2014 (1) TMI 1777 - AT - Income Tax

Revision u/s 263 - whether special privilege paid to the government can be allowed as expenditure? - it is contention of the assessee that the assessee having acted as an authority on behalf of the State or as an agent of the state as per sec. 68A of the State Excise Act, the income forms ale of IMFL is the income of the State, hence, cannot be subjected to income-tax in view of restrictions imposed under Article 289(1) of the Constitution of India - Held that - The fact that the Corporation is allowed to operate an over-draft account with a limit of ₹ 100 crore per month proves that the deposit of sale proceeds of liquor made in the PD account is again ploughed back to the assessee in the form of overdraft account. That besides the contention of the assessee that sale proceeds never reaches the assessee is also not acceptable as the aforesaid GOMS instructs the depot managers of the assessee corporation to obtain demand drafts in favour of government of A.P. This clearly proves that only after the sale proceeds reach the assessee corporation, demand drafts are to be made in favour of Government of A.P for depositing in the P D Account. In this view of the matter, there cannot be any diversion of income by overriding title. For the same reason, the payment of surplus/margin /privilege fee etc., by whatever name called is only parting of the profit of the assessee corporation to the State. In the circumstances, it cannot be anything else but application of income and therefore not allowable as an expenditure. Though it may be a fact that the assessee corporation is carrying out the wholesale distribution of IMFL as an authority of government or on behalf of government but, that cannot be a reason for claiming immunity from taxation under the provisions of I T ACT in view of Article 289(2) of the Constitution. Though the learned AR had submitted that the ratio laid down in case of APHB (2013 (10) TMI 542 - ITAT HYDERABAD) would not be applicable to the facts of assessee s case in view of factual difference, but on deeper examination, we are of the view that principles decided therein would also apply to the facts of the present case. In aforesaid view of the matter, all the contentions of the assessee with regard to non taxability of the amount paid towards privilege fee and special privilege fee etc., fails. The assessee has also assailed the order passed by the CIT (A) by contending that since the Tribunal had directed the CIT (A) only to consider the amendment she was not competent to the validity of amendment. However, such contention of the learned AR is not acceptable. Even if we accept that the CIT (A) is not competent to go into the validity of the amendment but it has no direct bearing on the ultimate conclusion reached by her. The assessee has raised a further ground that the CIT has dropped the proceeding u/s 263 of the Act for the assessment year 2001-02 therefore a different view could not have been taken by the department for the impugned assessment year. This contention of the assessee is not acceptable as principles of res judicata do not strictly apply to the income-tax proceedings. Even otherwise also as can be seen from facts on record, the CIT has revised the assessment order by invoking his powers u/s 263 of the Act for the assessment year 2006-07. Therefore, the assessee s contention that proceedings initiated u/s 263 for the assessment year 2001-02 having been dropped, different view can be taken is not acceptable. It was also contended by the learned AR that the Tribunal had remitted the matter back to the CIT (A) for a limited purpose of examining the amendments made to Excise Act by inserting new provisions 4A, 4B and 4C. therefore the CIT (A) is not competent to go into the other aspects of application of income and disallowance of expenditure as the Tribunal has rejected such findings of CIT (A). On a perusal of the order passed by the Tribunal while remanding the matter back to the CIT (A), it is to be noted that the Tribunal has directed the CIT (A) to decide the matter de novo after taking into consideration the amendments made to the Excise Act. Nowhere the Tribunal has made any observation with regard to the merits of the addition. Therefore the contention of the learned AR is not acceptable. - Decide against assessee

Issues Involved:
1. Accrual of income and tax liability.
2. Deduction of sums before declaring loss.
3. Admissibility of privilege fee, special privilege fee, and special privilege fee for sports as deductions under section 23A of the Excise Act.
4. Compliance with the provisions of section 23A of the Excise Act.
5. Adherence to the provisions of Company Law and accounting standards.
6. Diversion of sums by overriding title.
7. Application of section 23A of the Excise Act.
8. Decisions on allowance of these deductions.

Detailed Analysis:

1. Accrual of Income and Tax Liability:
The Assessing Officer (AO) noted that the liability to pay income-tax arises on the accrual of income. The income had accrued to the assessee when sales were conducted, and it should have paid advance tax accordingly. The AO emphasized that the income should be computed as per the Companies Act and AS-22, considering income tax as an expense.

2. Deduction of Sums Before Declaring Loss:
The AO observed that the assessee should have first deducted income tax liability as an expenditure before remitting the margin to the government. The assessee had adopted an alternative method of taking the gross margin and remitting it under different heads, thereby declaring a loss or nominal income.

3. Admissibility of Privilege Fee, Special Privilege Fee, and Special Privilege Fee for Sports as Deductions under Section 23A of the Excise Act:
The AO found that the deduction claimed on account of privilege fee, special privilege fee, and special privilege fee for sports was not admissible since they were not computed in accordance with section 23A of the Excise Act. The AO noted that the entire margin was paid to the government under different heads, avoiding the responsibility to pay income-tax.

4. Compliance with the Provisions of Section 23A of the Excise Act:
The AO observed that the assessee had not followed the procedure laid down in section 23A of the Excise Act. The assessee's method of remitting the entire margin to the government was not in line with the legislative intent of section 23A, which required the deduction of expenses, including income tax, before remitting the margin.

5. Adherence to the Provisions of Company Law and Accounting Standards:
The AO noted that the assessee should have followed the provisions of the Companies Act and AS-22, which require the deduction of income tax as an expense before arriving at the net profit. The AO concluded that the assessee had not complied with these provisions.

6. Diversion of Sums by Overriding Title:
The AO, relying on judicial precedents, concluded that there was no diversion of income by overriding title in the case of the assessee. The entire margin collected was not passed on to any fund by overriding title but was part of the trading receipts, resulting in taxation of such income in the hands of the assessee.

7. Application of Section 23A of the Excise Act:
The AO observed that section 23A of the Excise Act indicates that the net margin after deducting expenses is to be paid as privilege fee or any other fee to the government. The assessee's method of remitting the entire margin without deducting income tax was not in accordance with section 23A.

8. Decisions on Allowance of These Deductions:
The CIT (A) confirmed the assessment, noting that the amendments to the Excise Act did not change the nature of payment in the hands of the assessee. The CIT (A) held that the income of the assessee corporation is passed on to the state government after meeting the expenditure, including income tax. The CIT (A) dismissed the appeal, holding that the entire income of the assessee is not that of the State and only the amounts specified as privilege fee are income of the State.

Conclusion:
The ITAT upheld the AO's and CIT (A)'s findings that the privilege fee, special privilege fee, and special privilege fee for sports were not admissible deductions. The ITAT concluded that the income from the sale of IMFL is the income of the assessee corporation, and the payment of privilege fee is an application of income. The ITAT dismissed the appeals for the assessment years 2008-09 and 2009-10 and partly allowed the appeal for the assessment year 2006-07 for statistical purposes.

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