Prospective tax amendment on privilege fee disallowance cannot be applied to earlier assessment years without clear retrospective wording.

Section 40(a)(iib) of the Income-tax Act was applied prospectively from assessment year 2014-15 because the provision, CBDT circular and Finance Bill materials expressly fixed that commencement, and there was no clear retrospective language. On that basis, privilege fee paid by a State Government undertaking for earlier assessment years could not be disallowed under the later amendment or treated as an inadmissible diversion of profits merely because of its label or quantum. The settled position that the State may charge consideration for parting with exclusive liquor rights remained unaffected, and the earlier assessments were unsustainable to the extent they disallowed the fee.

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Issues: Whether section 40(a)(iib) of the Income-tax Act, 1961, inserted by the Finance Act, 2013, applied retrospectively to assessment years prior to 2014-15 so as to disallow privilege fee paid by a State Government undertaking, and whether the privilege fee could otherwise be treated as taxable or as an inadmissible appropriation of income.

Analysis: The insertion of section 40(a)(iib) was held to be operative only from 1 April 2014, as the provision and the accompanying CBDT circular and Finance Bill clause expressly stated that it would apply from assessment year 2014-15 onwards. In the absence of any express retrospective indication, the amendment could not be treated as clarificatory. The Court also relied on the settled position that the State may charge consideration for parting with its exclusive liquor rights, and that the label or quantum of the charge does not alter its character. The Assessing Officer could not therefore treat the privilege fee paid in earlier years as disallowable merely on the basis of the later amendment or on the premise that the levy was an artificial device to divert profits.

Conclusion: The disallowance of privilege fee for assessment years prior to 2014-15 was unsustainable, and the impugned assessments were set aside to that extent in favour of the assessee.

Ratio Decidendi: A taxing amendment that disallows a particular outgo for State Government undertakings operates prospectively where the statute and the explanatory materials expressly fix its commencement from a stated future assessment year; in the absence of clear retrospective language, earlier years cannot be reopened by treating the amendment as clarificatory.

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