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TMI Blog2022 (11) TMI 990X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax return, which has been disallowed by the Assessing Officer for AY 2017-18 u/s.40(a)(iib) As the list of areas which fall within the exclusive power of States are given in the List II of the Seventh Schedule. State has the exclusive power to levy taxes on sale and purchase of intoxicating liquor (Entry 54). But the power to levy fees in respect of matters in the List is given under a different entry (Entry No 66). Thus, the State derives power to levy sales tax (VAT) on liquor under entry 54 and power to levy fees in connection with production, manufacture, transportation etc. is derived under Entry no 69 of the List II of VII schedule the Constitution of India. So, the power of State Government to levy tax on sale and purchase of liquor and power to levy fees are two different powers and are derived from two different entries in the State list. Thus, fees levied by whatever name called under the power granted under Entry 69 cannot encompass tax levied by virtue of Entry 54. It is impossible to comprehend that when the legislature proposes to disallow taxes that the State Government has levied under its exclusive domain, such tax is not specifically mentioned in the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 14-11-2022 - Shri Mahavir Singh, Vice President And Dr. Dipak P. Ripote, Accountant Member For the Appellant : Shri R.Vijayaraghavan, Advocate For the Respondent : Shri M. Rajan, CIT ORDER PER MAHAVIR SINGH, VICE PRESIDENT: This appeal by the assessee is arising out of the revision order passed u/s.263 of the Income Tax Act, 1961 (hereinafter the Act ) by the Principal Commissioner of Income Tax (Appeals), Chennai-3 in Revision No.PCIT, Chennai-3/Revision-263/100000339483/2022 dated 31.03.2022. The assessment was framed by the ACIT, Corporate Circle-3(1), Chennai for the assessment year 2014-15 u/s.143(3) of the Act vide order dated 30.12.2016. 2. The only issue in this appeal of assessee is as regards to the revision order passed by PCIT by holding the assessment framed as erroneous and prejudicial to the interest of Revenue on account of Value Added Tax paid by assessee and claimed as deduction u/s.37 r.w.s. 43B of the Act and allowed. 3. Brief facts are that the assessee is a State owned undertaking engaged in trading and retail vending in liquor. The original assessment was completed u/s.143(3) of the Act, after scrutinizing the accounts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... far as prejudicial to the interest of Revenue and directed the AO to reframe the assessment by observing in para 10 to 19 as under:- 10. The first issue to be considered is whether the VAT levied by the Government of Tamilnadu is in the nature of royalty, license fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called and the second issue to be considered is whether amended it is levied exclusively on TASMAC so as to attract the provisions of section 40(a)(iib). 11. In the following paragraphs we have brought out how Fee, Charge is different from Tax : 11.1 The Interpretation of the Department seems to be that the wordings royalty, license fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called are wide enough to include Sales Tax (i.e. VAT) also. 11.2 In this context it is submitted that the VAT is levied by the State Government of Tamil Nadu by the power vested in it under the Entry No. 54, List I, Seventh Schedule, Constitution of India and the Petitioner pays the Stale Govenment VAT as per Section 3(5) of the TNVATAct, 2006 read with the rate mentioned in Second Schedule to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that the Explanatory explaining the impugned provision itself makes it clear that the intention is only to disallow royalty, license fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which is levied exclusively on state Government undertakings. If it had been the intention to include Sales Tax/VAT, then in the section, taxes would have mentioned first before Royalty etc. The section refers to only Fees which are levied for some privileges granted to specific assessee's. It will not cover Sales Tax (VAT) which is an exaction and cannot be considered as Fees, charges. Further in the Memo explaining the introduction of section deal only with privilege fees, License fees, Royalty that disputed have arisen regarding their deductibility. It is also mentioned that orders have been issued to the effect that surplus arising to such undertakings shall vest with the Government. Deductibility of Sales Tax was never in dispute. 11.7 It is submitted that the definition of fee/charge is very clearly distinguished from tax in the following decisions: i) COMMISSIONER, HINDU RELIGIOUS ENDOWMENTS, MADRAS vs. SRI LAKSHMINDRATHIRT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fee lies primarily in the fact that a tax is levied as a part of a common burden, while fee is a payment for special benefit or privilege. Public interest seems to be at the basis of all imposition, but in a fee it is some special benefit which the individual receives 11.9 In the case of the The Hingir-Rampur Coal Co., Ltd. vs The State Of Orissa. And Others 1961 SCR (2) 537, the Hon'ble Apex Court held: The distinction between tax and fee is, however, important and it is recognized by the Constitution. Several entries in the Three Lists empower the appropriate Legislature to levy Taxes; but apart from the power to levy taxes thus conferred each List specifically refers to the power to levy fees in respect of any of the matters mentioned in the said list. 11.10 The Constitution Bench of the Hon'ble Supreme Court in the case of Bar Shankar V. Deputy Excise and Taxation Commissioner AIR 1975 SC 1121, has expounded on the distinction between a tax' and fee and the characteristics of these two as also excise duty, in the following words: Since rights in regard to intoxicants belong to the State, it is open to the Government to part with those rights for a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conform to the requirement that it must bear a reasonable relationship with the services rendered to the licensees. The amount charged to the licensees is not a fee properly so-called nor indeed a tax but is in the nature of the price of a privilege, which the purchaser has to pay in any trading or business transaction 11.11 The Hon'ble Supreme Court in the case of Om Parkash Agarwal v Giri Raj Kishorl Others (164 ITR 376, 1986 AIR 726) have noticed the difference between Tax and fee and has held that State Government cannot levy,/ tax under the guise of calling it a Fee The three principal characteristics of a tax noticed by Mukherjea J. in the above passage are: (i) that it is imposed under statutory power without the taxpayer's consent and the payment is enforced by law; (ii) that it is an imposition made for public purposes without reference to any special benefit to be conferred on the payer of the tax; and (iii) that it is a part of the common burden, the quantum of imposition upon the taxpayer depending generally upon the capacity of the taxpayer to pay. As regards fees, Mukherjea J. observed in the above decision thus (at p. 295 of AIR): Coming now ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o this conclusion the Hon'ble Delhi High Court had considered and distinguished the case of India cements Ltd vs State of Tamil Nadu (188 ITR 690) and held as under 21. This takes us to the consideration of the issue as to whether cess is the same thing as a tax and that even though the word cess was not used in Section 43B(a) as it originally stood, it always included cess inasmuch as tax was covered in the said provision. We find ourselves in agreement with the submission made by Mr Mehta that the decision of the Supreme Court in India Cement Ltd. (supra) would not be of any help to the revenue inasmuch as the issue there was entirely different. The focus in that decision was not on whether a cess was a tax or not but whether levy of cess on royalty was within the competence of the State Legislature. We also feel that the considerations with regard to cess in that case were in the context of legislative competence of the State Legislature to levy the cess on royalty which, by virtue of an explanation to Section 115 of the Tamil Nadu Panchayats Act, 1958, were said to be included in the meaning of land revenue. In that case, it was not in dispute that the cess which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Customs vs Dilip Kumar (Civil Appeal No.3327 Of 2007 dated 30thJuly 2018) held as follows: Article265 of the Constitution (265. Taxes not to be imposed save by authority of law No tax shall be levied or collected except by authority of law) prohibits the State from extracting tax from the citizens without authority of law. It is axiomatic that taxation statute has to be interpreted strictly because State cannot at their whims and fancies burden the citizens without authority of law. In other words, when competent Legislature mandates taxing certain persons/certain objects in certain circumstances, it cannot be expanded/ interpreted to include those, which were not intended by the Legislature. . In this context, trying to bring, in tax into fee or charge as S.40(a)(iib) reads is violative of Article 265 of the Constitution. 11.15 It is submitted that the very fact that Taxes are not mentioned in the main section, nor any reference has been made in the memo Explaining the introduction of section would go to show that the Legislature never intended to disallow Taxes under sec 40(a)(iib) of the Act. 11.16 It is impossible to comprehend that when the Legislature proposes to dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oming within the scope of Section 40(a)(iib)and is not an amount which can be disallowed under the said provision. Therefore the disallowance made in this regard is liable to be set aside. In the result the assessment completed against the appellants with respect to the assessment years 2014-2015, 2015-2016 are hereby set aside . 11.19 In view of the above it is submitted that VAT collected and paid by TASMAC under the provisions of the Tamilnadu Value Added Tax Act, 2006 is an allowable expenditure and cannot be disallowed under the amended provisions of section 40(a)(iib) of the Act. 12. Value Added Tax (VAT) Dot exclusive on TASMAC: 12.1 It is submitted that S.40(a)(iib) operates only on royalty, license fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which is levied exclusively on... State Government Undertaking by State Government . In other words exclusivity of such fee, charge is a requirement. 12.2 It is submitted that Value Added Tax is an Indirect Tax collected from customers and remitted to Government on monthly basis after filing necessary monthly return as per the provisions of the Tamilnadu Value Added ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... means the allocation of the profits, after setting off the expenditure, among various Reserves and Dividend. Thus in the accounts of the company, the net profit for the year after provision for tax, together with Credit Balance in the Profit and Loss account, is considered as Profit available for appropriation. This is appropriated towards Dividend, Redemption Reserves, Capital reserve, General reserve and balance is taken to the credit of the Profit and Loss account. 13.3 Under the accounting for Government Finance, no money can be withdrawn from the Government Fund to meet specified expenditure except under an appropriation made by Law approved by the Parliament/Assembly. While Finance Act regulates the income, Appropriation Act authorizes incurring of expenditure. Thus, appropriation in Government accounts means the allocation of the income for various expenses of the Government. 13.4 Appropriation means allocating or taking away funds for a specific purpose. In other words, it is an application of income. It will not cover Taxes on which is and always has been a deduction while arriving at the net profits. Such deductible expenditure cannot be considered as an appropriati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. It is pertinent to note that as per section 9(2), of the CGST Act, 2017 tax on supply of petroleum crude, HSD, Motor spirit (commonly known as petrol), natural gas, aviation turbine fuel shall be levied w.e.f such date as may be notified by the Government on recommendation of the GST Council. Hence, those items are taxed under TNVATAct, 2006. Therefore, the stand taken in our case is unjustified and unwarranted. In line with S.40(a)(iib), TASMAC has disallowed the license fee paid to government under the provisions of Tamil Nadu Prohibition Act, 1937 and the rules framed there under while computing taxable income. The Accounting Policy adopted by TASMAC is disclosed under Significant Accounting Policies in the Audited financial statements and it is clearly stated in the accounts that Sale is accounted inclusive of VAT. This is as per the Accounting Standards issued by the ICAI, AS 9-Revenue Recognition. Thus, correctly, the Sales (inclusive of VAT) is enumerated under Revenue and the VAT on IMPS and Beer is enumerated under Expenses. These final accounts for the impugned period 2016-17 have been audited and certified by the Statutory auditors appointed by the C AG a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Courts and has to be decided by your good self and the same cannot be set aside to the AD to sit on judgment of the decision of the Higher Forums particularly when the specific issue of applicability of provisions of sec 40(a)(iib) to VAT has been decided by the Hon'ble Kerala High Court. It is also pointed out that the Assessing Officer in the course of Income Tax. Assessments cannot sit on judgment on the reasonableness of the VAT charges. As long as the State has the statutory powers to levy VAT, the rates cannot be questioned by the Department on account of it being High. Therefore, in view of all the above facts and circumstances including the clear decisions on this point by the Apex Court and other High Courts and particularly the recent by Kerala High Court on this very issue, the AO's Order cannot be held to be erroneous by the Principal Commissioner of Income Tax to invoke S.263 of the Income Tax Act, In any case, when there are two opinions possible on an issue,(even though in this issue in our opinion, only one view is possible in view of the decisions of the Apex Court and Kerala High Court have In favour of the Assessee), and the Assessing Officer has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... categorical decision of the Hon'ble Supreme Court, the provisions of Section 40(a)(iib) will not apply to Value Added Tax paid by TASMAC to the Government of Tamilnadu under the provisions of the Tamllnadu Value Added Tax Act, 2006. We request you to complete the assessment proceedings in line with the ratio bf the decision of the Hon'ble Supreme Court in the case of M/s. Kerala State Beverages Manufacturing Marketing Corporation Ltd vs ACIT, Circle 1(1) in CA No 11 of 2022 dated 03. 01. 2022, that is the Value Added Tax paid under the provisions of Tamilnadu Value Added Tax Act, 2006 is an allowable expenditure and hence the cannot he disallowed u/s. 40(a)(iib) of the Act. Assessee made the following submissions on 25.03.2022 This is the written submission dated 22.5.2020, in response to the Honourable Madras High Court Order for the Assessment Year 2014-15 in WP No.8829 of 2019 and WMP No.9394 of 2019. In that submission we had elaborately submitted that provisions of sec 40(a)(iib) would apply only to Fees and similar charges which are in the nature of quid pro quo for privileges parted with by the State Government but would not apply to Taxes which are i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 263 of the Income Tax Act, 1961, for the Assessment Year 2014-15 in our case initiated by Show Cause Notice U/S. 263 of the Income Tax Act, 1961 dated 18.03.2019. 9. The submissions made by the Assessee company is carefully examined and verified with the records. 10. On examination of the P L accounts of the Assessee Company for the Financial Years shows the following. Sl. No. Particulars Amount for F.Y. 13-14 in Crores of Rupees Amount for F.Y. 12-13 in Crores of Rupees 1 Revenue from Operations (Sales) 25,412.86 24,815.70 2 VAT on IMFS and BEER 11,491.97 4,372.91 3 Special Privilege Fee Nil 4,291.43 11. From the above table, it is seen that the Tamil Nadu State Government has increased the VAT by 263% and reduced the Special Privilege Fee to Nil during the current year. It is interesting to note that with effect from 01.04.2014, clause (iib) was inserted by the Finance Act 2013 to the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed hereunder- Disallowance of certain fee, charge, etc. in the case of State Government Undertakings The existing provisions of section 40 specifies the amounts which shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession . The non-deductible expense under the said section also includes statutory dues like fringe benefit tax, income-tax, wealth-tax, etc. Disputes have arisen in respect of income-tax assessment of some State Government undertakings as to whether any sum paid by way of privilege fee, license fee, royalty, etc. levied or charged by the State Government exclusively on its undertakings are deductible or not for the purposes of computation of income of such undertakings,. In some cases, orders have been issued to the effect that surplus arising to such undertakings shall vest with the State Government. As a result it has been claimed that such income by way of surplus is not subject to tax. It is a settled law that: State Government undertakings are separate legal entities than the State and are liable to income-tax. In order to protect the tax base of State Government undertakings vis-a-vis exclusive levy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Corporation. That judgement is based on the Kerala Abkari Act and Kerala VAT legislation. Whether these legislations are identical with the similar laws of Tamil Nadu is to be examined. Also it is understood that a review petition is filed/being filed before the Hon'ble Supreme Court. 19. While completing the assessment, this issue was not examined properly examined by the Assessing Officer. Therefore, the assessment is erroneous as it is prejudicial to the interest of the revenue. In view of this, I hereby set aside the assessment to the file of the Assessing Officer to examine the issue in detail and complete the assessment after affording reasonable opportunity of being heard to the Assessee. Aggrieved, assessee came in appeal before the Tribunal. 4. Before us, the ld.counsel for the assessee submitted the fact that the assessee is a Government of TamilNadu undertaking incorporated on 23.05.1983 under the Companies Act, 1956 and vested with the special privilege for wholesale distribution and retail sale of Indian Made Foreign Liquor and beer in the whole State of TamilNadu. He submitted that Section 17C(1A)(a) and Section 17C(1B)(b) of the TamilNadu Prohibition Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e right to appoint the majority of the directors or to control the management or policy decisions, directly or indirectly, including by virtue of its shareholding or 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; . 4.2 The ld.counsel stated that in the present case the revision proceedings have been initiated on the ground that the amended provisions of section 40(a)(iib) provide that the amount paid by way of fee, charge, etc., which is levied exclusively on or any amount appropriated, directly or indirectly, from a State Government undertaking by the State Government, shall not be allowed as deduction for the purposes of computation of income of such undertakings under the head profits and gains of business or profession . The charge of VAT, which is levied exclusively on the assessee, the State Government undertaking by the State Government do not comes within the provisions of section 40(a)(iib) of the Act. In view of the above, the ld.counsel stated that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax on sale and purchase of liquor and power to levy fees are two different powers and are derived from two different entries in the State list. Thus, fees levied by whatever name called under the power granted under Entry 69 cannot encompass tax levied by virtue of Entry 54. 6.1 We noted that the definition of fee charge is very clearly distinguished from tax by the Hon ble High Court in the case of Har Shankar vs. Deputy Excise and Taxation Commissioner, AIR 1975 SC 1121 and has founded on the distinction between tax and fee and the characteristics of these two, as also excise duty and held as under:- Since rights in regard to intoxicants belong to the State, it is open to the Government to part with those rights for a consideration. By Article 298 of the Constitution, the executive power of the State extends to the carrying on of any trade or business and to the, making of contracts for any purpose. Again, it has been observed in that decision: 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 exa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 376 have noticed the difference between tax and fee and has held that State Government cannot levy tax under the guise of fee. The Hon ble Supreme Court held as under:- The three principal characteristics of a tax noticed by Mukherjea, J. in the above passage are: (i) that it is imposed under statutory power without the tax-payer's consent and the payment is enforced by law; (ii) that it is an imposition made for public purposes without reference to any special benefit to be conferred on the payer of the tax; and (iii) that it is apart of the common burden, the quantum of imposition upon the tax-payer depending generally upon the capacity of the tax payer to pay. As regards fees Mukherjea, J. Observed in the above decision thus: Coming now to fees, a fee is generally defined to be a charge for a special service rendered to individuals by some governmental agency. The amount of fee levied is supposed to be based on the expenses incurred by the government in rendering the service, though in many cases the costs are arbitrarily assessed. Ordinarily, the fees are uniform and no account is taken of the varying abilities of different recipients to pay. These are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch as tax was covered in the said provision. We find ourselves in agreement with the submission made by Mr Mehta that the decision of the Supreme Court in India Cement Ltd. (supra) would not be of any help to the revenue inasmuch as the issue there was entirely different. The focus in that decision was not on whether a cess was a tax or not but whether levy of cess on royalty was within the competence of the State Legislature. We also feel that the considerations with regard to cess in that case were in the context of legislative competence of the State Legislature to levy the cess on royalty which, by virtue of an explanation to Section 115 of the Tamil Nadu Panchayats Act, 1958, were said to be included in the meaning of land revenue. In that case, it was not in dispute that the cess which the Madras Village Panchayat Act proposes to levy was nothing but an additional tax and originally it was levied only on land revenue, and that apparently land revenue would fall within the scope of Entry 49 of List II in Schedule VII to the Constitution. The Supreme Court however held that it could not be doubted that royalty which was a levy or tax on the extracted mineral was not a tax or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollected is passed on to the Government. In this manner also, Value Added Tax, which is separately collected from the Purchaser, is different and distinct from the charges mentioned in S.40(a)(iib) of the Act, which are borne by the TASMAC and cannot be collected from the purchaser. As referred by ld.counsel, the recent decision of Hon ble Kerala High Court in the case of Kerala State Beverages (Manufacturing and Marketing) Corporation Ltd., vs. ACIT, in I.T. Appeal Nos.135, 146 313 of 2019 dated 30.04.2020 considered an identical fact and legal situation, deleted the disallowance of surcharge on sales tax and turnover tax by observing as under:- 22. On analysing the rival contentions, we take note of the fact that the surcharge on sales tax was introduced only as an increase in the tax payable. Merely because the statute imposed a prohibition with respect to passing on such liability to others, the basic characteristics of the levy is not changed. As settled through various legal precedents, a 'tax' cannot by equated with a 'fee or charge'. When the provisions contained in Section 40 (a) (iib) is clear in its terms that it will take in only 'fee or charges ..... X X X X Extracts X X X X X X X X Extracts X X X X
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