Kerala State Beverages Manufacturing & Marketing Corporation Ltd. vs The Assistant Commissioner of Income Tax Circle 1(1)

Income Tax Act, 1961: s.40(a)(i), 40(a)(ia), 40(a)(iib), 40(a)(ic) – Wherever the Parliament intended to cover the tax, it specifically mentioned as a tax – s.40(a)(i) and s.40(a)(ia) specifically relate to tax related items – s.40(a)(ic) refers to a sum paid on account of fringe benefit tax – At the same time, s.40(a)(iib) refers to royalty, licence fee, service fee, privilege fee or any other fee or charge – If these words are considered to include a tax or surcharge like sales tax, the distinction so carefully spelt out in s.40 between a tax and a fee will be obliterated and rendered meaningless – It is settled principle of interpretation that where the same Statute, uses different terms and expressions, then it is clear that Legislature is referring to distinct and different things.

Disposing of the appeals, the Court

Held: 1. Section 40 of the Income tax Act, 1961 is a provision which deals with the amounts which are not deductible while computing the income chargeable under the head ‘Profits and gains of business or profession’. Section 40 of the Act is amended in the year 2013, and 40(a)(iib) is inserted by Amending Act 17 of 2013, which has come into force from 01.04.2014. In terms of Article 289 of the Constitution of India, the property and income of a State shall be exempt from Union taxation. Therefore, in terms of Article 289, the Union is prevented from taxing the States on its income and property. It is the constitutional protection granted to the States in terms of the above said Article. This protection has led the States in shifting income/ profits from the State Government Undertakings into Consolidated Fund of the respective States to have a protection under Article 289. In the instant case the KSBC, a State Government Undertaking, is a company like any other commercial entity, which is engaged in the business and trade like any other business entity for the purpose of wholesale and retail business in liquor. As much as these kind of undertakings are under the control of the States as the total shareholding or in some cases majority of shareholding, is held by States. As such they exercise control over it and shift the profits by appropriating whole of the surplus or a part of it to the Government by way of f ees, taxes or similar such appropriations. From the relevant Memorandum to the Finance Act, 2013 and underlying object for amendment of Income Tax Act by Act 17 of 2013, by which Section 40(a)(iib)(A)(B) is inserted, it is clear that the said amendment is made to plug the possible diversion or shifting of profits from these undertakings into State’s treasury. In view of Section 40(a)(iib) of the Act any amount, as indicated, which is levied exclusively on the State owned undertaking (KSBC in the instant case), cannot be claimed as a deduction in the books of State owned undertaking, thus same is liable to income tax. [Para 13][121-D-H; 122-A-B]

2. In the instant case the gallonage fee, licence fee, shop rental (kist), surcharge and turnover tax are the amounts of which assessee claims that they are not attracted by Section 40(a)(iib) of the Act. On the other hand it is the case of the respondent/revenue that all the said components attract the ingredients of Section 40(a) (iib)(A) or Section 40(a)(iib)(B), as such they are not deductible. Broadly these levies can be divided into three categories. Gallonage fee, licence fee and shop rental (kist) are in the nature of fee imposed under the Abkari Act of 1902. These are the fees payable for the licences issued under FL-9 and FL1. In the impugned order, the High Court has held that the gallonage fee, licence fee and shop rental (kist) with respect to FL-9 licence are not deductible, as it is an exclusive levy on the Corporation. Further a distinction is drawn between FL-1 licence and FL-9 licence, to apply Section 40(a)(iib), only on the ground that, FL-1 licences are issued not only to the appellant/KSBC but also issued to one other Government Undertaking, i.e., Kerala State Cooperatives Consumers’ Federation Ltd. High Court has held that as there is no other player holding licences under FL-9 like KSBC as such the word ‘exclusivity’ used in Section 40(a)(iib) attract such amounts. At the same time only on the ground that FL-1 licences are issued not only to the KSBC but also to Kerala State Co-operatives Consumers’ Federation Ltd., High Court has held that exclusivity is lost so as to apply the provision under Section 40(a)(iib). If the amended provision under Section 40(a)

(iib) is to be read in the manner, as interpreted by the High Court, it will literally defeat the very purpose and intention behind the amendment. The aspect of exclusivity under Section 40(a)(iib) is not to be considered with a narrow interpretation, which will defeat the very intention of Legislature, only on the ground that there is yet another player, viz., Kerala State Cooperatives Consumers’ Federation Ltd. which is also granted licence under FL1. The aspect of ‘exclusivity’ under Section 40(a)(iib) has to be viewed from the nature of undertaking on which levy is imposed and not on the number of undertakings on which the levy is imposed. If this aspect of exclusivity is viewed from the nature of undertaking, in this particular case, both KSBC and Kerala State Cooperatives Consumers’ Federation Ltd. are undertakings of the State of Kerala, therefore, levy is an exclusive levy on the State Government Undertakings. Therefore, that any other interpretation would defeat the very object behind the amendment to Income Tax Act, 1961. [Para 14][122-B-H; 123-A]

2. It is fairly well settled that the interpretation is to be in the manner which will subserve and promote the object and intention behind the legislation. If it is not interpreted in the manner as aforesaid it would defeat the very intention of the legislation. To defeat the said provision, the State Governments may issue licences to more than one State owned undertakings and may ultimately say it is not an exclusive undertaking and therefore Section 40(a)(iib) is not attracted. The submission for the appellant is that the gallonage fee, licence fee and the shop rental (kist) are the levies under the Abkari Act on all the licence holders, as such it cannot be said that same is an exclusive levy on the appellant/KSBC. It is submitted that because of the Abkari Policy in particular year, licences are issued in favour of the appellant – State owned Undertaking, as such it cannot be said that the statutory levies under the Abkari Act are on the State Government Undertaking and such levies are only on the licensees but not on the State-owned Undertakings like KSBC. The said submission cannot be accepted for the reason that by virtue of licence which is granted in favour of State-owned Undertaking, the statutory fees etc., viz., gallonage fees, licence fee and shop rental (kist) are payable by the appellantUndertaking, i.e., KSBC. Once the State Government Undertaking takes licence, the statutory levies referred above are on the Government Undertaking because it is granted licences. Therefore, the finding of the High Court that gallonage fee, licence fee and shop rental (kist) so far as FL-1 licences are concerned, is not attracted by Section 40(a)(iib), cannot be accepted and such finding of the High Court runs contrary to object and intention behind the legislation. [Para 14.1][123-B-F]

4. Further, because another State Government

Undertaking, i.e., Kerala State Co- operatives Consumers’ Federation Ltd. was also granted licences during the relevant years, as such exclusivity mentioned in Section 40(a)(iib) is lost, also cannot be accepted, for the reason that exclusivity is to be considered with reference to nature of licence and not on number of State owned Undertakings. If the interpretation, as held by the High Court, is accepted, the legislative intent can be defeated by issuing licences in FL-1 to several State Government Undertakings and then make a contention that exclusivity is lost. Said interpretation runs contrary to the intent of the amendment. [Para 14.2][123-F-H]

5. So far as surcharge on sales tax is concerned, the High Court has held in favour of KSBC and against the revenue. The reasoning of the High Court is that surcharge on sales tax is a tax and Section 40(a) (iib) does not contemplate ‘tax’ and surcharge on sales tax is not a ‘fee’ or a ‘charge’. Therefore, High Court was of the view that surcharge levied on KSBC does not attract Section 40(a)(iib) of the Act. The submission of revenue with regard to surcharge on sales tax is two-fold. One is that the levy of surcharge on sales tax is also an exclusive levy on KSBC, therefore, attracts Section 40(a)(iib) itself. Secondly, it is submitted, as an alternative submission that if the same is not covered by Section 40(a)(iib)(A) it would fall under Section 40(a)(iib)(B) of the Act, for the reason that the surcharge on sales tax is a tax and tax is a form of appropriation by the State from KSBC. On the other hand it is the case of the appellant/assessee that the sales tax is outside the scope of Section 40(a)(iib) and the surcharge is nothing but is an enhancement of the tax. By referring to words used in Section 40(a)(iib), learned counsel Sri Ganesh has submitted that the said provision is to be interpreted by applying the doctrine of ejusdem generis. It is submitted that the words ‘any other fee or charge’ immediately following the words ‘royalty, licence fee, service fee, privilege fee, service charge’ relate to such similar charges and none of the terms can possibly cover a tax, like sales tax or surcharge on sales tax. The ‘fee’ or ‘charge’ as mentioned in Section 40(a)(iib) is clear in terms and that will take in only ‘fee’ or ‘charge’ as mentioned therein or any fee or charge by whatever name called, but cannot cover tax or surcharge on tax and such taxes are outside the scope and ambit of Section 40(a)(iib)(A) and Section 40(a)(iib)(B) of the Act. [Para 14.3][124-A-G]

6. A reading of preamble and Section 3(1) of the KST Act, make it abundantly clear that the surcharge on sales tax levied by the said Act is nothing but an increase of the basic sales tax levied under Section 5(1) of the KGST Act, as such the surcharge is nothing but a sales tax. It is also settled legal position that a surcharge on a tax is nothing but the enhancement of the tax. [Para 14.4][125-G-H]

7. Further, CBDT itself has issued Circular No.3/2018 as a measure for reducing litigation, by revision of monetary limits for filing appeals by the Department before the Income Tax Appellate Tribunal, High Courts and SLP/appeals before this Court. In the said circular, it is clearly mentioned that for considering tax effect it includes applicable surcharge and cess. Same will also strengthen the stand of the assessee. Thus, it is clear that the surcharge which is sought to be levied is nothing but the enhancement of sales tax, which is levied under Section 5(1) of the KGST Act. When on the basic sales tax paid by KSBC under Section 5(1)(b) of the KGST Act, deduction was allowed, there is no reason not to allow deduction of surcharge on sales tax. If the revenue does not consider Section 40(a)(iib) is applicable to the basic sales tax paid by KSBC under Section 5(1)(b) of the KGST Act, it is not known how the surcharge on sales tax, which is nothing but the sales tax, can be brought in the net of Section 40(a) (iib)(A) or 40(a) (iib)(B) of the Act. Further a clear distinction between ‘fee’ and ‘tax’ is carefully maintained throughout the scheme under Section 40(a) of the Act itself. Wherever the Parliament intended to cover the tax it specifically mentioned as a tax. Section 40(a)(i) and 40(a)(ia) specifically relate to tax related items. Section 40(a)(ic) refers to a sum paid on account of fringe benefit tax. At the same time, Section 40(a) (iib) refers to royalty, licence fee, service fee, privilege fee or any other fee or charge. If these words are considered to include a tax or surcharge like sales tax, the distinction so carefully spelt out in Section 40 between a tax and a fee will be obliterated and rendered meaningless. It is settled principle of interpretation that where the same Statute, uses different terms and expressions, then it is clear that Legislature is referring to distinct and different things. Further turnover tax is also a tax. The very same reason assigned above for surcharge, equally apply to the turnover tax also. As such turnover tax is also outside the purview of Section 40(a) (iib)(A) and 40(a) (iib)(B). Thus, gallonage fee, licence fee and shop rental (kist) with respect to FL-9 and FL-1 licences granted to the appellant will, squarely fall within the purview of Section 40(a)(iib) of the Income Tax Act, 1961. The surcharge on sales tax and turnover tax, is not a fee or charge coming within the scope of Section 40(a)(iib)(A) or 40(a)(iib)(B), as such same is not an amount which can be disallowed under the said provision and disallowance made in this regard is rightly set aside by the High Court. [Paras 14.5, 15, 16][126-G-H; 127-A-D; 128-B-D]

DLF Qutab Enclave Complex Educational Charitable Trust v. State of Haryana & Ors. (2003) 5 SCC 622 : [2003] 2 SCR 1; Kailash Nath Agarwal & Ors. v.

Pradeshiya Industrial & Investment Corporation of U.P. Ltd.& Anr. (2003) 4 SCC 305 : [2003] 1 SCR 1159; Shri Ishar Alloy Steels Ltd. v. Jayaswals Neco Ltd. (2001)

3 SCC 609 : [2001] 2 SCR 36; C.I.T. v. K. Srinivasan (1972) 4 SCC 526 : [1972] 2 SCR 309; Sarojini Tea Co. Ltd. v. Collector, Dibrugarh (1992) 2 SCC 156 : [1992] 1 SCR 371; Jalkal Vibhag Nagar Nigam & Ors. v Pradeshiya Industrial and Investment Corporation and Another 2021 SCC OnLine SC 960 – referred to.