2012 (11) TMI 579 - AT - Income Tax

Tribunal overturns CIT's decision on privilege fees, remands for review under amended Excise Act.

The Tribunal set aside the CIT's order disallowing privilege fees as business expenses, remanding the case for fresh examination in light of amendments to ... CIT's revisionary powers u/s 263 - disallowance of privilege fee, Special privilege fee and special privilege fee as allowed by AO - Held that:- The amount of privilege fee is a balancing charge on the P&L account being variable and not based on quid pro quo. Also, only the amount that remains out of margins after deducing expenditure including income tax would be the sum to be paid as privilege fee. The amendments passed by the Andhra Pradesh Legislature on 16-04-2012 to the Andhra Pradesh Excise and Andhra Pradesh (Regulation of trade in Indian made foreign liquor, Foreign Liquor) Acts, (Amendment) Act, 2012(Andhra Pradesh Act No. 5 of 2012), has to be examined and analyzed with respect to newly inserted section 4C, it only reaffirms the fact that it is the profit that is sought to be appropriated. The new amendment to Excise Act, clearly establishes the fact that the entire income of the assessee is not that of the State and only the amounts specified as privilege fees is income of the State. With respect to newly inserted section 4A, the invoices raised by the assessee do not indicate separate amounts as privilege fee or special privilege fee or sports privilege fee. And with respect to the newly inserted section 4B, the manner of computation is not specified under 4B and the computation needs to be made u/s 23A and the implication of AS-22 is to be examined. As the CIT has no occasion to consider the amendments passed by the Andhra Pradesh Legislature on 16-04-2012 as the said amendments came after the CIT passed the order u/s 263 on 29/03/2011 the order of the CIT is to be set aside and restore the issue back to his file with a direction to decide the issue de-novo after examining the said amendments and in accordance with law - in favour of assessee for statistical purposes. Issues Involved:1. Validity of the order passed by the CIT under Section 263 of the Income Tax Act.2. Nature and allowability of privilege fee, special privilege fee, and sports privilege fee as business expenditure.3. Impact of amendments to the Andhra Pradesh Excise Act and Andhra Pradesh (Regulation of Trade in Indian Liquor, Foreign Liquor) Act on the case.4. Application of Article 289 of the Constitution regarding the taxability of income derived by a state government corporation.Detailed Analysis:1. Validity of the Order Passed by the CIT under Section 263 of the Income Tax Act:The CIT exercised revisionary powers under Section 263, disallowing the entire amount of privilege fee, special privilege fee, and sports privilege fee amounting to Rs. 883,90,15,513/-. The CIT's rationale was that these payments were not business expenses but rather a share of profit paid to the Andhra Pradesh Government. The assessee argued that these fees were paid for obtaining the exclusive commercial right to bottle and distribute liquor, which should be considered a business expense. The CIT's order was challenged on the grounds of change of opinion, citing the Supreme Court decision in Mallabar Industries Ltd (243 ITR 83) which necessitates quashing the CIT's order if it is based on a mere change of opinion.2. Nature and Allowability of Privilege Fee, Special Privilege Fee, and Sports Privilege Fee as Business Expenditure:The assessee contended that the fees paid to the Andhra Pradesh Government were for the exclusive right to bottle and distribute liquor, thus qualifying as business expenses under Section 37 of the Income Tax Act. The Department argued that these payments were not business expenses but appropriations of profit. The Department cited various case laws, including the Supreme Court rulings in Poona Electric Supply Co. Ltd. and Pondicherry Railway Co. Ltd., to support their stance that such payments are applications of income rather than expenditures incurred to earn income.3. Impact of Amendments to the Andhra Pradesh Excise Act and Andhra Pradesh (Regulation of Trade in Indian Liquor, Foreign Liquor) Act:The amendments passed by the Andhra Pradesh Legislature on 16-04-2012, inserted sections 4A, 4B, and 4C, and repealed sections 23A and 23B of the AP Excise Act. The Department argued that these amendments have a significant impact on the case, as they retrospectively deem the payments made by the assessee as the income of the Government. The amendments indicate that the payments are appropriations of income, thus supporting the Department's stance. The Tribunal noted that the CIT did not have the opportunity to consider these amendments as they were passed after the CIT's order.4. Application of Article 289 of the Constitution Regarding the Taxability of Income Derived by a State Government Corporation:The Department argued that the income of the assessee corporation is distinct from the income of the State, and thus, not exempt from income tax under Article 289 of the Constitution. The Department cited the Supreme Court decision in the case of APSRTC Ltd (52 ITR 524) and the AP High Court decision in the case of AP State Civil Supplies Corporation Ltd (149 ITR 497), which held that a corporation is a separate legal entity and its income cannot be equated with the income of the State. The Tribunal was directed to reconsider the issue in light of these amendments and legal precedents.Conclusion:The Tribunal set aside the CIT's order and remanded the case back to the CIT for a de-novo examination, considering the amendments to the Andhra Pradesh Excise Act and Andhra Pradesh (Regulation of Trade in Indian Liquor, Foreign Liquor) Act. The CIT is to decide the issue afresh in accordance with the law after providing a reasonable opportunity of hearing to the assessee. The appeal of the assessee was thus allowed for statistical purposes.