2019 (10) TMI 1067 - AT - Income Tax

Addition u/s. 40(a)(iib) with regard to surcharge on sales tax - contention of the Ld. AR is that expenditure mentioned in section 40(a)(iib) covers only expenditure which is incurred in consideration of obtaining some benefits or rights or license by the State Government in connection with conduct of business - element of quid pro quo in payments - HELD THAT - In our opinion, the assessee has been granted FL 9 license under the Abkari Act and the assessee is liable to pay surcharge to the State Government. This surcharge is exclusively levied only on State Government undertaking and the FL 9 license was not given to any undertaking other than the assessee for carrying on business. Being so, the payment was incurred for obtaining specific benefits from the State Government and it cannot be said that there is no element of quid pro quo in the payments. With regard to the additional evidence filed by the assessee on levy of surcharge in respect of assessees mentioned in para 2 above, these assessees are not granted FL 9 license under the Abkari Act and only the assessee before us is granted FL 9 license under the Abkari Act. Hence, the additional evidence is of no assistance to the assessee and the same is rejected. Thus, the argument of the assessee s Counsel is rejected. Surcharge is nothing but sales tax paid by the assessee to the State Government. - In our opinion, this argument of the Ld. AR has no merit on the reason that sales tax is collectable or recoverable from the customers to whom the goods are sold or services are rendered. In the present case, there is prohibition on collection of surcharge from the customers and it should be borne by the assessee itself. As per the Kerala Surcharge on Taxes Act, 1957, there is prohibition for levy of surcharges on certain taxes. Hence, it cannot be said that surcharge is equivalent to sales tax. This argument of the Ld. AR is rejected. Surcharge is not exclusively levied by State Government on the assessee - In our opinion, FL 9 license under the Abkari Act was exclusively given to the assessee and no other undertaking has been granted such license. Being so, it is exclusively levied on the assessee. This argument of the Ld. AR is rejected. Surcharge is charged to the P L account and not to the appropriation of P L account - it is a flow back of the profits of the assessee by way of payment of surcharge to the government account which is nothing but a colourable device used by the State Government so as to reduce the taxable profits of the assessee. Thus, it amounts to appropriation of the profits of the assessee directly or indirectly to the State Government. The word appropriation used in section 40(a)(iib) of the Act does not mean that it should be charged to P L appropriation account. In the present case it was charged to P L account by way of colourable device, hence, the provisions of section 40(a)(iib) of the Act are applicable. It is evident from the budget speech and explanatory note, as above, that the surcharge levied under section 3(1) of the Kerala Surcharge on Taxes Act, 1957 is an exclusive levy by the State Government on a State Government undertaking and the same is covered by the provisions of section 40(a)(iib) - Decided against assessee.

Summary

Issues Involved:
1. Admissibility of additional evidence/documents.
2. Interpretation and applicability of Section 40(a)(iib) regarding surcharge on sales tax.
3. Whether surcharge on sales tax is equivalent to sales tax.
4. Exclusivity of the surcharge levy on the assessee.
5. Appropriation of profits by the State Government.

Issue-wise Detailed Analysis:

1. Admissibility of Additional Evidence/Documents:
The assessee filed a petition for the admission of additional evidence/documents showing that other assessees dealing in liquor also paid a surcharge on sales tax. The Tribunal found bona fide reasons for not raising the additional ground earlier and admitted the additional ground for adjudication, citing the Supreme Court judgment in National Thermal Power Corporation Ltd. vs. CIT (229 ITR 383).

2. Interpretation and Applicability of Section 40(a)(iib):
The Ld. AR argued that Section 40(a)(iib) disallows only those expenditures incurred in consideration of obtaining benefits, rights, or licenses from the State Government. The section refers to payments like royalty, license fee, service fee, privilege fee, service charge, or any other fee or charge. The Ld. AR contended that surcharge on sales tax does not fall under these categories as it is a statutory payment without quid pro quo. The Tribunal, however, held that the surcharge is exclusively levied on the State Government undertaking (the assessee) and is connected to the benefits obtained from the State Government, thus falling within the purview of Section 40(a)(iib).

3. Whether Surcharge on Sales Tax is Equivalent to Sales Tax:
The Ld. AR argued that surcharge on sales tax is part of sales tax and should not be disallowed under Section 40(a)(iib). The Tribunal rejected this argument, stating that sales tax is recoverable from customers, whereas surcharge on sales tax, as per the Kerala Surcharge on Taxes Act, 1957, cannot be collected from customers and must be borne by the assessee. Thus, surcharge on sales tax is not equivalent to sales tax.

4. Exclusivity of the Surcharge Levy on the Assessee:
The Ld. AR claimed that the surcharge is not exclusively levied on the assessee. The Tribunal found that the FL 9 license under the Abkari Act was exclusively granted to the assessee and no other undertaking. Therefore, the surcharge is exclusively levied on the assessee, making Section 40(a)(iib) applicable.

5. Appropriation of Profits by the State Government:
The Ld. AR argued that surcharge is charged to the P&L account and not an appropriation of profits. The Tribunal held that the surcharge payment is a flowback of profits to the State Government, constituting a colorable device to reduce taxable profits. Thus, it amounts to appropriation of profits under Section 40(a)(iib).

Conclusion:
The Tribunal upheld the disallowance of the surcharge amounting to ?551,61,01,115/- under Section 40(a)(iib) and dismissed the appeal and stay petition of the assessee. The surcharge was deemed an exclusive levy on the State Government undertaking and an appropriation of profits, making it non-deductible.