Kerala State Beverage Manufacturing & Marketing Corporation Limited v. ACIT Circle 1(1)

Case snapshot

Sections / provisions: Section 40(a) of Income-tax Act; 1961

Questions before the Court / Tribunal

• *Kerala State Beverage Manufacturing & Marketing Corporation Limited Vs ACIT, Circle 1(1)* *Forum-Supreme Court* *Date-3/1/2022* *Sub-Whether surcharge on sales tax is liable to be disallowed u/s 40(a)(iib) of Income-tax Act,1961.* The Supreme Court of India allowing the appeal of the State Government undertaking by allowing the arguments of Senior Advocate S Ganesh that 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. 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…
• Which factual, statutory and procedural conditions controlled the requested relief?
• How did the forum apply the governing provisions to the evidence and procedural history recorded in this case?

Material facts and procedural background

C.A.@S.L.P .(C)No.12859 of 2020 etc. REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 11 OF 20 22 [Arising out of S.L.P.(C) No.12859 of 2020] Kerala State Beverages Manufacturing & Marketing Corporation Ltd. ...Appellant v. The Assistant Commissioner of Income Tax Circle 1(1) ...Respondent

W I T H CIVIL APPEAL NO. 12 OF 20 22 [Arising out of S.L.P.(C) No.12162 of 2020] CIVIL APPEAL NO. 13 OF 20 22 [Arising out of S.L.P.(C) No.12768 of 2020] AND CIVIL APPEAL NO. 14 OF 20 22 [Arising out of S.L.P.(C) No.14150 of 2020] J U D G M E N T R. SUBHASH REDDY, J . 1. Leave granted. 2. These appeals are preferred, by the Stateowned Undertaking, Kerala State Beverages Manufacturing & Marketing Corporation Ltd., a

C.A.@S.L.P .(C)No.12859 of 2020 etc. company registered under the Companies Act, 1956, engaged in the wholesale and retail trade of beverages, aggrieved by the common judgment and order dated 30.04.2020 passed in I.T.A. No.135; 146 and 313 of 2019 by the High Court of Kerala at Ernakulam. The Civil Appeal arising out of S.L.P.(C)No.12859 of 2020 is filed by the assessee and other three appeals are preferred by the revenue. 3. For the assessment year 20142015, the Deputy Commissioner of Income Tax, Circle2(1), Thiruvananthapuram finalised the assessment of income of the appellant under Section 143(3) of the Incometax Act, 1961 (in short, ‘the Act’) vide Assessment Order dated 14.12.2016. The Principal Commissioner of Income Tax, Thiruvananthapuram has exercised power of revision as contemplated under Section 263 of the Act and set aside order of assessment on the ground that same is erroneous and is prejudicial to the interest of the revenue, to the extent it failed to disallow the debits made in the Profit & Loss Account of the assessee, with respect to the amount of surcharge on sales tax and turnover tax paid to the State Government, which ought to have been disallowed under Section 40(a)(iib) of the Act. Against order of the Principal Commissioner, Income Tax, dated

C.A.@S.L.P .(C)No.12859 of 2020 etc. 25.09.2018, the appellant herein filed appeal before the Income Tax Appellate Tribunal (in short, ‘the Tribunal’) in ITA No.536/Coch/2018. 4. With respect to Assessment Year 20152016 assessment against the appellant was completed under Section 143(3) of the Act by the Assistant Commissioner of Income Tax, Circle1(1), Thiruvananthapuram vide order of assessment dated 28.12.2017. Debits contained in the Profit & Loss Account of the appellant with respect to payment of gallonage fee, licence fee, shop rental ( kist) and surcharge on sales tax, amounting to a total sum of Rs.811,90,88,115/ were disallowed under Section 40(a)(iib) of the Act. Aggrieved by the said order, appellant herein has filed appeal before the Commissioner of Income Tax (Appeals), Thiruvananthapuram and the same was dismissed. The appellant carried the matter by way of second appeal before the Tribunal in ITA No.537/Coch/2018. The Tribunal has dismissed the ITA Nos.536537/Coch/2018 by a common order dated 12.03.2019. The appellant herein thereafter has filed miscellaneous application in MP No.47/Coch/2019 on the ground that the Tribunal had failed to consider the issue agitated against the disallowance of the surcharge on sales tax. The said miscellaneous application was allowed by recalling earlier order dated 12.03.2019 passed in I.T.A.No.537/Coch/2018 and a fresh order was passed on

C.A.@S.L.P .(C)No.12859 of 2020 etc. 11.10.2019, finding the issue against the appellant and dismissing the appeal. Aggrieved by the aforesaid three orders, the appellant herein has filed Income Tax Appeals before the High Court in ITA Nos.135; 146 and 313 of 2019 which are disposed, by the common impugned order. In the common impugned order passed by the High Court, the question of law raised, was answered partly in favour of the assessee/appellant and partly in favour of the revenue. Para 23 and 24 of the judgment read as under : “23. While summing up the conclusions, we are persuaded to answer the question of law raised, partly in favour of the revenue and partly in favour of the assessee.

Appellant / petitioner / assessee submissions

With regard to surcharge on sales tax and turnover tax, it is held that same is not a ‘fee’ or ‘charge’ within the meaning of Section 40(a)(iib) as such same is not an amount which can be disallowed under the said provision. 10. Sri Ganesh, learned senior counsel appearing for the appellant by referring to Explanatory Note to the Finance Act, 2013, and Section 40(a)(iib) of the Act, has submitted that the levy of gallonage fees, licence fee and shop rental ( kist) on FL9 licence is not on any State Government Undertaking but same is a levy on the licensee. It is

C.A.@S.L.P .(C)No.12859 of 2020 etc. sales tax is nothing but an enhancement of tax itself. In support of the said submission, the learned counsel has placed reliance on the judgments of this Court in the case of C.I.T. v. K. Srinivasan 1 and in the case of Sarojini Tea Co. Ltd. v. Collector, Dibrugarh 2. Reference is also made on the CBDT Circular No.3/2018 dated 11.07.2018, to buttress the said submission. Learned counsel, by drawing our attention to the distinction between ‘fee’ and ‘taxes’ which is maintained throughout the scheme under Section 40(a) has submitted that, the sales tax and turnover tax is outside the scope of Section 40(a) (iib) of the Act. Lastly it is submitted that for the assessment year 20142015, the assessing officer has allowed deductions in respect of surcharge on sales tax and turnover tax, the Commissioner interfered, in exercise of power of revision under Section 263 of the Act. It is submitted that the view taken by the assessing officer was a possible view, as such the very invocation of revisional power was not permissible, to interfere with the order of the assessing officer. With the aforesaid submissions, learned counsel has submitted to allow the appeal filed by the assessee and dismiss the appeals filed by the revenue. 1 (1972(4) SCC 5262 (1992) 2 SCC 156

C.A.@S.L.P .(C)No.12859 of 2020 etc. 14.1. 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 of Sri Ganesh, learned senior counsel 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 Stateowned Undertakings like KSBC. The said submission cannot be accepted for the reason that by virtue of licence which is granted in favour of Stateowned 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

C.A.@S.L.P .(C)No.12859 of 2020 etc. the submission of Sri Ganesh, learned senior counsel appearing for appellant. 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. The surcharge which is imposed on KSBC is under Section 3(1) of the KST Act which reads as under : “3. Levy of surcharge on sales and purchase taxes. – (1) The tax payable under subsection (1) of section 5 of the Kerala General Sales Tax Act, 1963, by a dealer in foreign liquor shall be increased by a surcharge at the rate of ten per cent, and the provisions of the Kerala General Sales Tax Act 1963 shall apply in relation to the said surcharge as they apply in relation to the tax payable under the said Act.

Revenue / respondent submissions

The judgment does not separately label the respondent’s submissions in an independently extractable passage. No contention is inferred; read the full record.

Court / Tribunal analysis and reasoning

We hold that the levy of Gallonage Fee, Licence Fee and Shop Rental (kist) with respect to the FL9 licences granted to the appellant will clearly fall within the purview of Section 40 (a) (iib) and the amount paid in this regard is liable to be disallowed. The amount of Gallonage Fee, Licence Fee, or Shop Rental (kist) paid with respect to FL1 licences granted in favour of the appellant, with respect to the retail business in foreign liquor, is not an exclusive levy on the appellant, which is a state government undertaking. Therefore the disallowance made with respect to those amounts cannot be sustained. The surcharge on sales tax and turnover tax is not a 'fee or charge' coming 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. 24. In the result the assessment completed against the appellants with respect to the assessment years 2014 2015, 20152016 are hereby set aside. The matter is remitted to the Assessing Officer to pass revised orders, after computing the I.T. Appeal Nos. 135, 146 &

C.A.@S.L.P .(C)No.12859 of 2020 etc. 313/2019 32 liability in accordance with the position settled hereinabove, on affording an opportunity of hearing to the appellant. The needful steps in this regard shall be completed at the earliest, at any rate, within three months from the date of receipt of a copy of this judgment.” 5. For the purpose of disposal, we refer to the parties, as arrayed in the appeal filed by Kerala State Beverages Manufacturing & Marketing Corporation Ltd. (KSBC). 6. We have heard Sri S. Ganesh, learned senior advocate for the appellant and Sri N. Venkataraman, learned Additional Solicitor General appearing for the respondent. 7. Section 40 of the Incometax Act, 1961 is the provision dealing with ‘amounts not deductible’. The amounts as detailed in the Section are not deductible, in computing the income chargeable under the head “Profits and gains of business or profession”. By the Finance Act, 2013 (Act 17 of 2013), Section 40 of the Act is amended by inserting Section 40(a)(iib), which has come into force from 01.04.2014. The said provision under Section 40(a)(iib) reads as under : “40. Amounts not deductible. Notwithstanding any thing contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,

C.A.@S.L.P .(C)No.12859 of 2020 etc. 11. Sri Venkataraman, learned ASG appearing for the revenue, by drawing our attention to the provisions under Articles 285 and 289 of the Constitution of India, has explained the intent behind the amendment to Section 40 of the Incometax Act, 1961, by Act 17 of 2013. It is submitted that in terms of Article 289 of the Constitution, the property and income of a State is exempted from Union taxation. The constitutional protection under Article 289 had led the States in shifting income/profits from the State Government Undertakings into Consolidated Fund of the States. It is submitted that State Government Undertaking – KSBC, which in this case is a company like any other commercial concern, is engaged in trade and business and commercial activity, therefore, is to be treated like any other business entity. However, when it came to filing of Return of Income, the State as the only shareholder or major shareholder in this type of undertakings, exercise control over it and shift profits by appropriating the whole of the surplus or a part of it by way of taxes, fee or similar such appropriations. It is submitted that this resulted in erosion of profits in the hands of State Government Undertakings leading to lesser payment of taxes, since these appropriations by the respective States from their State Government Undertakings were accounted for as allowable expenditure under Section 40(a) and these undertakings

C.A.@S.L.P .(C)No.12859 of 2020 etc. claimed deduction of the same from the income earned, therefore could not be taxed in the hands of the State Government Undertakings. It is further submitted that the shifted profit, upon its transfer, went into the Consolidated Fund of the States and on this basis constitutional protection under Article 289 were claimed as a result of which, these amounts could neither be taxed in the hands of the State Government Undertakings nor in the hands of the respective States. Precisely the underlined spirit in bringing out the said amendment by inserting Section 40(a)(iib), is to plug the possible diversion or shifting of profits from these undertakings into State’s treasury. Learned counsel also referred to the Memorandum attached to the Finance Bill of 2013 which explains the provisions relating to direct taxes. The relevant portion of the Memorandum reads as under : “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 nondeductible expense under the said section also includes statutory dues like fringe benefit tax, incometax, wealthtax, etc. Disputes have arisen in respect of incometax 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

C.A.@S.L.P .(C)No.12859 of 2020 etc. another licence holder, viz., to Kerala State Cooperatives Consumers’ Federation Ltd., the High Court has held that there is no exclusivity so far as FL1 licences are concerned. It is the contention of the learned counsel that the disallowance under Section 40(a)(iib) is not contingent upon the nature of licence. The test should be whether levy under the Abkari Act is exclusive or not and in this case it is exclusive. It is submitted that the restricted interpretation made by the High Court to the extent of FL1 licences issued in favour of the appellant runs contrary to object and intent of Section 40(a)(iib) of the Act and makes the said provision redundant and otiose. It is the case of the revenue that the aspect of exclusivity used under Section 40(a)(iib) of the Act, has to be viewed from the nature of undertaking on which levy is imposed and not on the number of undertakings on which levy is imposed. It is further submitted that the KSBC and the Kerala State Cooperatives Consumers’ Federation Ltd. are undertakings of the State of Kerala, therefore, the levy is an exclusive levy on such State Government Undertakings which are licensees. 11.2. So far as surcharge on sales tax is concerned, again it is submitted that such a levy is an exclusive levy on KSBC alone, therefore, attracts Section 40(a)(iib)(A) itself. Alternatively, it is further submitted that even assuming that such tax is not attracted by Section

Operative decision and relief

C.A.@S.L.P .(C)No.12859 of 2020 etc. granted to the appellant will, squarely fall within the purview of Section 40(a)(iib) of the Incometax 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. 17. Accordingly, the civil appeal filed by the assessee is dismissed and the civil appeals filed by the revenue are partly allowed to the extent indicated above. In result, the assessments completed against the assessee with respect to assessment years 20142015 and 2015 2016 stand set aside. The assessing officer to pass revised orders after computing the liability in accordance with the directions as indicated above. As the dispute relates to assessment years 20142015 and 20152016, the assessing officer shall pass appropriate orders, within a period of two months from the date of receipt of this judgment. ………………………………J. [R. Subhash Reddy] ………………………………J. [Hrishikesh Roy] New Delhi. January 03, 2022.

Ratio and legal principle

The narrow proposition associated with Kerala State Beverage Manufacturing & Marketing Corporation Limited v. ACIT Circle 1(1) concerns *kerala state beverage manufacturing & marketing corporation limited vs acit, circle 1(1)* *forum-supreme court* *date-3/1/2022* *sub-whether surcharge on sales tax is liable to be disallowed u/s 40(a)(iib) of income-tax act,1961.* the supreme court of india allowing the appeal of the state government undertaking by allowing the arguments of senior advocate s ganesh that 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. 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… The proposition cannot be separated from the judgment’s facts, the governing statutory version, the forum’s jurisdiction, and the exact relief recorded in Civil Appeal Nos. 11-14 of 2022.

For working-paper purposes, the decision should be cited only after matching the material facts and reading the passages under the judgment-grounded record above. The editorial outcome label “Quashed / set aside” is a navigation aid; it does not replace the operative order or explain every issue in a multi-issue case.

Why this judgment matters

This decision is relevant when a file raises the same central question identified in the source headnote: *Kerala State Beverage Manufacturing & Marketing Corporation Limited Vs ACIT, Circle 1(1)* *Forum-Supreme Court* *Date-3/1/2022* *Sub-Whether surcharge on sales tax is liable to be disallowed u/s 40(a)(iib) of Income-tax Act,1961.* The Supreme Court of India allowing the appeal of the State Government undertaking by allowing the arguments of Senior Advocate S Ganesh that 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. 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… Its practical value lies in the way the Supreme Court of India connected the governing provisions—Section 40(a) of Income-tax Act; 1961—to the procedural posture and evidence before it.

The authority level is Supreme Court. That affects persuasive or binding weight, but authority level alone is never enough. Territorial jurisdiction, statutory period, the identity of the challenged order, and later appellate treatment must all be checked before the case is used in advice, a submission, or litigation strategy.

Practitioner action points

• Begin with the complete judgment and mark the paragraphs supporting the exact proposition relied upon.
• Match the statutory version of Section 40(a) of Income-tax Act; 1961 and the decision date 2022-01-03; do not assume the current text is identical.
• Compare the notice, assessment, appeal or other procedural sequence with the chronology recorded in this case.
• Verify the stated later-history status and any review, appeal, SLP, curative or rectification proceedings before citation.
• Record why the client’s evidence is materially similar, and also record any fact capable of distinguishing the result.

Does this case match your facts?

Detailed reliance and distinction analysis

Identity check. Confirm that the cited cause title is Kerala State Beverage Manufacturing & Marketing Corporation Limited v. ACIT Circle 1(1), the proceeding is Civil Appeal Nos. 11-14 of 2022, and the decision is dated 2022-01-03. These fields are taken from the judgment record and should appear exactly in the citation note.

Bench check. The judgment identifies the coram as Hon'ble Mr. Justice R. Subhash Reddy; Hon'ble Mr. Justice Hrishikesh Roy. A later order by another bench, a larger bench, or a higher forum may alter the weight or interpretation of the proposition.

Provision check. The source associates the dispute with Section 40(a) of Income-tax Act; 1961. The practitioner should place the historical statutory text next to the current text and identify every amendment, proviso, explanation, rule or notification that could change the analysis.

Fact check. The source issue is not a free-standing abstract rule. It arises from the concrete record summarized above. A reliable application note should list the common facts, the different facts, and whether each difference affects jurisdiction, admissibility, limitation, burden, computation or relief.

Remedy check. The recorded result is Quashed / set aside. Where a matter is remanded, set aside, partly allowed, or disposed with directions, the exact operative language is more important than a binary winner/loser label.

History check. The current closure state is REVIEW_CURATIVE_DOCKET_CHECK_PENDING. If that state is pending, the page does not assert that no later case exists. It means the check remains open and must be completed at the point of professional reliance.

Section / provision impact

• Section 40(a) of Income-tax Act — apply the exact version considered in the judgment.
• 1961 — apply the exact version considered in the judgment.

Case network

• OERLIKON BALZERS COATING INDIA PRIVATE LIMITED VS. UNION OF INDIA & ANR — Court / Tribunal to be verified · Quashed / set aside
• UCB India Pvt. Ltd. vs. ACIT — Supreme Court of India · Quashed / set aside
• SPL Labs India Pvt ltd Vs ITO,Circle 6 Bangalore — Supreme Court of India · Quashed / set aside
• M/s Suneja Towers Private Limited & Anr Vs Anita Merchant — Supreme Court of India · Quashed / set aside

Related Finin2min resources

• Case Law Hub
• Search all 592 judgments
• Explore Appeals, Revision, Rectification & Procedure

Full judgment and source control

Read / download packaged judgment record

Source class: OFFICIAL_PRIMARY_EXACT_SANITIZED_MIRROR · Repository status: PUBLISH_READY