By TIOL News Service

BANGALORE, MAR 14, 2016: THE issue is - Whether privilege fee paid by the assessee to the State Government was allowable as business expenditure prior to 1.4.2014. YES is the answer.

Facts of the case

The assessee is a company, a Government of Karnataka Undertaking engaged in the business of canalization of liquor, beer and rectified spirit. Assessing Officer disallowed privilege fee for the Assessment years 2010-11, 2011-12 and 2009-10 on the ground that the payment of privilege fee is not an expenditure incurred towards earning of income.

Having heard the parties, the Court held that,

++ the privilege fee which was paid by the assessee to the State Government for the years 2004-05, 2005-06, 2006-07 was allowed as business expenditure. The respondents 1 and 2 have drawn inspiration from the 2013 amendment, whereby Clause (iib) of sub-clause (a) of Section 40 of the IT Act was inserted by the Finance Act, 2013 with effect from 1.4.2014. This apparently has been held by the Assessing Authority as being clarificatory in nature and has sought to apply it with retrospective effect. In that, the Assessing Officer has passed the assessment order disallowing the privilege fee paid as business expenditure on the very date of the Budget. Though the Assessing Officer has taken a view that the privilege fee would be disallowed as business expenditure even prior to the amendment by insertion of subclause (iib) of clause (a) of Section 40 of the IT Act, the Assessing Officer feels fortified in his view on such amendment and it is also his opinion that it is merely clarificatory in nature and that such expenditure cannot be allowed as business expenditure and is liable to tax and the liability is with retrospective effect and hence is justified in seeking to disallow such expenditure over the years. On a further reasoning, it is sought to be demonstrated with reference to comparison of the privilege fee, the turnover, taxable income of the assessee for the years 2004-05 upto 2011-12 as if to demonstrate the shocking increase in the turnover of the assessee while the taxable income has remained low and therefore, the assessee seeking to use this as a device to evade tax. Therefore, the primary reasoning of the Assessing Officer is that the privilege fee imposed is unreasonable and does not take on the characteristic of a privilege fee and it could not be construed as a fee at all and it is merely a device to evade tax. Supreme Court in the case of Har Shankar v. Deputy Excise and Taxation Commissioner AIR 1975 SC 1121, has expounded on the distinction between a 'tax' and 'fee'. It was held that the power of the Government to charge a price for parting with its rights and not the mode of fixing that price is what constitutes the essence of the matter. Nor indeed does the label affixed to the price determine either the true nature of the charge levied by the Government or its right to levy the same. It was held that a tax is a compulsory exaction of money by public authority for public purposes enforceable by law and is not a payment for services rendered. A fee is a charge for special services rendered to individuals by some governmental agency and such a charge has an element in it of a quid pro quo;

++ with the insertion of sub-clause (iib) in the Act, it would no longer be possible for the assessee to claim that the said privilege fee is not taxable. A plain reading of the provision would not indicate that it is to be applied with retrospective effect. There are other provisions which were also amended, and wherever the Legislature intended that certain provisions would have retrospective effect, it is expressly indicated therein and therefore, there being no such express indication insofar as the present provision, it cannot be said to be applicable with retrospective effect. This is also evident from the CBDT circular No.3/2014 dated 24.01.2014 issued by the Department, which would be binding on the Assessing Authority. The privilege fee payable by the assessee to the State Government would be taxable with effect from 1.4.2014 and not prior thereto. The unreasonableness of the privilege fee payable is also not a ground to hold that it is a device by which the assessee and the State Government are avoiding payment of tax. It was not open for the Assessing Officer to opine that privilege fee appears to be relatable to the profit earned and a large chunk of it is transferred to the State Government in the name of privilege fee. There is no illegality committed by the assessee in paying such privilege fee on the State Government having fixed such privilege fee. There is no legal prohibition in this regard and therefore, it cannot be said that the same could have been disallowed by the Assessing Officer. The impugned assessments are set aside insofar as it treats the privilege fee paid as being taxable to income.

(See 2016-TIOL-481-HC-KAR-IT)