TaxTMI 
TaxTMI 
2022 (11) TMI 990
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.....w.s. 43B of the Act and allowed. 3. Brief facts are that the assessee is a State owned undertaking engaged in trading and retail vending in liquor. The original assessment was completed u/s.143(3) of the Act, after scrutinizing the accounts of the assessee by the AO vide order dated 30.12.2016. Subsequently, the PCIT, Chennai on perusal of records noted that the assessee has claimed VAT expenses of Rs.11,491.97 crores in the profit & loss account during the previous year 2013-14 relevant to this assessment year 2014-15 and this being unusual VAT expenditure needs to be examined. The PCIT examined the provisions of section 40 of the Act and noted that this provision specified the amounts which shall not be deducted in computing the income chargeable under the head "profits and gains of business or profession". According to PCIT, statutory duties like income-tax, wealth tax, etc., are non-deductible expenditure and disputes have arisen in respect of some of State Government undertakings as to whether any sum paid by way of privilege fee, license fee, royalty etc., levied or charged by the state government exclusively on its undertaking are deductible or not. The PCIT also observe....
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.... the State Government of Tamil Nadu by the power vested in it under the Entry No. 54, List I, Seventh Schedule, Constitution of India and the Petitioner pays the Stale Govenment VAT as per Section 3(5) of the TNVATAct, 2006 read with the rate mentioned in Second Schedule to the TNVAT Act, 2006 and claims it as an expenditure u/s.37 1961 in its Income Tax return which has been r.w.s.43B of the Income Tax Act, 1961 disallowed by the Assessing Officer for A Y 2017-18 u/s. 40(a)(ib) of the Income Tax Act, 1961. 11.3 It is submitted that under the Constitution of India, the list of areas which fall within the exclusive power of States are given in the List II of the Seventh Schedule. State has the exclusive power to levy taxes on sale and purchase of intoxicating liquor (Entry 54). But the power to levy fees in respect of matters in the List is given under a different entry (Entry No 66). Thus, the State derives power to levy sales tax (VAT) on liquor under entry 54 and power to levy fees in connection with production, manufacture, transportation etc. is derived under entry no 69 of the List II of VII schedule the Constitution of India. So, the power of State Government to levy....
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....undertakings shall vest with the Government. Deductibility of Sales Tax was never in dispute. 11.7 It is submitted that the definition of "fee/charge" is very clearly distinguished from "tax" in the following decisions: i) COMMISSIONER, HINDU RELIGIOUS ENDOWMENTS, MADRAS vs. SRI LAKSHMINDRATHIRTHA SWAMIAR OF SRI SHIRUR MUTT 1954 AIR 282 ("Shirur Mutt" case), ii) The Hingir-Rampur Coal Co.Ltd. Vs The State Of Orissa And Others 1961 SCR (2) 537, iii) Har Shankar v. Deputy Excise and Taxation Commissioner AIR 1975 SC 1121, iv) Om Parlkash Agarwal v Giri Raj Kishori & Others (164 ITR 376, 1986 AIR 726) v) Srikakollu Subba Rao & Co. & Ors. vs. UOI & Ors. (1988) 173 ITR 708 (AP), vi) CIT VS. M.L Agro Products Pvt. Ltd. (1992) 197 1TR 485 (AP), vii) CIT Vs. Dineshkumar Gordhanlal (1997) 2261TR 826 (MP) 11.8 In the Shirur Mutt case (supra) the Hon'ble Apex Court pointed out: "though levying of less is only a particular form of the exercise of taxing power of the Slate, Our Constitution has placed fees under a separate category for the purpose of Legislation and at the end of each one of three legi....
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....tion Bench of the Hon'ble Supreme Court in the case of Bar Shankar V. Deputy Excise and Taxation Commissioner AIR 1975 SC 1121, has expounded on the distinction between a tax' and fee and the characteristics of these two as also excise duty, in the following words: "Since rights in regard to intoxicants belong to the State, it is open to the Government to part with those rights for a consideration. By Article 298 of the Constitution, the executive power of the State extends to the carrying on of any trade or business and to the, making of contracts for any purpose. Again, it has been observed in that decision "The distinction which the Constitution makes for legislative purposes between a 'tax' and a 'fee' and the characteristic of these two as also of excise duty' are well-known, tax is a compulsory exaction of money by public authority for public purposes enforceable by law and is not a payment for services rendered". (1) A fee is a charge for special services rendered to individuals by some government tat agency and such a charge has an element in it of a quid pro quo. (2). Excise duty is primarily a duty on the production or manufacture of good....
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....nt and the payment is enforced by law; (ii) that it is an imposition made for public purposes without reference to any special benefit to be conferred on the payer of the tax; and (iii) that it is a part of the common burden, the quantum of imposition upon the taxpayer depending generally upon the capacity of the taxpayer to pay. As regards fees, Mukherjea J. observed in the above decision thus (at p. 295 of AIR): "Coming now to fees; a reel is generally defined to be a charge for a special service rendered to individuals by some governmental agency. The amount of fee levied is supposed to be based on the expenses incurred by the government in rendering the service, though in many cases the costs are arbitrarily assessed. Ordinarily, the fees are uniform and no account is taken of the varying abilities of different recipients to pay. These are undoubtedly some of the general characteristics, but as there may be various kinds of fees, it is not possible to formulate a definition that would be applicable to all cases ......If, as we hold, a fee is regarded as a sort of rectum or consideration for services rendered, it is absolutely necessary that the levy of fees sh....
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....tax or not but whether levy of cess on royalty was within the competence of the State Legislature. We also feel that the considerations with regard to cess in that case were in the context of legislative competence of the State Legislature to levy the cess on royalty which, by virtue of an explanation to Section 115 of the Tamil Nadu Panchayats Act, 1958, were said to be included in the meaning of land revenue. In that case, it was not in dispute that the cess which the Madras Village Panchayat Act proposes to levy was nothing but an "additional tax" and originally it was levied only on land revenue, and that apparently land revenue would fall within the scope of Entry 49 of List II in Schedule VII to the Constitution. The Supreme Court however held that it could not be doubted that royalty which was a levy or tax on the extracted mineral was not a tax or levy on land alone and that if cess was charged on the royally, it could not be said to be a levy or tax on land and therefore, it could not be upheld a imposed in exercise of jurisdiction under Entry 49 List II by the State Legislature. The Court held that the legislature went beyond its jurisdiction under Entry 49 List H and the....
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....Legislature.". In this context, trying to bring, in tax into fee or charge as S.40(a)(iib) reads is violative of Article 265 of the Constitution. 11.15 It is submitted that the very fact that Taxes are not mentioned in the main section, nor any reference has been made in the memo Explaining the introduction of section would go to show that the Legislature never intended to disallow Taxes under sec 40(a)(iib) of the Act. 11.16 It is impossible to comprehend that when the Legislature proposes to disallow taxes that the State Government has levied under its exclusive domain, such tax is not specifically mentioned in the Section but allowed to be derived from the phrase "charges by whatever name called" 'particularly when the Apex Court has clearly laid down the distinction between Taxes and fees and have held that Taxes cannot be levied under the guise of fees. 11.17 Further, TASMAC cannot collect Privilege Fees /Vend fees separately from the Purchasers. Value Added Tax is collected' from the Customers. It is collected on behalf of the Government and passed on to the Government in totality. A trader can collect Value Added Tax as per the provisions o....
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....C: 12.1 It is submitted that S.40(a)(iib) operates only on "royalty, license fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which is levied exclusively on... State Government Undertaking by State Government". In other words exclusivity of such fee, charge is a requirement. 12.2 It is submitted that Value Added Tax is an Indirect Tax collected from customers and remitted to Government on monthly basis after filing necessary monthly return as per the provisions of the Tamilnadu Value Added Tax Act, 2006 and rules framed there under, it is further submitted that Annual audited VAT return is also filed as per the provisions of the Tamilnadu Value Added Tax Act, 2006 and rules framed there under. 12.3 It is submitted that Value Added Tax (VAT) is imposed on the sales or purchases made by any Assessee. VAT does not confer any special or specific benefit to the Assessee who pays the VAT. Nor can the Payer of VAT demand any specific privileges from the State Government on account of payment of VAT and Surcharge. 12.4 It is submitted that VAT is transaction specific and anybody who transacts the transa....
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....et specified expenditure except under an appropriation made by Law approved by the Parliament/Assembly. While Finance Act regulates the income, Appropriation Act authorizes incurring of expenditure. Thus, appropriation in Government accounts means the allocation of the income for various expenses of the Government. 13.4 Appropriation means allocating or taking away funds for a specific purpose. In other words, it is an application of income. It will not cover Taxes on which is and always has been a deduction while arriving at the net profits. Such deductible expenditure cannot be considered as an appropriation/ application of income. Further it is a on profits and is based on the type of transaction and not a particular Assessee. For example, the levy is on the different types of License holders, without reference to whom or how many persons, may have been granted that type of License. Individual holders of the license may vary, but the levy is constant for all such License holders. Such a common levy on sale of goods applicable to all sellers cannot be considered as an appropriation in the case of Assessee alone. 13.5 When Value Added Tax is considered and allowe....
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....provisions of Tamil Nadu Prohibition Act, 1937 and the rules framed there under while computing taxable income. The Accounting Policy adopted by TASMAC is disclosed under "Significant Accounting Policies" in the Audited financial statements and it is clearly stated in the accounts that Sale is accounted inclusive of VAT. This is as per the Accounting Standards issued by the ICAI, AS 9-Revenue Recognition. Thus, correctly, the Sales (inclusive of VAT) is enumerated under "Revenue" and" the "VAT on IMPS and Beer" is enumerated under Expenses. These final accounts for the impugned period 2016-17 have been audited and certified by the Statutory auditors appointed by the C&AG and Supplementary Audit has been conducted by the C&AG for which they have issued a certificate agreeing with the accounts and have passed NIL comments. Finally, in rebuttal to point no. 3 of your Show Cause Notice, we humbly submit that alcoholic liquors for human consumption is falling under the State list as per the Constitution of India. The enactment of TNVAT Act, 2006 was made as per the delegated powers to State Government. Hence, the claim of VAT being arbitrary and abnormal goes against t....
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....e statutory powers to levy VAT, the rates cannot be questioned by the Department on account of it being High. Therefore, in view of all the above facts and circumstances including the clear decisions on this point by the Apex Court and other High Courts and particularly the recent by Kerala High Court on this very issue, the AO's Order cannot be held to be erroneous by the Principal Commissioner of Income Tax to invoke S.263 of the Income Tax Act, In any case, when there are two opinions possible on an issue,(even though in this issue in our opinion, only one view is possible in view of the decisions of the Apex Court and Kerala High Court have In favour of the Assessee), and the Assessing Officer has taken one possible view, the provisions of sec 263 will not apply as held by the Hon 'hie Supreme Court & numerous High Courts : Malabar Industrial Co Ltd v CIT 243 ITR 83 SC CIT Vs Mepco Industries Ltd 294 ITR 121 (Mad) CIT v Max India Ltd 295 ITR 282 SC In the light of the above submissions we request your good self to kindly drop the revision proceedings initiated vide notice u/s.263 dated 18.03.2020 proposing to disallow VAT u/s....
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....r the provisions of Tamilnadu Value Added Tax Act, 2006 is an allowable expenditure and hence the cannot he disallowed u/s. 40(a)(iib) of the Act." Assessee made the following submissions on 25.03.2022 "This is the written submission dated 22.5.2020, in response to the Honourable Madras High Court Order for the Assessment Year 2014-15 in WP No.8829 of 2019 and WMP No.9394 of 2019. In that submission we had elaborately submitted that provisions of sec 40(a)(iib) would apply only to Fees and similar charges which are in the nature of quid pro quo for privileges parted with by the State Government but would not apply to Taxes which are in the nature of appropriation. Subsequently, the Hon'ble Kerala High Court in the case of M/s. Kerala State Beverages Manufacturing & Marketing Corporation Lid. Vs CIT, Corporate Circle 1(1) in ITA No.135 of 2019 have held that provisions of Section 40(a)(iib) will not apply to surcharge on sales-tax and Turnover tax as they constitute tax and not fees. The issue was taken up by the Revenue before the Hon'ble Supremo Court of India wherein the Hon'ble Supreme Court in the case of M/s. Kerala State Beverag....
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....97 4,372.91 3 Special Privilege Fee Nil 4,291.43 11. From the above table, it is seen that the Tamil Nadu State Government has increased the VAT by 263% and reduced the Special Privilege Fee to Nil during the current year. It is interesting to note that with effect from 01.04.2014, clause (iib) was inserted by the Finance Act 2013 to the section 40(a) of the Income Tax Act which is as under- "40. Notwithstanding anything to the contrary in sections 30 to 82[38], the following not be deducted in computing the income charge- able "Profits and gains of business or profession",- (a) In the case of any assessee- (iib) any amount- (A) paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever called, which is levied exclusively on; or (B) which is appropriated, directly or indirectly, from, a State Government undertaking by the State Government Explanation.-For the purposes of sub-clause, a State Government undertaking includes- (i) a corporation established by or under Act of the State Government; (ii) a company in which more than f....
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....es, orders have been issued to the effect that surplus arising to such undertakings shall vest with the State Government. As a result it has been claimed that such income by way of surplus is not subject to tax. It is a settled law that: State Government undertakings are separate legal entities than the State and are liable to income-tax. In order to protect the tax base of State Government undertakings vis-a-vis exclusive levy of fee, charge, etc. or appropriation of amount by the State Governments from its undertakings, it is proposed to amend section 40 of the Income-tax Act to provide that any amount paid by way of fee, charge, etc., which is levied exclusively on, or any amount appropriated, directly or indirectly, from a State Government undertaking, by the Government, shall not be allowed as deduction for the purposes of computation of income of such undertakings under the head "Profits and gains of business or profession". It is also proposed to define the expression "State Government Undertaking" for this purpose. This amendment will take effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years. [Cl....
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....ee came in appeal before the Tribunal. 4. Before us, the ld.counsel for the assessee submitted the fact that the assessee is a Government of TamilNadu undertaking incorporated on 23.05.1983 under the Companies Act, 1956 and vested with the special privilege for wholesale distribution and retail sale of Indian Made Foreign Liquor and beer in the whole State of TamilNadu. He submitted that Section 17C(1A)(a) and Section 17C(1B)(b) of the TamilNadu Prohibition Act, 1937, the assessee have the exclusive privilege of supply by wholesale and retail of Indian Made Foreign Spirit (IMFS) for the whole State of TamilNadu. He further submitted that the assessee retails alcoholic liquor through retail vending shops across the state of Tamil Nadu and collects from its customers (buyers of liquor) the sale price of the liquor bottle along with the Value Added Tax (VAT) as per Section 3(5) of the TamilNadu Value Added Tax Act, 2006 read with the Second Schedule to said Act. Accordingly, the assessee remits the VAT so collected to the State Government on or before 14th of succeeding month after filing necessary return as prescribed in the TamilNadu Value Added Tax Rules, 2007. 4.1 The ld.cou....
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.... any amount appropriated, directly or indirectly, from a State Government undertaking by the State Government, shall not be allowed as deduction for the purposes of computation of income of such undertakings under the head 'profits and gains of business or profession'. The charge of VAT, which is levied exclusively on the assessee, the State Government undertaking by the State Government do not comes within the provisions of section 40(a)(iib) of the Act. In view of the above, the ld.counsel stated that the VAT levied by the Govt. of TamilNadu is not in the nature of royalty, license fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called. Hence, he argued that the revision order passed by PCIT is without any backing of law, as the assessee has rightly claimed deduction of Value Added Tax and this is not in the nature of royalty, license fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called. Hence, he asked the Bench to quash the revision order passed u/s.263 of the Act, by the PCIT as the issue is neither debatable nor any dispute on this issue is involved and entire jurisprudence is in favou....
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....en to the Government to part with those rights for a consideration. By Article 298 of the Constitution, the executive power of the State extends to the carrying on of any trade or business and to the, making of contracts for any purpose." Again, it has been observed in that decision: "The distinction which the Constitution makes for legislative purposes between a 'tax' and a 'fee' and the characteristic of these two as also of 'excise duty' are well-known. "A tax is a compulsory exaction of money by public authority for public purposes enforceable by law and is not a payment for services rendered".(1) A fee is a charge for special services rendered to individuals by some government tat agency and such a charge has an element in it of a quid pro quo. (2). Excise duty is primarily a duty on the production or manufacture of goods produced or manufactured within the country (3). The amounts, charged to the licensees in the instant case are, evidently, neither nature of tax nor excise duty. But then, the 'Licence fee' which the State government charged to the licensees through the medium of auctions or the 'Fixed fee' which it charged to ....
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....pon the capacity of the tax payer to pay. As regards fees Mukherjea, J. Observed in the above decision thus: "Coming now to fees, a "fee" is generally defined to be a charge for a special service rendered to individuals by some governmental agency. The amount of fee levied is supposed to be based on the expenses incurred by the government in rendering the service, though in many cases the costs are arbitrarily assessed. Ordinarily, the fees are uniform and no account is taken of the varying abilities of different recipients to pay. These are undoubtedly some of the general characteristics, but as there may be various kinds of fees, it is not possible to formulate a definition that would be applicable to all cases. ............. If, as we hold, a fee is regarded as a sort of return or consideration for services rendered, it is absolutely necessary that the levy of fees should on the face of the legislative provision, be correlated to the expenses incurred by government in rendering the services." 6.3 Further, the Hon'ble Delhi High Court in the case of Dalmia Cement (Bharat) Ltd., vs. CIT, 357 ITR 419, while incorporating the provisions of section 43B of the Act....
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....ty which, by virtue of an explanation to Section 115 of the Tamil Nadu Panchayats Act, 1958, were said to be included in the meaning of land revenue. In that case, it was not in dispute that the cess which the Madras Village Panchayat Act proposes to levy was nothing but an "additional tax" and originally it was levied only on land revenue, and that apparently land revenue would fall within the scope of Entry 49 of List II in Schedule VII to the Constitution. The Supreme Court however held that it could not be doubted that royalty which was a levy or tax on the extracted mineral was not a tax or levy on land alone and that if cess was charged on the royalty, it could not be said to be a levy or tax on land and therefore, it could not be upheld as imposed in exercise of jurisdiction under Entry 49 List II by the State Legislature. The Court held that the legislature went beyond its jurisdiction under Entry 49 List II and therefore the levy was clearly without the authority of law. 22. These observations whereby there is some indication that cess has been equated with tax have been sought to be relied upon by Mr Sabharwal. However, we reiterate that the Supreme Court was not....
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....eted the disallowance of surcharge on sales tax and turnover tax by observing as under:- 22. On analysing the rival contentions, we take note of the fact that the surcharge on sales tax was introduced only as an increase in the tax payable. Merely because the statute imposed a prohibition with respect to passing on such liability to others, the basic characteristics of the levy is not changed. As settled through various legal precedents, a 'tax' cannot by equated with a 'fee or charge'. When the provisions contained in Section 40 (a) (iib) is clear in its terms that it will take in only 'fee or charges' enumerated therein or any 'fee or charge by whatever name called, it is clear that any levy of 'tax' is outside the ambit and scope of the said provision. Inorder to include surcharge on sales tax or turnover tax within the sweep of Section 40 (a) (iib), it becomes necessary to read something into the provision. Therefore we are inclined to accept the view as contended by the appellant, that the disallowance of surcharge on sales tax and turnover tax cannot be sustained. the surcharge on sales tax and turnover tax is not a 'f....