Section 40(a)(iib) excludes VAT from disallowance where the levy is a tax, not a fee or charge.

Section 40(a)(iib) applies only to specified fees or charges appropriated by a State Government from a State undertaking and does not extend to taxes. The Tribunal treated VAT paid on liquor sales under the Chhattisgarh Value Added Sales Tax Act, 2003 as a tax, not a licence fee or privilege fee, and held that it fell outside the statutory embargo. On that basis, the revisional direction requiring disallowance of the VAT claim could not be sustained and was set aside.

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Issues: Whether value added tax paid by a State undertaking on sale of liquor could be disallowed under section 40(a)(iib) of the Income-tax Act, 1961, and whether the revisional direction requiring such disallowance could be sustained.

Analysis: The Tribunal noted that the levy in question was value added sales tax under the Chhattisgarh Value Added Sales Tax Act, 2003 and, applying the Supreme Court's ruling on the scope of section 40(a)(iib), held that the provision covers amounts in the nature of fee or charge but not a tax. Since VAT is a tax and not a fee or charge, it does not fall within the mischief of section 40(a)(iib). The revisional order proceeded on the premise that the VAT burden was akin to license fee or privilege fee, but that premise could not survive in view of the binding exposition that tax payments are outside the statutory embargo.

Conclusion: VAT paid by the assessee was not disallowable under section 40(a)(iib), and the revisional direction to disallow the claim was set aside.

Ratio Decidendi: Section 40(a)(iib) disallows only specified fees or charges appropriated by a State Government from a State undertaking and does not extend to taxes such as VAT.

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