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TMI Blog2016 (3) TMI 461X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 829,41,58,944/- and made disallowance under Section 14-A of the Act in a sum of ₹ 60,30,758/-, by order dated 12.03.2015. For the Assessment year 2009-10, an order under Section 143(3) read with Section 147 and 254 of the Act was passed as on 19.03.2015, disallowing the privilege fee of ₹ 479,36,60,000/- and made disallowance under Section 14-A of the Act in a sum of ₹ 41,28,225/- and provision for exgratia ₹ 18,90,000/-. The total disallowance of privilege fee is as follows: Writ Petition Number Assessment Year Privilege Fee 12872/2013 2010-2011 Rs.570,14,37,000/- 14687/2014 2011-2012 Rs.695,14,70,000/- 15910/2015 2012-2013 Rs.829,41,58,944/- 17514/2015 2009-2010 Rs.479,36,60,000/- The Assessing Officer has disallowed the Privilege fee on the following grounds namely: i) The privilege fee paid is more than the surplus earned by the Company in the trade of liquor. ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Finance Act, 2013 with effect from 1.4.2014 and the said section specifically disallows any amount paid by way of privilege fee or which is appropriated directly or indirectly from a State Government undertaking by a State Government. Consequently in view of the said provision, no disallowance can be made to the impugned assessment years 2009-2010, 2010-2011, 2011-2012 and 2012-2013, for the reason that the above provision is applicable only from the assessment year 2014-15 and subsequent years and it is applicable prospectively. This is supported by the Memorandum explaining the provisions of the finance bill, Circular No.3/2014 dated 24.01.2014 and Note on clauses. It is also pointed out that the decision of the Supreme Court in the case of CIT vs. Vatika Township (P) Ltd., (2014) 367 ITR 466 (SC), would support the case of the petitioner that from a plain reading of the said provision, it is clearly prospective. Further, the learned counsel Shri Shankar would point out that the circular is binding on the Department and there is ample authority in this regard, namely: a) Navnit lal C. Javeri vs. K.K.Sen, AAC [1965] 56 ITR 198 (SC). b) Ellerman Lines Limited vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distributors who have been paying such fee would also have to take into account that the revenue has never disallowed privilege fee collected from such wholesale distributors by invoking Section 40(a)(ii). It is also a matter of record that the Central Government Undertakings like BSNL, MTNL pay privilege fee to Central Government and the said amounts have not been disallowed invoking provisions of Section 40(a)(ii). One other aspect which the Assessing Officer has sought to hold against the petitioner is as to the State Government being a shareholder of the company and therefore, was receiving privilege fee far in excess of what the shareholder would be entitled to, is also an observation which is irrelevant. It is also pointed out that even appropriation of income directly or indirectly is covered by the inserted provision of Section 40(a)(iib) of the Act. The petitioner would not be provided with Distributor Licence without payment of privilege fee to the Government. The State Government being a shareholder of the petitioner, is immaterial. The capacity of receiving privilege fee is as a sovereign state and not as a shareholder of the assessee company. The role of a sovereig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcentage on the value of transactions of the petitioner company. The intention behind fixing the fee at the end of the year is to ensure that the petitioner is not saddled with losses and undue hardship, in view of the privilege fee being far in excess of the turnover. As for example, it is pointed out that if the privilege fee is fixed at ₹ 75 crore per month, it would be ₹ 900 crore for the entire year, in which event, the revenue would have allowed the entire expenditure and if the resultant amount is loss, it would have allowed it to carry forward the same. The Assessing Officer was also not justified in forming an opinion that appropriation has been made from the income quoted under the other income in the profit and loss account. The said income is also business income. In regard to the proposition that the business income can be broken up under different heads only for the purpose of computation of total income under Income Tax, is settled in the case of CIT vs. Chugandas and Co. 196 LV ITR 17 (SC). The dividends paid by the petitioner for the relevant assessment years, is as follows: Assessment Year Amount of Dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, it is open for the Department to question it before the appropriate forum and the power of the State Government to bring about such amendment also cannot be questioned. In that, the amendments made to the Excise Act are in relation to Section 24 of the Excise Act, Rule 3 Clause (11), Rule 8 sub-rule (4), Rule 8 sub-rule (5) and Rule 8 subrule (13) of the Karnataka Excise (Sale of Indian Foreign Liquors) Rules, 1968. It is pointed out that the petitioner is issued distributorship licence under Rule 3(11) of the 1968 Rules. The State Government has levied privilege fee on the petitioner as per the provisions of Section 24 of the Excise Act and 1968 Rules. Intoxicating liquors , that is to say, the production, manufacture, possession, transport, purchase and sale of intoxicating liquors is enumerated at No.8 of List-II in the VII Schedule to the Constitution of India and the Legislature of the State has exclusive powers to make laws for the State in respect of any of the matters enumerated in List-II in the Seventh Schedule as per the provisions of Article 246(3) of the Constitution of India. The fee or charges received by the Government for parting with its exclusive righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vein that the learned counsel Shri Shankar would contend that the disallowance in respect of the years prior to 2014-15 by the Assessing Officer is contended to be bad in law and that it is liable to be set aside. 4. The Respondents 1 and 2 have filed statement of objections, in support of which Shri Neeralgi would contend that any activity conducted in the line of business with an intention to earn profit even if it is a State Government undertaking, the taxable income is determined by taking cognizance of the relatable statutory provisions of the Act. He contends that there is sufficient identification of the various types of income arising out of sources like business or profession. A plain reading of Section 37 of the IT Act would indicate that an expenditure to be allowed under this section should fit into the central theme of the section and the question was, of allowing or disallowing the deduction claimed as privilege fee in the present case on hand and this has extensively been dealt with by the Assessing Officer in the course of the assessment order with reference to true nature of the valid parameters and incidents for a fee, as distinct from other imposition such as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date of decision of the government regarding the amount paid Method of calculation of privilege fee Income from sources other than liquor business for the year Taxable Income 2004-05 21.79 21.5 02.11.2004 Lump sum 3.89 0.29 2005-06 38.57 32.00 30.03.2005 Lump sum 10.07 6.57 2006-07 47.96 41.00 20.03.2006 Lump sum 10.08 6.96 2007-08 170.67 165.54 27.03.2007 5.15.% on IML sales value 14.82 5.13 2008-09 376.97 345.38 31.03.2008 6.00% on IML sales value 29.11 31.59 2009-10 486.26 479.64 23.03.2009 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Legislature to impose such a fee which would render the provisions of the Act otiose and non-implementable, thereby depriving the Central Government of its constitutional mandate to impose and collect tax on income other than agricultural income. Reliance is placed on a constitutional Bench judgment in the case of The Calcutta Gas Company (Proprietory) Ltd. vs. State of West Bengal and others AIR 1962 SC 1044 in this regard. 5. On a consideration of the above contentions and the facts and circumstances, it is not in dispute that the privilege fee which was paid by the petitioner to the State Government for the years 2004-05, 2005-06, 2006-07 was allowed as business expenditure. The respondents 1 and 2 have drawn inspiration from the 2013 amendment, whereby Clause (iib) of sub-clause (a) of Section 40 of the IT Act was inserted by the Finance Act, 2013 with effect from 1.4.2014. This apparently has been held by the Assessing Authority as being clarificatory in nature and has sought to apply it with retrospective effect. In that, the Assessing Officer has passed the assessment order disallowing the privilege fee paid as business expenditure on the very date of the Budget. Thou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a lease of its right to 'manufacture, supply or sell intoxicants. Section 34 of the Act read with Section 59(d) empowers the Financial Commissioner to direct that a licence, permit or pass be granted under the Act on payment of such fees and subject to such restrictions and on such conditions as he may prescribe. In such a scheme, it is not of the essence whether the amount charged to the licensees is predetermined as in the appeals of Northern India Caterers and of Green Hotel or whether it is left to be determined by bids offered in auctions held for granting those rights to licensees. The power of the Government to charge a price for parting with its rights and not the mode of fixing that price is what constitutes the essence of the matter. Nor indeed does the label affixed to the price determine either the true nature of the charge levied by the Government or its right to levy the same. 56. The distinction which the Constitution makes for legislative purposes between a 'tax' and a 'fee' and the characteristic of these two as also of 'excise duty' are well-known. A tax is a compulsory exaction of money by public authority for public purposes enf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of the price of a privilege, which the purchaser has to pay in any trading or business transaction. In any event, with the insertion of sub-clause (iib) in the Act, it would no longer be possible for the petitioner to claim that the said privilege fee is not taxable. The question as to whether the said provision can be applied with retrospective effect, is the only question that would remain for consideration. As rightly pointed out by Shri Shankar, a plain reading of the provision would not indicate that it is to be applied with retrospective effect. There are other provisions which were also amended, and wherever the Legislature intended that certain provisions would have retrospective effect, it is expressly indicated therein and therefore, there being no such express indication insofar as the present provision with which we are concerned, it cannot be said to be applicable with retrospective effect. This is also evident from the CBDT circular No.3/2014 dated 24.01.2014 issued by the Department, which would be binding on the Assessing Authority, the relevant portion of which reads as follows: 12. Disallowance of certain fee, charge, etc. in the case of State Governm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r management rights or shareholders agreements or voting agreements or in any other manner; (v) an authority, a board or an institution or a body established or constituted by or under any Act of the State Government or owned or controlled by the State Government. 12.3 Applicability.- This amendment takes effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years. Further, Clause 7 which is appended to the Finance Bill, 2013, reads as follows: Clause 7 of the Bill seeks to amend Section 40 of the Income-tax Act relating to amounts not deductible. The provisions of Section 40 specify the amounts which shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession . It is proposed to insert a new sub-clause (iib) in clause (a) of the aforesaid section so as to provide that any amount 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 any amount which is appropriated, whether directly or indirectly, from a State Gover ..... X X X X Extracts X X X X X X X X Extracts X X X X
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