2016 (3) TMI 461 - HC - Income Tax

Disallowance of Privilege fee paid u/s 40(a)(ii) or (iib) - sharing of revenue with the state - scope of any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains - Scope of any amount (A) paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which is levied exclusively on; or (B) which is appropriated, directly or indirectly, from, a State Government undertaking by the State Government. - disallowance with effect from Assessment year 2014-15 or prior to that. - Held that - The privilege fee payable by the petitioner to the State Government would be taxable with effect from 1.4.2014 and not prior thereto. The unreasonableness of the privilege fee payable is also not a ground to hold that it is a device by which the petitioner and the State Government are avoiding payment of tax. In this regard, reliance is placed on Har Shankar 1975 (1) TMI 89 - SUPREME COURT which is clear on this aspect and therefore, it was not open for the Assessing Officer to opine that privilege fee appears to be relatable to the profit earned and a large chunk of it is transferred to the State Government in the name of privilege fee. It is settled law that there is no illegality committed by the petitioner in paying such privilege fee on the State Government having fixed such privilege fee. There is no legal prohibition in this regard and therefore, it cannot be said that the same could have been disallowed by the Assessing Officer. It requires to be emphasized that the Supreme Court in Har Shankar 1975 (1) TMI 89 - SUPREME COURT has expressed that, the power of the Government to charge a price for parting with its rights and not the mode of fixing the price is what constitutes the essence in the exercise of the matter , are the words used by the Supreme Court in dealing with the privilege of the State Government to fix such a privilege fee. Therefore, it would aptly apply in the facts and circumstances of these cases insofar as the Assessing Officer having expressed an opinion of the State Government having exercised its power unscientifically, illegally and irrationally . (sic) Consequently, these petitions are allowed. The impugned assessments are set aside insofar as it treats the privilege fee paid as being taxable to income. - Decided in favour of assessee

Issues Involved:
1. Disallowance of Privilege Fee under Section 40(a)(iib) of the Income-tax Act.
2. Applicability of Section 40(a)(ii) to the petitioner's case.
3. Classification of Privilege Fee as business expenditure.
4. Legitimacy of amendments to the Karnataka Excise Act.
5. Alternative remedy submissions.

Detailed Analysis:

1. Disallowance of Privilege Fee under Section 40(a)(iib) of the Income-tax Act:
The primary issue revolves around the disallowance of the Privilege Fee paid by the petitioner to the State Government for various assessment years. The Assessing Officer disallowed the Privilege Fee based on the grounds that it exceeded the surplus earned by the company, was not a fixed rate, and was not known in advance, among other reasons. The petitioner argued that Section 40(a)(iib) of the Income-tax Act, which disallows such fees, was inserted by the Finance Act, 2013, and is applicable prospectively from the assessment year 2014-15. The court agreed with the petitioner, stating that the provision is not retrospective and applies only from the assessment year 2014-15, as supported by the Memorandum explaining the provisions of the Finance Bill, Circular No.3/2014, and the Supreme Court decision in CIT vs. Vatika Township (P) Ltd. The court emphasized that the Privilege Fee payable by the petitioner to the State Government would be taxable with effect from 1.4.2014 and not prior thereto.

2. Applicability of Section 40(a)(ii) to the petitioner's case:
The petitioner contended that Section 40(a)(ii) of the Income-tax Act, which disallows certain taxes, was not applicable to the Privilege Fee as it is not a tax but a fee. The court supported this view, stating that the Privilege Fee does not satisfy the definition of a tax and is not levied as any rate or tax on the profits and gains of business or profession. The court referenced the Supreme Court decision in Har Shankar v. Deputy Excise and Taxation Commissioner, which distinguished between a tax and a fee, and concluded that the Privilege Fee is the price or consideration charged by the government for parting with its privileges and is not a tax.

3. Classification of Privilege Fee as business expenditure:
The petitioner argued that the Privilege Fee is an allowable business expenditure under Section 37(1) of the Income-tax Act, as it is incurred wholly and exclusively for the purpose of business. The court agreed, stating that the Privilege Fee is a legitimate business expenditure and should be allowed as such. The court referenced several judgments, including Sassoon J. David and Company, Private Limited vs. CIT and Hero Cycles (Private) Limited vs. CIT, to support this view. The court also emphasized that the commercial expediency of the assessee should not be questioned by the revenue authorities.

4. Legitimacy of amendments to the Karnataka Excise Act:
The Assessing Officer had questioned the legality and rationality of the amendments made to the Karnataka Excise Act, which allowed the State Government to levy the Privilege Fee. The court held that the Assessing Officer had no jurisdiction to question the validity of the State legislation and that such matters should be addressed before the appropriate forum. The court stated that the amendments to the Excise Act were legitimate and within the powers of the State Government as per the Constitution of India.

5. Alternative remedy submissions:
The petitioner contended that the alternative remedy of appeal was not feasible due to the extralegal authority exercised by the Assessing Officer. The court acknowledged this contention and proceeded to address the issues raised in the petitions.

Conclusion:
The court allowed the petitions, setting aside the impugned assessments insofar as they treated the Privilege Fee as taxable income. The court remanded the matter to the Assessing Officer to re-examine the other disallowances after affording an opportunity of hearing to the petitioner for the several assessment years.

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