M/S.KERALA STATE BEVERAGES(M&M) CORPORATION LTD,TRIVANDRUM vs. THE ACIT, TRIVANDRUM

Per CHANDRA POOJARI, AM:

The appeal filed by the assessee in ITA No. 536/Coch/2018 is directed against

the order passed by the Pr. CIT, Trivandrum u/s. 263 of the I.T. Act dated

25/09/2018 and pertain to the assessment year 2014-15. The other appeal filed by

the assessee in ITA No. 537/Coch/2018 is directed against the order of the CIT(A),

Kottayam dated 05/11/2018 and pertain to the assessment year 2015-16. The

assessee has also filed Stay Petition in S.P. Nos. 40/Coch/2018.

which is directed against the order of the CIT passed u/s. 263 of the Act. The facts

of the case are that the assessee filed the Return of Income for the Assessment

Year 2014-15 on 29.11.2014 declaring a total income of Rs. 1,82,70,79,970/. A

revised return was filed on 31.03.2016 declaring total income of Rs.

6,01,81,50,270/- and the assessment u/s 143(3) was completed on 14.12.2016 by

determining total income at Rs. 6,01,84,16,899/-.

2.1 However, on subsequent examination of the records, the CIT noticed that an

amount of Rs. 96076.20 lakh was debited in the Profit & Loss a/c towards Surcharge

on Sales Tax and Turn over Tax. The surcharge was paid as per section 3(1) of the

Kerala Surcharge on Taxes Act, 1957 (Act 11 of 1957). But, according to the CIT,

this was not disallowed by the Assessing Officer u/s 40(a)(iib) of the Income tax Act

1961. Therefore, the CIT held that the order passed u/s 143(3) dated 14.12.2016

was erroneous and prejudicial to the interest of the Revenue.

2.2 The CIT referred to section 40(a)(iib) of the Income tax Act which stipulates

that " the following amounts shall not be deducted in computing the income

chargeable under the head 'Profits and gains of business or profession’, any amount 2

(A) paid by way of royalty, licence fee, service fee, privilege fee, service charge, or

any other fee or charge, by whatever name called, which is levied exclusively on: or

(B) which is appropriated, directly or indirectly from, a State Government

undertaking includes (i) a corporation established by or under any Act of the State

Government: (ii) a company in which more than fifty per cent of the paid-up equity

share capital is held by the State Government; (iii) a company in which more than

fifty percent of the paid-up equity share capital is held by the entity referred to in

clause (i) or clause (ii) (whether singly or taken together); (iv) a company or

corporation in which the State Government has the right to appoint the majority of

the directors or to control the management or policy decisions, directly or indirectly,

including by virtue of its shareholding agreements or voting agreements or in any

other manner; (v) an authority, a board or an institution of a body established or

constituted by or under any Act of the State Government or owned or controlled by

the State Government". Further, according to the CIT, the surcharge on sales tax

u/s 3(1) of the Kerala Surcharge on Taxes Act, 1957 (Act 11 of 1957) being an

exclusive levy on the assessee which is a State Government undertaking by the

State Government is to be disallowed u/s 40(a)(iib) of the Income tax Act 1961.

Since the Assessing Officer had not made the disallowance u/s 40(a)(iib) of the

Income tax Act 1961. Therefore, the CIT invoked the provisions of section 263 of

the Act proposing revision of the assessment order u/s 143(3) dated 26.12.2016.

their contentions against the proposed revision.

2.3 The Ld. AR contended that there is no error in assessment order since

surcharge on Sales Tax and Turnover Tax are not levies charged exclusively on the

assessee and is applicable to all general trading organisations. According to the Ld.

AR turnover tax is applicable to Bars, Beer and Wine Parlours, Clubs having Bars,

persons importing intoxicating drugs such as drug manufacturing units and

distilleries in Kerala. The Ld. AR also contended that surcharge on sales tax and

turnover tax is applicable to the above institutions as well as to several other trading

and manufacturing concerns in Kerala.

2.4 The CIT referred to sub section I of Section 3 of 'the Kerala Surcharge on

Taxes Act, 1957 (Act 11 of 1957)' which states that "The Tax payable under sub

section 1 of Section 5 of the Kerala General Sales Tax Act, 1963, by a dealer in

foreign liquor shall be increased by a surcharge at the rate of 10%. Also sub section

2 of Sections states that, no dealer referred to in sub section (1) shall be entitled to

collect the surcharge payable from his purchaser. According to the CIT, these

provisions of law clearly states that any dealer in foreign liquor is bound to remit

surcharge and cannot do the business without remittance of surcharge". In this

case, the assessee was entrusted with the monopoly purchase and sale of Indian

Made Foreign Liquor (IMFL) / Beer in the state of Kerala and hence, surcharge paid

on the sales tax as per the provisions of Section 3(1) of 'the Kerala Surcharge on

Taxes Act, 1957 (Act 11 of 1957)' is an exclusive levy. Therefore, the CIT held that

surcharge on sales tax should have been disallowed u/s 40(a)(iib) of the Act.

2.5 The CIT relied on the following judicial decisions: 4

1. CIT vs. Jawahar Bhattacharjee (2012) 341 ITR 434 (Gau.) (FB) wherein it was stated the assessment made on

A. wrong assumption of facts or B. on incorrect application of law or C. without due application of mind or D. without following the principles of natural justice would be 'erroneous'

2.5 After considering all aspects, the CIT found that the assessment was

completed without due verification and application of mind in the manner it ought to

be, resulting in an order erroneous and prejudicial to interests of revenue.

assessee is a State Government undertaking engaged in the Wholesale and Retail

trading in IMFL and Beer. The Ld. AR submitted that assessee was bound to pay

Surcharge on the Sales Tax, as per the provisions of "The Kerala Surcharge on

Taxes Act, 1957" (Act 11 of 1957). Section 2 of the above said Act states that "The

Agricultural income tax" payable by any person ["other than a company"] asessed

to such tax under the ["The Kerala Agricultural Income Tax Act, 1991"] shall be

increased by a surcharge at the rate of [ten per centum] of the tax payable each

year, and the provisions of the ["The Kerala Agricultural Income Tax Act, 1991"] 5

shall apply in relation to the said surcharge as they apply in relation to the

["Agricultural income tax "] payable under the said Act. It was submitted that the

Sub section 1 of Section 3 of the said Act states that "The Tax payable under

subsection 1 of section 5 of The Kerala General Sales tax Act, 1963, by a dealer in

foreign liquor shall be increased by a surcharge at the rate of ten percent and the

provisions of The Kerala General Sales Tax Act, 1963 shall apply in relation to the

said surcharge as they apply in relation to the tax payable under the said Act". As

the surcharge on taxes is as per the above Act is applicable to Agriculture Income

Tax also, the Surcharge on Sales Tax remitted by the assessee is not an exclusive

levy on the assessee as required by the provisions of the Section 40{a)(iib) of the

Income Tax Act, 1961.

3.1 The Ld. AR submitted that the assessee was also bound to pay Turnover Tax as

per the provisions of Section 5(2) of The Kerala General Sales Tax Act, 1963 which

is reproduced below.

"Sub section(2) (i) Notwithstanding anything contained in sub-section (1), every dealer in Foreign Liquor, as specified hereunder, shall pay Turnover Tax on the turnover of foreign liquor at all points of sale in the State, after making such deductions as may be prescribed , namely:- (a) by a bar attached hotel, at the rate of ten per cent ; and (b) by others at the rate of five per cent, on the turnover at all points of sale."

3.2 It was submitted that Turnover Tax is payable by bars, beer and Wine parlors,

clubs having bars, persons importing intoxicating drugs such as drug manufacturing

units and distilleries in Kerala. In this regard we wish to submit that section

40(a)(iib) clearly states that it is applicable only amounts which are levied 6

exclusively on a Government undertaking. In this case it was submitted that

Surcharge on Sales Tax and Turnover Tax are not levies charged exclusively to the

appellant and is applicable to other entities also as explained above and which is

evident from the provisions of the respective sections of the applicable Acts of the

State Government. Hence, it was submitted that it never came within the ambit of

the provisions of Section 40(a)(iib) to disallow the expenses claimed under the head

Surcharge on Sales Tax.

3.3 According to the Ld. AR, the above levies are paid as per the provisions of

respective statutory provision contained in the respective statues which were in

force even before the formation of the assessee Corporation and not by any order

of the Government. It was submitted that none of the payments proposed to be

disallowed by the revision as per the proposal u/s. 263 of the Income Tax Act, was

made based on any government order. All the above levies were being paid by

private licensees earlier before the formation of the assessee Corporation and none

of these levies are newly introduced one so as to appropriate or vest the surplus of

the appellant with the State Government. It was submitted that the intent of

legislation is not to bring to tax levies which are intended to appropriate or the vest

surpluses with the State Government. As the levies proposed to be disallowed and

in challenge under this appeal were in existence even before the formation of the

assessee Corporation, it cannot be stated that these levies were intended to vest

surpluses with State Government. Hence it was submitted that considering the

intent of legislation also, all the above levies does not come under the purview of 7

section 40(a)(iib) and hence are allowable as expenditure. In view of the above

facts, it was submitted that the order passed by the Pr. CIT u/s. 263 of the Act may

be set aside.

the Income-tax Act seeks to remove the prejudice caused to the revenue by the

erroneous order passed by the Assessing Officer. It empowers the Commissioner to

initiate suo moto proceedings either where the Assessing Officer takes a wrong

decision without considering the materials available on record or he takes a decision

without making an enquiry into the matters, where such inquiry was prima facie

warranted. The Commissioner is well within his powers to treat an order as

erroneous on the ground that the Assessing Officer should have made further

inquiries before accepting the wrong claims made by the assessee. The Assessing

Officer cannot remain passive in the face of a claim, which calls for further enquiry

to know the genuineness of it. In other words, he must carry out investigation

where the facts of the case so require and also decide the matter judiciously on the

basis of materials collected by him as also those produced by the assessee before

him. The Assessing Officer was statutorily required to make the assessment under

Section 143(3) after scrutiny and not in a summary manner as contemplated by

Sub-section (1) of Section 143. The Assessing Officer is therefore, required to act

fairly while accepting or rejecting the claim of the assessee in cases of scrutiny 8

assessments. The Assessing Officer should protect the interests of the revenue and

to see that no one dodged the revenue and escaped without paying the legitimate

tax. The Assessing Officer is not expected to put blinkers on his eyes and

mechanically accept what the assessee claims before him. It is his duty to ascertain

the truth of the facts stated and the genuineness of the claims made in the return.

The order passed by the Assessing Officer becomes erroneous when an enquiry has

not been made before accepting the genuineness of the claim which resulted in loss

of revenue.

5.1 In the present case, the Assessing Officer had not made the

disallowance u/s. 40(a)(iib) of the Act. Without enquiring, the Assessing

Officer accepted the assessee’s claim. The failure on the part of the

Assessing Officer to make necessary enquiry rendered the assessment order

erroneous which also resulted in loss to the revenue. The CIT had observed

in his order that the surcharge on sales tax and turn over tax was not

disallowed by the Assessing Officer u/s. 40(a)(iib) of the Act. Hence, the

order of the CIT cannot be held as erroneous. The CIT’s approach was

correct. Therefore, the CIT exercised his power conferred u/s. 263 of the Act

in setting aside the assessment. In our opinion, the Assessing Officer has

not considered the issue relating to the application of section 40(a)(iib) of the

Act and he had accepted the claim without applying his mind. Hence, the

order of the Assessing Officer is erroneous in so far as it is prejudicial to the

interests of the revenue. In our opinion, the CIT is justified in invoking the

provisions of section 263 of the Act. Accordingly, this ground of appeal of

the assessee is dismissed.

5.2 The assessee has also raised additional grounds which read as follows:

“(a) Disallowance of Gallonage Fee Rs 54,83,87,000/-

It had been submitted by the appellant in the argument notes already submitted on 06.02.2019 that the Gallonage Fee is payable by distilleries ON RECTIFIED SPRIT as per Rule 14 of Kerala Rectified Spirit Rules 1972,(rules made under The Abkari Act) also, in addition to the appellant. It is further submitted that in addition to distilleries mentioned above, Gallonage Fee is payable by persons specified in Rule IX of Cochin Mass Wines Rule1117 which is reproduced below:

"IX Excise Duty and Gallonage Fee: Mass wine shall be charged an excise duty and Gallonage Fee at Rs 1 & 25 naye paise respectively per bulk liter manufactured and taken into stock." We attach herewith three challans evidencing the payment of Gallonage Fee by producers of mass wine (Annexure 1, Page 3-5). We also attach copies of the relevant pages of following rules under Abkari Act for easy reference. 1. Foreign Liquor Rules 1953 (Annexure 2, Page 6) 2. The Kerala Rectified Spirit Rules 1972 (Annexure 3, Page 7) 3. Cochin Mass Wine Rules 1117 (Annexure 4, Page 8)

It is also submitted that The Hon. Karnataka High Court has held that "If a businessman or a professional has incurred expenses by way discharge of a statutory obligation to get a license to do business or to get a license to undertake profession, such expenditure can be termed as an expenditure on account of necessity of business or profession." (2017) 395 ITR 444(Kar). A. Copy of the judgement is attached (Annexure 5, Page 9-22). In view of the above decision, it is submitted that Gallonage Fee paid is not an appropriation of income.

Hence it is submitted that Gallonage Fee is not an amount levied on the assesse by the State Government and hence cannot be disallowed under section 40(a)(iib).

For the reasons stated above and the submissions made in our argument notes submitted on 06.02.2019, this Honorable Income Tax Tribunal may kindly be pleased to allow the appeal and delete the additions made by the learned Assessing officer. “ Since we have disposed of the appeal of the assessee, the additional grounds

are of no consequence and hence, they are dismissed. The appeal of the

assessee in ITA No. 536/Coch/2018 is dismissed.

the case are that the assessee filed its return of income for AY 2015-16 on

29/09/2015 declaring total income of Rs.220,71,67,890/-. The assessment

u/s. 143(3) of the Act was completed on 28/12/2017 by disallowing the

following expenses u/s. 40(a)(iib) of the Act.

S. No. Item Amount (Rs.) 1 Gallonage fee 54,83,87,000 2 License fee 5,75,00,000 3 Shop Rental (Kist) 199,71,00,000 4 Surcharge on Sales Tax 551,61,01,115

40(a)(iib) of the Act. The Ld. AR contended that gallonage fee and license fee paid

by the assessee was not exclusive in nature.

7.1 The Ld. DR relied on the order of the lower authorities.

7.2 We have heard the rival submissions and perused the record. The clause

“exclusively” cannot be assessed with respect to the nomenclature of the payment

made but the same has to be determined with respect to mode and method of levy

of charge. The gallonage fee is paid by the assessee as per the Foreign Liquor

Rules, 1953 under Rule 15A. The gallonage fee referred under Rule 15A is with

regard to fee to be paid for FL-9 licensee. The FL-9 license is exclusively granted to

the assessee. Therefore, the gallonage fee paid by the assessee is covered by the

provisions of section 40(a)(iib) of the Act. The fact that a fee in the name of

gallonage fee is also levied under clause 14 of Kerala Rectified Spirit Rules, 1972 is

not relevant for the purpose of examining the applicability of provisions of section

40(a)(iib) of the Act for the fee paid under Foreign Liquour Rules, 1953.. Therefore

in view of the above reasons, the disallowance of gallongage fee of

Rs.54,83,87,000/- u/s. 40(a)(iib) of the Act is upheld. This ground of appeal of the

assessee is dismissed.

7.3 The next ground is with regard to disallowance of license fee and shop rental

u/s. 40(a)(iib) of the Act. The Ld. AR submitted that the provisions of section

40(a)(iib) of the Act are not applicable to license fee and shop rent paid by the

assessee.

7.4 The Ld. DR relied on the order of the lower authorities.

7.5 We have heard the rival submissions and perused the record. Admittedly, the

assessee is exclusive licensee for FL-9 shop and FL-1 shop for the relevant previous

year. It is also a fact that these licenses are issued on a year-to-year basis. The

assessee is paying license fee and shop rent in respect of exclusive licenses granted

by way of FL-1 and FL-9 license by the State Government. Therefore, in the

absence of any dispute on fact about the exclusive nature of license fee and shop

rental, the disallowance of Rs.205,46,00,000/- made by the Assessing Officer and

confirmed by the CIT(A) is upheld.

7.6 Further, the website of the State Excise Department of Kerala gives details of

licenses granted as under:

"2. Issue of Licence for Sale of Liquor, Drugs etc

The licenses are issued for a period of one financial year, ie. 1st April to 31st March. At the end of the year, shops are again put up for sale or the existing Licences are renewed as per the Abkari policy of the Government.

An important licence granted by the department for sale of foreign liquor is FL 3 licence, widely known as Bar licence. Bar licence are granted to hotels having facilities, which are rated as three star or above with prior sanction of the Government.

Wholesale business Indian Made Foreign Liquor (FL-9 licence) in the State is the monopoly of Kerala State Beverages Corporation, which is a State Government undertaking. Foreign Liquor retail outlets also (FL1 shops) are exclusively earmarked for the State Public Sector Units, Kerala State Beverages Corporation and Consumer Federation. These licenses too are issued on a year-to-year basis." [Emphasis Supplied]

7.7 Thus it is evident from the above that FL-1 shop license is earmarked for the

assessee and Consumer Federation, another State Public Sector Unit. Therefore, the

argument that the Shop Rental payable for FL-1 license is not an exclusive fee, does

not hold good also. The provisions of section 40(a)(iib) of the Act are as under:

"(lib) any amount—

(A) paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which is levied exclusively on; or

(B) which is appropriated, directly or indirectly, from,

a State Government undertaking by the State Government."

7.8 From the above, it is evident that the language used by legislature used the

sentence is "any fee or charge which is levied exclusively on a State Government

undertaking by the State Government" but not the sentence "any fee or charge

which is levied exclusively on the assessee by the State Government". Therefore,

any fee or charge which is exclusively levied only on State Government

undertakings by the State Government is covered by the provisions of section

40(a)(iib) of the Act. Hence, even considering hypothetically that Shop rental was

payable by another state government undertaking also, the nature of the payment

remains "exclusive" for the purpose of section 40(a)(iia) of the Act.

7.9 In view of the above discussion, we hold that there is no merit in the grounds

raised by the assessee on the issue of disallowance of license fee and Shop rental

and therefore, the same are dismissed. The appeal of the assessee in ITA

No.537/Coch/2018 is dismissed.

the assessee in S.P. No. 40/Coch/2018 has become infructuous and the same is

dismissed as infructuous.

filed by the assessee are dismissed. Order pronounced in the open Court on this 12th March, 2019

sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Place: Kochi Dated: 12th March, 2019

GJ Copy to: 1. Kerala State Beverages, (M&M) corporation Ltd., Sasthamangalam, Trivandrum-695 010. 2. The Assistant Commissioner of Income-tax, Circle-1(1), Trivandrum. 3. The Commissioner of Income-tax(Appeals), Kottayam. 4. The Pr. Commissioner of Income-tax, Kottayam. 5. The Pr. Commissioner of Income-tax, Trivandrum. 6. D.R., I.T.A.T., Cochin Bench, Cochin. 7. Guard File. By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin