned CIT(A) is bad, both in the eye of law and on the facts. by the learned CIT(A) is bad, both in the eye of law and on the facts. 2. On the facts and circumstances of 2. On the facts and circumstances of the case, the learned CIT(A) the case, the learned CIT(A) has erred, both on facts and in law, in confirming disallowance of Rs. has erred, both on facts and in law, in confirming disallowance of Rs. has erred, both on facts and in law, in confirming disallowance of Rs. 100,80,00,000/ 100,80,00,000/- made by the AO under section 40(a)(iib)of the Act made by the AO under section 40(a)(iib)of the Act on account of license fees paid to the Govt, of Odisha on account of license fees paid to the Govt, of Odisha on account of license fees paid to the Govt, of Odisha 3. On the facts and circumstance 3. On the facts and circumstances of the case, the learned CIT(A) s of the case, the learned CIT(A) has erred, both on facts and in law, in rejecting the contention of the has erred, both on facts and in law, in rejecting the contention of the has erred, both on facts and in law, in rejecting the contention of the
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assessee that since license fees is exclusively not levied on the assessee, provisions of clause (iib) of Section 40(a) are not applicable. 4. On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in ignoring the contention of the assessee that the license fees paid by the assessee to carry on the liquor trading under section 22 of the Bihar & Orissa Excise Act, 1915, is an allowable expenditure. 5. On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in confirming the action of AO by misinterpreting the provisions of clause (iib) of Section 40(a) of the Act. 6. (i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in upholding the disallowance of Rs.4,52,158/- as prior period expenditure. (ii) That the said disallowance has been confirmed despite the fact that the liability to pay these expenses have been crystallized during the current year. 7. The appellant craves leave to add, amend or alter any of the grounds of appeal.” 3. Ground Nos.1 & 7 are general in nature. 4. Apropos Ground Nos.2 to 5 of appeal are that the assessee company is a State Government undertaking under the Ministry of Excise, Government of Odisha. During the year under consideration, the assessee company is engaged in the business of supply of wholesale foreign liquor, Indian made Foreign liquor and country liquor manufactured from molases for the whole of the State of Odisha. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has shown license fee payment of Rs.100,80,00,000/- in its profit and loss account and required the assessee to furnish details regarding payment of license fees
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and the allowability of claim in the light of provisions of section 40(a)(iiib) of the Income tax Act, 1961. The Assessing Officer referred to Section 40(A)(iib), which lays down that any amount paid by way of royalty, license fee, service fee, privilege fee, service charge or any other fee or charge by whatever name called which is levied exclusively on or which is appropriated directly or indirectly, from a State Government undertaking by a State Government shall not be allowed as a deduction while computing the income chargeable under the head 'profits & gains of business or profession'. Before the AO, the assessee has filed elaborate submissions contending that the license fee paid to the State Government by the assessee cannot be taxed. However, the Assessing Officer did not accept the explanation of the assessee and made disallowance invoking the provisions of section 40(a)(iiib) of the Act.
On appeal, the CIT(A) confirmed the action of the Assessing Officer. Hence, this appeal by the assessee.
We have heard the rival submissions, inter alia, impugned assessment order, first appellate order, paper book of the assessee spread over 258 pages, written synopsis and entire material placed on record of the Tribunal.
LdAuthorised Representative of the assessee (AR) submitted that the CIT(A) has grossly erred, both on facts and in law, in confirming
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disallowance of Rs. 100,80,00,000/- made by the AO under section 40(a)(iib)of the Income tax Act , 1961 (in short ‘the Act’) on account of license fees paid to the Govt, of Odisha. Ld AR submitted that the CIT(A) was not correct and justified in rejecting the contention of the assessee that since license fee is exclusively not levied on the assessee, thus, provisions of clause (iib) of section 40(a) of the Act are not applicable to the impugned payment. Ld AR vehemently pointed out that the authorities below were not correct and justified in making and confirming the addition by mis- interpreting the provisions of clause (iib) of Section 40(a) of the Act. 8. Ld AR further submitted that the assessee company is a State Government Undertaking under the Ministry of Excise, Government of Odisha and during the year under consideration, the assessee company was engaged in the business of supply of wholesale foreign liquor, Indian made Foreign liquor and country liquor manufactured from molases for the whole of the State of Odisha. Ld AR further submitted that during the assessment proceedings vide letter dated 3.10.2016 and dated 28.10.2016, it was explained by the assessee that the license fee has been paid to the State Government of undertaking to acquire the right to carry trade of liquor in the State of Odisha. It was explained that any person whosoever wants to engage in any business activity in relation to liquor business in the State of Odisha needs to obtain license from the State Government of Odisha and make payment to obtain such license, and the assessee similarly
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is required to pay such fees to obtain license for wholesale trade on record. Ld A.R. strenuously contended that license fee is not a charge that is levied exclusively by State Government on the assessee or which is appropriated directly or indirectly by assessee to State Government as envisaged under section 40(a)(iib) of the Act. Hence, there was no exclusive levy or appropriation of profits in order to attract u/s. 40(a)(iib) of the Act. Ld AR further explained that license fee is collected by the Excise Department at the beginning of the year, which indicate that it is not the case of appropriation of income and the pricing of the products sold by the assessee are determined after considering such cost of license fee. Therefore, no disallowance is warranted in this regard. 9. Ld AR further drew our attention towards copy of the audited financial statement of the assessee for the financial year 2013-14 relevant to assessment year 2014-15 and submitted that the assessee Corporation has been created and incorporated under the Companies Act, 1956 and the payment of license fee is not under exclusive levy or appropriate of profits. Therefore, provisions of section 40(a)(iib) of the Act does not attract to the said payment. 10. Ld AR further took us through the provisions of section 19 of the Odisha Excise Act, 2005 and submitted that the said Excise company is not under anexclusive notification regarding creation of the assessee company. Ld AR further pointed out that the object to insert clause (iib) is to disallow
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license fee which is levied exclusively to avoid income tax on the surplus arising to the State Government Undertaking. However, the intention is not to disallow the license fee, which is payable to be able to carry on the business of liquor trade, which the State Government has the power to levy under Entry No.8, 51 and 66 of List II of Schedule VII of the Constitution of India. Ld AR submitted that the memorandum of undertaking explaining the object behind insertion of such provisions explicitly reveals that the intention is to curb tax avoidance practices in the form of appropriation of surplus to the State Government, exclusive levy being made by the State Government on its undertaking to divert the profits. The said intention was once again reiterated by CBDT vide Circular No.3/2014 dated 24.1.2014, which provides that the explanatory notes to the provisions of the Finance Act, 2013 and the said circular is binding on the revenue authorities. 11. Ld AR submitted that the interpretation of section 40(a)(iib) should be made in view of the settled legal principle of Noscitur a sociis and Ejusdem Generis i.e. the clause (A) dealing with exclusive levy should be read in the context of clause (B) that deals with appropriate of profits and accordingly, only such levies which intend to divert the profits should eb considered for disallowance under section 40(a)(iib) of the Act. Ld AR submitted that it is well settled, as noted by Maxwell in interpretation of statutes and while elaborating on the principle of noscitur a sociism, that when two or more words which are susceptible to analogous meaning
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aresed together they are deemed to be used in their cognate sense. They take, as it were, their colours from each other, the meaning of more general being restricted to a sense analogous to that of lessgeneral. Explaining this principle in general terms, Hon'ble Shri M.K. Chaturvedi, the then Vice President (MZ) has, in Interpretation of Taxing Statutes (AIFTP Journal : Vol. 4, No. 7, July, 2002, at p. 7), in his inimitable words observed:
"Law is not a brooding omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism. Similarly, the rules relating to interpretation are also based on common-sense approach. Suppose a man tells his wife to go out and buy bread, milk or I anything else she needs, he will not normally be understood to include in the I terms 'anything else she needs' a new car or an item of jewellery. The dictum of ejusdem generis refers to similar situation. It means of the same kind, class I or nature. The rule is that when general words follow particular and specific words of the same nature, the general words must be confined to the things of same kind as specified. Noscitur a sociis is a broader version of the maxim ejusdem generis. A man may be known by the company he keeps and a word may be interpreted with reference to be accompanying words. Words derive colour from the surrounding words." 12. Ld A.R. submitted that the objective to insert such provision as contained in the Memorandum also supports on legal principle of Noscitur a sociis and E jsdem Generis while interpreting such provision. It is pertinent to note that the case under the consideration does not fall under the ambit of the objective for which the provision has been inserted. The case under consideration is that of granting of rights which are vested in the State Government, to, inter-alia, assessee and charging a fee to part with such rights. In such circumstances, invocation of section 40(a)(iib) is not
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warranted. He submitted that it is a well settled law that an anti-avoidance measure should be strictly construed c thus, its invocation in the case in hand is injudicious and against the facts of the case. Ld A.R. placed reliance on the decision of High Court of Rajasthan in the case of Commissioner of Income Tax v. Rajasthan State Ganganagar Sugar Mills (2017] 88 taxmann.com 522 (Rajasthan), wherein on similar facts, itwas held that there is no appropriation of profits and thus, expenditure is an allowable business expenditure.
Replying to above, ld CIT(DR) submitted that as per copy of guidelines issued by the Excise Department for settlement of excise shops and establishment for financial year 2013-14, clause -18 (assessee’s paper book - 84) reveals that the license fee on wholesale liquor distribution has been levied on Odisha State Beverage Corporation Ltd., i.e. assessee for renewal of license for financial year 2013-14 on payment of license fee of Rs.100 crores per annum.Ld CIT (DR) submitted that in view of the amended provisions of section 40(a)(iib) of the Act, the license fees paid to State Government is taxable in the hands of the assessee.
Ld D.R. contended that clause (18) of guidelines issued by Excise Department of Government of Odisha clearly reveals that the wholesale distribution if foreign liquor, IMFL and country liquor has been exclusively assigned to Orissa State Beverage Corporation i.e. the assessee. Thus, the
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rigour of provisions of sub-clause(iib) of clause (a) of section 40 of the Act is to be triggered against the assessee as the assessee by way of license fee of wholesale distribution of liquor has paid the impugned amount and the same has been levied on the assessee exclusively as there is no other wholesaler of liquor in the state of Odisha. Ld D.R. supporting the assessment order submitted that on going through the guidelines issued by the Excise Department of Government of Odisha alongwith the provisions of section 40(a)(iib) of the Act, it can be easily gathered that this provision is applicable for any amount which is paid by way of license fees or charge which is levied exclusively on the State Government Undertaking by State Government or which is appropriated directly or indirectly from the State Government Undertaking by the State Government. Therefore, the CIT(A) was right in confirming the disallowance by holding that the impugned license fee paid by the assessee to the State Government which clearly in the nature of payments specified u/s.40(a)(iib) of the Act w.e.f. 1.4.2014. Ld CIT DR finally prayed that the assessment as well as the first appellate order may kindly be upheld on this issue by dismissing the grounds of appeal taken by the assessee.
On a careful consideration of the rival submissions, we find that the assessee is a State Government Undertaking dealing in supply of wholesale foreign liquor, Indian made Foreign liquor and country liquor manufactured from molases for the whole of the State of Odisha. The assessee has shown payment of Rs.100,80,00,000/- as license fees in its profit and loss
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account. We find that clause (iib) was inserted by the Finance Act, 2013 with effect from 1.4.2014 and the said section specifically disallows any amount paid by way ofroyalty, license fee, service fee, privilege fee, service charge or any other fee or charge by whatever name called which is levied exclusively on or which is appropriated directly or indirectly, from a State Government undertaking by a State Government shall not be allowed as a deduction while computing the income chargeable under the head 'profits & gains of business or profession'. Consequently, in view of the said provision, disallowance can be made from the assessment year 2014-15 and subsequent years and it is applicable prospectively. This is supported by the memorandum explaining the provisions of the Finance Bill Circular No.3/2014 dated 24.1.2014 and note on clauses. The assessment year under consideration being 2014-15,hence, the provision of section 40(a)(iib) of the Act is applicable and disallowance made by the Assessing Officer and confirmed by the CIT(A) is in order.
We further observe that the copy of guidelines issued by the Excise Department for settlement of excise shops and establishment for financial year 2013-14 pertaining to assessment year 2014-15 (assessee’s paper book 77-92) clause (18) clearly reveals that the wholesale distribution of foreign liquor, IMFL and country liquor has been exclusively assigned to the assessee on payment of license fee of Rs.100 crores per annum.
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Ld A.R. did not controvert the fact that there is no other wholesaler of foreign liquor, IMFL and country liquor in the State of Odisha and the assessee has exclusive right to undertake wholesale liquor business in the State of Odisha without any competitor.
At the cost of repetition, we may point out that in clause (18) of guidelines of Excise Department of Government of Odisha makes it clear that the assessee is the exclusive wholesaler of all kind of liquor in the State of Odisha. Therefore, the other contentions of ld A.R. are not tenable that provisions of sub-clause (iib) of clause (a) of section 40 of the Act is not applicable to the assessee for making disallowance the impugned payment of license fee. In the totality of facts and circumstances of the case, as noted above, we are satisfied that the Assessing Officer was right in making the disallowance of impugned license fee and the CIT(A) was also correct and justified in understanding the provisions of section 40(a)(iib) of the Act. Accordingly, Ground Nos.1 to 5 of assessee devoid of any merits, is dismissed.
Apropos Ground No.6 of appeal is concerned, we have heard the rival submissions and perused the record of the case.
The Assessing Officer noticed that the assessee has shown prior period expenses of Rs.4,52,158/- in its profit and loss account. In response to Assessing Officer’s requisition, the assessee submitted that the prior period expenses separately shown in profit and loss account is an account of any
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adjustment of expenditure pertaining to earlier years and grouped under this head of expenditure and is in conforming to accounting presentation laid down in revised Schedule VI noticed by MCA under Companies Act, 1956. It was submitted that a sum of Rs.4,52,158/- crystalised as expenditure during the financial year 2013-14 relating to previous year under consideration has been shown separately in the accounts as prior period item. The Assessing Officer observed that since the assessee is following mercantile system of accounting in which the expenses related to the prior period are not allowable and, therefore, he disallowed Rs.4,52,158/- and added the same to the total income of the assessee u/s.37 of the Act.
On appeal, the CIT(A) confirmed the action of the Assessing officer.
Ld A.R. of the assessee submitted that the expenses crystalised during the year under consideration and, therefore, the same are not in the nature of prior period expenses. He submitted that if crystalisation occurred during the year, no disallowance is to be made. Ld AR also submitted that the issue is squarely covered in favour of the assessee by the following decisions:
i) Hon’ble Supreme Court in the case of CIT vs. M/s. Excel Industries Ltd ,358 ITR 295 (SC) ii) Hon’ble Delhi High Court in CIT vs Dinesh Kumar Goel, 331 ITR 10(Del) iii) Hon’ble Bombay High Court in CIT vs Nagri Mills Co. Ltd, 33 ITR 681 (Bom) iv) Delhi High Court in CIT vs M/s. Vishnu Industrial Gases Pvt Ltd in ITA No.229/1988
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v) Hon’ble Delhi High Court in CIT vs Shri Ram Pistons & Rings Ltd., 220 CTR 404(Del) 23. Ld D.R. supported the orders of lower authorities.
After hearing the rival submissions, we find that the main reason for disallowance made by the Assessing Officer is that the assessee has not established with evidence that the expenses related to earlier(s) have actually crystalised during the relevant previous year, which has been confirmed by the CIT(A). 25. We are aware that it is one of the well-recognised principle of taxation that earlier years' expenses can be allowed, in the mercantile method of accounting,in the year in which the liability is accepted and paid. But, at the same time it is also accepted principle of taxation that even when the assessee is following the mercantile system of accounting, it is supposed to file an explanation that the expenses were not booked in earlier years due to some reasonable cause like to non- receipt of details, pending litigation, decision regarding unliquidated damages, an agreement entered in to for making payments for earlier period etc. and that such expenses got crystallised during subsequent assessment year. Thus, there are two limbs for allowing prior period expenses- firstly the expenses should have been incurred in earlier years and should not have been claimed in those years as same were not quantified and crystallised and secondly crystallisation of such expenses should take place
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in the subsequent years. Like any other expense to be allowed u/s.37 of the Act, claim for prior period expenses has to be supported by documentary evidence. If there is no evidence that the expenses were crystallised in a particular year then same would not be allowed as a deductible expenditure for that year. Mere making a claim that certain expenditure is prior period expense is not sufficient. It has to be supported by evidences. 26. In the instant case, the assessee was following the mercantile system of accounting. Therefore, it has to establish that these liabilities pertaining to the previous year and were actually crystalised during the year under consideration. Therefore, we, in the interest of justice, set aside the matter on this issue and restore to the file of the Assessing Officer with a direction that if these liabilities are actually crystalised during the year under consideration, then the Assessing Officer will allow the claim of the assessee. This ground is accordingly is allowed for statistical purposes. 27. In the result, appeal of the assessee is partly allowed for statistical purposes. Order pronounced on4/10/2019.
Sd/- sd/- (Laxmi Prasad Sahu)(Chandra Mohan Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER
Cuttack; Dated 04 /10/209 B.K.Parida, SPS P a g e 14 | 15
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Copy of the Order forwarded to : 1. The Appellant : Odisha State Beverage Corpn Ltd., 2nd floor, Fortune Towers, Chandrasekharpur 2. The Respondent. ACIT, Corporate Circle-1(2), Chandrasekharpur, Bhubaneswar 3. The CIT(A)-1, Bhubaneswar 4. Pr.CIT-1, Bhubaneswar 5. DR, ITAT, Cuttack 6. Guard file. //True Copy// By order
Sr.Pvt.secretary ITAT, Cuttack
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