# KERALA STATE BEVERAGES MANUFACTURING & MARKETING CORPORATION LTD v. THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 1(1)

- **Citation:** [2022] 1 S.C.R. 105
- **Court:** Supreme Court of India
- **Decided:** 2022-01-03
- **Case number:** Civil Appeal No. 11 of 2022
- **Bench:** R. Subhash Reddy, Hrishikesh Roy
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/kerala-state-beverages-manufacturing-marketing-corporation-ltd-v-the-assistant-36017
- **Pages:** 24

## Headnote

Income Tax Act, 1961: s.40(a)(iib) - Purpose of amendment
of Income Tax Act by Act 17 of 2013, by which s.40(a)(iib)(A), (B)
is inserted - Held: The said amendment is made to plug the possible
diversion or shifting of profits from state owned undertakings into
State's treasury - In view of s.40(a)(iib) of the Act any amount,
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 - 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 s.40(a)(iib) is not attracted
- Abkari Act, 1902 - Constitution of India - Art.289.
Income Tax Act, 1961: s.40(a)(iib) - Gallonage fee, licence
fee and shop rental (kist) with respect to FL-9 and FL-1 licences
squarely fall within the purview of s.40(a)(iib) of the Act .
Income Tax Act, 1961: s.40(a)(iib) - 'fee' or 'charge' as
mentioned in s.40(a)(iib) - Held: It 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 - Surcharge on sales tax
is nothing but an increase of the basic sales tax levied under s.5(1)
of the KGST Act, as such the surcharge is nothing but a sales tax -
It is nothing but the enhancement of the tax - It falls outside the
purview of s.40(a)(iib)(A) and s.40(a)(iib) (B) of the Act - Same
reason shall apply to the turnover tax also - As such turnover tax is
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also outside the purview of s.40(a)(iib)(A) and s.40(a)(iib)(B) of
the Act.
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

## Text

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[2022] 1 S.C.R. 105
105
KERALA STATE BEVERAGES MANUFACTURING &
MARKETING CORPORATION LTD.
v.
THE ASSISTANT COMMISSIONER OF INCOME TAX
CIRCLE 1(1)
(Civil Appeal No. 11 of 2022)
JANUARY 03, 2022
[R. SUBHASH REDDY AND HRISHIKESH ROY, JJ.]
Income Tax Act, 1961: s.40(a)(iib) - Purpose of amendment
of Income Tax Act by Act 17 of 2013, by which s.40(a)(iib)(A), (B)
is inserted - Held: The said amendment is made to plug the possible
diversion or shifting of profits from state owned undertakings into
State's treasury - In view of s.40(a)(iib) of the Act any amount,
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 - 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 s.40(a)(iib) is not attracted
- Abkari Act, 1902 - Constitution of India - Art.289.
Income Tax Act, 1961: s.40(a)(iib) - Gallonage fee, licence
fee and shop rental (kist) with respect to FL-9 and FL-1 licences
squarely fall within the purview of s.40(a)(iib) of the Act .
Income Tax Act, 1961: s.40(a)(iib) - 'fee' or 'charge' as
mentioned in s.40(a)(iib) - Held: It 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 - Surcharge on sales tax
is nothing but an increase of the basic sales tax levied under s.5(1)
of the KGST Act, as such the surcharge is nothing but a sales tax -
It is nothing but the enhancement of the tax - It falls outside the
purview of s.40(a)(iib)(A) and s.40(a)(iib) (B) of the Act - Same
reason shall apply to the turnover tax also - As such turnover tax is
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also outside the purview of s.40(a)(iib)(A) and s.40(a)(iib)(B) of
the Act.
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
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the Government by way of fees, 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,
KERALA STATE BEVERAGES MFG. & MARKETING CORP. LTD. v. THE ASST.
COMMISSIONER OF INCOME TAX CIRCLE 1(1)
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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
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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
KERALA STATE BEVERAGES MFG. & MARKETING CORP. LTD. v. THE ASST.
COMMISSIONER OF INCOME TAX CIRCLE 1(1)
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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
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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.
KERALA STATE BEVERAGES MFG. & MARKETING CORP. LTD. v. THE ASST.
COMMISSIONER OF INCOME TAX CIRCLE 1(1)
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Case Law Reference
[1972] 2 SCR 309
referred to
Paras 10 and 14.4
[1992] 1 SCR 371
referred to
Paras 10 and 14.4
2021 SCC OnLine SC 960
referred to
Paras 11.2 and 14.3
[2003] 2 SCR 1
referred to
Para 14.5
[2003] 1 SCR 1159
referred to
Para 14.5
[2001] 2 SCR 36
referred to
Para 14.5
CIVIL APPELLATE JURISDICTION: Civil Appeal No.11 of
2022.
From the Judgment and Order dated 30.04.2020 of the High Court
of Kerala at Ernakulam in ITA No.135 of 2019
With
Civil Appeal Nos. 12, 13 and 14 of 2022.
N. Venkataraman, ASG, S. Ganesh, A. K. Panda, Sr. Advs., Anil
D. Nair, Ms. Beena Victor, Ms. Priya, Jogy Scaria, Mrs. Anil Katiyar,
Manish Pushkarna, Ms. Preeti Rani, Raj Bahadur Yadav, Advs. for the
appearing parties.
The Judgment of the Court was delivered by
R. SUBHASH REDDY, J.
1. Leave granted.
2. These appeals are preferred, by the State-owned Undertaking,
Kerala State Beverages Manufacturing & Marketing Corporation Ltd.,
a 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 2014-2015, the Deputy Commissioner
of Income Tax, Circle-2(1), Thiruvananthapuram finalised the assessment
of income of the appellant under Section 143(3) of the Income-tax Act,
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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 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 2015-2016 assessment against
the appellant was completed under Section 143(3) of the Act by the
Assistant
Commissioner
of
Income
Tax,
Circle-1(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.536-537/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 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 :
KERALA STATE BEVERAGES MFG. & MARKETING CORP. LTD. v. THE ASST.
COMMISSIONER OF INCOME TAX CIRCLE 1(1) [R. SUBHASH REDDY, J.]
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"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. We hold that the levy of
Gallonage Fee, Licence Fee and Shop Rental (kist) with respect
to the FL-9 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 FL-1
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, 2015-2016 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 & 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 Income-tax 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 :
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"40. Amounts not deductible.- Notwithstanding anything
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",-
(a)
in the case of any assessee-
(i) ... ... ... ...
 ... ... ... ...
(iib)
any amount -
(A)
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
(B)
which is appropriated, directly or indirectly, from,
a State Government undertaking by the State Government.
Explanation.-For the purposes of this sub-clause, a State
Government undertaking includes-
(i)
a corporation established by or under any Act of the
State Government;
(ii)
a company in which more than fifty per cent of the
paid-up equity share capital is held by the State
Government;
(iii)
a company in which more than fifty per cent of the
paid-up equity share capital is held by the entity
referred to in clause (i) or clause (ii) (whether singly
or taken together);
(iv)
a company or corporation in which the State
Government has the 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;".
KERALA STATE BEVERAGES MFG. & MARKETING CORP. LTD. v. THE ASST.
COMMISSIONER OF INCOME TAX CIRCLE 1(1) [R. SUBHASH REDDY, J.]
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8. While it is the case of the assessee/appellant that the gallonage
fees, licence fee and shop rental (kist) for FL-9 licence and FL-1 licence,
the surcharge on sales tax and turnover tax do not fall within the purview
of the abovesaid amended Section, the case of the revenue is that all the
aforesaid amounts are covered under Section 40(a)(iib) as such, such
amounts are not deductible for the purpose of computation of income,
for the assessment years 2014-2015 and 2015-2016.
9. During the assessment years 2014-2015 and 2015-2016 the
appellant was holding FL-9 and FL-1 licences to deal in wholesale and
retail of, Indian Made Foreign Liquor (IMFL) and Foreign Made Foreign
Liquor (FMFL) granted by the Excise Department. FL-9 licence was
issued to deal in wholesale liquor, which they were selling to FL-1, FL-3,
FL-4, 4A, FL-11, FL-12 licence holders. The FL-1 licence was for sale
of foreign liquor in sealed bottles, without privilege of consumption within
the premises. The gallonage fee is payable as per Section 18A of the
Kerala Abkari Act and Rule 15A of the Foreign Liquor Rules. The
appellant was the only licence holder for the relevant years so far as
FL-9 licence to deal in wholesale, and so far as FL-1 licences are
concerned, it was also granted to one other State owned Undertaking,
i.e., Kerala State Co-operatives Consumers' Federation Ltd.. By
interpreting the word 'exclusively' as worded in Section 40(a)(iib)(A) of
the Act, High Court in the impugned order has held that the levy of
gallonage fee, licence fee and shop rental (kist) with respect to FL-9
licences granted to the appellant will clearly fall within the purview of
Section 40(a)(iib) of the Act and the amounts paid in this regard is liable
to be disallowed. At the same time the amount of gallonage fee, licence
fee and shop rental (kist) paid with respect to FL-1 licences granted in
favour of the appellant for retail business, the High Court has held that it
is not an exclusive levy, as such disallowance made with respect to the
same cannot be sustained. 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 FL-9 licence is not on any State Government
Undertaking but same is a levy on the licensee. It is submitted that the
levy was on the licence holder whoever he or it might be and only in
view of the Abkari Policy of the relevant years licences were granted to
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the appellant as such it cannot be said that same was exclusive levy on
the appellant attracting Section 40(a)(iib) of the Act so as to disallow the
same. It is submitted that the mere fact that in a particular year, the
licence holder happens to be State Government Undertaking does not
make the levy, one, which is imposed directly and exclusively on the
State Government Undertaking. It is submitted that High Court has failed
to appreciate that the decision as to whom FL-9 licences are to be granted,
depends only on the State Government's Abkari Policy, which may vary
from year to year. It is submitted that said submission also holds good
with regard to gallonage fee, licence fee and shop rental for FL-1 licence,
which issue is already decided in favour of appellant, by the High Court.
With regard to surcharge on sales tax and turnover tax, it is submitted
that taxes levied, are completely outside the ambit of Section 40(a)(iib)
of the Act. It is submitted that the Kerala Surcharge on Taxes Act, 1957
(for short, 'KST Act') is enacted only to increase the taxes, inter alia,
on the sale or purchase of goods, as such it is nothing but an increment
to the basic sales tax levied under Section 5(1) of Kerala General Sales
Tax Act, 1963 (for short, 'KGST Act'). It is submitted that surcharge on
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. Srinivasan1 and in the case of
Sarojini Tea Co. Ltd. v. Collector, Dibrugarh2. 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 2014-2015, 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 526
2 (1992) 2 SCC 156
KERALA STATE BEVERAGES MFG. & MARKETING CORP. LTD. v. THE ASST.
COMMISSIONER OF INCOME TAX CIRCLE 1(1) [R. SUBHASH REDDY, J.]
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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 Income-tax 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 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 non-
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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-à-vis exclusive levy of fee, charge, etc. or appropriation of
amount by the State Governments from its undertakings, it is
proposed to amend section 40 of the Income-tax Act to provide
that any 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". It is also proposed to define the
expression "State Government Undertaking" for this purpose.
This amendment will take effect from 1st April, 2014 and will,
accordingly, apply in relation to the assessment year 2014-15 and
subsequent assessment years."
11.1. With regard to gallonage fees, licence fee and the shop rental
(kist), it is submitted that High Court has upheld the disallowance in
favour of the revenue with regard to FL-9 licence on the ground that the
appellant - KSBC is the exclusive licence holder, so far as FL-9 licences
are concerned. It is submitted that so far as FL-1 licences are concerned
only on the ground that similar licences are also given for another licence
holder, viz., to Kerala State Co-operatives Consumers' Federation Ltd.,
the High Court has held that there is no exclusivity so far as FL-1 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
KERALA STATE BEVERAGES MFG. & MARKETING CORP. LTD. v. THE ASST.
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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 FL-1
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 Co-operatives 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 40(a)(iib)(A),
it would fall under Section 40(a)(iib)(B) for the reason that surcharge on
sales tax is a 'tax' and tax is a form of appropriation by the State from
KSBC. It is submitted that the surcharge levied under Section 3(1) of
the KST Act is on the tax payable by a dealer in foreign liquor under
Section 5(1) of the KGST Act. It is the contention of the learned counsel
that, the cumulative reading of Section 3(1) of the KST Act and Section
5(1)(b) of the KGST Act would reveal that surcharge is levied on the
tax payable by a dealer in foreign liquor under Section 5(1) of KGST
Act. It is submitted that Section 3(1) does not deal with any other category
and specifically pertain only to a dealer in foreign liquor. It is submitted
that as much as Section 5(1)(b) of the KGST Act refers to trade in
foreign liquor and it applies specifically and exclusively to KSBC and
further surcharge levied under Section 3(1) of KST Act is on the sales
tax, exclusively payable by KSBC under Section 5(1)(b) of KGST Act.
As such, the inevitable conclusion, therefore is that it qualifies as an
exclusive levy attracting Section 40(a)(iib) of the Act. To show that the
distinction between a 'tax' and a 'fee' has substantially been effaced in
the development of constitutional jurisprudence, learned counsel, has
placed reliance on a recent judgment of this Court in the case of Jalkal
Vibhag Nagar Nigam & Ors. v Pradeshiya Industrial and
Investment Corporation and Another3.
3 2021 SCC OnLine SC 960
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11.3. With regard to turnover tax, it is submitted that unlike
surcharge which is an exclusive levy on KSBC, it is fairly submitted that
such tax was imposed not only on KSBC under Section 5(1)(b) of the
KGST Act, but also was being imposed on various other retail dealers
specified under Section 5(2) of KGST Act. It is submitted that as the
issue has not been dealt and examined in detail by the High Court, made
a request to leave it open for fresh adjudication since facts and figures
need to be verified.
 With the above submissions, learned ASG has pleaded to allow
the appeals filed by the revenue and dismiss the appeal filed by the
KSBC.
12. Having heard the learned counsels on both sides we have
perused the impugned order and other material placed on record.
13. 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 abovesaid Article.