2024 (9) TMI 1309 - AT - Income Tax

VAT payment on liquor sales does not attract section 40(a)(iib) disallowance provisions, revision order quashed

M/s. Tamilnadu State Marketing Corporation Limited, CMDA Tower II, Chennai Versus The Deputy Commissioner of Income Tax, Corporate Circle 3 (1), Chennai

ITAT Chennai allowed the assessee's appeal against PCIT's revision order under section 263. The tribunal held that VAT payment on liquor sales does not ... Revision u/s 263 - VAT on sale of liquor is levied exclusively on the assessee and provisions under section 40(a)(iib) of the Act is violated - HELD THAT:- The facts and circumstances of the case are similar to AY 2014-15 [2022 (11) TMI 990 - ITAT CHENNAI] and 2015-16 [2024 (1) TMI 1316 - ITAT CHENNAI] in assessee’s own case, wherein, it was held that VAT payment would not attract the provisions of section 40(a)(iib) - Thus, following the same, we hold that the order of the ld. PCIT in setting aside the assessment order u/s 143(3) r.w.s. 143(3A) & 143(3B) is erroneous and prejudicial to the interest of Revenue, is not justified. Therefore, the grounds raised by the assessee in seeking to quash the order passed by the ld. PCIT under section 263 of the Act are allowed. Assessee appeal allowed. Issues Involved:1. Legality of VAT expenses debited by the assessee.2. Applicability of Section 40(a)(iib) of the Income Tax Act, 1961 to VAT payments.3. Interpretation of VAT as a tax or fee under the Income Tax Act.4. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act.Issue-wise Detailed Analysis:1. Legality of VAT Expenses Debited by the Assessee:The PCIT initiated proceedings under Section 263 of the Income Tax Act, 1961, upon examining the books of accounts and noting that the assessee had debited a sum of Rs. 14930,54,85,164/- as VAT expenses in the profit and loss account. The PCIT held that VAT expenses levied by the Tamil Nadu State Government on TASMAC (a State Government Undertaking) fit the clause 'any other fee or charge, by whatever name called' as per Section 40(a)(iib) of the Act. Consequently, the PCIT directed the Assessing Officer to recompute the total income after correcting the set-off losses in accordance with the law.2. Applicability of Section 40(a)(iib) of the Income Tax Act, 1961 to VAT Payments:The assessee's representative argued that the VAT payable by the assessee to the State Government is neither in the nature of royalty, license fee, service fee, privilege fee, service charge, nor any other fee or charge by whatever name called. It is not levied exclusively on the assessee nor can it be considered as appropriation by the State Government. The Tribunal, in the assessee's own case for the assessment year 2014-15, had quashed the order passed by the PCIT under Section 263 of the Act, holding that VAT payments do not attract the provisions of Section 40(a)(iib) of the Act.3. Interpretation of VAT as a Tax or Fee under the Income Tax Act:The Tribunal discussed various legal precedents to distinguish between a tax and a fee. It noted that VAT is levied by the State Government of Tamil Nadu under Entry No. 54, List-II, Seventh Schedule, Constitution of India, and is paid by the assessee as per Section 3(5) of the TNVAT Act, 2006. The Tribunal held that the power of the State Government to levy tax on the sale and purchase of liquor and the power to levy fees are derived from different entries in the State list. Therefore, VAT collected and paid by TASMAC is an allowable expenditure and cannot be disallowed under Section 40(a)(iib) of the Act.4. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act:The Tribunal found that the PCIT's interpretation of the term 'any other fee or charge, by whatever name called' to include VAT was incorrect. The Tribunal reiterated its earlier decision that VAT is an indirect tax collected from customers and remitted to the Government, and it is not an appropriation by the State Government. The Tribunal held that the PCIT's revision order under Section 263 of the Act was erroneous and prejudicial to the interest of the Revenue.Conclusion:The Tribunal concluded that VAT payments made by the assessee do not attract the provisions of Section 40(a)(iib) of the Income Tax Act, 1961. The VAT is neither a fee nor a charge but an indirect tax collected on behalf of the Government. The Tribunal quashed the revision order passed by the PCIT under Section 263 of the Act and allowed the appeal filed by the assessee. The Tribunal's decision was consistent with its previous rulings in the assessee's own case for the assessment years 2014-15 and 2015-16. The appeal filed by the assessee was allowed, and the order was pronounced on 23rd August 2024 at Chennai.