THE COMMISSIONER OF INCOME TAX vs. M/S KARNATAKA STATE BEVERAGES CORPORATION LIMITED

THE COMMISSIONER OF INCOME TAX BANGALORE-560001 C.R. BUILDING, QUEEN’S ROAD, BANGALORE-560 001

THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-11(5), R.P. BHAVAN, OPPOSITE RESERVE BANK OF INDIA, NRUPATHUNGA ROAD, BANGALORE-560 001

M/S. KARNATAKA STATE BEVERAGES CORPORATION LIMITED REPRESENTED BY IT’S EXECUTIVE DIRECTOR (FINANCE), SRI. SHRIKANT B VANAHALLI AGED ABOUT 60 YEARS NO.78, SEETHALAKSHMI TOWERS, MISSION ROAD, BANGALORE-560027

STATE OF KARNATAKA THROUGH ITS ADDITIONAL CHIEF SECRETARY TO, GOVERNMENT OF KARNATAKA, FINANCE DEPARTMENT, 2ND FLOOR, VIDHANA SOUDHA, BANGALORE-560001

THE COMMISSIONER OF EXCISE VOKKALIGARA BHAVAN, K C R CIRCLE, BANGALORE-560001

THE COMMISSIONER OF INCOME TAX BANGALORE-I

THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-11(5), R.P. BHAVAN, OPPOSITE RESERVE BANK OF INDIA, NRUPATHUNGA ROAD, BANGALORE-560 001

M/S. KARNATAKA STATE BEVERAGES CORPORATION LIMITED REPRESENTED BY IT’S EXECUTIVE DIRECTOR (FINANCE) SRI. SHRIKANT B VANAHALLI AGED ABOUT 60 YEARS NO.78, SEETHALAKSHMI TOWERS, MISSION ROAD BANGALORE-560 027

STATE OF KARNATAKA THROUGH ITS PRINCIPAL SECRETARY TO GOVERNMENT OF KARNATAKA, FINANCE DEPARTMENT, 2ND FLOOR, VIDHANA SOUDHA, BANGALORE-560001.

THE COMMISSIONER OF EXCISE 2ND FLOOR, TTMC A BLOCK, BMTC COMPLEX, K.H. ROAD, SHANTINAGAR, BANGALORE-560001.

THE COMMISSIONER OF INCOME TAX BANGALORE - 560004 C R BUILDING QUEEN’S ROAD BANGALORE-560001

THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE - 4(1)(1) R P BHAVAN OPPOSITE RESERVE BANK OF INDIA NRUPATHUNGA ROAD BANGALORE-560 001

M/S KARNATAKA STATE BEVERAGES CORPORATION LIMITED REPRESENTED BY IT’S EXECUTIVE DIRECTOR (FINANCE) SRI SHRIKANT B VANAHALLI AGED ABOUT 60 YEARS 4TH FLOOR, TTMC BUILDING ‘A’ BLOCK, BMTC SHANTHINAGAR

STATE OF KARNATAKA THROUGH ITS PRINCIPAL SECRETARY TO GOVERNMENT OF KARNATAKA FINANCE DEPARTMENT 2ND FLOOR, VIDHANA SOUDHA BANGALORE-560 001.

THE COMMISSIONER OF EXCISE 2ND FLOOR, TTMC A BLOCK BMTC COMPLEX K.H.ROAD SHANTINAGAR BANGALORE-560 001.

THE COMMISSIONER OF INCOME TAX BANGALORE-560004 C.R. BUILDING, QUEEN’S ROAD, BANGALORE-560 001

THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-4(1)(1) R.P. BHAVAN, OPPOSITE RESERVE BANK OF INDIA, NRUPATHUNGA ROAD,

M/S.KARNATAKA STATE BEVERAGES CORPORATION LIMITED REPRESENTED BY ITS EXECUTIVE DIRECTOR (FINANCE) SRI. SHRIKANT B VANAHALLI AGED ABOUT 60 YEARS 4TH FLOOR, TTMC BUILDING ‘A’ BLOCK, BMTC, SHANTHINAGAR, BANGALORE-560 027

STATE OF KARNATAKA THROUGH ITS PRINCIPAL SECRETARY TO GOVERNMENT OF KARNATAKA FINANCE DEPARTMENT, 2ND FLOOR, VIDHANA SOUDHA, BANGALORE-560 001

THE COMMISSIONER OF EXCISE 2ND FLOOR, TTMC A BLOCK, BMTC COMPLEX, K.H. ROAD, SHANTHINGAR, BANGALORE-01

All the appeals are directed against the common order dated 18.02.2016 passed by the learned Single Judge in the respect of writ petitions whereby the learned Single Judge, for the reasons recorded in the order, has set aside the impugned assessment orders so far as they relate to `Privilege Fee’ as being taxable income. Learned Single Judge has further remanded the matter to the assessing Officer to re-examine in respect of disallowance after giving opportunity of hearing to the respondent-herein the original petitioner in respect of the concerned assessment years.

The short facts of the case appears to be that, the respondent-original petitioner is a Company being an undertaking of the Government of Karnataka engaged in the business of canalization of liquor, beer and rectified spirit. In respect of the assessment year of 2009-10, 2010-11, 2011-12 and 2012-13, the assessing officer under Section 143(3) of the Income Tax Act (hereinafter referred to as `the Act’) after making assessment, has passed the order disallowing of privilege fee of the respective amount paid by the respondent-Company to the Government of Karnataka. The other disallowance was also made in the assessment year in respect of certain other expenses.

We may, for ready reference, reproduce the details of the original writ petitions, writ appeals, assessment year and the privilege fees which are disallowed by the impugned assessment orders in the respective original writ petitions as under:

The assessing officer has disallowed the privilege fee on the following grounds:

The respondent-Company filed respective writ petitions before the learned Single Judge challenging the aforesaid assessment orders for the respective years passed by the Assessment Officer and prayed to declare disallowance of the privilege fee in the assessment year as in violation of the powers of the State to have its statute as per Entry No.8 of List.II of Seventh Schedule within the power of the State under Article 245(1) and 246(3) of the Constitution of India.

The learned Single Judge found that the unreasonableness of the privilege fee payable is not a ground to hold that it is a device by which the petitioner and the State Government are avoiding payment of tax. He also held that the privilege fee payable by the original petitioner to the State Government would be taxable with effect from 1.4.2014 in view of the amendment which is prospective in nature and not prior

The learned Single Judge found that there is no illegality committed by the original petitioner in paying such privilege fee to the State Government and it was not open to the assessing officer to hold that the privilege fee appears to be relatable to the profit earned or that large chunk of it is transferred to the State Government in the name of privilege fee. The learned Single Judge therefore, found that the same could not have been disallowed by the assessing officer. Ultimately the learned Single Judge has allowed the petitions by setting aside the impugned orders so far as they relate to privilege fee to be treated as taxable income and remanded the matter to the assessing officer. Under the circumstances, the present appeals before this Court.

We have heard Mr.Prabhuling K.Navadgi, learned ASG with Sri K.V.Aravind, learned counsel for

The learned ASG appearing for the appellants mainly raised two contentions; one was the maintainability of the writ petition under Article 226 of the Constitution when there was regular statutory remedy available to the assessee to prefer an appeal under the Act and the second contention raised by the learned ASG was that, under Section 37 of the Act, the assessing officer has power to disallow a particular expense if he finds that such expense is not wholly or exclusively for the purpose of business or profession. He submitted that, whether a particular expense is allowable or not as a revenue expenditure is a question of fact and when the assessing officer on facts has found that the expenditure incurred for payment of privilege fee was not available as an expenditure, the

Learned ASG relied upon certain decisions which shall be referred hereinafter to the extent found relevant.

The learned counsel appearing for the respondent supported the order passed by the learned

We may at the outset mention that, on the question of entertainment of petition under Article 226 of the Constitution in a case where statute provides alternative remedy, is by now well settled. If the action is wholly without jurisdiction or is ultravires to the power, the existence of alternative remedy is no bar to the entertainment of the petition under Article 226 of the Constitution. To put it in other words, unless an exceptional case is made out warranting interference to invoke extra-ordinary jurisdiction under Article 226, this Court would, by self imposed restriction, may decline to entertain a petition.

In our view, if the action is wholly without jurisdiction or is ultravires to his power, such order would fall in the category of exceptional case to make a departure from the normal principles of non-

In order to find out as to whether the case falls in the exceptional category or as to whether the action by the assessing officer in the assessment proceedings disallowing the expenditure incurred for payment of privilege fee can be said to be wholly without jurisdiction or ultravires to the power, we need to further examine the matter.

Section 37(1) of the Income Tax Act which is pressed into service by the learned ASG (with explanation 1 and 2): “37. (1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the

The plain reading of the aforesaid section shows that any expenditure other than capital expenditure or personal expenditure made wholly or exclusively for the purpose of business or profession shall be allowed in computing the income chargeable under the head `Profits and gains of business or profession’ and any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law same shall not be deemed to have

It is by now well settled that, when any taxing statute is introduced or amendment is made to any taxing statute, unless it is expressly made retrospective, it would be prospective. Considering the amendment brought about with effect from 1.4.2014 and its language, it is not possible for us to accept the contention that the amendment brought about could be termed as clarificatory in nature but, is prospective and

Learned ASG mainly relied upon the decision of the Apex Court in case of S.A.Builders vs. Commissioner of Income Tax (Appeals) reported in 2007(1)SCC 781 and more particularly the observations made at paragraphs No.24 to 27 in the said Judgment and contended that it was within the powers of an assessing officer to decide that whether there was any commercial expediency for incurring a particular expenditure and therefore, the action could not be said to be wholly without jurisdiction or ultravires to his power if the assessing officer has disallowed the fee.

In order to appreciate the contention, we may reproduce paragraphs No.24 to 27 of the aforesaid decision which reads as under: “24. In our opinion, the decisions relating to Section 37 of the Act will also be

The perusal of the aforesaid observation made by the Apex Court shows that for examining the commercial expediency, the Apex Court has mainly

Apart from the above, if one is to trace the expenditure incurred for necessity, it would certainly include the statutory liability for running of the business. On the contrary, if the statute is not obeyed and resultantly the person is unable to do business, such expenditure incurred for compliance of the statute would in any case fall under the expenditure for necessity. As we are not required to examine the other expenditure which may fall as necessity, we would not be required to further discuss in detail.

Even if it is to be considered under the head of direct and immediate benefit for the purpose of considering the nature of expenditure, then, also the same has no applicability for testing the commercial expediency. For example, if one is to make the payment of the raw material for producing the finished product,

Again coming to the facts, principally the business of liquor is reserved by the State of Karnataka but by enacting legislature known as Karnataka Excise Act.1965, it is regulated as per the said Act. Sec.24 provides as under; “Sec.24: Payment of fees for grant or renewal of lease or licence-

Rule-4 of the Karnataka Excise (Sale of Indian and Foreign Liquors) Rules, 1968 empowers the Commissioner to demand privilege fee as per State Government guidelines which reads as under:

It is an undisputed position that, the respondent-original petitioner has entered into agreement with the Government of Karnataka and as

In our view, the aspects of expenditure for necessity and the expenditure having direct benefit are specifically excluded when the House of Lords in the above referred decision in case of Atharton (supra) made the observation for the expenditure incurred on the ground of commercial expediency or to indirectly facilitate carrying on of the business.

Even otherwise also, if any businessman or a professional has incurred expenses by way of discharge of statutory obligation to get a licence to do business or to get a licence to undertake profession such expenditure in any case can be termed as an expenditure on account of necessity of the business or profession. Since in the present case, it is privilege fee and the liability to pay the said amount arises on account of the statutory obligation even if the payment of which is agreed upon by contractual arrangement, such expenditure would not fall into the arena of

On the contrary, the assessing officer being a statutory authority under the Act is bound to respect all the laws may be made by the Parliament or may be made by the State Legislature. He has no jurisdiction to examine the constitutional validity of any Act or the statute or a subordinate legislation which creates statutory liability upon the assessee to make the payment by way of an expenditure incurred.

Under the circumstances, we find that the action of disallowance of the payment of the privilege fee by the assessing officer for the respective period of assessment years which is prior to 1.4.2014 is per se without jurisdiction and also ultravires to his power under the Act.

In our view, the learned Single Judge has rightly observed that the assessing officer has no authority or competence to hold that the privilege fee is not having the character of statutory fee or that the State Legislature or the State Government in exercise of its power by way of a delegated legislation, cannot decide the quantum of fee or the percentage of the revenue on the income earned from the business. Be it recorded that the assessing officer was not exercising the power as that of a constitutional Court nor at any point of time the constitutional validity of the Karnataka Excise Act read with the Rules which include the grant

Under the circumstances, the observations made by the assessing officer in the impugned order so far as privilege fee is concerned can be said to be ultravires to his power under the Act.

In view of the above, if an action of disallowance of the deduction of privilege fee, the expenditure of privilege fee is wholly without jurisdiction and ultravires to his power, it would be the case falling under exceptional category for entertainment of writ power under Article 226 of the Constitution of India.

Under the circumstances, we find that the case would fall in the exceptional category to make a departure from the normal principle of relegating the party to the statutory remedy by way of appeal in exercise of power under Article 226 of the Constitution.

The exercise of the power by the learned Single Judge for remanding the matter to the Assessing Officer for consideration other than of privilege fees also

In view of the above, we find that appeals being meritless deserve to be dismissed. Hence, they are dismissed.