This legal case delves into the detailed analysis conducted by the court regarding the interpretation of tax laws, specifically focusing on the treatment of surcharge on sales tax. The court’s examination of the nature of the surcharge, its relationship to the underlying tax, and the legislative intent behind Section 40(a)(iib) provides valuable insights into the application of tax laws in similar scenarios.
Facts
- The Principal Commissioner of Income Tax, Thiruvananthapuram set aside the assessment order on the grounds of errors and prejudice to revenue.
- Debits in the Profit & Loss Account related to surcharge on sales tax and turnover tax were disallowed under Section 40(a)(iib) of the Act.
- The appellant filed an appeal against the disallowance before the Income Tax Appellate Tribunal.
- The High Court partly ruled in favor of the appellant and partly in favor of the revenue with regards to Gallonage Fee, Licence Fee, and Shop Rental (kist) under Section 40(a)(iib).
- A miscellaneous application was filed by the appellant regarding the issue of disallowance of surcharge on sales tax, leading to a fresh order and appeal before the Tribunal.
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Arguments
- The appellant argues that the levy of gallonage fees, license fee, and shop rental on FL-9 licenses is not on any State Government Undertaking but on the licensee.
- The contention is made that the State Government Undertakings are separate legal entities liable to income-tax and should be treated as such.
- There is a dispute regarding the deductibility of sums paid as fees, charges, royalties, etc., levied exclusively on State Government undertakings for income tax purposes.
- The appellant asserts that the sales tax and surcharge on sales tax should not fall under Section 40(a)(iib) as they are outside the scope of that provision.
- The argument is made that the exclusivity of the levy should be based on the nature of the undertaking on which it is imposed, not on the number of undertakings affected.
- The issue regarding turnover tax and surcharge on sales tax was highlighted.
- Turnover tax was imposed not only on KSBC but also on various other retail dealers specified under KGST Act.
- It is argued that the terms ‘royalty, license fee, service fee, privilege fee, service charge’ in relation to any other fee or charge do not cover a tax like sales tax or surcharge on sales tax.
- Agreement with the submission regarding surcharge on sales tax made by learned senior counsel for the appellant.
- Distinction made between statutory levies under the Abkari Act on licensees and State-owned Undertakings like KSBC.
- Reference to the effacement of distinction between ‘tax’ and ‘fee’ in constitutional jurisprudence.
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Analysis
- Section 40(a)(iib) of the Income Tax Act was inserted by the Finance Act, 2013 and came into force from 01.04.2014.
- Surcharge imposed on the Kerala State Beverages Corporation (KSBC) under Section 3(1) of the Kerala Sales Tax Act is considered an increase in basic sales tax.
- The surcharge is essentially an enhancement of the tax itself, as established in legal precedent.
- Case law references support the view that a surcharge is an augmentation of the underlying tax.
- Specific provisions of the Kerala General Sales Tax Act, 1963 along with relevant sections further clarify the nature and implications of the surcharge.
- It is emphasized that the surcharge on sales tax is to be treated as an increase in the basic tax amount.
- Appropriate actions need to be taken within three months from the date of receipt of this judgment to address the matter regarding deduction of the surcharge in computing income.
- Section 40(a)(iib) of the Income-tax Act, 1961 deals with amounts not deductible while computing income under ‘Profits and gains of business or profession.’
- The amendment in 2013 aimed to prevent profit shifting from state undertakings into state treasuries.
- The High Court’s interpretation must consider the nature of the undertaking, not the number of undertakings, for exclusivity under Section 40(a)(iib).
- The surcharge on sales tax was considered part of the sales tax in the context of Section 40(a)(iib).
- CBDT’s circular aimed to reduce litigation by revising monetary limits for filing appeals.
- Interpreting surcharge on sales tax as not covered by Section 40(a)(iib) would defeat the legislative intent.
- A distinction between ‘fee’ and ‘tax’ is crucial in interpreting Section 40(a) of the Act.
- The High Court’s reasoning that surcharge on sales tax is not a ‘fee’ or ‘charge’ under Section 40(a)(iib) was debated.
- Differentiation between ‘fee’ and ‘tax’ is essential to maintain legislative clarity and intent.
- The judgment aims to distinguish between royalties, license fees, and taxes while analyzing Section 40(a)(iib).
- The Finance Act of 1971 clearly includes surcharge under the term ‘Income tax’ in Section 2.
- The judgment in Sarojini Tea Co. Ltd. case rejects the view that surcharge on land revenue is a distinct levy from land revenue.
- The judgment in Sarojini Tea Co. Ltd. case specifically deals with whether water tax under U.P. Water Supply and Sewerage Act is a fee or a tax.
- References to judgments such as DLF Qutab Enclave Complex Educational Charitable Trust, Kailash Nath Agarwal, and Shri Ishar Alloy Steels Ltd. are made to support the above views.
- The judgment in Jalkal Vibhag Nagar Nigam case does not assist the revenue’s case.
- Surcharge or tax was not intended to be included in the net of Section 40(a)(iib)(A) or 40(a)(iib)(B) of the Income-tax Act, 1961.
- Turnover tax imposed on various retail dealers is also outside the purview of Section 40(a)(iib)(A) and 40(a)(iib)(B).
- Gallonage fee, licence fee, and shop rental with respect to FL-9 and FL-1 licences fall within the purview of Section 40(a)(iib).
- The language used in Section 40(a)(iib) does not support the case of the revenue.
- Surcharge on sales tax and turnover tax is not a fee or charge covered by Section 40(a)(iib)(A) or 40(a)(iib)(B), hence disallowance of these amounts was rightly set aside by the High Court.
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Decision
- Civil appeal filed by the assessee dismissed
- Civil appeals filed by the revenue partly allowed
- Assessing officer to pass revised orders as per directions
- Assessments for assessment years 2014-2015 and 2015-2016 set aside
Case Title: KERALA STATE BEVERAGES MANUFACTURING AND MARKETING CORPORATION LIMITED Vs. THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 1(1) (2022 INSC 4)
Case Number: C.A. No.-000011-000011 / 2022
