Water charges and police protection charges allowed under section 40(a)(iib) based on nature of undertaking exclusivity

The ITAT Visakhapatnam allowed the assessee's appeal against revision under section 263 regarding disallowance of water charges, water cess, and police protection charges under section 40(a)(iib). The tribunal held that the SC in Kerala State Beverages Manufacturing Marketing Corporation Ltd established that exclusivity under section 40(a)(iib) depends on the nature of undertaking, not the number of undertakings subject to levy. The CIT erred in invoking section 263 provisions, and the tribunal quashed the Principal CIT's order under section 263.

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Issues:
1. Revisionary jurisdiction under section 263 of the Income Tax Act regarding disallowance of expenditure under section 40(a)(iib).
2. Interpretation of the term "royalty" under section 40(a)(iib) in relation to water charges.
3. Exclusivity of water charges and police guard charges for invoking disallowance under section 40(a)(iib).

Analysis:
The judgment by the Appellate Tribunal ITAT VISAKHAPATNAM involved an appeal filed by the assessee against the order of the Ld. Principal Commissioner of Income Tax, Vijayawada, under section 143(3) of the Income Tax Act, 1961, for the AY 2017-18. The case revolved around the revisionary powers under section 263 of the Act exercised by the Ld. Pr. CIT, who considered the assessment order as erroneous and prejudicial to the interests of the Revenue. The issues highlighted were the disallowance of payment towards water charges, water cess, and police guard charges under section 40(a)(iib) of the Act.

The assessee contended that the water charges paid were not exclusively levied on them by the State Government, thus not meeting the criteria for disallowance under section 40(a)(iib). The Ld. AR argued that water should be treated as a commodity, not royalty, and cited legal precedents to support the argument. Similarly, the payment for police guard services was also challenged, stating that the services were not exclusively provided to the assessee, as evidenced by confirmation letters from the Andhra Pradesh Special Protection Force.

The Appellate Tribunal analyzed the provisions of section 40(a)(iib) of the Act and concluded that the water charges were not levied exclusively on the assessee, thereby rejecting the Ld. Pr. CIT's interpretation of considering it as royalty. The Tribunal also found that the principle of exclusivity was wrongly applied to the payment for police guard services. Legal references and case laws were cited to support the decision, emphasizing the need for an exclusive levy on State Government undertakings for disallowance under section 40(a)(iib).

In light of the discussions and legal interpretations, the Appellate Tribunal allowed the appeal filed by the assessee, quashing the order passed by the Ld. Pr. CIT under section 263 of the Act. The Tribunal held that the disallowance of water charges, water cess, and police guard charges under section 40(a)(iib) was not valid, thereby allowing the grounds raised by the assessee in the appeal.

The judgment was pronounced in the open court on 28th May 2024 by the Appellate Tribunal ITAT VISAKHAPATNAM, with detailed analysis and legal reasoning provided for each issue raised in the appeal.

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