TaxTMI 
TaxTMI 
2012 (9) TMI 1082
X X X X Extracts X X X X
X X X X Extracts X X X X
....e. On the other hand, the Revenue assails the CIT(Appeals)'s order in accepting the Assessee's appeal partly qua 'special privilege fees'. The Revenue has also challenged CIT(A)'s order in deleting addition re-change in valuation of closing stock of bottles, which was made by the Assessing Officer. 3. As it appears from the respective grounds raised in the appeals, we frame the following issues for our adjudication :- i) Whether CIT(Appeals) has erred in adopting the expenditure towards 'special privilege fees' at a uniform rate of Rs. 53.23 per litre of IMFL instead of Rs. 57.72 per litre as claimed by the Assessee and that taken by Assessing Officer as Rs. 46.35 per litre as pleaded by both the parties before us in their respective appeals. If so, whether the CIT(Appeals)'s order to this effect is liable to be confirmed or modified per respective stand adopted by both parties (common ground in both appeals) ? ii) Whether the order of CIT(Appeals) in deleting addition made by Assessing Officer in respect of change in valuation of closing stock of empty bottles is liable to be upheld or not (the second substantive ground in Revenue's appeal)? ISS....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and without prejudice to the generality of the foregoing provisions, the [State] Government may make rules - (a) to (o) x x x x x x x x x x x x (2-A). A rule or notification under this Act may be made or issued so as to have retrospective effect on and from a date not earlier than, - (i) The 1st September 1973, in so far a it relates to toddy; and (ii) The 1st September 1974, in so far as it relates to any liquor other than toddy; (iii) The 1st May 1981, in so far as it relates to the matters dealt with in sections 17-B, 17-C, 17-D, 17-E, 18-B and 18-C : a. Provided that a notification issued under sub section (1) of section 16 may have retrospective effect from a date not earlier than 1st November 1972: Provided further that the retrospective operation of any rule made or notification issued under this Act shall not render any person guilty of any offence in regard to the contravention of such rule or the breach of any of the conditions subject to which the exemption is notified in such notification when such contravention or breach occurred before the date on which the rule or notification is published, as the case ma....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 7. The instant strife between the assessee and Revenue revolves around the effective date of notification amending the rules for levy of special privilege fees which the Government charges annually from the assessee, with retrospective effect. As per the paper book available before us, in Asst. Year 1987-88, the assessee had shown vend fee etc. payable to the State under the head 'outstanding expenses'. The A.O. in the said assessment proceedings invoked sec.43B of the "Act" and disallowed the assessee's claim in the shape of provision made qua the said expenditure. It appears that the said case came before the co-ordinate bench of ITAT, Madras which was decided on 31.12.1991 (reported as ITD Vol.42 Page 349 Tamil Nadu State Marketing Corporation v. DCIT), wherein whilst deciding issue of applicability of sec.43B of the Act vis-àvis the vend fee sought to be charged by the State under the Prohibition Act and Rules framed thereunder (supra), it had been observed herein below:- "27. We may now notice sections 17B, 17C and 17D of the Prohibition Act. Section 17B authorises the State Government, or subject to their control, the Collector, to issue, subject ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ign Spirits (Supply by Wholesale) Rules, 1983 read with section 17C(1A) of the Prohibition Act, and the issue is whether the said Vend Fee and Addl. Vend Fee are fees within the meaning of Entry 66 of the State List, or a tax simpliciter, or the price or consideration charged by the State Government for parting with, in favour of the assessee-corporation, its exclusive rights and privilege of supply by wholesale Indian-made Foreign Spirits for the whole of the State of Tamil Nadu. 29. As we see it, the said Vend Fee and Addl. Vend Fee are nothing but the price or consideration charged by the State Government, in its capacity as a trader, for parting with one of its valuable rights and privileges, namely the right and privilege of supplying, by whole sale, Indian-made Foreign Liquor throughout the State of Tamil Nadu. Such fees are directly relatable to the executive power of the State to carry on any trade (Art. 298) a power which the State Government had exercised in the process of making laws under Entry 8 of the State List. This being the essence of the matter, irrespective of the mode and mechanics of collection of the fees, irrespective of the quantum of the fees levi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....poly; and that there was no fundamental right in a citizen to carry on trade or business in liquor. A.N. Ray, the learned Chief Justice, speaking on behalf of the 3Judge Bench observed: "There are three principal reasons to hold that there is no fundamental right of citizens to carry on trade or to do business in liquor. First, there is the police power of the State to enforce public morality to prohibit trades in noxious or dangerous goods. Second, there is power of the State to enforce an absolute prohibition of manufacture or sale of intoxicating liquor. Article 47 states that the State shall endeavour to bring about prohibition of the consumption except for medicinal purposes of intoxicating drinks and of drugs which are injurious to health. Third, the history of excise law shows that the State has the exclusive right or privilege of manufacture or sale of liquor." (emphasis supplied). In the case of Har Shankar (supra) the legal position was stated thus: "There is no fundamental right to do trade or business in intoxicants. The State, under its regulatory powers, has the right to prohibit absolutely every form of activity in relation to intoxicants -....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at the incidence of the levy was on the ultimate consumers as in the case of excise duty on liquor - considerations which weighed with the lower authorities do not alter the nature of the levy. The levy remains what it essentially is, namely, the price paid in a purely commercial transaction to the State Government for parting with its valuable rights and privilege relating to intoxicating liquors. 32. The question then arises for consideration is whether the provisions of section 43B of the Income-tax Act, 1961, with or without the 1988 amendment, would be applicable to this case. In our considered opinion, the provisions of the said sections are not at all applicable to the case before us. It is self-evident that, as it stood prior to the 1988 amendment, the section governed taxes and duties properly so-called. The case before us is not one of tax or duties. The said section is, therefore, not applicable. 33. Even if we were to go on the basis that, the 1988 amendment is declaratory in nature and retroactive in operation, the case of the Department will not improve, because the case before us, as we have seen earlier, is not one of fee strictu sensu, nor is it o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bsp; Dated : 25.10.2006 1. G.O.(Ms) No.65, Prohibition and Excise (VIII) Department, dated 27.10.2005. 2. From the Managing Director, Tamil Nadu State Marketing Corporation Limited, letter 1184/N2/2006, dated 20.10.2006. -------- ORDER : The following notification will be published in the next issue of the Tamil Nadu Government Gazette :- NOTIFICATION In exercise of the powers conferred by sections 17-D and 54 of the Tamil Nadu Prohibition Act, 1937 (Tamil Nadu Act X of 1937), the Governor o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n sub-rule (3), for the expression 53.23, against item (i), the expression 57.72 shall be substituted. S. MALATHI SECRETARY TO GOVERNMENT" Accordingly, the Assessee's submission before Assessing Officer was that since the special privilege fee had been increased retrospectively under the Prohibition Act and Rules framed thereunder (supra), it had no option but to make proviso regarding the revised rate of Rs. 57.72 per litre of liquor and claim the same in its profit and loss account as expenditure.. 9. The Assessing Officer in assessment order dated 14.12.2009 did not agree to assessee's contention and observed that the GO dated 20.7.2007 was not in operation as on 31.3.2007 (on the closing day of previous year) being notified thereafter i.e. on 20.7.2007 and only GO dated 25.10.2006 had been in operation as on 31.3.2007. Per Assessing Officer, by way of G.O. dated 20.07.2007, a method was adopted by the assessee to reduce net profit for the purpose of computation of income. Since the Assessee had been following mercantile system of accounting, Assessing Officer observed that the Assessee's claim was unacceptable as the GO could not be given effect retrospectively as t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r, GOs in question, assessee's making of provisions in compliance thereof and facts narrated hereinabove, the A.R. has justified assessee's action of making provision qua revised rates (supra) in its P&L account in view of rates revised on 20/7/2007 by way of GO concerned. It has also been highlighted that the assessee follows mercantile system of accounting in which liability is allowable in the year of accrual even if the same is crystallized well beyond the previous year. More so, on the principle that under above system of accounting, the liability which has attained finality goes back to the year of accrual which in the instant case is A.Y. 2007-08 (time period from 1.4.2006 to 31/3/2007). To buttress the plea, case law of Hon'ble Apex Court reported as 82 ITR 363 (Kedernath Jute Manufacturing Co. v. CIT), 218 ITR 164 (CIT v. Kalinga Tubes) and Hon'ble Jurisdictional High Court 245 ITR 221 has also been cited. 12. Next submission made by the A.R. is that as has been past practice of the assessee, the liability in hand has been continuously arrived at beyond the previous years and no such action was initiated by the department as the same was allowed to be claimed having bee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the new fee as has been done in the instant case. Thereafter, the AR has preferred to again throw light on the entire scheme of 'Act' and 'Rules' to urge that since at the time of finalization of accounts, the fee per litre stood revised, so it was incumbent on the assessee to make necessary provision in the P&L Account. Per AR, the amended figures of special privilege fee as it existed at the time of filing the return stood complied by the assessee as the concept of liability as it existed on closing day of the previous year would not apply as per the retrospective amendment in rules (supra) and till the concerned amendment is not declared null and void by the appropriate judicial forum, the same holds ground. The case law cited in support is India Cements 98 ITR 69 Madras HC; KSN Bhatt's case 145 ITR 1 SC; CIT v. United Bank of India - 115 CTR 35. The gist of the assessee's submissions before us is that the liability in question came into being by retrospective legislative amendment; therefore, it would relate back to the year of accrual which is allowable as a deduction. 14. In addition to this, assessee's alternative submission is if the assessee's plea of liability is no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to the payment in question as on 31.3.2007. On the said day, per DR, the additional special vend fee as notified on 20.7.2007 did not exist. Therefore, his stand is that the assessee's plea is not acceptable. He has also been placed reliance on case law in support of the argument that only liability present and crystallized is allowable and not the one which arises in future as under: a) CIT v. Lachhma Das Mathura Das 124 ITR 411 - All b) CIT v. Seshasayee Industries Ltd. - 242 ITR 691 (Madras) c) Alembic Chemical Works v. DCIT 266 ITR 47 (Gujrat HC) 18. Further, opposing the assesee's submission that the liability is 'statutory' in nature having been in existence as soon as the sales were made, the DR has forcefully submitted that the GO had come on 20.7.2007. Till then, there was no reasonable belief or indication of any hike; that too, with retrospective effect. So, the Revenue's argument is that at the best, the liability arose in accounting year 2007-08 ie. year when demand was made giving rise to its enforceability only when the notification came into operation. The case law cited in support is :- a) Narender Kumar v. Union of India - AI....
X X X X Extracts X X X X
X X X X Extracts X X X X
....officials including Secretaries and Commissioner Excise etc. Per Revenue, since the assessee had accumulated profits of Rs. 218 crores qua AY in hand an attempt had been made to reduce the taxable income to a paltry sum of Rs. 5 crores. Therefore, the assessee has acted in connivance with State Govt. as it did not challenge the hike in Special Privilege Fee with retrospective effect. Hence, a corporate veil has been adopted by the assessee which deserves to be pierced so as to bring into tax the actual income. The Revenue's case law in support is :- i) CIT v. Meenakshi Mills Ltd. (SC) - 631 ITR 609 ii) CIT v. Indian Express Newspaper - 238 ITR 70 iii) Workmen v. Associated Rubber Industry - 157 ITR 77 22. The DR then prayed for rejection of assessee's appeal and in support of Revenue's appeal, prayed for restoring A.O's order. 23. In rebuttal, the AR has reiterated various submissions raised and distinguished the case law relied upon by Revenue. He has also supplied copy of necessary correspondence dated 2.11.2007 by the Under Secretary of the Tamil Nadu State Legislative Assembly informing the Excise Department that the GO dated 20.7.2007 had been ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....privilege fees arising out of notifications having retrospective effect; that too which were issued after the end of relevant financial year. 26. Moreover, the past history also suggests that so far as the levies or fees imposed by the Tamil Nadu State Govt. is concerned, the ld. Co-ordinate Bench (supra) had duly elaborated the scheme of fee etc. prescribed by the State Govt. to be paid by the assessee in reaching to the conclusion that the said fees are nothing but consideration paid by the assessee to the State Govt. in lieu of enjoying exclusive rights of liquor whole sale business. After going through the same, we also observe that in the said case, there were no pleas raised on part of the Revenue that in complying with various notifications under 'Prohibition Act' and Rules, there was any attempt by the assessee to evade tax by resorting to "Corporate veil'. Though in the said case, the issue was of vend fees and additional vend fees, but at the same time, we are unable to loose sight of the fact that the mechanism adopted by the State Govt. was the same in levying the fee ie. notification under Prohibition Act and Rules. The difference between the two instances as we fou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e's Board of Directors and also its MD is one of the said officers, however, this itself cannot act as the basis for proceeding on the assumption as they are not holding the Directorship of assessee in their individual capacities but on behalf of the Govt. of Tamil Nadu. So, after lifting the veil, what we see is the State Govt. being assessee's owner has nominated its above said high level officer to act as its Directors. In such an event, there can be no two opinions at all that by view of exercising legislative jurisdiction under Constitution of India; the special privilege fee has been increased with retrospective effect; without any colorable exercise of power. Hence, we hold that since there is no case for lifting veil. 31. Moreover, it is also clear that on the closing day of A.Y. 2007-08 in question ie. 0n 31.3.2007, the assessee could not have foreseen increased fee to be levied by the Tamil Nadu Govt. under 'Prohibition' Act and Rules vide GO dated 20.7.2007. That too w.e.f. 01.4.2006 leading to hike of special privilege fee from Rs. 53.25 per litre to Rs. 57.72 per litre. However, when its accounts were being finalized, the GO dated 20.7.2007 had come into....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ue. ISSUE No.2 : 34. Facts apropos to this issue are that in its profit and loss account for the assessment year 2007-08, the assessee had shown value of the closing stock comprising empty bottles as Rs. 1.00 per bottle, whereas, the corresponding value of the same as on 31.03.2006 was Rs. 1,24,08,08,595/- regarding assessment year 2006-07. Similarly, the assessee had reported sales in the assessment year 2007-08 of Rs. 894,34,62,632.48 as compared to sales of Rs. 731,46,60,9732.89 i.e. increase of sales about 20%. The Assessing Officer was of the opinion that there should have been proportionate increase in the assessee's closing of empty bottles, which had been shown by the assessee as Rs. 1.00 only. Per him, the assessee's valuation of closing stock of empty bottle as Rs. 1.00 only had resulted inconsistency in the method of closing stock, which had reduced its profit. Therefore, the Assessing Officer estimated assessee's closing stock as per the following formula: Closing stock as on 31.3.06 x Sale of A.Y 2007-08/Sale of A.Y. 2006 -07 = Rs. 1,51,71,695 Thereafter, the Assessing Officer added the above amount in the assessee's total income. 35. In appe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....'s property. Faced with this situation the ICAI advised it not to value the closing stock in the absence of acquisition as the principle of valuing the closing stock as market value, whichever is lower. So, the closing stock was not valued. Hence, on legality, we agree with the assessee. At the same time, we find from both Assessing Officer and CIT(Appeals)'s orders that there is neither any evidence referred qua proper verification of stock nor any findings of facts to this effect have been recorded. Faced with this situation, we remit the matter back to Assessing Officer to verify the factual position enumerated above after hearing the assessee in accordance with law. Therefore, this issue is accepted in favour of Revenue for statistical purpose. 39. To sum up, assessee's appeal I.T.A. No. 962/Mds/2010 stands accepted, whereas I.T.A. No. 1202/Mds/2010that filed by Revenue is partly allowed for statistical purposes. I.T.A. No. 07/Mds/2012 and 258/Mds/2012: Assessment Year 2007-08 40. These two cross appeals have been preferred by the assessee and the Revenue respectively against the order of the CIT(A) III, dated 25.11.2011 in ITA No. 889/2010-11A.III for the assessmen....