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TMI Blog2012 (11) TMI 579X X X X Extracts X X X X X X X X Extracts X X X X ..... on u/s.23A of the Excise Act, which reads as under:- "PAYMENT BY THE CORPORATION Sec.23A. In consideration of the privilege conferred on the Corporation, in terms of the Andhra Pradesh (Regulation of Trade in Indian Liquor, Foreign Liquor) Act, 1993, the entire margins Special Privilege Fee, any other receipts and any other amount realized by the Corporation from whatever source after deducting the expenses incurred by the Corporation, shall be paid as Privilege Fee or Special Privilege Fee or any other fee by whatever name called to the Commissioner of Prohibition & Excise in terms of Section 23(1) in the month succeeding the month of sale." 4. The AP Government has been notifying the amount payable by the assessee corporation by way of special privilege fee and assessee has claimed payment made by them to the AP Government as special privilege fee as a deduction in its return of income. 5. The Assessing officer had allowed the claim of the Assessee. The CIT exercising revisionary powers u/s 263 has disallowed the entire amount of privilege fee, Special privilege fee and special privilege fee in respect of sports amounting to Rs.883,90,15,513/- on the ground that payment of pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecial privilege fee and special privilege fees for sports. 9. According to the CIT this action of the AO was merely to consider whether there should be any disallowance under Section 43B and that he has not examined serious legal issue regarding the allowability of this payment. 10. The CIT mentions that even though all the particulars were available on record, he completed the assessment without examining the same. The Assessee further submits that the CIT issued three notices viz., 10.10.2005, 25.12.2005, 02.02.2006 for the assessment year 2002-03, wherein all the particulars regarding payment of privilege fee were discussed. 11. The CIT disallowed in computing book profit statutory liability for privilege fee all the years paid in that year. 12. Aggrieved by the order of the CIT, the assessee is in appeal before us. 13. Before us, the learned Departmental Representative argued vehemently that the order of the CIT has been well reasoned and should be sustained. The learned DR Shri V. Srinivas filed written submissions and the contents of which are as under: 1. The claims of privilege fee, special privilege fee and sports fee ought to have been allowed u/s. 37 of the Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, in column 21 (i)(B) (a) of 3CD annexure of tax audit reports u/s 44AB filed for different years, privilege fee is recognized as fee u/s 43B. (e) Payment by overriding title is claimed while the actual affairs show that the receipts and expenditures are fully reflected in the own profit and loss account of the assessee. Sale receipts include this sum whereas claim is made that it is not their receipt. (f) Website of the Corporation reads 'ploughing back of profits' as against the claim of assessee before tax authorities that the fee is an 'expenditure'. Section 23A states that it is margin paid after expenses. (g) Accounting Standards and Company law are claimed to be not applicable. Whereas the accounts are audited and there is no qualification or remark made in the audit report to state that these laws are not applicable. Points raised against order u/s. 263 : 1. It is claimed that the earlier Commissioner decided the issue in A.Y.2002-03 and there is no change in law since then. 2. It is claimed that precedent should have been followed because earlier CIT dropped the issue after examination. It is also stated that the Commissioner should have decided the iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee were to be accepted, there would be no income arising in any year and the provisions of Income-tax Act would be made redundant which is not the intention of the State Legislature. 4. The State Legislature was fully aware of the case of APSRTC and other judgments of the Apex Court wherein it was held that company/corporation is not exempt as per Article 289 of the Constitution. This fact cannot be ignored. 5. The conduct of the Corporation shows that it was filing returns of income and paying income tax on the disallowables or on prior period adjustments etc., which means that it was not convinced of its own arguments regarding its exemption under Article 289 of the Constitution. 6. The Corporation is paying sales tax and other duties to the State Government, thereby recognizing itself as an independent entity. The assessee is not taking a consistent stand with regard to privilege fee - statutory fee. The records show that in the tax audit report u/s. 44AB, privilege fee etc., is treated as a liability disallowable or allowable u/s. 43B by the assessee itself. This is contrary to the arguments made by the Ld. AR. 7. The question of admissibility of the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iple of res judicata does not apply to income-tax proceedings. Even otherwise the objection of the assessee that the matter was decided upon by the CIT for earlier year 2002-03 was unsubstantiated and unproved, the AR failed to point out any such finding of the CIT though records were fully made available to him for study. Further, it was pointed out to counter the argument of the AR that there was no judicial precedent in this case by way of any decision of appellate authority on this issue. Irrespective of these arguments it may clearly be seen that a well reasoned order has been passed by the CIT. Objections against action u/s. 263 are dealt with at length in para - 8 of the order u/s. 263. 14. Reliance is placed on Windwell Securities Ltd [2011-ITAT-MUM], Apollo Hospitals Enterprises Ltd [2008-HC-MAD-IT] and in the case of Namdhari Seeds [2011-HC-KAR-IT]. 15. It is well established from the records that the assessment order was passed on 30.10.2008 without taking into consideration the material submitted by the assessee on 20.11.2008. The assessment order was duly served on assessee on 03.11.2008. Reliance is placed on K.U. Srinivasa Rao Vs. CWT (152 ITR 128, A.P) to state th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax is paid nothing is left to be paid as privilege fee to the State is not true as 70% of the profit is still available to be paid to State Government. 22. Once 'real profit' is computed, no other expenditure is to be allowed. This is the ultimate stage and charge of income tax arises first before such profit is given back to the state government. It cannot be denied that 'real profit' is computed in this case. Reliance is placed on the judgments of the Supreme Court filed. (Poona Electric Supply Co. Ltd. & Pondicherry Railway Co. Ltd.). 23. The claim of the assessee that he will pay away the 'real profit' and show the income as nil would mean violation of other laws and misinterpretation of its own section 23A of the Excise Act. 24. In the fitness of things it can clearly be seen that what is paid is the resultant profit in the name of privilege fee or by any other name called. To the extent profit is sought to be paid it amounts to application of income irrespective of all other considerations / arguments. Once 'Real Profit is computed no expenditure can be allowed further as deduction. It amounts to only appropriation of income. Even if it were to be regarded as other than ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partment was aware of the characteristic of the payment of special privilege fee, additional privilege fee etc. 15. The learned counsel for the assessee contended before us that It is not in dispute that the Government of AP had granted license to the assessee corporation for carrying out bottling and distribution of liquor within the State of Andhra Pradesh. Section 23A of the Act grants the AP Government charged privilege fee, special privilege fee, or any other fees by whatever manner called, the entire margin special privilege fee, any other receipts and any other amount realized by the Corporation. From the Act it is clear that what is charged by the AP Government is fee in exchange for granting exclusive right of bottling and distribution of liquor in the State of AP to the assessee. This fee permits the assessee to carry on business and realize profit. Further this fee is payable on the sale made by the assessee corporation. It is therefore clear what is charged by the AP government is fee for permitting the assessee to carry on business. This being so, it clearly fell in the revenue field and the same should be allowed as a deduction in computing the business profit of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t arise at all. 18. The learned counsel for the assessee further relied on the decision of Jaipur Tribunal in the case of Rajasthan State Beverages Corporation Limited in ITA No 540 & 545/JP/2011, wherein the Tribunal held in para 13 of their order as under:- "13. The ld.CIT(A) has followed the order of his predecessor and such decision has been confirmed by the Tribunal vide order No. 901/JP/2009 dated 20.08.2010. The ld.CIT(A) has reproduced the observation of the Tribunal as under:- "We have already decided the appeal in the case of Rajasthan State Ganganagar Sugar Mills and have held that the privilege fee paid by the assessee is allowable as a business expenditure. The fee was paid for granting right to manufacture and vend he liquor which is exclusively domain of the State. Determination of privilege fee at any reasonable amount was within the jurisdiction of State Authorities ie., Excise Department and levy fee cannot be termed as application of income or dividend. This is purely a business expenditure and has to be allowed in view of the provisions of Section 37(1) of the Act. The AO has made an objection that privilege fee was not paid against any agreement entered bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licable as they are on separate aspect. We have gone through the other case laws, relied upon by ld.A R and found that they also support the case of the assessee. In view of the above facts and circumstances, we held that privilege fee paid by the assessee is allowable as business expenditure. Accordingly we direct the AO to allow the deduction to the assessee. Since the facts are identical therefore following the precedent, we confirm the order of the ld.CIT(A) here in the present case also." 14. The ld.CIT(A) after considering the above observation deleted the addition after observing as under:- "In the present case, the appellant company was granted exclusive privilege for wholesale trade of Indian made Foreign Liquor & Beer in the State of Rajasthan for financial year 2006-07 under the provisions of the Rajasthan Excise Act, 1950 by competent authority under the said Act. In exercise of its power under Section 30 and 42(c0 of the Rajasthan Excise Act, 1950 the competent authority under the said Act has levied a privilege fee of Rs.15 crores for FY 2006=-07 vide its order No.F.4(5)FD/Ex/2005 dated 28.03.2007 upon the appellant company in lieu of granting the said privi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. The levy remains what is essentially is namely the price paid in a purely commercial transaction to the State Government for parting with its valuable rights and privileges relating to intoxicating liquors. 20. The learned counsel for the assessee submitted that from the said decision, it is clear that the amount paid by the assessee corporation for the rights granted to dealing in liquor can only be of revenue nature and the same should be deducted from the profit of the assessee corporation. 21. The learned counsel for the assessee further submitted that the other factor which had impact on the decision of the CIT, is that privilege fee is based on the profit made by the assessee corporation and hence cannot be claimed as expenditure. Once the payment has been held to be revenue expenditure, method of quantification could not affect the characteristic of such expenses. This was the expenditure incurred solely for the purpose of profit and gains and hence even though it is paid in relation to profit made in the business the same is an allowable deduction. 22. Originally, the case was posted for hearing on 10/02/12 and later the case was adjourned to 19/04/12 as part h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deemed to be and always deemed to have been the income of Government and due payment for the relevant years in terms of section 4B. This clearly shows that the payment is nothing but appropriation of income. The issue that needs determination in this context is whether the State Government has an overriding title on such amounts. Section 4C only states that the amount paid is income of Government i.e in the hands of the recipient. For the purpose of taxation, the nature of payment in the hands of recipient is not material and the nature in the hands of the payer assessee is important. As per detailed submissions already made by the Department, the manner of computation of such payments clearly establishes the fact that income of the assessee corporation is passed on to the State Government. In such a case, it is obligatory on the part of the assessee to pay income tax on the appropriation of profits and then remit the balance amount. 5. The argument of the assessee that the income of the corporation is income of the state and hence not liable to tax, is not tenable in law. This argument is amply rebutted with supporting case laws in pages 26 to 32 of the order u/s 263 of the CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporation is always subject to the exceptions which statutes may create, and if there is a statutory provision which clearly indicates that despite the concept of the separate personality of the corporation, the trade carried on by it belongs to the shareholders who brought the corporation into existence and the income received from the said trade likewise belongs to them, that would be another matter. It would then be possible to hold that as a result of the specific statutory provisions the income received from the trade carried on by the corporation belongs to the shareholders who have constituted the said corporation, and so, we must look to the Act to determine whether the income in the present case can be said to be the income of the State of Andhra Pradesh. In this connection, we may usefully refer to the observations made by Lord Denning in Tamlin v. Hannaford (1) : " In the eye of the law, " said Lord Denning, " the corporation is its own master and is answerable as fully as any other person or corporation. It is not the Crown and has none of the immunities or privileges of the Crown. Its servants are not civil servants, and its property is not Crown property. It is as m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee for any of its acts or omissions or commission. ii) The assessee is paying Sales Tax and Property tax to the State. The argument that Sales tax is collected from the retailers is devoid of merit because State Government or its own Department do not act as dealers for Sales Tax. A dealer is an independent entity and obeys by Sales Tax Law. This shows that the assessee is subject to the laws of the Sate as any other subject, which would not be the case, if it were the King. iii) There is no notification or statutory provision expressly treating the income of the Corporation as that of the State. Section 4C now introduced, only states that certain payments made by the Corporation are deemed as income of the State Government and this does not extend to the entire income of the assessee. For instance, for the present year, the payments cover only part of the income and the balance amount of the profit is remitted as donation on which deduction u/s 80G is claimed by the assessee. iv) The case is also not covered under Article 289(3) because trading in liquor is not declared by Parliament as an activity incidental to the ordinary functions of the Government. v) Fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and enunciated a wide and comprehensive definition of "State" for the purpose of Part III of the Constitution. Under the I.T. Act, a "company" as defined in s. 2(17), inter alia, includes any Indian company, any body corporate incorporated by or under the laws of a country and any institution, association or body whether incorporated or not. A State undertaking incorporated under the Companies Act is not outside the definition of a "company." "Person" defined under s. 2(31) includes a "company." Income derived by any "person" is liable to charge of income tax under s. 4 as laid down under the several provisions of the Act. The I.T. Act as such does not excluded the income of a "company", which is a "person" within the meaning of s. 2(31) read with s. 2(17) from liability of tax. The exemption is claimed by the petitioner-company not under any provision of the I.T. Act, but only under art. 289(1) of the Constitution of India, which reads thus "298(1). The property and income of a State shall be exempt from Union taxation." What is exempt from taxation is the income of a State and not the income of the instrumentality or agency of a State. That the income of this company is not th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is repugnancy with Central Law. As a result, section 4C is bound to fail. Once, section 4C fails and the manner of computation as prescribed u/s 23A of the AP State Excise Act is non-existent due to omission of section 23A, the amounts have to be treated as nothing but appropriation of profit. Relevant portions of Article 254 and Article 251 are quoted below for the kind perusal of Hon'ble ITAT. "254. (1) If any provision of a law made by the Legislature of a State is repugnant to any provision of a law made by Parliament which Parliament is competent to enact, or to any provision of an existing law with respect to one of the matters enumerated in the Concurrent List, then, subject to the provisions of clause (2), the law made by Parliament, whether passed before or after the law made by the Legislature of such State, or, as the case may be, the existing law, shall prevail and the law made by the Legislature of the State shall, to the extent of the repugnancy, be void". "251. Nothing in articles 249 and 250 shall restrict the power of the legislature of a State to make any law which under this Constitution it has power to make, but if any provision of a law made by the Legislatu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firms the fact that it is the profit that is sought to be appropriated. The Income tax Department never disputed the fact that the Government of AP has a right to receive income from the assessee. The new amendment to the Excise Act also clearly establishes the fact that the entire income of the assessee is not that of the State and only the amount specified as privilege fee is income of State. This is contrary to the argument of the assessee that income from trading in liquor is exempt from taxation because the entire activity is conducted on behalf of State. Further, it may be submitted that the assessee has no other income for the present year except income from trading in liquor and the argument of the counsel of the assessee that the assessee has filed returns of income because there could be income from other sources is also devoid of merit. The fact that Assessee Corporation voluntarily complied with tax audit provisions and commercial audit provisions year after year shows clearly that it recognized the fact of its liability under the Income-tax Act. 13. As per the newly inserted section 4A of the State Excise Act, it is stated that "the Government shall from time to time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the judgment which became conclusive and binding on the parties to enable the State Government to retain the amount wrongfully and illegally collected as sales tax and this object has been sought to be achieved by the impugned amendment which does not even purport or seek to remedy or remove the defect and lacuna but merely raises the rate of duty from 61/2% to 45% and further proceeds to nullify the judgment and order of the High Court. In our opinion, the enhancement of the rate of duty from 61/2% to 45% with retrospective effect is, in the facts and circumstances of the case, clearly arbitrary and unreasonable. The defect or lacuna is not even sought to be remedied and the only justification for the steep rise in the rate of duty by the amended provision is to nullify the effect of the binding judgment. The vice of illegal collection in the absence of the removal of the illegality which led to the invalidation of the earlier assessments on the basis of illegal levy, continues to taint the earlier levy. In our opinion, this is not a proper ground for imposing the levy at a higher rate with retrospective effect. It may be open to the Legislature to impose the levy at a higher rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation Ltd for A.Y 2007-08 allowed privilege fee. However, the facts are entirely different and certain comments in the said case are of crucial significance. g) In the said case, the assessee paid Rs.15 Cr as privilege fee. This privilege fee was paid as per the authority u/s 30 and 42(c) of the Rajasthan Excise Act through an order by the competent authority. The reason for disallowance by the AO was that the fee was capital in nature. ITAT followed its own decision for earlier year and allowed the fees as deduction. h) The finding of the ITAT in the said case as quoted from its earlier order is : "the assessee earned huge profit even after paying the privilege fee". Therefore, there is clear element of quid pro quo in the said case. In the case of M/s APBCL, the fee is not fixed and the element of proportionality or quid pro quo is missing and only profit is paid back and it is also recognized on the website that it is ploughing back of profit in the name of privilege fee. 17. Thus, the case of the assessee is not comparable with that of TASMAC or Rajasthan State Beverages Corporation Ltd. In the both the said cases, the fees is fixed at a specified quantum where as in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egislature may attempt to impose a tax; and in the case of such a colourable exercise of legislative power courts would have to scrutinise the scheme of the levy very carefully and determine whether in fact there is a co-relation between the service and the levy, or whether the levy is either not co-related with service or is levied to such an excessive extent as to be a presence of a fee and not a fee in reality. In other words, whether or not a particular cess levied by a statute amounts to a fee or tax would always be a question of fact to be determined in the circumstances of each case". The Hon'ble Court also held that "In order to determine whether a levy is a tax or a fee, what has to be considered is the pith and sub- stance of the levy. Where the levy in pith and substance is not essentially different from a tax, it cannot be converted into a fee by crediting it to a special fund and attaching certain services to it". 20. The decision of Supreme Court in the case of Jindal Stainless Ltd (283 ITR 1) also reaffirms the above view. In the said case the Constitution Bench of five Judges held that the theory of compensatory tax is that it rests upon the principle that if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Income Tax proceedings. The decision of Supreme Court in the case of Catholic Syrian Bank Ltd [2101-TIOL-16-SC-IT-LB], the Supreme Court held that "Merely because the orders of the Special Bench of the ITAT were not assailed in appeal by the Department itself, this would not take away the right of Revenue to question the correctness of the orders of assessment, particularly when a question of law is involved. ..... As already noticed, the question raised in the present appeal go to the very root of the matter and are questions of law in relation to interpretation of sections 36(1)(vii) and 36(1)(viia) read with section 36(1)(2) of the Act. Thus, without hesitation, we reject the contention of the appellant banks that the findings recorded in earlier assessment years 1991-1992 to 1993-94 would be binding on the Department for the subsequent years as well". 24. In summary, it is submitted that in the present case, the CIT was well within his jurisdiction to revise the assessment u/s 263. On the facts of this case, the amount of privilege fee is a balancing charge on the P&L account being variable and not based on quid pro quo. Also, only the amount that remains out of marg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pradesh Legislature on 16-04-2012, vide G.O. Ms. No. 326, Revenue (Excise-II), 21st May, 2012 to the Andhra Pradesh Excise and Andhra Pradesh (Regulation of trade in Indian made foreign liquor, Foreign Liquor) Acts, (Amendment) Act, 2012(Andhra Pradesh Act No. 5 of 2012), has to be examined and analysed taking into account the submissions made by the learned DR Shri V. Srinvias. The learned DR has pointed out that the following: i) with respect to newly inserted section 4C, it only reaffirms the fact that it is the profit that is sought to be appropriated. According to the DR, the new amendment to Excise Act, clearly establishes the fact that the entire income of the assessee is not that of the State and only the amounts specified as privilege fees is income of the State. ii) with respect to newly inserted section 4A, the invoices raised by the assessee do not indicate separate amounts as privilege fee or special privilege fee or sports privilege fee. iii) with respect to the newly inserted section 4B, the manner of computation is not specified under 4B and the computation needs to be made u/s 23A and the implication of AS-22 is to be examined. 25. Under these circumstan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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