2017 (3) TMI 736 - HC - Income Tax

Disallowance of the payment of the privilege fee - allowable business expenditure - Held that - It is an undisputed position that, the respondent-original petitioner has entered into agreement with the Government of Karnataka and as per such agreement, the fee is agreed to be paid for grant of lease by the State Government to the respondent-Company. The State Government, in exercise of its delegated statutory power has to notify the privilege fee for the respective financial year which the respondent-Company has agreed to pay. The character of liability to pay privilege fee is not only by virtue of the contract but is by way of a statutory obligation once lease is granted in favour of the respondent-Company by the State. It is on account of the lease so granted, the respondent-Company is in a position to undertake the business of the liquor as per the terms and conditions of the licence. Hence, in any case, payment of privilege fee can be termed as by way of necessity. If any assessee has incurred expenses to discharge its statutory obligation for doing of business, the same by no stretch of imagination can be termed as not for the purpose of business or profession. Since in the present case, it is privilege fee and the liability to pay the said amount arises on account of the statutory obligation even if the payment of which is agreed upon by contractual arrangement, such expenditure would not fall into the arena of voluntariness or the ground of commercial expediency or facilitation in carrying on of the business. Even if the decision upon which the reliance has been placed by the learned ASG are considered, the assessing officer will have a power to examine the commercial expediency for the expenditure incurred but it cannot be said that he will have jurisdiction to disallow the expenditure incurred for necessity or with a view to have a direct benefit in the business of liquor. On the contrary, the assessing officer being a statutory authority under the Act is bound to respect all the laws may be made by the Parliament or may be made by the State Legislature. He has no jurisdiction to examine the constitutional validity of any Act or the statute or a subordinate legislation which creates statutory liability upon the assessee to make the payment by way of an expenditure incurred. Under the circumstances, we find that the action of disallowance of the payment of the privilege fee by the assessing officer for the respective period of assessment years which is prior to 1.4.2014 is per se without jurisdiction and also ultravires to his power under the Act. The disallowance of the deduction of privilege fees as expenditure is wholly without jurisdiction and the observations made by the assessing Officer so far as constitutional validity of the relevant Act and the Rules and the power exercised by the State for delegated legislation for fixation of the quantum of fees can also be said as ultravires to his power because he has no power or authority to test the validity of any statutory provision, may be made by the State Legislature or the Parliament. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of Privilege Fee as taxable income.
2. Maintainability of the writ petition under Article 226 despite the availability of an alternative statutory remedy.
3. Jurisdiction and power of the assessing officer under Section 37 of the Income Tax Act.
4. Constitutional validity of the Karnataka Excise Act and the power of the assessing officer to question it.

Detailed Analysis:

1. Disallowance of Privilege Fee as Taxable Income:
The appeals challenged the common order by the learned Single Judge, which set aside the assessment orders disallowing the privilege fee paid by the respondent-Company to the Government of Karnataka. The assessing officer disallowed the privilege fee on multiple grounds, including that it exceeded the surplus earned, was an appropriation of income, and did not meet the definition of a fee under Section 40(a)(ii) and (iib) of the Income Tax Act. The Single Judge found no illegality in the payment of the privilege fee and ruled that it could not be disallowed as taxable income. The Court emphasized that the privilege fee was a statutory obligation necessary for the business, thus qualifying as an allowable expense under Section 37(1) of the Income Tax Act.

2. Maintainability of the Writ Petition under Article 226:
The appellants contended that the writ petition was not maintainable under Article 226 of the Constitution since an alternative statutory remedy of appeal was available. However, the Court held that in cases where the action is wholly without jurisdiction or ultravires, the existence of an alternative remedy does not bar the writ petition. The Court found that the disallowance of the privilege fee by the assessing officer was without jurisdiction and ultravires, thus justifying the invocation of Article 226.

3. Jurisdiction and Power of the Assessing Officer under Section 37:
The Court examined whether the assessing officer had the jurisdiction to disallow the privilege fee under Section 37 of the Income Tax Act. The Court noted that Section 37 allows for the deduction of any expenditure incurred wholly and exclusively for business purposes, provided it is not prohibited by law. The Court concluded that the privilege fee, being a statutory obligation, was necessary for conducting the business and thus fell within the allowable expenses under Section 37. The Court also emphasized that the assessing officer had no jurisdiction to question the statutory liability imposed by the Karnataka Excise Act.

4. Constitutional Validity of the Karnataka Excise Act:
The Court addressed the issue of whether the assessing officer had the authority to question the constitutional validity of the Karnataka Excise Act. The Court ruled that the assessing officer, being a statutory authority under the Income Tax Act, must respect all laws enacted by the Parliament and State Legislature. The assessing officer had no jurisdiction to examine the constitutional validity of the Karnataka Excise Act or the rules made thereunder. The Court found that the assessing officer's action in disallowing the privilege fee was ultravires to his power and without jurisdiction.

Conclusion:
The Court upheld the learned Single Judge's decision, finding that the disallowance of the privilege fee was wholly without jurisdiction and ultravires to the assessing officer's power. The Court dismissed the appeals, affirming that the privilege fee was a necessary statutory expenditure for the business and thus allowable under Section 37 of the Income Tax Act. The Court also confirmed that the writ petition was maintainable under Article 226 due to the exceptional circumstances of the case.