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Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI GEORGE MATHAN, & SHRI A. MOHAN ALANKAMONY
आदेश / O R D E R PER GEORGE MATHAN, JUDICIAL MEMBER:
against the Order of Commissioner of Income Tax (Appeals)-11, Chennai, in 122/14-15, 145/15-16, 233/15-16 dated 06.09.2016 for the AYs 2010-11, 2011-12, 2012-13, 2012-13 & ITA No.233/Mds/2017 is an appeal filed by the assessee against the Order of Commissioner of Income Tax (Appeals)-11, Chennai, in ITA No.115/16- 17/CIT(A)-11 dated 23.12.2016 for the AY 2013-14.
ITA Nos.2866 to 2869/Mds/2016 & :- 2 -:
Mrs.Ruby George, CIT represented on behalf of the Revenue and Mr.R.Vijayaraghavan, Adv. represented on behalf of the assessee.
As the issues in all these cases are inter-connected, common and relates to the same assessee, all these issues are disposed of by this common order.
The assessee has filed concise grounds of appeals for all the three assessment years as follows:
The order of The Commissioner of Income Tax (Appeals) is contrary to law, facts and circumstances of the case.
2. The CIT(A) erred in confirming the disallowance of entirety of special privilege fee/annual privilege fee (License Renewal fee)/vend fee/special fees paid during the relevant previous year in accordance with and in compliance with the Tami Nadu Prohibition Act 1937 read with the Tamil Nadu liquor (Supply by Whole sale) Rules, 1983.
2.1 The CIT(A) ought to have appreciated that similar payments for the earlier years from 1983-84 to 2009-10 has been allowed by the ITAT and or Hon’ble High Court of Madras and the CIT(A) grossly erred in ignoring and not following the earlier decision of the Tribunal and the High Court in assessee’s own case on the very same issue.
3. The CIT(A) erred in holding that for the earlier years the Tribunal and the High Court had not specified that said fees are allowable under Section 37 grossly ignoring the fact that the question of allowability of such fees will arose only under Section 37.
3.1 The CIT(A) ought to have appreciated that the Apex Court in the case of CIT, KERALA Vs M/S.TRAVANCORE SUGARS & CHEMICALS LTD in CIVIL APPEAL NO.2558 OF 2005 dtd. 7th May 2015 has held that ‘fee’ by ‘whatever name called’, is an allowable deduction as and when if it is actually paid in accordance with Sec 43B.
3.2 The CIT(A) ought to have appreciated that the assessee has paid all the relevant fees before filing of the return and hence the same is allowable under Section 43B.
3.3 The CIT(A) ought to have appreciated that allowance to which Section 43B applies pre-supposes the same is otherwise allowable under the provisions of the Act, hence the CIT(A) erred in disallowing the claim on the ground that earlier decision did not specify that the same is allowable under Section 37 of the Act.
4. The Commissioner of Income Tax (Appeals) erred in holding that clause (iib) to Section 40(a) introduced with effect from 01.04.2014 will be applicable retrospectively to the assessment year under appeal.
4.1 The CIT(A) ought to have appreciated that the decision of Hon’ble Karnataka High Court in the case of M/s.Karnataka Beverages Corporation v CIT reported in 238
ITA Nos.2866 to 2869/Mds/2016 & :- 3 -:
Taxman 0299 has held that clause (iib) to Section 40(a) of the Finance Act, 2013 has retrospective in nature.
5. The CIT(A) erred in holding that Levy of Privilege Fee, License fee etc under Tamil Nadu Prohibition Act 1937 read with relevant rules are not reasonable and are conflicting with the Central Act viz., Income Tax Act and is a tax avoidance measure.
5.1 The CIT(A) failed to appreciate that the payments by assessee was in compliance with the statutory provisions of Tamil Nadu Prohibition Act 1937 read with relevant rules and the same cannot be held to be tax avoidance measure.
5.2 The CIT(A) ought to have appreciated that the decision of Hon’ble Karnataka? High Court in the case of M/s.Karnataka Beverages Corporation v CIT reported in 238 Taxman 0299 following the case of Apex Court in the case of Har Shankar V DTC - AIR - 1975 SC 1121 has held that fees levied by the State in respect of grant of license or privilege fee cannot be disallowed on the ground that it is not reasonable its power to levy fee and not mode of computation or Levy of fee is essence of the power of the State to levy said fee.
5.3 The CIT (A) ought to have appreciated that the G.Os have been validly legislated by placing before the Legislative Assembly and duly notified in the Official Gazette.
6. The CIT (A) erred in relying on the decision of the Hyderabad Tribunal in the case of Andhra Pradesh Beverages Corporation Limited ignoring the decision of the Co-ordinate Bench in assessee’s own case.
6.1 The CIT(A) ought to have appreciated that the decision of the Hyderabad Tribunal was based on the Prohibition Act applicable to the State of Andhra Pradesh and the privilege fee etc., paid by Andhra Pradesh Beverages Corporation Ltd., and the Tribunal held that there was no specific provision charging privilege fee etc., under the Act. Thus, the decision of the Hyderabad ITAT is not applicable to the facts of the present case.
6.2 The CIT(A) ought to have appreciated that the ITAT, Hyderabad themselves have indicated that the decision of the Chennai Tribunal was not applicable to the case of the Andhra Pradesh Beverages Corporation is a fact prevailing were different in both the case.
6.3 The CIT(A) erred in not adjudicating the ground relating to disallowance of a sum of Rs.40,75,34,247/- being annual privilege fee for FY 2010-11 not pertaining to this AY 2012-13, ought to have allowed the same in AY 2011-12. (only for Asst Year: 2012-13).
The Ld.AR at the time of hearing submitted that the assessee is a government company incorporated on 23.05.1983 with the main object of carrying on the business of manufacturing, processing, buying, stocking, selling, exporting to other states in India, importing from other states in India and generally deal in all kinds of Indian Made Foreign Sprits as a Wholesale dealer or a retail dealer or as a manufacturer in Tamil Nadu. It was a submission that Tamil Nadu Prohibition Act, 1937 clause 17C, the ITA Nos.2866 to 2869/Mds/2016 & :- 4 -:
assessee was given the exclusive privilege of supplying by wholesale IMFL for the state of Tamil Nadu to the exclusion of all others. Such license was subject to the Rules made by the State Government in this behalf. The assessee was also granted the license to open branches and also sell by retail IMFL. Under clause 17D of the said Tamil Nadu Prohibition Act, 1937, it was prescribed that the State Government may by Rules, levy a sum or fee or both in consideration of the grant of any exclusive or privilege u/s.17C and also fee on the license granted u/s.17(C). The Tamil Nadu IMFS (Supply by wholesale) Rules, 1983, were also incorporated and under Rule 15, the vend fee had been prescribed for various items at various rates. U/s.54(2) Tamil Nadu Prohibition Act, 1937, the State Government prescribed the provisions for making Rules. It was a submission that subsequently, notifications by issuance of various Government Orders (in short “GOs”) were done fixing the rates under Rule 15 of the Tamil Nadu IMFS (Supply by wholesale) Rules, 1983. The GO was put to the assembly and was issued in the name of the Governor.
The GO amends the Rule by substitution of the figures in the Rule 15 of the Tamil Nadu IMFS (Supply by wholesale) Rules, 1983. These substitutions were basically in respect of 3 categories: i. The vend fee which is a fee collected from the assessee on the purchase of liquor. ii. Special privilege fee collected in respect of the sale of liquor under Sec.17C and iii. The annual license fee being the license fee in respect of the various shops nearly 6200 running by the assessee under Sec.15D.
It was a submission that for the AYs 1983-84 to 1986-87, the various fees paid by the assessee to the government of the state of Tamil
ITA Nos.2866 to 2869/Mds/2016 & :- 5 -: Nadu had been disallowed by the AO by holding that the provisions of Sec.43B applied. It was a submission that this issue of vend fee had come in appeal before the Hon’ble Supreme Court in the case of Travancore Sugars & Chemicals Ltd., reported in Civil Appeal No.2558/2005, wherein the Hon’ble Supreme Court by an order dated 07.05.2015 had held that the 43B did apply and if the vend fee was paid by the assessee to the state before the due date for filing return then it is allowable as it would fall under fee “by whatever name called”, even if the vend fee is called “privilege”. The Hon’ble Supreme Court had held that if the payment had been made before the due date of the filing of the return, the same was allowable and alternatively, it was allowable in the year in which it is actually paid. It was a submission that for the AYs 2004-05 to 2008-09, the AO had disallowed the various fees paid by the assessee to the State Government holding that no retrospective levy was permissible. It was a submission that various fee more specifically the privilege fee had been directed by the government to be paid after the end of the relevant assessment year. It was submitted by the Ld.AR that this issue has also now been held in favour of the assessee by the decision of the Co-ordinate Bench of this Tribunal in the assessee’s own case in No.964/Mds/2011 & No.07/Mds/2012 and also in ITA Nos.1367 to 1370/Mds/2012 dated 30.10.2012 and also by the Hon’ble Jurisdictional High Court of Madras in TC(A) No.688-690/2004 dated 14.12.2010. It was a submission that now for the AYs 2010-11 to 2012-
ITA Nos.2866 to 2869/Mds/2016 & :- 6 -:
13, the AO has disallowed the said expenditure by raising the following four issues: i. The expenditure is not allowable u/s.37 and that the said expenditure was an application of income and consequently capital in nature. ii. The Hyderabad Bench of the Income Tax Appellate Tribunal has held the same to be application of income. iii. The privilege fee takes away, the entire surplus of the corporation and is in conflict with the Income Tax Act and therefore the notifications by way of GOs were invalid and it is a tax avoidance measure. iv. Sec.40(a)(iib) has been amended w.e.f. 01.04.2014 and is clarificatory in nature and is, therefore, applicable for these years.
It was a submission that a perusal of the decision of the Hyderabad ITAT in the case of AP Beverages Corporation Ltd., Hyderabad in & 545/Hyd/2013 dated 21.01.2014 at Page No.47, Para No.26 has held that the decision of the ITAT Chennai Benches in the case of Tamil Nadu State Marketing Corporation in ITA No.962/Mds/2010 dated 18.09.2012 wherein these issues had been considered were factually distinguishable. It was a submission that as per the decision of the ITAT Hyderabad Bench in the case of AP Beverages Corporation Ltd., the said decision itself could not be applied in the case of the assessee. It was a further submission that the said expenditure were exclusively incurred for the purpose of business of the assessee and was clearly a statutory levy in so far as the levy is as per the provisions of Sec.17D of the Tamil Nadu Prohibition Act, 1937 r/w Rule 15 of the Tamil Nadu IMFS (Supply by wholesale) Rules, 1983 and the said GOs were issued under the name of the Governor of Tamil Nadu after having been put through assembly. It was a further submission that the issue was fully covered by the decision of the Hon’ble Karnataka High Court in the case of Karnataka State
ITA Nos.2866 to 2869/Mds/2016 & :- 7 -:
Beverages Corporation Ltd., reported in [2017] 391 ITR 185 (Karn). It was a submission that the additions made by the AO and as confirmed by the Ld.CIT(A) in respect of the various fees paid by the assessee to the State Government was liable to be allowed.
In reply, the Ld.DR submitted that the levy of the fee has put the assessee into a loss and loss is an artificial loss and is basically a bogus loss on account of the unreasonable fees levied by the State Government on the assessee’s company for the purpose of stripping the assessee company of all its profits. It was a further submission that the Managing Director of the assessee’s company, though a government servant had written to the government in regard to the strong financial position of the assessee and had also suggested the quantification of the fees to be levied on the assessee and the same was also levied as per the request of the Managing Director. It was a further submission that when the costing of the liquor as sold by the assessee is verified, it is noticed that the same includes the basic price plus excise duty plus Sales Tax levied by the manufacturer plus the wholesale and retail margins and the Sales Tax paid by TASMAC. It did not include the various levies by State Government on the assessee’s company which showed that the levy was not Revenue expenditure in nature but was an application which was the basic levy to strip the assessee company of its profits and thereby deprive the Income Tax Department, the rightful share of the Revenue in the form of taxes. It was a submission that various GOs issued at the behest of the ITA Nos.2866 to 2869/Mds/2016 & :- 8 -:
Managing Director of the assessee’s company was a colourable device. It was a submission that the order of the AO & the Ld.CIT(A) were liable to be confirmed.
We have considered the rival submissions. At the outset, a perusal of the provisions of Rule 15 of the Tamil Nadu IMFS (Supply by wholesale)
Rules, 1983 shows that the levy is made by the State Government in respect of the various varieties of liquor dealt with by the assessee company. A perusal of the Tamil Nadu Prohibition Act, 1937 more specifically Secs.17B, 17C & 17D showed that the State Government has given the exclusive right to deal with IMFL to the assessee subject to levies may be prescribed by the State Government. The State Government has prescribed multiple levies on the assessee which are the vend fee, special privilege fee and the annual license fee. The annual license fee was collected to the extent of Rs.1.00 Cr. every year, was suddenly increased to Rs.250.00 Cr. for the AY 2011-12 and Rs.500.00 Cr. from the AY 2012-13. When the annual license fee was an amount of Rs.1.00 Cr., the Revenue did not have any objections. When the State Government increased the levy to Rs.250.00 Cr. and then again to Rs.500.00 Cr. the Revenue has put objection stating that the levy is unreasonable and is a colourable device to deprive the Income Tax Department of its rightful share in the form of taxes from the Revenue generated by the assessee. In respect of the special privilege fee, the allegation of the Revenue seems to be that the Managing Director of the ITA Nos.2866 to 2869/Mds/2016 & :- 9 -: assessee’s company who is also a government servant has intimated the government regarding the profitability of the assessee’s company and the possible rates that could be fixed and the State Government after considering the same had increased the levy accordingly. In respect of the vend fee also, the Revenue argued that its application in so far as the same was not considered while computing the cost in respect of the liquor sold by the assessee. The fact being missed is that the assessee is a company owned and controlled by the State Government. The Directors of the assessee’s company are also appointees by the State Government.
Admittedly, the assessee is also the monopoly dealer of liquor in the state of Tamil Nadu on account of the Tamil Nadu Prohibition Act, 1937. The levy on the assessee company is not by way of any demand but by way of a statutory compulsion in so far as the GOs are modifying the Rule 15 of the Tamil Nadu IMFS (Supply by wholesale) Rules, 1983. This being so, it cannot be said that there is a colourable device or that any attempt is being made to strip the assessee’s company of its profits. The assessee company cannot do its business unless it pays the demands raised on it via statutory substitution of the levies. If at all these levies are to be challenged, it is to be done by the assessee. If the Income Tax Department desires to challenge these levies on the ground that it is encroaching upon the profits of the assessee company thereby affecting the levy of Income Tax on the profits of the assessee company, it would have to do so by writ before the Hon’ble Jurisdictional High Court. The Revenue cannot disallow the payments made by the assessee company in ITA Nos.2866 to 2869/Mds/2016 & :- 10 -: compliance to statutory levies holding the levies by the state government to be unreasonable or colourable. The Hon’ble Karnataka High Court in the case of the Karnataka State Beverages Corporation Ltd., had by applying the principles laid down by the Hon’ble Supreme Court in the case of Har Shankar v. Dy. Excise and Taxation Commissioner, AIR 1975 SC 1121 had held as under:
Therefore, it can safely be said that the privilege fee payable by the petitioner to the State Government would be taxable with effect from 1.4.2014 and not prior thereto. The unreasonableness of the privilege fee payable is also not a ground to hold that it is a device by which the petitioner and the State Government are avoiding payment of tax. In this regard, reliance is placed on Har Shankar supra, which is clear on this aspect and therefore, it was not open for the Assessing Officer to opine that privilege fee appears to be relatable to the profit earned and a large chunk of it is transferred to the State Government in the name of privilege fee. It is settled law that there is no illegality committed by the petitioner in paying such privilege fee on the State Government having fixed such privilege fee. There is no legal prohibition in this regard and therefore, it cannot be said that the same could have been disallowed by the Assessing Officer. It requires to be emphasized that the Supreme Court in Har Shankar supra has expressed that, ‘the power of the Government to charge a price for parting with its rights and not the mode of fixing the price is what constitutes the essence in the exercise of the matter’, are the words used by the Supreme Court in dealing with the privilege of the State Government to fix such a privilege fee. Therefore, it would aptly apply in the facts and circumstances of these cases in so far as the Assessing Officer having expressed an opinion of the State Government having exercised its power “unscientifically, illegally and irrationally”. (sic)
A perusal of the decision of the ITAT Hyderabad Bench in the case of AP Beverages Corporation Ltd., showed that Co-ordinate Bench had clearly and categorically specified that the facts in the case of AP Beverages Corporation Ltd., were distinguishable from the facts of the assessee’s case, therefore, admittedly the said decision cannot be held to have any persuasive value. In these circumstances, as the issue of fees levied by the government has already been held to be an allowable expenditure, respectfully following the principles laid down in the decision of the Hon’ble Karnataka High Court in the case of Karnataka Beverages Corporation Ltd., the additions made by the AO and as confirmed by the ITA Nos.2866 to 2869/Mds/2016 & :- 11 -: Ld.CIT(A) in respect of the vend fee, special privilege fee and the annual license fee stands deleted.
In the result, the appeals filed by the assessee are allowed.