Income Tax Appellate Tribunal - Hyderabad
M/S. A.P. Bevarages Corporation, ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD "B " BENCH, HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI
SAKTIJIT DEY, JUDICIAL MEMBER
ITA No.302-303 & 545/Hyd/13
Assessment Years: 2006-07, 2008-09 & 2009-10.
Andhra Pradesh Beverages -vs- ITO, Ward-1(1)
Corporation Ltd., Hyderabad.
Hyderabad.
PAN:AABCA 7385 A
(Appellant) (Respondent)
Appellant by S/Shri K. Vasant Kumar A.V.
Raghu Ram
Respondent by Shri M. Ravindra Sai (DR)
Date of Hearing 22-11-2013.
Date of pronouncement 21-01-2014
ORDER
PER SAKTIJIT DEY, J.M:
These are three appeals filed by the assessee. While appeals for the assessment years 2008-09 and 2009-10 are against separate orders of CIT (A), Hyderabad, the appeal pertaining to the assessment year 2006-07 is against the order passed u/s263 of the Act. Since assessee is common, and identical issues are involved in 2 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
these three appeals, these are heard, clubbed together and disposed of by this consolidated order for the sake of convenience.
2. Though facts are identical and issues are common in all the appeals, since the assessee has made his submissions in respect of appeal in ITA No.302/Hyd/13 relating to the assessment year 2008- 09, we will deal with the facts as involved in this appeal.
3. Briefly the facts as emanate from records are, the assessee company is sole wholesale distributor of alcoholic products in the State of Andhra Pradesh. While examining the return filed for the impugned assessment year, the Assessing Officer noticed that though the assessee had declared a turnover of Rs.8348.05 crores for the impugned assessment year, but it has declared nil income under the regular provisions and book profit of Rs.2,85,642/- u/s 115JB of the Act. He further noted that in the annual report the assessee disclosed loss of Rs.36,82,862/-. He further noted that on account of prior period adjustment , a profit of Rs.10,14,478/- was shown for income-tax purposes. The assessee also added back the inadmissibles such as capital expenditure, donation to Chief Minister's Relief Fund and 40a(ia). After claiming certain allowances u/s 43B on payment basis, it disclosed a gross total income of Rs.1348.27 crores and after claiming deduction u/s 80G the income was brought down to nil. The Assessing Officer for the purpose of understanding the exact nature of activity carried on by the assessee and to ascertain its margin made a query as to how and at what rate it procures its supplies and at what rate it sold the goods. He further called upon the assessee to explain the policy followed with respect to purchase and sales and the margins fixed. The assessee in its reply dated 22-10-2010 stated that the purchase 3 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
price is fixed by the tender committee formed by the government. He further stated that the tender committee is constituted and an open tender notification is issued through Press for supply of IMFL and beer on rate contract basis to the Corporation. So the company procures the products from the suppliers on the price fixed by the committee through an open tender notification. Margin over the cost price on each brand is fixed by the government of Andhra Pradesh through their G.O. The manner in which the rate is fixed is indicated in one of the GOs dated 11-11-2009. The Assessing Officer on perusing the said GO noted that above basic cost price, the margin will go up to even 38%. Therefore in essence both the purchase price and sale price are determined by the government of A.P and the margin is also separately determined by the Government. of A.P. The Assessing Officer on going through the computation of loss declared in the annual return noticed that after reducing the cost of purchase of IMFL amounting to Rs.3516 crores from the total turnover of Rs.8646 crores, the assessee has claimed the rest of the major expenditure under the following three heads.
i) Privilege fee to the Government. of A.P. Rs.1415.28 crores
ii) Chief Minister's Relief Fund Rs.138.29 crores
iii) Sales tax Rs.3331.64 crores
4. Out of the above expenditure claimed, the Assessing Officer accepted the expenditure towards sales-tax as an admissible deduction. With regard to the donation made to Chief Minister's Relief Fund, the Assessing Officer noted that the assessee itself had added it back in the computation of income as an inadmissible 4 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
deduction and sought to claim the same as deduction u/s 80G of the Act. In fact, as would be evident from the final computation made by the Assessing Officer he allowed the claim of the assessee in this respect. Therefore, the only dispute remained with regard to the expenditure claimed towards privilege fee paid to the Government. of A.P. The details of which are as under:-
i) Privilege fee Rs.1161.66 crores
ii) Special privilege fees Rs. 228.11 crores
iii) Special privilege fees for sport
promotion Rs. 25.50 crores
Total Rs.1415.28 crores.
----------------------
5. The Assessing Officer asked the assessee to explain under what provision of excise law these payments were made and how it is claimed as deduction in computing income. The assessee in its reply dated 28-1-2010 stated that the basis of claim was as per section 23A of Excise Act 1968. It was stated that no demand was raised under excise act for privilege fee or special privilege fee or special privilege fee for sports. A direction was received from the Government vide GOMS No.391 dated 12-6-2001 to pay a sum of Rs.25 crores as special privilege fee for sports. The Corporation also received directions of the Government. of A./P. in GO No.242 dated 31-3-2001 to increase the rate of margins by 10% and to pay special privilege fee of Rs.250 crores. It was submitted by the assessee that sale price is inclusive of excise duty and sales tax. The assessee further stated that privilege fee, special privilege fee and special privilege fee for sports and contribution to Chief 5 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
Minister's Relief Fund are neither separately indicated in the sale bills nor any separate heads are shown in the sale bills. The Assessing Officer noticed that though the assessee had claimed the aforesaid three sums as deductions based on section23A of the Excise Act but, from reading of section 23A of Excise Act, it becomes clear that the assessee obtains through a consolidated sale bill a gross sum. It can receive the entire margin, special privilege fee and other receipts or any other amounts from whatever sources. The second part of section states that it should reduce the expenses incurred there from. The third part of the section states that after deducting expenses, the Corporation shall pay away the privilege fee or special privilege fee or any other fee by whatever name called to the Commissioner of Prohibition and Excise in the month or succeeding the month of sale. He therefore was of the view that section 23A indicates that profit and loss a/c is to be drawn up and the income and the expenditure is to be ascertained and the margin is only to be paid under various heads or as lumpsum to the Government of A.P. He therefore called upon the assessee to explain if it has followed the procedure as laid down in section 23A of the Excise Act. As stated by the Assessing Officer in the assessment order, the assessee in its explanation submitted that it has not followed the procedure but an alternate method was adopted and submitted a work sheet showing computation of sale price as under:-
Sale price= margin +special margin +VAT As per which it would follow that the assessee took into consideration the total margin and deducted there from special privilege fee for sports and CM's Relief Fund and the balance 6 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
amount was paid as privilege fee. The Assessing Officer noted that on certain brands (fast moving brands ) 10% margin is obtained. On these brands, taking into consideration the cost of sale plus the margin and VAT 10% is derived and paid as special privilege fee. Thus, the special privilege fee is worked as a percentage of turnover on special brand. He further noted that as per record, there is no demand notice or working of privilege fee or special privilege fee or sports fee under the Excise Act. The entire margin is taken and it is bifurcated and paid under certain heads to the Government of A.P. In the aforesaid factual backdrop the Assessing Officer while considering admissibility of the deduction claimed by the assessee on account of privilege fee etc., found the following issues arising for consideration.
i) Whether income has accrued and arisen to
assessee on which assessee is liable to pay tax?
ii) Whether the assessee is correct in deducting
these sums first and declaring loss avoiding
income-tax, through income has accrued and
arisen during the previous year?
iii) Whether the deduction claimed under the three
heads i.e. Privilege fee, special privilege fee and
special privilege fee Sports is admissible u/s 23A
or not?.
iv) Whether the assessee has complied with the
provisions of sec. 23A of the Excise Act in order
to claim the deductions?
v) Whether the assessee company has followed the
provisions of Company Law and accounting
7
ITA nos.302-303 &545 of 2012
AP Beverages Corporation, Hyd.
standards in order to claim these sums as
deductions?
vi) Whether these sums can be said to have been
diverted by overriding title?
vii) Whether section 23A of Excise Act amounts to
application of income.
viii) Decisions on allowance of these deductions.
6. The Assessing Officer relying upon a decision in case of Wallace Brothers and Co. Ltd. V/s. CIT (16 ITR 240) and Kalwa Devadattam V/s. Union of India (49 ITR 165) (SC) noted that liability to pay income-tax arises on the accrual of income and not from the computation made by the taxing authorities in the course of assessment proceedings. The Assessing Officer noted that the assessee has conducted business activities throughout the year and income had accrued and arisen to it whenever sales were conducted.
On such income which accrued to the assessee almost on daily basis it should have paid advance-tax as well as income-tax as it cannot be denied that the assessee is engaged in trading activity. The Assessing Officer further observed that a reading of section 23A of Excise Act clearly shows that the assessee can receive any sums as entire margins, special privilege fee, any other receipts and any other amounts realised. These four types of receipts can arise for the assessee-Corporation. It has to deduct invariably the expenses. The net margin/sum after deducting the expenses is to be paid as privilege fee, special privilege fee or any together fee by whatever name called to the Government. In these circumstances, the question which arises for consideration is, when the assessee is a 8 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
corporation registered under the company's Act was it obligatory on its part to follow provisions of Company Law. The Assessing Officer noted that according to section 210, 210A ,211 and Schedule-6 only true and fair view of the state of affairs of the company are to be published. A profit and loss a/c should be enclosed duly showing current tax liability as well as the deferred tax liability. Tax has to be first claimed as expenditure and the net profit is to be disclosed. The Assessing Officer noted that even according to the accounting standard -22 current tax liability is to be taken into consideration as an expense. Hence the assessee should have first deducted income- tax liability as an expenditure and remitted the residuary sum as a margin, privilege fee, special privilege fee etc.
7. In this context, the Assessing Officer made a query to the assessee as to why this procedure was not followed. It was stated that alternative method of ascertaining the entire margin was adopted. In fact the entire margin was paid to the government. The assessee further stated that the taxas expenses was shown below the line in the annual statement. The Assessing Officer noted that the assessee had not followed the procedure laid down in section 23A of the Excise which according to assessee, is the basis of their claim. Had they drawn up the P & L a/c before remitting the margin, they would have deducted the income-tax liability also. However, they have conveniently adopted an alternative method of taking the gross margin as fixed by the government and remitting the same to the government under different heads and declaring loss or nominal income to the income-tax department that too on account of minor adjustments such as adding back of disallowable on account of prior period adjustments. The Assessing Officer 9 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
therefore was of the view that the deduction claimed on account of privilege fee, special privilege fee, special privilege fee sports etc.,. are not admissible since they are not computed in accordance with section 23A of the Excise Act which is very basis of their claim. Even, according to the company law and accounting standards, the income should have been first arrived at and then the income-tax liability ought to have been deducted and later the margin should have been paid as privilege fee or whatever name called to the Government of Andhra Pradesh. Therefore, even under the company law the assessee is not eligible to claim these deductions prior to payment of income-tax. So far as the contention of the assessee that no income accrued to the assessee as it was diverted to the Government of A.P by over-riding title the Assessing Officer noted that there is no doubt that the assessee received these sums through sale bills. The sale bill indicates only the gross sums and hence the assessee received lumpsum sale consideration.
8. The Assessing Officer relying upon various judicial precedents noted that where an assessee applies an income to discharge an obligation after the income reaches its hands it would be an application of income and this would result in taxation of such income in the hands of the assessee. However, there is diversion of income before it reaches the hands of the assessee, it would be an obligation to apply the income in a particular way before it is received by the assessee or before it has accrued or arisen to the assessee results in the diversion of income. Applying the judicial precedents referred to in his assessment order the Assessing Officer concluded that in case of the assessee there is no diversion of income by over-riding title. The trading receipts or gross receipts 10 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
that are received by the assessee the purchasers do not know the various components of sale price. The Government is also not aware of the exact component of each sum that it is going to receive and the rate at which it is paid. The entire margin is sought to be taken away in the name of privilege fee to mobilise additional resources, further sums under the head special privilege fee and sports privilege fee are collected suitably by directing the Corporation to enhance the margin. It is not by specific levy of privilege fee or sports privilege fee in the sale bill that it is collected. Therefore, it is not passed on to any fund by over-riding title. Therefore, the entire resource mobilisation done by Government of A.P through the assessee corporation by raising the margin and collecting the same cannot be excluded from the trading receipts. Therefore, there cannot be any diversion of income by over-riding title. The Assessing Officer observed that the manner in which the computations are made by the company also shows that the entire margin was passed on to the Government. When the entire margin is sought to be taken away by the Government, it means it wants to take the entire profit.
9. Thus, the legislature in its wisdom introduced section 23A to enable the Corporation to pay the entire margin to the Government of A.P after deducting the expenses including taxes. However, the assessee Corporation ignoring the legislative intent of section 23A of Excise Act adopted its own method of paying margin thereby avoiding its responsibility to pay income-tax. This observation made by the Assessing Officer was due to the fact that the assessee failed to adopt the method of deducting expenses and drawing up profit and loss account as per company law or otherwise. The 11 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
Assessing Officer observed that if assessee's contention is accepted then different meaning to section 23A of Excise Act has to be given which would also be repugnant to the state law as well as company law and income-tax law. He further observed that the contention of the assessee that since the money is paid back to the State Government hence no income-tax need be paid, is accepted it would lead to drastic conclusion. In effect it would mean that total margin income of a sole distributor of IMFL for the whole state is exempt from income-tax though it is involved in proper business activity. The Assessing Officer referring to the contents downloaded from the website of the assessee Corporation which provided the methodology of fixation of prices and margins, sale price and the purpose noted that though the profit was earned, by giving it the name of privilege fee the same was siphoned of evading payment of income-tax. The Assessing Officer held that the information available on the website would make it clear that various names given to margin/profit as privilege fee, special privilege fee etc. is nothing but profit that is given back to the Government out of the monopolistic business.
10 The Assessing Officer observed that since the assessee itself in its website has admitted that the privilege fee is nothing but profit ploughed back the deduction claim cannot be allowed. The Assessing Officer referring to the memorandum and articles of association of the assessee noted that it does not contain any clause with respect to declaration of dividend, payment of dividend etc which shows a deliberate attempt to siphon off profits to the state Government. This is in total contrast to memorandum and articles of association of other Government corporations which contain 12 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
specific clauses with respect to declaration or payment of dividend. The Assessing Officer thereafter analysing the nature of privilege fee, special privilege fee and special privilege fee sports ultimately came to a conclusion that the deduction claimed on account of payment of privilege fee, special privilege fee and special privilege fee sports is not admissible. In this context, the Assessing Officer noted that in course of proceedings, when the auditor who certified annual accounts was called upon to clarify how the assessee is said to have complied with the provisions of company law and also with regard to the provisions of section 23A of the Act, the auditor vide letter dated 28-12-2010 claimed that the entire margin is to be paid as privilege fee to Government for the right obtained as sole dealer of alcohol and beverages. They have stated that the provision for tax has been done below the line. The profit has been arrived after allocating expenses and income and necessary provisions for taxation has been made which has been certified by CAG.
11. It was contended by the auditor that the assessee Corporation has to be treated as an extended arm of the Government. Hence it is but natural for the Government to exercise total control over the operations of the Corporation. The assessee being a Government company has to obey the directions of the Government. Though the auditor also raised various other contentions in support of its claim of deduction of the amount paid to the state Government but the Assessing Officer rejecting the same ultimately completed the assessment by bringing to tax the privilege fee etc amounting to Rs.1415,28,24,605/-. The Assessing Officer also disallowed an amount of Rs.30,90,849/- representing outstanding liability towards leave salary payable and pension 13 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
contribution payable u/s 43B of the Act. Being aggrieved of the assessment order, the assessee preferred an appeal before the CIT (A). The CIT (A) however confirmed the assessment vide order dated 16-1-2012. Against the said order of the first appellate authority, the assessee preferred further appeal before the ITAT.
12. In course of hearing before the ITAT, as appears from facts on record, the departmental representative brought to the notice of the bench certain amendments made to the Excise Act with retrospective effect. The ITAT considering such fact observed that since the CIT (A) had no occasion to consider the amendments effected to the Excise Act on 16-4-2012 directed the CIT (A) to decide the issue de novo after examining the said amendment.
13. The CIT (A), in pursuance to the direction of the Income-tax Appellate Tribunal took up the proceedings again. In course of hearing, the assessee also filed written submissions before the CIT (A). the CIT (A) after considering the submissions of the assessee and taking note of the provisions contained in the newly inserted sections 4A, 4B and 4C of the Excise Act and the repealed sections 23A and 23B observed that section 4C only states that the amount paid is income of government i.e. in the hands of the recipient. The CIT (A) however was of the view that for the purpose of taxation, the nature of payment in the hands of the recipient is not material but the nature in the hands of the payer i.e. the assessee is important. The CIT (A) further observed that the manner of computation of such payment clearly established the fact that the income of the assessee corporation is passed on to the state government. Hence, it is obligatory on the part of the assessee to pay income-tax on the income before the appropriation of profits 14 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
and then remit the balance amount. The CIT (A) noted that there is no notification or statutory provisions expressly treating the income of the corporation as that of the State. Section 4C only states that certain payments made by the corporation are deemed as income of the state and this does not extend to the entire income of the assessee as the payments cover only part of the income and the balance amount of profit is remitted as donation on which deduction u/s 80G is claimed. The CIT (A) relying upon the decision of the Hon'ble AP High court in case of APSCSC Ltd (149 ITR 497) noted that the Hon'ble AP high court laid down 5 tests for a corporation to be termed as instrumentality of State. Even though the Hon'ble High Court found the Corporation was meeting all the tests, still then the High Court held that an instrumentality is different from state and its income cannot be equated to that of a State. The CIT (A) further observed that if section 4C is interpreted in a manner to mean that income of the Corporation is that of the State then it would imply that legislation is passed by the State on a subject on which centre is only competent to legislate. In such event, the State law is bound to fail as there is repugnancy with central law. In this context the CIT (A) relied upon a decision of Hon'ble Allahabad High Court in the case of UP Jal Nigam Ltd. (202 Taxman 285). The CIT (A) on interpreting section 4C was of the view that it only re-affirms the fact that it is the profit that is sought to be appropriated. It is never the case of the department that the government of AP has no right to receive income from the assessee. The new amendment to the excise act clearly establishes the fact that the entire income of the assessee is not that of State and only the amounts specified as privilege fee is income of the State. The CIT (A) observed that as section 4A does 15 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
not prescribe method of computing privilege fee, the computation still needs to be made u/s 23A.
14. The CIT (A) was of the view, since income tax is an expense in commercial sense as per AS-22, the assessee's contention that the entire margin after excluding the expenses is the income of the State cannot be accepted. The CIT (A) relying upon the decision of Hon'ble Supreme Court in case of D. Cawasji and Co. (150 ITR
648) held that the amendment having been made to ratify the payment only with a view to avoid income-tax, such amendment is illegal and cannot be applied retrospectively. The CIT (A) further held that even the amendment do not in any way come to the rescue of the assessee in view of the ratio laid down by the Hon'ble Supreme Court on Article 289 of the Constitution in the context of tax liability of a Corporation vis-a vis the State Government. With the aforesaid observation, the CIT (A) dismissed the appeal of the assessee.
15. The ld. AR apart from making submissions at the time of hearing also filed written submissions contending as under:-
"2. The first ground is with regard to validity of amendments made to the state Act. The learned CIT(A) while dealing with the amendments made to the State Act has held that it is repugnant to the Central Act and held it to be invalid. The learned CIT(A) relied on the decision of Supreme Court in the case of UP Jal Nigam Ltd., reported in 202 Taxman 285. It is respectfully submitted that their Lordships of Allahabad High court while dealing with taxability of income of a Local Authority, after amendment to Sec.10(20) of the Act, referred to Article 246 of the Constitution of India read with E'ntry 82 of List 1 of Schedule VII of the Constitution of India and held that the State cannot exercise its power on an item meant for the Central government. Their lordship went on to observe that the Local Authority should be defined keeping in view the provisions,contained in Part IX and IXA of the Constitution and Section 10(20) of the I.T.Act. Accordingly it held that in view of article 254 of the Constitution to the extent of repugnancy the Central Act shall prevail.16
ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
3. The appellant respectfully submits that the learned CIT(A) fell in error on relying on this decision to hold that the amendments to the State Act is repugnant to Central Act even without stating as to which power of the Centre the State has taken over while making amendments to the State Act, by referring specifically to such part of the provision in the amended Act. It is submitted that the amendments are carried out to the Andhra Pradesh Excise and Andhra Pradesh (Regulation of trade in Indian made Foreign Liquor, Foreign Liquor) Acts, (Amendment) Act, 2012(Andhra Pradesh Act No. 5 of 2012). Such Act is made under powers conferred, in Schedule VII, Entry 8 of List II of the Constitution of India. This provision deals with intoxicating liquors. This is exclusively in the State domain and as per the frame work of the Constitution of India Centre has no power what so ever on this.
4. The appellant submits that it has exclusive rights not just in making laws in respect of intoxicant but also with regard to impost on sale of intoxicants. To substantiate this submission, the appellant invites kind attention of the Hon'ble Tribunal to the decision of Supreme Court in the case of State of UP vs. Sheopat Rai, AIR 1994 SC 813 (Paras 16, 32 and 41) wherein their lordships upheld the ordinance passed by State besides categorically holding that such charge in fact is not a 'fee' falling under Entry 66 of List II which deals with 'excise duty' but it is a consideration received by the Government for parting with its exclusive privilege to deal in intoxicants thereby falling under Entry 8 of list II of Schedule VII to Constitution of India.
5. The appellant further invites kind attention of the Hon'ble Tribunal to the recent decision of Supreme Court in the case of State of Kerala and Others Vs. Kandath Distilleries [Civil Appeal No. 1642 of 2013 arising out of SLP (CiVil) No. 9098 of 2009] a copy of which is placed in paper book at pages 155 to 167. The relevant portion is extracted here under:
"20. We may, before examining the scope of the above mentipned provisions and the nature of jurisdiction or the powers t6 be exercised by the Commissioner and the State Government, examine the general purport of the Act in the light of Article 19(1)(g) of the Constitution of India.
RIGHT TO CARRY ON TRADE OR BUSINESS IN LIQUOR
21. Article 47 is one of the Directive Principles of State Policy which is fundamental in the governance of the country and the State has the power to completely prohibit the manufacture, sale, possession, distribution and consumption of liquor as a beverage because it is inherently dangerous to the human health. Consequently, it is the priVilege of the State and it is for the State to decide whether it should part with that privilege, which depends upon the liquor policy of the State. State has, therefore, the exclusive right or privilege in 17 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
respect of portable liquor.
A citizen has, therefore, no fundamental right to trade or business in liquor as a beverage and the activities, which are res extra commercium, cannot be carried on by any citizen and the State can prohibit completely trade or business in portable liquor and the State can also create a monopoly in itself for the trade or business in such liquor. This legal position is well settled. State can also impose restrictions and limitations on the trade or business in liquor as a beverage, which restrictions are in nature different from those imposed on trade or business in legitimate activities and goods and articles which are res commercium. Reference may be made to the judgments of this Court in Vithal Dattatraya Kulkarni and Others v. Shamrao Tukaram Power SMT and Others (1979) 3 SCC 212, P. N. Kaushal & Others v. Union of India & Others (1978) 3 SCC 558, Krishna Kumar Narulaetc. v. State of Jammu & Kashmir & Others AIR 1967 SC 1368, Nashirwar and Others v. State of Madhya Pradesh & Others (1975) 1 SCC 29, State of A. P. & Others v. McDowell & Co and Others (1996) 3 SCC 709 and Khoday Distilleries Ltd. & Others v. State of Karnataka & Others (1995) 1 SCC
574.
22. Legislature, in its wisdom, has given considerable amount of freedom to the decision makers, the Commissioner and the State Government since they are conferred with the power to deal with an article which is inherently injurious to human health.
23. Section 14 of the Act indicates that the Commissioner can exercise his powers to grant licence only with the approval of the State Government because the State has the exclusive priVilege in dealing with liquor. The powers conferred on the Commissioner and the State Government under Section14 as well as Rule, 4 are discretionary in nature, which is discernible from the permissible language used therein.
24. Liquor policy of State is synonymous or always closely associated with the policy of the Statute dealing with liquor or such obnoxious subjects. Monopoly in the trade of liquor is with the State and it is only a priVilege that a licensee has in the matter of manufacturing and vending in liquor, so held, by this Court in State of Maharashtra v. Nagpur Distilleries (2006) 5 SCC 112. Courts are also not expected to express their opinion as to whether at a particular point of time or in a particular situation, any such policy should have been adopted or not. 1998 Policy has life only in that year and if any rights have accrued to any party, that have to be adjudicated then and there."
6. The appellant would also invite kind attention of the Hon'ble Tribunal to the decision of Supreme Court in the case of APSRTC reported in 52 ITR 524 relevant portion of which is reproduced here under:
"15. It may be that the statute under which a notification has been issued constituting the appellant corporation may provide expressly or by necessary implication that the income derived by the corporation from its trading activity would be the income of the 18 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
State. The doctrine of the separate entity or personality of the corporation is always subject to the exceptions which statutes may create, and if there is a statutory provision which clearly indicates that despite the concept of the separate personality of the corporation, the carried on by it belongs to the shareholders who brought the corporation into existence and the income received from the said trade likewise belongs to them, that would be another matter. It would then be possible to hold that as a result of the specific statutory provisions the income received from the trade carried on by the corporation belongs to the shareholders who have constituted the said corporation, and so, we must look to the Act to determine whether the income in the present case can be said to be the income of the State of Andhra Pradesh".
7. The Apex court in the above observations of the said decision has impliedly held that the State could expressly or by implication hold the income from a Corporation to be that of the State. The appellant further submits that the State while carrying out the amendments to the Excise Act etc., in no way has transgressed into the subjects that are meant for Centre in Entry 82 of List 1 of Schedule VII to Constitution of India, but confined only to the powers that are granted to it by the Constitution of India to deal with intoxicants. The appellant therefore submits that the conclusion of the learned CIT(A) that the amendments made by State to Excise Act etc., are repugnant to Central Act is without basis and without appreciating the Constitutional provisions under which the State has carried out the amendments.
8. In case the learned CIT(A) had in her mind about the amendment to hold the income to be that of the State, the appellant submits that the provision holding the income to be that of the State is not understood in its right perspective. Kind attention of the Hon'ble Tribunal is invited to the provisions of amended Act which is reproduced here under;
1. Levy of Trade margin Privilege fee etc: Sec.4-A: The Government shall from time to time specify the Trade margin, Privilege Fee or any other levy by whatever name called, to be collected by the AP Beverages Corporation Ltd, from the holders of licences.
2. Remittance to the Government: Sec.4-B: The Amount realized under section 4-A being the income of the Government, shall be remitted by the A.P.Beverages Corporation Ltd., to the Government in the manner specified by the Government.
3. Privilege fee etc., u/s.23(l), 23-A and 23-B of the AP.Excise Act to be the income of the Government: Sec.4-C NotWithstanding anything contained in this Act, the AP Excise Act, 1968 and the rules made there under or any order issued by the Government or the Commissioner of Prohibition and Excise, all amounts paid by the Corporation from 211993 to the Commissioner of Prohibition and Excise or the Government as priVilege fee or Special PriVilege fee or any other fee or cess, by whatever name called, in consideration of the priVilege conferred on the Corporation, as per the provisions of sections 23(1), 23-A and 23-B of the A.P.Excise Act, 1968 shall be deemed to be and always deemed to have been the income of the Government and due 19 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
payment for the relevant years in terms of Section 4-B.
4. In the AP Excise Act, 1968, section 23-A and Section 23-B shall be omitted.
9. The Hon'ble Tribunal will appreciate that in the first prOVIsion SecAA it is stated that the Government shall from time to time fix the margins. In the second provision 48 it is stated that the "amounts realized under the provisions of SecAA being the income of the State". The appellant therefore submits that what the provision states is that the impost made under the provisions of SecAA are the income of the State, and by no stretch of imagination it could be held that the State has transgressed into legislating subjects that are contained in list I of Schedule VII to Constitution of India. As submitted earlier, Hon'ble Supreme Court in the case of State of UP Vs. Sheopat Rai held that the impost being a consideration for parting with the right to vend intoxicants falls under Entry 8 of List II of Schedule VII of Constitution of India that is in exclusive domain. Not just in this case, but the Supreme Court has consistently taken this view and those judgements are referred to in the decision of Mcdowels of Supreme court, extract of which is reproduced in a later part of these submissions. The appellant therefore submits that the finding of the learned C!T(A) that the provisions are repugnant is erroneous and is without basis and contrary to facts, Judgements of Hon'ble Apex Court and provisions of Constitution of India.
10. The learned CIT(A) while holding the amendments to Act to be repugnant, fell in error in holding that retrospective amendment also is incorrect by misplaced reliance on the judgement of Supreme Court in the case of D.Cawasji & Co reported in 150 ITR
648. Here again, the appellant submits that, the learned CIT(A) has not appreciated the facts on which the said judgement was rendered, and by overlooking other judgements of apex court which held that the State has all the power to enact law retrospectively.
11. In so far as the judgement of Hon'ble Supreme court in the case of Cawsji, upon which much reliance was placed by the learned CIT(A) the facts involved were totally different and the Hon'ble Court was dealing with different subject. In the said case, amendment that was carried out by the State to ratify the collections of Sales Tax was to nullify a judgement of High Court which has held such levy to be invalid. Even in the judgement of HMT that is referred to by the appellant the Apex Court expressed the view that once an issue is considered by High court the same cannot be made good by amendment. Kind attention is invited to State of A.P. vs. HMT (copy of which is placed in paper book at pages 168-175). Whereas in the appellant"s case, those facts does not exist and it is improper and incorrect on part of learned CIT(A) to hold the amendments made by the State to be invalid. Forthe first time the amendment is carried out. The learned CIT(A) has not ever\ tried to find out the reasons for such retrospective amendment before holding it to be invalid.
12. The appellant submits that as per GO Ms.No.614 Dt.6-5-2005, (Copy placed in paper book at page No.223) the State has directed the Director of Distilleries to direct the depot Managers of APBCL to obtain demand drafts in favour of Government of 20 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
A.P.Director of Distilleries and Breweries for the sale proceeds of liquor and deposit with concerned treasury under specified account. Subsequently, the provision in Excise Act 1968 also is amended by inserting Sec.23-A to state that in lieu of conferring the privilege for wholesale trade, entire margin should be remitted to the State. The remittances to the State continued with that provision in accordance with the above referred GO. Also as per this GO, only the Director of Distilleries used to make payments to APBCL for purchases at regular intervals finrom the PO account and also allowing APBCL to operate a 00 account with SBH to the tune of Rs.l00 crores in a month to meet the Salaries and other maintenance expenditure. This GO is in accordance with article 284 and 283 of Constitution.
13. The State having found that since 2005 the payments are being made to the State has decided to shift the provision from Exciise Act 68 to the 1993 Act that conferred the right to carryon wholesale trade in liquor. Therefore, the appellant submits that there is neither repugnancy nor illegality in making a retrospective amendment. This power is in accordance with entry 8 list II of Constitution. The appellant therefore submits that the finding of the learned CIT(A) to this effect is incorrect and contrary to judicial pronouncements and constitutional provisions.
14. The next ground relate to power of the learned CIT(A) to hold that the State has no power to make retrospective law. The appellant submits that the learned CIT being an official of the Government has no power to hold a provision enacted by a State Government to be incorrect or invalid. Only a High Court or Supreme Court are conferred with powers under Article 226 or Article 32 of Constitution of India to go into the validity or otherwise of a provision of Statute. If the revenue has any reservations, it ought to have filed a writ before the High court questioning such amendment.
15. The next ground relate to the observations of the learned CIT(A) th,at the income belong to the appellant. The learned CIT(A) after holding that the amendments are repugnant and are invalid being retrospective went on to reiterate that the income from wholesale trade in liquor belong to the appellant. In this regard the appellant submits that the learned CIT(A) has not considered any of the facts or provisions of law before coming to such conclusion. The attention of the learned CIT(A) was drawn to the relevant provision by which the appellant was conferred the right to do whole sale trade. It was submitted that only by virtue of holding the appellant to be an authority acting on behalf of the State for the purposes of Sec.68-A of Excise Act the appellant carried on the trade. The relevant provisions of the law are reproduced here under:
"Explanation to Provisions of Sec.4 of AP (Regulation of trade in Indian Liquor, Foreign Liquor) Act, 1993:
"Explanation:- For the removal of doubts it is hereby declared that the Andhra Pradesh Beverages Corporation Limited shall, while carrying on the holesale trade and distribution of [Indian Made Foreign Liquor], Foreign Liquor, Wine and 21 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
Beer under this section shall be deemed to be an authority acting on behalf of the Government for the purposes of Section 68-A of the Andhra Pradesh Excise Act, 1968. "
16. The appellant is also reproducing the provisions of See.68 A of Excise Act which is as under:
"68-A: Exemption of the Government from taking out licence or permit for production, manufacture, etc., of any intoxicant:-
Notwithstanding anything in this Act, it shall not be necessary for the Government or any authority or officer acting on their behalf to take out a licence or permit under this Act for the production, manufacture, possession, import, export, ransport, sale or purchase of any intoxicant."
17. The appellant submits that as per the above, it will be very clear that the appellant acting as an authority on behalf of the State has carried on the trade and not on its own. It has not obtained any licence to carryon the trade. Merely because the State has created this Corporation for carrying on whole sale trade in liquor, it could not have carried on the business.
18. Attention is also invited once again to the decision of Supreme CoWt in the case of State of Kerala and Others Vs. Kandath Distilleries cited supra. As held by the Apex court the appellant without the authority that is conferred by the State could not have carried on the trade. As such the income from such trade which is carried on with the licence of the State belongs to the State and can never belong to the appellant which had no license. Also once again the appellant invites attention of the Hon'ble Tribunal to relevant extraction from the decision of Supreme Court in the case of APSRTC wherein their lordships has observed that the State can explicitly or impliedly hold the income from the agent to be that of the State. The A.P.State, earlier in the provisions of Sec.23- A has impliedly, by directing entire margins shall be paid to the State has held the income to be that of the State, and by GOMs.614 has directed to remit entire sale proceeds to the State treasury and collecting the margins. The appellant further submits as per provisions of article 284 of Constitution of India once the funds of the State or Central are directed to be deposited in the Public account of State or Central and such remittances are other than revenues or public moneys raised or received by the State or Centre it belong to the State. The relevant article is reproduced here under:
"284. Custody of suitors deposits and other moneys received by public servants an courts All moneys received by or deposited with
(a) any officer employed in connection with the affairs of the Union or of a State in his capacity as such, other than revenues or public moneys raised or received by the Government of India or the Government of the State, as the case may be, or 22 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
(b) any court within the territory of India to the credit of any cause, matter, account or persons, shall be paid into the public account of India or the public account of the State, as the case may be"
19. As per the GO Ms.No.614 issued by Govt. of Andhra Pradesh the sale proceeds are remitted to the public deposit account and as per the above constitutional provision cited above, the income belongs to State. Its usage is regulated by the said GO in accordance with article 283 of Constitution of India which is reproduced here under:
"283. Custody, etc of Consolidated Funds, Contingency Funds and moneys credited to the public accounts (1) The custody of the Consolidated Fund of India and the Contingency Fund of India, the payment of moneys into such Funds, the withdrawal of moneys therefrom, the custody of public moneys other than those credited to such Funds received by or on behalf of the Government of India, their payment into the public account of India and' the withdrawal of moneys from such account and all other matters connected with or ancillary to matters aforesaid shall be regulated by law made by Parliament, and, until provision in that behalf is so made, shall be regulated by rules made by the President (2) The custody of the Consolidated Fund of a State and the Contingency Fund of a State, the payment of moneys into such Funds, the withdrawal of moneys therefrom, the custody of public moneys other than those credited to such Funds, received by or on behalf of the Government of the State, their payment into the public account of the State and withdrawal of moneys from such account and all other matters connected with or ancillary to matters aforesaid shall be regulated by law made by the Legislature of the State, and, until provision in that behalf is so made, shall be regulated by rules made by the Governor of the State"
20. Therefore the appellant respectfully submits that it never got any right whatsoever on the income from whole sale trade in liquor and therefore it will not be correct either to state it as the income of the appellant or payment to State is appropriation of profits.
21. The appellant further submits that the decision relied upon by the learned CIT(A) in the case of A.P. State Civil suppliers corporation of A.P.High Court to hold that the income of the appellant is distinct from that of the State has no application, since in that case the income is not from a trade which is within exclusive domain of the State and further in those cases the trade is not carried on as agent of the State, nor the funds are credited to the PD alc of the state. The appellant reiterates that its claim never is that it is an instrumentality of the State and hence its income is exempt as in the case of A.P.S.Civil supplies Corporation. The appellant's claim relate only to the income from wholesale trade in intoxicant. In view of these distinctive features those decisions has no application at all, and reliance on such decisions is totally misplaced.
23ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
22. The next ground relate to treating the payments to the state as application of income by the learned CIT(A):
The learned CIT(A) having observed that the income belong to the appellant has held payments to the State is nothing but appropriation of profit. The appellant submits that such a conclusion is totally perverse without appreciating the facts. The provisions of Sec.23-A as it stood then or the amended provisions categorically hold that the trade in intoxicants b,elong to the State, and having being conferred the privilege to carryon such trade by the State, the appellant should remit the margins to the state. Once payments are as per the Statute for conferring the privilege, it amounts diversion by over riding title or business expenditure. In this regard kind attention of the Honourable I.T.A.T., is invited to the decision of this tribunal in the case of M/s.Swarnandhra IJMII Integrated Township Development co, reported in 88 DTR (Hyd)(Trib) 65 wherein it was held that payment of predetermined anticipated profits by the assessee developer to the landowner as a component of land compensation for the land transferred by the latter to the assessee as per the terms of the contractual agreement under which the assessee company came into existence cannot be said to be diversion of profits to the landowner and the same is allowable as business expenditure incurred wholly and exclusively for the purpose of business.
23. In the appellant's case the appellant itself came into existence by virtue of an Act of 1993 which is referred to above. While bringing into existence the appellant company, the statute inserted explanation to the effect that the appellant shall act as an authority on behalf of the State. The State by virtue of GO MS 614 has directed the appellant to remit entire sale proceeds to the State Treasury. The provisions of Sec.23-A as it existed then, categorically states that in lieu of conferring the privilege of whole Sale trade entire margin shall be remitted to the State. All these read together clearly demonstrate that the profits are to be paid to the State and the appellant was created for that purpose only. Therefore the appellant submits that but for conferring such right the appellant could not have carried on the business and if the State direct that it shall pay for conferring such right as privilege fee the entire margin it shall pay. The profits never reached the appellant and it cannot be held as application of income or appropriation of profits. Only if the appellant earned such income on its own then it could have been so. In the appellant's case, it is evident that the appellant has no capacity to earn on its own from the wholesale trade in liquor since it has no licence. It carried on the trade acting as an authority on behalf of the State and therefore the profits belong to the State and whatever payments that are made to the State is either diversion by over riding title or business expenditure. The appellant therefore submits that the finding of the learned CIT(A) that it is nothing but appropriation of profits is erroneous, contrary to facts and legal position on this issue.
24. It was further brought to the notice of the learned CIT(A) that in the proceedings ujs.263 of I.T.Act for the A.Y.2002-03, the then CIT in ,his show cause letter proposed to treat the payments as application of income or appropriation of profits but has not passed any order after having the submissions on the same. A copy of the show cause 24 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
letter Dt.2-2-2006 is placed at paper book page 123 and order ujs.263 Dt.20-3-2006 is placed at page 124 of the paper book. The appellant submits that not passing of an order after issue of show cause letter and receiving submission tantamount to acceptance of such submissions. In this regard kind attention of the Hon'ble Tribunal is invited to the judgement of A.P.High Court in the case of Spectra Shares reported in 354 ITR 35, where in their lordships while dealing with an appeal against order ujs.263 sustained by I.T.A.T., has held so. The relevant portion is as under:
"The contention of the Revenue that there are no reasons given by the Assessing Officer about the nature of activity of the assessee cannot be accepted because a query was raised by him in the course of the assessment proceedings and was replied by the assessee. Obviously, he was satisfied with the explanation of the assessee and therefore did not think that the issue needs to be specifically mentioned. It is settled law that the Assessing Officer in the assessment order is not required to give detailed reasons and once it is clear that there was application of mind by an enquiry, the respondent, merely because he entertains a different opinion in the matter, cannot invoke his powers uls. 263 of the Act. It is therefore not correct to say that there was no proper enquiry by the assessing officer".
25. The appellant therefore submits that the finding of the learned C!T(A) that it is appropriation of profits is contrary to accepted principles of judicial discipline. An authority of equal rank has earlier examined this issue and held it to be not so. Now the C!T(A) is not expected to take a different stand unless there is change in facts or law. In the appellant's case admittedly there is no such change in facts or law.
26. The next ground relate to the finding of the learned CIT(A) which is as under;
"4.10. As per new section 4B, the amount of privilege fee needs to be remitted to Government in the manner specified by the government. However, the manner of computation is not specified ujs.4B. Therefore, the computation still needs to be made ujs.23A (though the section 23A is omitted, in absence of any computation formula) which specifies that the margins after meeting expenditure shall be paid as privilege fees. In this context, the stand of the Department that income . tax is an expense in commercial sense and as per the mandate in AS 22 remains unassailed. There is a primary distinction between the case of the appellant and that of the corporation of other States. In the case of the appellant, it makes its own computations, derives the surplus at the end of the day and pays the same in the name of 'fee~ whereas in other case, the 'fee' is a fixed amount under the rules or a specific amount based on stock quantity determined as per the rules. If section 23 A gets repealed on a notified date, even this mechanism would fail leaving no basis for computation"
27. The appellant submits that the above finding is totally perverse having made without 25 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
proper appreciation of the facts of the case and the provisions of Sec.4B of the amended Act. The appellant is reproducing the provisions of Sec.4B as under:
Remittance to the Government: See. 4-B:The Amount realized under section 4-A being the income of the Government/ shall be remitted by the A.P.Beverages Corporation Ltd./ to the Government in the manner specified by the Government.
Privilege fee etc., uls.23(1), 23-A and 23-8 of the AP.Excise Act to be the income of the Government: See.4-C: Notwithstanding anything contained in this Act/ the AP Excise Act/ 1968 and the rules made there under or any order issued by the Government or the Commissioner of Prohibition and Excise/ all amounts paid by the Corporation from 21-7-1993 to the Commissioner of Prohibition and Excise or the Government as privilege fee or Special Privilege fee or any other fee or cess/ by whatever name called/ in consideration of the privilege conferred on the Corporation/ as per the provisions of sections 23(1)/ 23-A and 23-B of the A.P.Excise Act/ 1968 shall be deemed to be and always deemed to have been the income of the Government and due payment for the relevant years in terms of Section 4-B.
28. The appellant submits that reference to Sec.4-B by the learned C!T(A) is absolutely incorrect. This provision is prospective provision and not retrospective provision to apply to the assessment year in question. The relevant provision in the amended Act is SecAC which was reproduced herein above. As per this provision, all the payments that are made as per the earlier provisions Sec.23(1), 23A and 23-B are deemed to have ben and always deemed to have been income of the State and due payment for the relevant years in terms of Sec.4B. Therefore the question of requirement as per Sec.4B for this year does not arise since by a deeming provision it is held to be payment under terms of SecAB. Even otherwise the learned C!T(A) never tried to find out whether any manner is specified in accordance with Section 4 B, since the Government has issued GO specifying how they should be paid. It is only the head of account. Further Sec.4A categorically states that the margins etc., are fixed by State from time to time and 4 B only specifies that such margins fixed from time to time to be paid in the manner specified to mean the head of account to which it should be paid and does not require any computation as imagined by the learned C!T(A).
29. For another reason the above cited findings of the learned CIT(A) are factually incorrect. The learned CIT(A) observed that the payment of fee in the appellant's case is not fixed and that the appellant does arrive at the amount payable at the end of the day. It is submitted that the State by GO fixes the margins on different items and the same is being paid to the State. Therefore it is factually incorrect to state that the fee is not fixed. Kind attention of the Hon'ble Tribunal is invited to the assessment order wherein the AO himself accepts this fact that the margins are fixed by the State. The relevant portion of the assessment order is as under;
"2.4 Margin over cost price on each brand etc., is fixed by the government of Andhra Pradesh through their G. O. How the rate is fixed is indicated in one of the GOs dated 26 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
11.11.2009 (enclosed as page nos. 14&15). A reading of this shows that above the basic cost price the margin can go up to even 380/0. In essence both the purchase price and sale price are determined by the Government of Andhra Pradesh. The margin is also separately determined by the Government of Andhra Pradesh. "
30. The attention of the learned CIT(A) was drawn to the letter filed before the AO Dt.22-12-2010 (paper book page 26) wherein the procedure adopted was explained and also to the GO.Ms.614 cited supra (Paper book page 223) to substantiate that the appellant has no control over the funds and that entire sales get remitted to the State as per GO and that the appellant gets the expenditure incurred through a OD account which again is funded by the Director Distilleries. The GO cited above demonstrates that the Director of Distilleries arrives at the privilege fee payable to the State to retain the same. Therefore the learned CIT(A) without looking into any 'of these submission which are facts and Government orders has patently erred in holding that there is no mechanism to arrive at the payment.
31. Lastly, the learned CIT(A) committed contempt of Supreme Court in holding that the fee should be fixed though it is brought to the notice of the learned CIT(A) that what is paid towards privilege is not a fee but a consideration as held by Supreme Court in various decisions that are referred to in the decision of Mc Dowels besides the one in the case of Sheopat Rai already referred to supra. The relevant portion of the decision is as under;
Mc Dowels reported in 314 ITR 167 where it has held as under:
"Business expenditure - disallowance u/s 43B-Bottling fees under excise law- Bottling fees for acquiring a right of bottling of IMFL determined under the Excise Act and rules framed thereunder payable by assessee as consideration for grant of approval by the Government is not tax, duty, cess or fee for the purposes of s. 43B-Expression now used in s. 43B(i)(a) is "tax, duty, cess or fee, by whatever name called"-By application of rule of ejusdem generis, the expression 'by whatever name called' must fall within the genus 'taxation' to which expressions 'tax~ 'duty~ 'cess' or 'fee' as a group of its specie belong by way of compulsory exaction in the exercise of State's power of taxation-Where levy and collection is duly authorised by law as distinct from amount chargeable on principle as consideration payable under contracttHigh Court was justified in holding that the amount does not fall within the purview of s. 43B See. 43B after amendment w.e.f. 1st April, 1989 refers to any sum payable by assessee by way of tax, duty or fee by whatever name called under any law for the time being in force. The basic requirement, therefore, is that the amount payable must be by way of tax, duty and cess under any law for the time being in force. The bottling fees for acquiring a right of bottling of IMFL which is determined under the Excise Act and r. 69 of the Central Excise Rules is payable by the assessee as consideration for acquiring the exclusive privilege. It is neither fee nor tax but the consideration for grant of approval by the Government 27 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
as terms of contract in exercise of its rights to enter a contract in respect of the exclusive right to deal in bottling liquor in all its manifestations. It would be pertinent to note that the expression now used in s. 438(i)(a) is "tax, duty, cess or fee, by whatever name called". It denotes that items enumerated constitute species of the same genus and the expression 'by whatever name called' which foNows preceding words 'tax', 'duty', 'cess' or 'fee' has been used ejusdem generis to confine the application of the provisions not on the basis of mere nomenclatures, but notwithstanding name, they must fall within the genus 'taxation' to which expressions 'tax', 'duty', 'cess' or 'fee' as a group of its specie belong viz. compulsory exaction in the exercise of State's power of taxation where levy and collection is duly authorised by law as distinct from amount chargeable on principle as consideration payable under contract.
'tax', 'duty', 'cess' or 'fee' constituting a class denotes to various kinds of imposts by State in its sovereign power of taxation to raise revenue for the State. Within the expression of each specie each expression denotes different kind of impost depending on the purpose for which they are levied. This power can be exercised in any of its manifestation only under any law authorising levy and collection of tax as envisaged under Art. 265 which uses only expression that no 'tax' shall be levied and collected except authorized by law. It in its elementary meaning coveys that to support a tax legislative action is essential, it cannot be levied and collected in the absence of any legislative sanction by exercise of executive power of State under Art. 73 by the Union or Art. 162 by the State. Under Art. 366(28) "taxation" has been defined to include the imposition of any tax or impost whether general or local or special and tax shall be construed accordingly. "Impost" means compulsory levy. The well known and well settled characteristic of 'tax' in its wider sense includes all imposts. It was the duty of Revenue authorities to ascertain whether the deduction which is to be tested on the touchstone of s. 43B(a) is the amount payable by way of tax or duty or fee or cess. The High Court was justified in holding that the amount does not fall within the purview of s. 43B.-Amar Chandra vs. CCE AIR 1972 SC 1863 and Housing Board of Haryana vs. Haryana AIR 1996 SC 434 relied on; State of Bombay vs. F.N. Balsara AIR 1951 SC 318 and Har Shankar vs. Dy. Excise & Taxation Commr. AIR 1975 SC 1121 applied; CIT vs. Udaipur Distillerv Co. Ltd. (2004) 186 CTR (Raj) 1 affirmed.
Bottling fees for acquiring a right of bottling of IMFL determined under the Excise Act and rules framed there under payable by assessee as consideration for grant of approval by the Government is not tax, duty, cess or fee for the purposes of s. 43B."
32. The appellant therefore submits that the conclusion of the learned C!T(A) that 'the privilege fee paid is not allowable in view of AS 22 and not providing for income-tax', has no basis and is not tenable at all. Even as per AS 22 income on which tax is to be proVided is to be worked out in accordance with taxation laws and the payment to State 28 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
is an allowable expenditure and after considering such expenditure, there is no income on which tax is required to be paid. Therefore once again to state that 'the stand of the department that the income tax is an expense in commercial sense as per AS-22 remains unassailed' is without proper appreciation of the facts. This submission is made without prejudice to the stand that AS-22 does not come into operation when the appellant had to remit the amounts to State after retaining expenditure. As submitted earlier, the entire proceeds go into State coffers and as per Article 284 of Constitution of India they become the revenues of the State and as per GO 614 cited above, the appellant Corporation is allowed to draw expenses and also payments to vendors. The question of Application of AS 22 never comes into question.
33. Next three grounds no.8,9 and 10 relate application of the decision of Supreme Court in the case of APSRTC and application of Article 289 of Constitution.
The appellant submits that the learned CIT(A) by referring to the decision of A.P.High Court in the case of A.P.State civil supplies Corporation held that income of the corporation is distinct from that of the State and if Section 4C newly inserted is interpreted to the contrary to mean that the income of the Corporation is that of the State, that would imply that legislation is passed by a State on a subject on which Centre is only competent to legislate (that is on Income Tax matters/exempting an appellant from Income-tax). The appellant submits that in its written submissions it has referred to the decision of the Supreme Court in the case of A.P.S.R.T.C. reported in 52 ITR 524 and drew particular attention to the following paragraph from that order the same is reproduced here for ready reference:
15. It may be that the statute under which a notification has been issued constituting the appellant corporation may provide expressly or by necessary implication that the income derived by the corporation from its trading activity would be the income of the State. The doctrine of the separate entity or personality of the corporation is always subject to the exceptions which statutes may create, and if there is a statutory provision which clearly indicates that despite the concept of the separate personality of the corporation, the carried on by it belongs to the shareholders who brought the corporation into existence and the income received from the said trade likewise belong~ to them, that would be another matter. It would then be possible to hold that as a result of the specific statutory provisions the income received from the trade carried on by the corporation belongs to the shareholders who have constituted the said corporation, and so, we must look to the Act to determine whether the income in the present case can be said to be the income of the State of Andhra Pradesh 1/.
34. The appellant submits that the learned CIT(A) has not considered this submission at all while considering the decision of the AP.High Court in the case of A.P.State Civil Supplies Corporation. The appellant while making submissions on other grounds has already demonstrated as to how the income belong to the State which is supported by a decision of Supreme court in the case of Sheopat Rai referred supra. As submitted 29 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
earlier entire sale proceeds are remitted to the State P.o.a/c and as per Article 284 of Constitution of India and the remittances to PO a/c become the revenues of the State. The Apex Court in the above judgement has observed that even where the agent is a separate Corporation, the income still could be held as income of the State if explicitly or impliedly the State notifies such income to be its income. In the appellant's case by GO 614 the State has directed the Sale proceeds to be deposited in PO alc thereby holding it to be income of the State. Therefore it is submitted that the income from wholesale trade in liquors is not taxable under Article 289 of the Constitution of India.
35. The Hon'ble Tribunal recently while dealing with the case of A.P.Housing Board has referred to this decision and has held in that case that it cannot be exempted under Article 289 of the Constitution of India. Whereas in the appellant's case as could be seen from the facts the revenues are directly credited to PO account and as per Article 284 the amounts remitted to PO alc belong to State and they can be used only in accordance with Article 283 of the Constitution. This feature is not there in the case of A.P.H.B. Therefore the appellant submits that the order in the case of A.P.Housing Board has no application.
36. The next Ground no.11 relates to finding that payment to State is application of income. Submissions on this are already made. Without prejudice to the same, it is to submit that the Hon'ble Tribunal in the earlier round of proceedings for the above assessment year, has directed the learned C!T(A) to consider only the amendments thereby impliedly rejected all the other reasons for holding the payments to State as not allowable. Application of income also is one of the reasons in the earlier order. Therefore the appellant submit that the learned C!T(A) is not correct to give such finding once again instead of confining herself to the amendments that are directed to be considered by the I.T.A.T.
37. The next ground 12 relate to validity of amendments. Submissions are already made in respect of ground no.2. The appellant pray that the same may be considered for this ground also.
38. The next ground 13 also relate to retrospective amendment and submissions are already made on this issue in the earlier ground nO.2.
39. The next ground 14 relate to finding on allowability ujs.37. The appellant submit that submissions are made on this ground also while making submissions in the earlier grounds.
40. The next ground 15 relate application of AS-22 - this issue is covered in submissions made on other grounds and prays the honourable I.T.A.T., to consider them.
41. The next ground relate to not considering the ground against disallowance of provisions for leave encashment of Rs.30,90,849 in spite of making specific 30 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
submissions. The appellant submitted that this issue is covered by Delhi High Court decision. This sum represent outstanding leave Salary payable of Rs.l0,71,901 and Pension contribution payable of Rs.20,18,948. The appellant therefore pray this Honourable I.T.A.T., to direct the AO to allow this deduction. These are amounts deducted from Salary of those employees who come on deputation. These amounts have to be transferred to the respective departments which are government departments. The Corporation for the period the employee worked with them, deducts from Salary and has to make payments to such departments. It is shown as provision in the balance sheet. Therefore they do not fall under the provisions of Sec.43 B, since they are not provision for its own employees.
In continuation to the aforesaid written submissions the assessee filed further submissions contending as under:-
1. During the course of proceedings before the honourable I.T.A.T., the Bench, while hearing the submissions on repugnancy, has enquired how about section 4 of I.T.Act.
The appellant intended to make submissions on such issue at the end, however could not make the same on that day. Therefore the appellant submits as under;
The appellant submits that the provisions of Sec. 4 of the I.T.Act is only a charging section and it reads as under:
4. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and [subject to the provisions (including provisions for the levy of additional income-tax) of, this Act] in respect of the total income of the previous year of every person:
Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other tha:dhe previous year, income-tax shall be charged accordingly."
(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act. "
3. The appellant respectfully submit that charging section comes into play only after determining the income in accordance with income-tax provisions. Before determining the income, it is also required to determine whether the income belong to assessee or not and later in accordance with the provisions contained in the Act, the income should be computed.
4. If the view is such that the enactment amending the provisions to 1993 Act by the State, has infringed the provisions of Sec.4, the honourable I.T.A.T., may please have a 31 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
look at the enactment made by the State of A.P., which is being referred to as repugnant. Already submissions are made that there is nothing in the Act that is repugnant. At the cost of repetition, it is submitted that what the provisions state is that the margins paid as Privilege fee, Special privilege etc., by whatever name called is the income of the State and it always remained as income of the State. It is further submitted that if a party charges something and receives it, it is accepted that such a receipt in the hands of that party will be its income. The appellant submits that there cannot be any doubt on this proposition. Therefore the question that should be addressed before considering the issue as to whether State is right in holding so or not, is whether the· State has right to charge and receive such amounts. The appellant by drawing attention of the Hon'ble Tribunal to the decision of Supreme Court in the case of Sheopat Rai dealing with a legislation of UP Govt., demonstrated that the Apex Court held that such charge is nothing but a consideration falling under Entry 8 of List II of Constitution which is within exclusive domain of the State. Therefore the action of the State in making such legislation is not questionable in any manner.~
5. In a recent decision, Hon'ble Mumbai Tribunal in the case of City & Industrial Corporation of Maharashtra Ltd. Vs. ACIT (90 DTR 406) while dealing with a similar issue held as follows:
"Income- Chargeability- Immunity under Article 289 vis-iI-vis State Government undertaking- Assessee is a company, wholly owned by the Government of Maharashtra engaged in construction of residential and commercial structures as well as development of infrastructures and towns - All financial dealings have to be routed through authorizations by the Government- Activity so performed by the assessee is nothing but an act of State without any profit or commercial motive attached with it in terms of ss.113 and 113A of MR& TP Act read with Art.289(1) and 289(3) of Constitution of India- Assessee Company is an agent and that it was performing the functions of the Government- Assessee's income was not therefore chargeable to tax. "
The appellant submit that the facts of the appellant's case is similClr in view of acting as an authority on behalf of State as per provisions of Sec.68 A of Excise Act and the income derived by such an activity has to naturally belong to the State to enjoy immunity under article 289 of Constitution.
6. The appellant has already drawn attention of the Hon'ble Tribunal to the GO NO.614 as per which remittances are made to PD A/c. By drawing further attention of the Honourable I.T.A.T., to the provisions of Article 284 and 283 of Constitution it was submitted that as per these articles the amounts remitted into PD alc belong to the State and only State has power to deal with such funds. This demonstrates that the State is right in declarin,9 that the amounts paid in accordance with the then existing provisions of Sec.23A read with GO Ms.614 belong to it. This does not interfere with the provisions of SecA of I.T.Act. The appellant further submits that the above referred enactment of the State has only declared the receipt in its hands as its income. Whether such 32 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
payments by the appellant are allowable or not while computing income is to be determined by the Assessing officer before invoking provisions of Sec.4 of the I.T.Act. The state legislation nowhere meddled with the taxing provisions of the I.T.Act to prevent the AO from considering the payments under income-tax provisions. The appellant therefore submits that there is no repugnancy even after considering the provisions of section 4 of the IT Act.
7. The appellant with regard to application of income, besides what is submitted already, submits further that, to consider a payment to be application of income, besides deciding whether the income is earned by the appellant on its own, should also examine whether such payment is of that nature that it is not required to be paid otherwise. Only in such circumstances, where certain amount is paid without any requirement then it could be held as application of income. The appellant also invite attention of the Honourable I.T.A.T., to the decision of Delhi High court in the case of D.T.T.D.C.Ltd., reported in 350 ITR 1 wherein the Delhi Government vested the right to sale in retail the country liquor and some other intoxicant and directed the Company to construct fly overs and pedestrian facilities, after retaining 5 paise per bottle and to use remaining sum on constructions. In that case the Assessing Officer has not allowed the amount spent by the Company as deduction on the ground that it is Capital expenditure. The High Court ultimately held them to be revenue expenditure. Important observations of the Honourable High Court is that mere realization of amount during trading is not determinative as to whether it the amount received is income. This demonstrates that the view of the AO confirmed by the learned CITCA) that amounts received by the appellant is its income before remitting them to the State is incorrect. This submission is without prejudice to the fact that the appellant never received such sums and were paid directly to the State P.D.A/c.
8. The appellant already drew attention to the then existing provisions of Sec.23A of excise Act and also the amended provision SecAC brought in retrospectively. The wordings are so clear that in lieu of conferring right of whole sale trade, the appellant is to pay all the margins in the form of privilege fee etc., to the State. Therefore in the light of such wordings the Assessing officer is required to give a finding as to why it is not a payment required to be made and then can hold it to be application of income. One such reason the department sought to state is that the payment is not a fixed one and hence it is application of income. The appellant already made submissions as to how it is fixed one. Without prejudice to the submission that the payment is undoubtedly a fixed one, the appellant submits that fixed payment is required only where it is a fee, tax etc., and not to a consideration charged by the State. The department to hold that it should be fixed relied on the decision of Supreme Court in the case of Govind Saran and Ganga Saran. This decision has no application since the payment is only a consideration and not fee or tax, as held by Constitutional bench of Supreme Court that are referred to in the case of Sheopat Rai and also in the decision of Mc Dowels which are already referred to in the submissions already made. The appellant therefore submits that the stand of the learned CIT(A) that it is application of income is incorrect.
33ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
9. The appellant hereunder summarizes the submissions that are made as under:
1. The appellant never had any right to carryon business in intoxicants but has carried on such business by virtue of 1993 Act explanation, which conferred the right to act as an authority on behalf of the State for the purposes of Sec.68 A of Excise Act 68 and as such the income from such business belong to the State.
2. The appellant never received any amount and that entire sale proceeds are remitted to State PD alc held by Director Distilleries as per GO Ms.No.614. As per article 284 of Constitution, the proceeds belong to State. As per article 283 of Constitution from such proceeds, the Director rylakes payment for purchases, makes payment towards privilege fee, "etc., provides for reimbursement of expenses drawn from an aD alc opene'd for that purposes. As such the question of making provision for income-tax or working out at the end of the day amount payable to State never arose and such observations of the learned CIT(A) is contrary to facts.
3. The enactment that is brought out to 1993 Act or even the provisions of Sec.23 A of Excise Act '68 are enacted as per Entry 8 of List II of Constitution which is held to be within exclusive domain of the State to the exclusion of Central government and the public and therefore is neither repugnant to provisions of Income-tax Act or the provisions of Sec.4C is a valid provision though it is retrospective in view of right conferred by Constitution of India as already referred to during submissions and supported by the decision in the case of HMT Ltd.
4. The levies made either under the then existing provisions of Sec.23A or the amended provisions of Sec. 4C read with SecAB are not fee or tax but are consideration for conferring the right to carryon the business as held by the Supreme Court in the case of Sheopat Rai, and hence they rightfully belong to the State and are allowing business expenditure.
5. The observations of Supreme Court in the case of APSRTC at para 15 whose extract is already submitted applies squarely to the appellant's case since the levy collected u/s.23A is held to be under entry 8 of list II of Constitution and which is income of the State and if such levy is excluded there is no income.
6. AS 22 has no application and even assuming that it applies since there will be no income once income is computed under Income-tax Act as required under AS 22 there is no necessity to make provision for Income tax Act.
7. The decisions in the case of A.P.State Civil Supplies Corporation, APSRTC or the A.P.Housing Board has no application since in those cases the claim is not with regard to payments made to State and further in those cases the collections never went into Government account but has gone into the accounts of the respective assessee's and lastly the trade or business carried on by them is not within exclusive right of the State 34 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
as in the appellant's case. In those cases the decision is not that payment to State is not allowable as expenditure as in the case of the appellant.
8. The amounts paid to State is as per Statute and constitutional right of the State and without such payment the appellant could not have carried on the business and hence it is allowable as business expenditure. "
16. The learned DR supporting the conclusion drawn by the revenue authorities submitted that the CIT (A) had dealt with all the contentions of the assessee and also taken into consideration the amendments made to the Excise Act. It was submitted that after examining the amended provisions of section 4C, the CIT (A) had made a clear distinction between the nature of payment in the hands of the State Government and in nature of payment in the hands of the assessee. Though section 4C of the Excise Act states that payment made by the Corporation to the state is income of the state but that automatically cannot mean that income of Corporation is income of State. Further, the manner/mode of computation of privilege fee etc., clearly show that it is in the nature of computing net income or profit which is to be passed on to the State. Therefore, the privilege fee in case of the assessee is balancing charge on the P & L account, the intention of the state is to appropriate 100% of profit, but such profit can be arrived only after meeting the expenditure which includes income-tax. In this context, he referred to AS-22 issued by the ICAI. It was submitted that a state legislation which confers income-tax exemption or excludes income of a corporation from chargeability to income-tax runs contrary to the charging section 4 of the Income-tax Act and would therefore be contrary to Article 254 of the Constitution of India, because then the state is in danger of contradicting or enacting a legislation which is in conflict with the powers of the Union as 35 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
income-tax is in the union list. Rebutting the assessee's contention that it is an agent of the state and also diversion of income before it reaches the assessee as per its GO No.614, the learned DR submitted that the power to legislate on a subject in seventh schedule list I of Constitution is different from claiming that income derived from an activity carried out in respect of a subject in this schedule is exempt from income-tax. Thus, while the amendments and statement of objects and reasons of the excise act specify what comes to the government of A.P, it can never be interpreted to mean that these receipts flowing to the government of A.P by whatever name called are exempt from income-tax. While a person can define what its income is but has no authority to imply that this income is also exempt from income-tax. Exclusion from the purview of the income-tax is governed either by constitution itself or by the Income-tax Act itself. The learned DR submitted that the income of the state and the income of Assessee Corporation is always distinct which can also be seen from the fact that the assessee corporation actually pays sales tax to the state. Therefore, the assessee is merely acting as a seller of the IMFL. The leaned DR submitted that the fact that the assessee deposits all its sale receipts into PD account by itself would not make such income, income of State. The corporation as well as the Government show this amount in their account as deposit. A deposit by definition is something which is refundable. Thus, when a corporation credits the amount into government PD account and shows them as deposit and the government also classifies it as a public deposit made with it, a distinction is drawn as regards the ownership of such amounts. Hence, the mere fact that amount is deposited in PD account or that the Director of Breweries determines the privilege fee etc., do not 36 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
materially change the position that it is the income of the corporation derived from sales made by it. In this context, the ld. DR referred to the decision of Income-tax Appellate Tribunal, Hyderabad Bench in case of AP Housing Board in ITA No. ..... dated 31-5-2013.
17. The learned DR submitted that so far as the assessee's claim that the income from sale of IMFL is not taxable as per Article 289 of the Constitution, the same is not tenable because the conditions set out in Article 289, clauses 1,2, and 3 have not been satisfied. For this contention, the learned DR again referred to the decision of Income-tax Appellate Tribunal, Hyderabad Bench in case of APHB (supra). The learned DR submitted that the new provisions brought to the Excise Act nowhere prescribe how and on what basis privilege fee is to be determined. That is why one has to go back to section 23A of the Excise Act to infer that this is computed as a balancing figure. It was submitted that unlike corporations in other states which has specified the levy of such fee as a fixed amount under the rules or a specific amount based on the stock quantity and reflected in terms of rupee per litre, there is no specific name or basis for levy of such fee. The learned DR submitted that computation itself shows that the privilege fee etc., is calculated as a remainder i.e. revenue less expenses. The learned DR submitted that considering all these aspects, the CIT (A) was justified in negating the assessee's claim that it was acting on behalf of State hence the income from sale of liquor is the income of the State. It was submitted that the CIT (A) therefore correctly applied the ratio decided by the Hon'ble AP High Court in case of AP State Civil Supplies Corporation and by the Hon'ble Supreme Court in case of 37 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
APSRTC. So far as the contention that the CIT has dropped the proceedings initiated under 263 of the Act on identical issue, the learned DR submitted that the principles of res judicata will not apply to income-tax proceedings. The learned DR submitted that the decisions on which the assessee relied upon are factually distinguishable hence, would not apply to the facts of the instant case.
18. We have heard the parties and taken note of written submissions, additional written submissions, counters, rejoinder filed by both the sides before us. We have also painstakingly gone through all the materials placed on record including the orders passed by the Revenue authorities. We have also carefully applied our mind to the decisions relied upon by the parties. From contentions raised by the learned AR, it is to be noted that the assessee's claim that the privilege fee paid to the government of A.P. under the provisions of Excise Act is not taxable is broadly based on the following grounds;-
i) As per the amended provisions of Excise Act the payment of margins in the form of privilege fee etc., is the income of the state, hence immune from taxation as per Article 289 of the Constitution of India.
ii) State has the exclusive right to carry on trade in wholesale liquor. When the State has parted its exclusive right to the corporation, an authority acting on behalf of the State, it has every right to collect the entire profits as a consideration for conferring such privilege.
38ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
iii) The State is competent to enact the provisions of sec. 4A, 4B,4C of the Excise Act under Entry 8 List II of Seventh Schedule to the Constitution of India.
iv) The Income-tax Department is allowing such payment to state as deduction in case of all corporations of other states, hence no differential treatment should be made in case of assessee. Therefore, the payment made to the state should be allowed as expenditure.
v) As per GOM 614, the Director, Distilleries shall pay for the expenses of the corporation from out of the sale proceeds deposited in PD a/c. Therefore, as per Article 283 and 284 of the Constitution of India the deposit in PD a/c belongs to the state and it is not in the nature of Revenue. The amount remitted to PD A/c is the entire sale proceeds and not the surplus.
vi) The CIT in a proceeding initiated u/s 263 for the A.Y 2001-02 accepting assessee's contention that payments made to the state will not amount to application of income had dropped the proceedings.
vii) State is competent to make retrospective amendment.
19. Before deciding the issues raised by the assessee it is necessary to deal with certain basic facts which have a crucial bearing. The assessee was incorporated under the Companies Act, 1956, on 23-7-1986. The objects of the assessee are set out in Article III(A) & (B) of the Memorandum of Association. The main objects of the assessee as per Article III(A) are as under:-
39ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
1. To manufacture, purchase, import, export alcohol and all other beverages suitable for human consumption.
2. To undertake bottling/packing of alcohol and other beverages in a suitable manner.
3. To carry on business as sellers, dealers and distributors of alcohol and other beverages either in bulk or in retail.
4. To undertake the manufacture of all machinery and equipment required to attain any of the above objects.
5. To act as stockists, commission agents, manufacturers, representatives or agents selling and purchasing agents, distributors, brokers, trustees, attorneys in connection with attainment of the main objects of the Corporation.
20. On a reading of main objects and ancillary objects would make it clear that the assessee is a purely business venture for carrying on the activity of manufacture, purchase import, export of alcohol and other beverages as sellers, dealers and distributors either in bulk or in retail. Articles of association of the assessee corporation mentions it as a private company within the meaning of sec. 3(1)(iii) of the Companies Act and further says that the regulations contained in table A of the first schedule to the companies Act, 1956 in so far as they are applicable to a private company shall apply to assessee to the extent they are not expressly or impliedly excluded by the Articles of association. The article of association further provides that the Board of directors shall manage the affairs of the company. From the memorandum and Article of Association therefore it becomes clear that the assessee is like any other corporation whose shares are held by the Govt. From the profit and loss account filed along with the return, a copy of which is at page 5 of the paper book, it appears that 40 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
thought the assessee has treated the sale turnover of IMFL amounting to Rs.8346.60 crores as its income but at the same time it has claimed expenditure there from the purchase price of IMFL, salaries & wages and manufacturing and administrative expenses, contribution to Chief Minister's Relief fund, privilege fee to government, sales-tax, interest and depreciation. The Assessing Officer has accepted all other expenditures claimed except the privilege fee of Rs.1415.28 crores. The reasoning of the Assessing Officer in disallowing the aforesaid expenditure which has also been confirmed by the CIT (A) is, it actually represents the profit of the assessee, and hence at best it can be an application of income on the part of the assessee. The Assessing Officer referring to the provisions of companies Act, AS-22 and sec.23A of the Excise Act has said that the assessee has to first compute its profit in terms with the Companies Act and AS-22 after taking into account expenditure and income tax payable and thereafter the special privilege fee etc. to be paid to the Commissioner of Prohibition and Excise. The CIT (A) after considering the amended provisions of sections 4A, 4B and 4C of the AP (Regulation of trade in IMFL, foreign Liquor) Act, 1993 held that sec. 4A has not specified any amount. The amount paid is also not collected from the sellers of IMFL which would be evident from the invoices. The amounts were paid out of the funds of the assessee realised from its sales and as per its own calculation. Similarly, though section 4B provides for remitting to the Government in the manner specified by the Government. However, it has not provided the manner of computation. Therefore, computation still needs to be made u/s 23A of the State Excise Act which specifies that the margins after meeting expenditure shall be paid as privilege fees. The CIT (A) therefore held that the department's stand that income tax is an expense as per AS-22 and in commercial sense remains unassailed. The CIT (A) further held that section 4C of the State Excise Act only reaffirms the fact that it is only the profit that is sought to be appropriated.
41ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
21. In the aforesaid context, the only issue which arises for consideration is whether special privilege paid to the government can be allowed as expenditure. It is contention of the assessee that state Government has the exclusive privilege of sale, distribution in IMFL. The State has appointed the assessee corporation to act as an authority on behalf of the State by vesting such exclusive privilege. Therefore, the assessee having acted as an authority on behalf of the State or as an agent of the state as per sec. 68A of the State Excise Act, the income forms ale of IMFL is the income of the State, hence, cannot be subjected to income-tax in view of restrictions imposed under Article 289(1) of the Constitution of India. It is also the claim of the assessee that privilege fee is nothing but a consideration paid to the Government for conferring a right. In this context, let us examine some of the relevant provisions under the State Excise Law. Sec. 23 of Excise Act provides that instead of any excise duty or fees leviable the government will prescribe privilege fee for grant of exclusive privilege in respect of liquor or any other intoxicant. Section 23A of the Excise Act provided that in consideration of the privilege conferred on the assessee corporation in terms of Andhra Pradesh Regulation of Trade in Indian Made Foreign Liquor, foreign liquor) Act, 1993, the entire margins, special privilege fee, any other receipts and any other amount realised by the corporation from whatever source after deducting expenses incurred by the Corporation, shall be paid as privilege fee or special privilege to the government. Section 23B of the Act provided that all amounts paid by the corporation from 21-7-1993 to the Commissioner of Prohibition and Excise as privilege fee etc. in consideration of the privilege conferred shall be deemed to be the due payment for the relevant year u/s 23 and 23A. Sec. 23 and 23A brought to the Excise Act to the statute in the year 2006 with retrospective effect from 21-7-1993 however were omitted by virtue of an amendment made in the year 2012. In the said amending Act of 2012, three new sections i.e., sec. 4A, 4B and 4C were brought to the statute with retrospective effect from 42 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
21-7-1993. Section 4A mentions that the Government shall specify the trade margin, privilege fee etc., to be collected by the assessee corporation sec. 4B speaks of the amount being realised u/s 4A being the income of the Government to be remitted to the government in the manner specified by the Government. Section 4C provides that amounts paid by the Corporation from 21-7-1993 to the Commissioner Prohibition or Government as privilege fee, special privilege fee etc., in consideration of the privilege conferred on the corporation as per the provision of sections 23(1), 23A and 23B of Excise Act shall be deemed to be the income of the Government. Though the assessee has claimed that the Government fixes the sale price but the fact is privilege fee,special privilege fee etc., have not been specified by the Government in terms of sec. 23A of the Excise Act or as per amended sec. 4A of the Act. This is very much evident from the invoices raised by the assessee which did not specify the details of price charged. In other words, the invoice did not specify the privilege fee, special privilege fee etc.., separately though both sections 23A and 4A provide for specifying such fee. Section 23A of the Act which was the provision providing for payment of margin, privilege fee etc., and which was governing the field at the relevant time clearly mentions of remitting such amount to the Govt. after deducting the expenses incurred by the corporation. As per AS-22, a copy of which is at page 60 of the paper book, income tax is to be considered as an expense incurred in earning income. The assessee being a company and having recognised that the provisions of Companies Act, 1956 as applicable to private companies will be applicable to it, the P & L account balance sheet etc., has to be drawn up as per the provisions of the Companies Act, 1956 as well as guidelines of the ICAI in accounting standards. Therefore, it would be logical to conclude that the assessee should have remitted its margin, privilege fee etc., after deducting expenses which also included income tax. Furthermore, when no mechanism has been provided for computing the privilege fee, special privilege fee etc., and admittedly the assessee having 43 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
not collected privilege fee, special privilege fee etc., separately in the bills, the quantification of such fee is also not possible. In these circumstances, it cannot be claimed as expenditure.
22. The assessee has also claimed that as per sec. 4C of the Excise Act the entire sale proceeds from IMFL is the income of the Government, hence immune from taxation under Article 289(1) of the constitution of India. Such contention of the assessee is not tenable in view of the clear provisions of State Excise Act. As already stated, section 23 of the Excise Act empowers the government to collect privilege fee etc. Section 23A read with 4A of the Act provided that trade margin, privilege fee etc to be collected by the corporation is to be remitted to the Government. As per sec. 4C amounts paid to the Government as privilege fee, special privilege fee etc., to be deemed to have been the income of the government. From these facts it is clear that the entire sale proceeds from IMFL cannot be the income of the government. The computation of privilege fee etc., as provided in the working at page 53 and 54-59 is not clear how and on what basis such fee have been worked out. The GOM 1168 dated 11-11-2009 does not provide any mechanism for quantifying privilege fee etc. No material has been placed on record to show that the government has prescribed mode and manner of computing privilege fee etc. Furthermore, as has been rightly pointed out by the Assessing Officer the assessee has treated the amount representing payment to Chief Minister's relief fund as its income and thereafter has claimed deduction u/s 80G of the Act. This itself falsifies the assessee's claim that the entire sale proceed from IMFL is the income of the government.
23. Assessee has contended that wholesale distribution and sale of IMFL undertook by the assessee corporation as an authority on behalf the State in terms of Explanation to section 4 of the Andhra Pradesh Excise Act, 1968 read with section 68A of the Act, hence the income from sale of IMFL is the 44 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
income of the State, therefore not taxable as per Article 289(1) of the Act. However, as can be seen from the profit and loss account for the impugned assessment year, the entire sale turnover from IMFL has been treated by the assessee as its income. Similarly, on examination of the sales-tax/VAT return , it is to be noted that the assessee is not only showing the entire turnover from sale of IMFL as its turnover but it is also collecting sales- tax/VAT on sales effected to the retailers and paying to the government account. Assessment orders have also been passed by the sales-tax authorities assessing the turnover relating to the sale of IMFL as the assessee's turnover. In such view of the matter, it cannot be said that the income from sale of IMFL is the income of the State, hence not taxable in view of Article 289(1) of the Constitution of India. In fact, in the rejoinder to the submissions made by the learned departmental representative, the assessee admits that it is not an instrumentality of State and it is distinct from State. If that is the case, then it cannot claim immunity u/s 289(1) of Constitution of India by treating the income of whole sale trade in IMFL as the income of State. It is also a contention of the assessee that the entire sale proceeds goes to the PD account of the State Government before it reaches the assessee, therefore, it cannot be held to be an application of income. In this context, the learned AR has placed reliance on the GOMS No. 614 dated 6-5-2005. A perusal of the aforesaid GOMS, a copy of which is placed at page 153 of the paper book, would show that as per the GOMS, the PD account is to be opened in the name of Director of Distilleries and Breweries of Hyderabad for depositing the sale proceeds of liquor by APBCL. It further states that the Director of Distilleries and Breweries shall issue instructions to all the depot managers of APBCL to obtain demand drafts in favour of "Government of Andhra Pradesh- Director of Distilleries and Breweries " for the sale proceeds of liquor and deposit with concerned treasury under the head of account provided in the aforesaid GOMS. It provides that the Director of Distilleries and Breweries shall apportion the 45 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
receipts among the different heads like sales-tax privilege fee and special privilege fee (sports) to be paid to the government exchequer on sale of liquor by adjustment from the above PD account. It further states that the Director shall also make payment to the MD, AP Beverages Corporation Limited on regular intervals for the supplies made by the Distilleries and Breweries through cheques by operating the above PD account.
24. The GOMS also authorises the MD of AP Beverages Corporation Limited to operate over-draft account with SBH/SBI subject to a maximum limit of Rs.100 crores in a month for the purpose of incurring expenditure by the APBCL. From a reading of the GOMS, it becomes clear that till the deposit of the amount in the PD account, there is no quantification of privilege fee, special privilege fee etc. Only after the amount is deposited in the PD account, the Director of Distilleries apportions the receipts under different heads for payment to the government exchequer. These facts coupled with the fact that the sale invoice also does not quantify the privilege fee, special privilege fee etc., makes it clear that the quantification of privilege fee and special privilege fee etc., as per section 23A read with the newly inserted section 4A of the Excise Act has not been made. In these circumstances, the assessee's claim that privilege fee and special privilege fee are considerations for conferring a privilege, hence should be allowed as expenditure is not tenable. On the contrary, the aforesaid GOMS gives an impression that the instructions to deposit the sale proceeds in the PD account are only an internal arrangement. The fact that the Corporation is allowed to operate an over-draft account with a limit of Rs.100 crore per month proves that the deposit of sale proceeds of liquor made in the PD account is again ploughed back to the assessee in the form of overdraft account. That besides the contention of the assessee that sale proceeds never reaches the assessee is also not acceptable as the aforesaid GOMS instructs the depot managers of the assessee corporation to obtain 46 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
demand drafts in favour of government of A.P. This clearly proves that only after the sale proceeds reach the assessee corporation, demand drafts are to be made in favour of Government of A.P for depositing in the P D Account. In this view of the matter, there cannot be any diversion of income by overriding title. For the same reason, the payment of surplus/margin /privilege fee etc., by whatever name called is only parting of the profit of the assessee corporation to the State. In the circumstances, it cannot be anything else but application of income and therefore not allowable as an expenditure.
25. The learned AR has advanced elaborate arguments with regard to the scope and purport of Article 283 and 284 of the Constitution of India to impress upon the fact that though PD account is also a part of consolidated fund of State but article 284 of the Constitution makes a distinction between the deposits of funds into PD account not to be in nature of revenues and Article 283 of the Constitution governs utilisation of such funds into PD account. The assessee has relied upon the decision of Hon'ble Supreme Court in case of State of Uttar Pradesh and Others vs. Sheopat Rai & Others [ AIR 1994 (SC) 813] to argue that State is competent to impose a levy for conferring an exclusive privilege under Entry-8 list-II of Seven Schedule to the Constitution. There is no dispute to the ratio laid down by the Hon'ble Supreme Court in the aforesaid decision. The issue before us is whether there is any consideration to be paid and what is the mode and manner of quantifying such consideration. Since nothing has been prescribed either u/s 23A of the Excise Act ( now repealed) and newly inserted section 4A of Excise Act, the claim of so-called privilege fee and special privilege fee paid to the government cannot be accepted. So far as the decision of Income-tax Appellate Tribunal, Mumbai Bench in the case of City and Industrial Development Corporation of Maharashtra Ltd. Vs. ACIT (90 DTR 47 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
406), it will not apply to the facts of the present case as the Tribunal after taking into consideration the fact, while deciding a writ application the Hon'ble High Court of Bombay has held that the assessee while performing the duties as an authority was acting as an agent of the State. Therefore, the income is the income of the State. However, no such principal-agent relationship is discernible in the present appeal before us. The learned AR had also cited the decision of Hon'ble Supreme Court in case of State of Kerala and Others vs. Kandath Distilleries judgment dated 22-2-2013 to submit that State under the Constitution of India has the exclusive privilege over trade in liquor. Nobody disputes such right of the State and we respectfully agree with the proposition laid down by the Hon'ble Supreme Court but the issue before us is not whether the state has exclusive privilege or not. The issue before us is taxability of income at the hands of the assessee corporation which is distinct and separate from the state.
26. The learned AR has relied upon the judgment of Hon'ble Supreme Court in case of Government of Andhra Pradesh vs. Hindustan Machine Tools Ltd. (1975 CTR 164) to submit that state government has power to legislate retrospectively. Though there is no dispute to such proposition of law but the facts involved in that case are clearly distinguishable and inapplicable to the facts of the present case, as we have already held, by the time the new provisions of section 4C were inserted to the Act in the year 2012, income has already accrued to the assessee. That besides the said provision also does not say that income of the assessee corporation is the income of the state. The assessee has also relied upon the decision of Hon'ble Delhi High Court in case of DTTDC Ltd. (350 ITR 1) and decision of Income-tax Appellate Tribunal, Chennai Bench in case of Tamilnadu State Marketing Corporation vs. ACIT in ITA 962/Mds/2010 dated 18-9-2012. Though we have gone through the decisions carefully but we do not feel it necessary to 48 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
deal with them exhaustively in this order as we found them to be factually distinguishable. It is a fact that section 23A and 23B of the Excise Act which were governing the field during the relevant period never said that the privilege fee and special privilege etc., to be remitted to the government is the income of the government. Section 4C introduced to the Excise Act by way of an amendment in the year 2012 provides that the privilege fee and special privilege fee etc., paid to the government account since 1993 should be deemed to be income of the State. However, by the time this amended provision came to the statute, income has already accrued to the assessee corporation. Therefore, chargeability to tax u/s 4 of the Act of such income which has already accrued cannot be taken away by the retrospective amendment made by way of section 4C of Excise Act. In this context, it is to be observed that article 289 of the constitution of India is divided into three parts. Clause (1) of Article 289 says that the property and income of State shall be exempt from union taxation. Article 289(2) however provides that nothing in clause(1) shall prevent the union from imposing and authorising the imposition of any tax to such extent, if any, as parliament may by law provide in respect of a trade or business of any kind carried on by, or on behalf of the government or State, or any operation connected therewith, or any property used or occupied for the purpose of such trade or business, or any income accruing or arising in connection therewith. Article 289(3) provides that nothing in clause(2) shall apply to any trade or business or to any class of trade or business, which parliament may by law to be incidental to the ordinary functions of government. Thus, a plain reading of the aforesaid clauses of Article 289 makes it clear that they are mutually exclusive and speaks of three different situations. In the present case, admittedly, no tax has been imposed either on the property or income of the State. Article 289(3) would also not apply to the facts of the present case as there is no such declaration by the parliament and therefore the only 49 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
provision left is Article 289(2) which is applicable to the present case. Though it may be a fact that the assessee corporation is carrying out the wholesale distribution of IMFL as an authority of government or on behalf of government but, that cannot be a reason for claiming immunity from taxation under the provisions of I T ACT in view of Article 289(2) of the Constitution. The contentions raised by the learned AR in the course of hearing as well as in the written submissions in the present appeal have been considered and exhaustively dealt with by the Income-tax Appellate Tribunal, Hyderabad bench in case of AP Housing Board vs. Addl. CIT (ITA Nos. 717, 1216 to 1218/Hyd/2012 & Others) dated 31-5-2013. The Tribunal after hearing almost similar arguments put forward by the assessee held as under:-
"33. We have considered the elaborate submissions made by both the parties orally at the time of hearing as well as through their respective written submissions. We have also perused materials placed on record as well as in the paperbooks. We have carefully applied our mind to the catena of decisions cited before us by both the parties. Before dwelling upon the merits of the contention of the parties we consider it necessary to narrate certain facts.
34.The assessee, APHB was formed under the AP Housing Board Act, 1956 of the state legislature. The main object of formation of the APHB as set out in the preamble of the APHB Act, 1956 is to take such measures, to make such schemes, and to carry out such works as are necessary for the purpose of dealing with and satisfying the need of housing accommodation. The activity of the assessee is to construct housing projects on land provided by the state Government or acquired by it and sale it to people belonging to different income groups. The assessee recognises income generated from the activity of sale of houses and also maintains regular books of account wherein such transactions are recorded. The assessee's accounts are also subject to statutory audit under the provisions of the IT Act. It is also a fact that for the AY 2004- 50 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
05, 2005-06 and 2006-07 the assessee had filed return of income declaring certain income and also claiming deduction u/s 80-IB of the Act. Assessments for the aforesaid assessment years were completed by rejecting claim of deduction u/s 80IB of the Act and also treating the income as business income. In fact it is evident from the assessment order passed for the assessment year 2005-06 the assessee itself in course of assessment proceeding had admitted the profit from sale of land as its business income. The assessee challenged the assessment before the First Appellate Authority and having failed there, approached the Income-tax Appellate Tribunal, Hyderabad Bench.
35. In course of hearing before the Income-tax Appellate Tribunal, the assessee raised certain additional grounds claiming its income to be not taxable in view of the amendment brought retrospectively to the APHB Act by introduction of sub-section (7) of section 58. The additional grounds having been raised for the first time before the Tribunal, it remanded the matters back to the CIT(A) for consideration of additional grounds as well as the other grounds. In the meanwhile, assessment for the AY 2007-08 and 2008-09 were also completed and the assessee's appeal against the assessment orders were pending before the CIT(A). It will be pertinent to mention here that for the AY 2007-08 and 2008-09 also the assessee had filed its return of income declaring income under the head 'income from house property' and 'income from other sources' and for the assessment year 2007-08 claimed deduction u/s 80-IB of the IT Act. After the retrospective amendment effected in the year 2010 to the APHB Act by introduction of sub-section (7) of section 58 of the APHB Act, the assessee claimed that the income earned by it is the income of the State.
36. From the aforesaid narration of fact, it is very much clear that, but, for the amendment to the APHB Act made by the state legislature in the year 2010 the assessee all along had been voluntarily filing its return of income by recognizing its income. It is also a fact that the assessee all along was claiming deduction u/s 80-IB of the Act. Only after the amendment to section 58 of the APHB Act, was made the assessee made a claim that its income is not taxable under the IT Act, by claiming 51 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
immunity under Article 289(1) of the Constitution of India. The main thrust of the argument of the learned AR of the assessee for claiming immunity from taxation under the IT Act, 1961 are broadly the following reasons:
1. The APHB is a creature of statute, clothed with statutory powers and functions under supervision, control and direction of the state Government. It is an instrumentality of the state for carrying out Government functions and as such is an extended arm of the Government and not a separate independent entity which can be subjected to tax.
2. The state Government exercises pervasive control over the Board under the terms of the statute, hence, it cannot be regarded as an independent and autonomous body.
3. The Board is empowered with statutory power to acquire land, evict any person from the premises, following the procedure laid down in the Act, and recover rent or damages from such person. Exercise of such statutory power is indicative of the fact that the Board is discharging sovereign function which is inconsistent with profit making venture in the nature of trade or business.
4. The assessee is used as an instrument by the state for resource mobilization for which land is allotted for exploiting commercially for this purpose.
5. The employees of the APHB are governed by the same terms and conditions as are applicable to the state government officers, which establishes that it is an extended arm of the Government.
6. The Accountant General of AP has categorized APHB for civil audit and not for commercial audit, which shows that the APHB is not considered as a commercial organization.
7. The activities of the Board are not undertaken with any profit motive.
It only discharges statutory functions to carry out housing schemes of the Government of providing of housing infrastructure in an orderly manner is a governmental function and APHB is carrying out such schemes on behalf 52 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
of the Government. Further as provided under the statutory provisions the revenue generated by the Board is either spent for housing infrastructure or it vests in the consolidated fund of the state.
8. APHB has been created under a statute to work as an executing agency of the state Government. All the ingredients relationship between principal and agent are present in the statutory arrangement between the state Government and APHB. The funds and land are provided by the Government and any surplus over the expenditure is incurred for the purposes of the Act vests in the consolidated fund of the state. Though APHB enters into contract in its own name but in effect it is doing so on behalf of the state. In law of agency what is to be seen is whether the profit or loss arising in the course of the dealing of the agent accrues to the principal and not to the agent.
37. The learned counsel for the assessee taking us through various provisions of the APHB Act,1956 had submitted that the State Government exercises pervasive control over the Board. To emphasize such contention he referred to the transfer order of one Shri G. Sai Prasad and appointment of law officer. He submitted that the Board cannot take any decision on its own but every action of the Board has to be with the approval of the Government. In this context the learned counsel referred to the minutes of meeting held in the chamber of the chief minister. He further submitted that Rajiv Gruha Kalpa scheme is a scheme of the State Government and the Board is only implementing it as an agency of the Government. He further submitted that for mobilizing resources by way of sale of land the Board is utilized as a tool. It was submitted that the mode and manner of maintaining the accounts is also as per the direction of the Government. For mortgaging also permission is required. In sum and substance it is the contention of the learned counsel that the state Government exercises pervasive control and the Board as such is not an independent autonomous body but is an extended arm of the state Government. It is the submission of the learned counsel that the income of the Board therefore, in effect, is the income of the State Government, hence, for that reason immune from taxation under Article 289(1) of the Constitution of India.
53ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
38. All the aforesaid contentions raised by the learned counsel has been dealt with and answered by the Hon'ble Supreme Court in case of APSRTC V/s. ITO, 52 ITR 524. The Hon'ble Supreme Court while affirming the decision of the Hon'ble AP High Court examined the provisions of APSRTC Act vis-à-vis Article 289 of the Constitution of India and held that the income of the APSRTC cannot be held to be the income of the State Government as APSRTC has its own identity and distinct from the Government. The Hon'ble Supreme Court anlaysing the three clauses of Article 289 of Constitution of India, held in the following manner:
"Reading the three clauses together, one consideration emerges beyond all doubt and that is that the property as well as the income in respect of which exemption is claimed under clause (1) must be the property and income of the State, and so, the same question faces us again: is the income derived by the appellant from its transport activities the income of the State ? If a trade or business is carried on by the State departmentally and income is derived from it, there would no difficulty in holding that the said income is the income of the State. If a trade or business is carried on by a State through its agents appointed exclusively for that purpose, and the agents carry it on entirely on behalf of the State and not on their own account, there would be no difficulty in holding that the income made from such trade or business is the income of the State. But difficulties arise when we are dealing with trade or business carried on by a corporation established by a State by using a notification under the relevant provisions of the Act. The corporation, though statutory, has a personality of its own and this personality is distinct from that of the State or other shareholders. It cannot be said that a shareholder owns the property of the corporation or carries on the business with which the corporation is concerned. The doctrine that a corporation has a separate legal entity of its own is so firmly rooted in our notions derived from common law that it is hardly necessary to deal with it elaborately; and so, prima facie, the income derived by the appellant from its trading activity cannot be claimed by the State which is one of the shareholders of the corporation."
39. The Hon'ble Supreme Court after analyzing the different clauses of Article 289(1) in the context of the claim made by the assessee held as under:
"The main point which we are examining at this stage: is the income derived by the appellant from its trading activity, income of the State 54 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
under article 289(1) ? In our opinion, the answer to this question must bein the negative. Far from making any provision which would make the income of the corporation the income of the State, all the relevant provisions emphatically bring out the separate personality of the corporation and proceed on the basis that the trading activity is run by the corporation and the profit and loss that would be made as a result of the trading activity would be the profit and loss of the corporation. There is no provision in the Act which has attempted to lift the veil from the face of the corporation and thereby enable the shareholders to claim that despite the from which the organization has taken, it is the shareholders who run the trade and who can claim the income coming from it as their own. Section 28 which provides for the payment of interest clearly brings out the dualty between the corporation on the one hand and the State and Central Governments on the other. Take, for instance, the case of supersession of the corporation authorized by section 38. Section 38(2)(c) emphatically brings out the fact that the property really vests in the corporation, because it provides that during the period of supersession, it shall vest in the State Government. Similarly, section 39(2) which deals with the distribution of assets in case of liquidation, brings out the same feature. It has been urged before us by the Advocate-General that section 30 contemplates that after provisions is made as required by section 28 and 29 and funds are utilized as prescribed by section 30, the balance has to be given to the State Government for the purpose of road development, and that, it is suggested, indicates that income belongs to the State Government. This argument is clearly not well-founded. When we are deciding the question as to whether the income derived by the corporation is the income of the State, the provision made by section 30 for making over to the State Government the balance that may remain as indicated therein, is of no assistance. The income is undoubtedly the income of the corporation. All that section 30 requires is that a part of that income may be entrusted to the State Government for a specific purpose of road development. It is not suggested or shown that when such income is made over to the State, it becomes a part of the general revenue of the State. It is income which is impressed with an obligation and which can be 55 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
utilized by the State Government only for the specific purpose for which it is entrusted to it. Therefore, we are satisfied that the income derived by the appellant from its trading activity cannot be said to be the income of the State under article 289(1), and if that is so, the facts that the trading activity carried on by the appellant may be covered by article 289(2) does not really assist the appellant's case. Even if a trading activity falls under clause (2) of article 289, it can sustain a claim for exemption from Union taxation only if it is shown that the income derived from the said trading activity is the income of the State. That is how ultimately, the crux of the problem is to determine whether the income in question is the income of the State, and on this vital test, the appellant fails."
40. Even though the learned AR has tried to impress upon us that the Assessee Board is nothing but an extended arm of the Government or part of the Government, but, in our view, it is not so. Sub-section (2) of Section 3 of the APHB Act, 1956 reads as under:
"The Board shall be a body corporate having perpetual succession and a common seal and may sue and be sued in its corporate name and shall be competent to acquire and hold property both moveable and immoveable and to contract and do all things necessary for the purpose of this Act."
41. A reading of the aforesaid provision makes it clear that the assessee is a body corporate having perpetual succession and a common seal and it can sue and be sued in its corporate name. The said provision also makes it clear that the Board shall be competent to acquire and hold property both movable and immovable and to contract and do all things necessary for the purposes of the Act. Sub-section (3) of section 3 of the Act provides that the Board shall be deemed to be a local authority for the purposes of Land Acquisition Act, 1894. The Constitution of the Board shall be as per section 4 of the APHB Act. As per the aforesaid provision, the Board shall be constituted of members, who are not only Government officials but also representative of the financial institution providing financial assistance to the Board. Sections 5 to 12 deal with the terms of office and conditions of service of the members, filing up vacancies, appointment of committees, meeting of the board etc. Section 13 of the Act empowers the Board to enter into and perform all such contracts as it may 56 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
consider necessary or expedient for carrying out any of the purposes of the Act. Section 14 of the Act provides that every contract shall be made on behalf of the Board by the Vice Chairman and Housing Commission. However, amendment was made by Act No. 12 of 2010 by introducing new clauses which require sanction of the Government if the contract exceeds certain monetary limit fixed by the Government. Section 21 of the Act provides that the Board subject to the control of the Government may incur expenditure and undertake works for the framing and execution of such housing schemes as it may consider necessary or as may be entrusted by the Government. Section 58 provides that the Board shall have its own fund and may accept grants, subventions, donations, gifts or loans from the central or state government or a local authority or any individual or body, whether incorporated or not for all or any of the purposes of the Act. It also provided that government shall every year make a grant to the Board of a sum equivalent to the administrative expenses of the Board. Section 58(4) provides that all moneys received by the Board, all proceeds of land or any other kind of property sold by the Board, all rents, betterment charges and all interest, profits and other moneys accruing to the Board shall constitute the fund of the Board. An amendment was made to section 58 by Act No. 12 of 2010 by introducing sub-section (7) with retrospective effect from 01/04/2002. The newly introduced sub-section (7) provides that the surplus net revenue after meeting the expenditure of the Board shall vest in consolidated fund of the State of Andhra Pradesh. Section 59 of the Act as it stood earlier provided that all property, the Board fund and all other assets vesting in the Board shall be held and applied by it, subject to the provisions and for the purposes of the Act. However, the earlier section 59 was substituted by a new section 59 by Act No. 12 of 2010 with retrospective effect from 01/04/2002. The amended section 59 reads as under:
"59. Application of the fund: subject to the provisions contained in sub-section (7) of section 58 all property, the Board fund and all other assets vesting in the Board shall be held and applied by it, subject to the provisions and for the purposes of this Act."
Section 81 of the Act empowers the Government to dissolve the Board.
57ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
42. On going through the aforesaid provisions it becomes clear that the Board has an independent identity distinct from the State Government. The Board is also constituted for the purpose of carrying out the work as envisaged under the preamble of the Act. The Board certainly cannot be equated with the Government or a department of the Government as it does not perform any of the duties of the Government or a Government department. It is quite obvious that the Board is a statutory body performing statutory functions distinct from the state Government. It may be a fact that the state Government exercises some amount of control over the functioning of the Board similar to control exercised over all other government corporation and public sector undertakings but that does not take away the independent identity or character of the Board. Therefore, it cannot be said that the income of the assessee Board is the income of the state Government. In case of Vidarbha Housing Board V/s. ITO (supra), the Hon'ble Bombay High Court after interpreting the provisions of the MP Housing Board Act, 1950, which are akin to the provisions in APHB Act, vis-à-vis the assessee's claim of immunity under Article 289(1) of the Constitution of India held as under:
"13. In our view, though it is true that the State has undoubtedly an obligation to promote the welfare of its citizens and providing housing accommodation would be one of the welfare activities of the State, the question is whether by constituting the petitioner board under the Madhya Pradesh Housing Board Act, 1950, a separate legal entity has been established undertaking the various activities on its own or whether the entity established is either a department of the State Government or an agent of the State Government acting on behalf of the State Government, for, it is obvious that if the activity undertaken is being performed by the petitioner board directly as the department of the State Government or as an agent acting on behalf of the State Government, it would be clear that the property and income of the board would be the property and income of the State Government, but if that be not the case and if the board under relevant provisions of the Act is a separate legal entity discharging functions enjoyed upon it on its own and not as an agent or department of the State Government, then clearly the immunity claimed by the petitioner board under article 289(1) of the Constitution would not be available to it. In our view, with the possible exception of the provision contained in section 32A, none of the other features pointed out by Mr. Thakar shows at all that the board is a department of the State Government or is its agent and even the provisions of section 32A dones not indicate that. Under that 58 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
section all moneys recoverable by the board under the Act or under any agreement are declared to be recoverable as arrears of land revenue and Mr. Thakar urged that this provision showed that the board will have to be regarded as recoveries of the State Government, otherwise these would not have been made recoverable as arrears of land revenue. In our view, it is not possible to accept this submission of Mr. Thakar, for, all that section 32A provides for is merely indicate a mode a recovery and simply because a particular mode of recovery which is generally available to the State Government for making its recoveries has been made available to the board for making its recoveries, it cannot mean that the said recoveries becomes recoveries of the State Government or that the recoveries made by adopting that particular mode become recoveries made by the board for and on behalf of the State Government. Similarly, the provision under which the board has been deemed to be a local authority for the purposes of the Land Acquisition Act could not be suggestive of an inference which would favour or support the petitioner's contention. In fact, the provision contained in section 3(3) is a deeming provision which implies that but for the said provision the board would be not a local authority, and what is more, it has been declared local authority for the purposes of certain enactment, namely, the Land Acquisition Act, which only facilitates acquisition of properties for the board. The features that the board as a corporate body has no power to raise share capital or that its activities are not of trading or commercial nature or that the element of profit-making is absent may have some relevance on the point whether its income will attract exemption under section 4(3)(i) of the 1922 Act, but from these features no inference could be drawn that the board is a mere department of the State Government or its agent. It is true that under the Act the board while discharging its functions does so under the general supervision and control of the State Government but that by itself cannot lead to the necessary inference that the board is a department or agent of the State Government. As against this, there are several provisions in the Act which support Mr. Manohar's contention for the 1st respondent.
14. In the first place, as we have stated in the earlier part of the judgment, the very constitution of the board under section 3 of the Act clearly shows that the board on its incorporation shall be a body corporate having perpetual succession and common seal. This provision clearly shows that prima facie the board is statutory entity distinct from the State Government. Even the constitution of the board which has been provided for by section 4 clearly shows that some members of the board could be nominated by the Speaker of the Legislative Assembly and by the State Government. The provision contained in section 12 of the Act would be a clear pointer to the board being a separate entity distinct from the State Government. Under that section the board shall have its own fund and such fund is to get 59 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
augmented by acceptance of grants, subventions, donations or gifts as well as loans from the Central or the State Governments and obviously the board would be paying interest on such loans. Now, if the board were the department of the Government or an agent undertaking various activities for and on behalf of the Government, no provision would have been made enabling the board to borrow loans from the State Government or to pay interest thereon to the State Government, for, it is inconceivable that a party would by interest to itself. This provision, in our view, is a clear pointer to the fact that the Board is a distinct entity apart from the State Government and not department or an agent of the State Government. On the other hand, this provision clearly suggests that the board is a separate entity, possesses its own property, assets or funds and undertakes the various activities on its own account. The other provision which, in our view, is of a clinching character is the one to be found in section 40(2) of the Act. That provision indicates as to what should happen to the property and assets of the board upon its dissolution being made by the State Government. Under sub-clause (a) of sub-section (2) of section 40 it is provided that with effect from the date specified in the notification under sub-section (1), all properties, funds and dues which are vested in or realizable by the board shall vest in and be realizable by the State Government. If the board was acting as department of the State Government or was merely as agent undertaking the activities for and on behalf of the State Government, it was utterly unnecessary to make the provision of the type indicated above. The very fact that provision has been made in section 40(2)(a) that upon the dissolution of the board all properties funds and dues recoverable by the board shall vest in the Government clearly shows that the board is a distinct entity and is not an agent or a department of the State Government. Similarly, section 40(2)(b) is further indication in the same direction. It provides that all liabilities enforceable against the board shall be enforceable against the State Government but only to the extent of the properties, funds and dues vested in and realised by the State Government. In other words, upon the dissolution of the board if the board is found to have created liability in excess of its assets or properties and funds which shall vest in the State Government, then the State Government is not responsible for such excess liabilities incurred by the board. If the board were merely acting as a department of the State Government or as an agent of the State Government, then the State Government would have been liable for all the liabilities created by the board. These provisions, in our view, run counter to the contention urged by Mr. Thakar before us that the petitioner-board, when it under took the activities enjoined upon it by the Act, did so either as a department of the State Government or as an agent of the State Government acting on behalf of the State Government. On the other hand, these provisions clearly show that the petitioner-board is a separate statutory body distinct from the State Government and it has 60 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
been undertaking the activities enjoined on it not as an agent of the State Government but on its own. If that the position which really emerges from examination of the several provisions of the Act, it seems to us very clear that the income and property of the board could not be regarded as income and property of the State Government, with the result that the immunity claimed by the petitioner-board under article 289(1) of the Constitution is clearly not available to the petitioner-board. In our view, therefore, on an examination of the provisions of the Act, the contention raised by Mr. Thakar must fail."
43. The Hon'ble Bombay High Court while coming to such conclusion also followed the ratio laid down by the Hon'ble Supreme Court in case of APSRTC V/s. ITO (supra) and held as under:
15. In this context it would not be out of place to refer to the judgment of the Supreme Court in the case of Andhra Pradesh State Road Transport Corporation v.
Income-tax Officer. In that case a similar question based on the provisions of the article 289(1) of the Constitution was raised and immunity from Union taxation thereunder was claimed by the Andhra Pradesh State Road Transport Corporation, and on an examination of the relevant provisions of the Road Transport Corporation Act, 1950, under which the Andhra Pradesh State Road Transport Corporation was constituted the court came to the conclusion that the trading or business activity that was being carried on by the Andhra Pradesh State Road Transport Corporation was not carried on by that corporation either as department of the State Government or as an agent on behalf of the State Government, but the corporation indulged in concerned trade or business activity on its own and it was held that the immunity claimed by that corporation under article 289(1) of the Constitution was not available to it. In that case there were provisions of that Act which showed that the bulk of the capital necessary for the establishment of the corporation had been contributed by the State Government, a small portion by the Central Government and a few shares were held by some individuals; the provisions of the Act also indicated that the activity of the corporation was controlled by the State and in particular there was a provision to be found in section 30 of the Act for making over surplus receipts to the State Government after disbursements indicated in sections 28 and 29 had been made and, notwithstanding these features, which emerged from the provisions of the Road Transport Corporations Act, 1950, the Supreme Court took the view that the other features emerging from the examination of the other provisions of the Act showed that the Andhra Pradesh State Road Transport Corporation was a distinct statutory corporation and the property and income thereof were not the property and the income of the State Government and as such the immunity from Union taxation under article 289(1) of the Constitution could not be claimed by that corporation. It is true that some distinguishing features would be noticed if the provisions of the Madhya Pradesh Housing Board Act, 1950, are exclaimed in the context of the provisions which obtained in the Road Transport Corporations Act, 1950, but, in our 61 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
view, the distinguishing features which were pointed out by Mr. Thakar could not be regarded as having any bearing on the question which is required to be considered in this case by us; for example, it was pointed out by Mr. Thakar that whereas under
the Road Transport Corporations Act, 1950, there was provision for raising a share capital which could be subscribed by private individuals, there was not such provision for raising any share capital for the petitioner-housing board, under the Madhya Pradesh Housing Board Act, 1950; it was also pointed out that there was a glaring difference between the nature of activity undertaken by the Andhra Pradesh State Road Transport Corporation and the nature of activity undertaken by the petitioner- board, as, for instance, the activity undertaken by the former entity was in the nature of trading activity, while the activity undertaken by the petitioner-board could not be regarded as any trading activity in any sense of the term; further, it was pointed out that since profit motive was absent in the instant case before us, there was no question of making any provision for making over surplus receipts to the State Government which was feature which appeared clear under section 30 of the Road Transport Corporations Act, 1950. In the first place, in spite of the aforesaid peculiar features which obtained under the Road Transport Corporations Act, 1950, the Supreme Court took the view that the A. P. State Road Transport Corporation was distinct entity. Secondly, as stated earlier, the distinguishing features mentioned by Mr. Thakar may be relevant on the point of attracting the exemption under section 4(3)(i) and not on the issue which has been raised. The principal question involved both in that decision as well as in the case before us has been whether the income and the property of the board could be regarded as the income and property of the State Government and on that question the provisions of the Madhya Pradesh Housing Board Act, 1950, especially provisions of sections 3, 4, 12 and 14, clinchingly indicate that the petitioner-board cannot be regarded as department or an agent of the State Government and will have to be regarded as separate legal entity distinct from the State Government, and, therefore, the income and property of the board could not be regarded as the income and the property of the State Government. In other words, the relevant provisions concerning a particular entity established under a particular enactment would have to be considered for deciding the question and, in our view, as stated earlier, the provisions of the Madhya Pradesh Housing Board Act, 1950, clearly indicate that the board, its property and income cannot be regarded as property and income of the State Government. In this view of the matter, we feel that the principle enunciated in the Supreme Court's decision in the case of Andhra Pradesh State Road Transport Corporation, would be applicable to the instant case before us and on an analysis of the provisions of the concerned Act before us, we have come to the conclusion that the property and income of the board is not the property and income of the State Government. Mr. Thakar's contention, therefore, must fail."
44. Facts being identical, the ratio laid down as above clearly applies to the assessee. The assessee's contention that the income of the Board cannot be 62 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
subjected to tax under the income-tax Act, in view of the provisions contained under Article 289(1) of Constitution of India is not acceptable. For the same reason, the assessee's contention that it acted as an agent of the state Government is also tenable. No material has been placed on record that a relationship of agency exists between the state Government and the APHB. On the contrary, the provisions of the APHB Act as well as the other materials on record clearly establishes the fact that the assessee APHB undertakes the housing activity as a commercial venture not as an agent of the state but independently. Therefore, the income derived from sale of housing project would certainly be the income of the assessee Board and not of the state Government. Furthermore, in case of a principal and agent relationship, the agent is entitled for certain commission for the services rendered by it. In the present case, there is no such consideration for which the APHB acts as an agent of the state Government for carrying out the housing schemes of the state Government. Only because sub-section (7) to section 58 was brought into the APHB Act by way of an amendment in 2010 giving retrospective effect from 2002, which provided for vesting of the surplus fund in consolidated fund of the state Government it cannot be said that the income earned by the assessee is actually the income of the state Government. In fact a similar provision u/s 30 of the APSRTC Act, provided for vesting of the surplus fund with the State Govt. In spite of such provision, the Hon'ble Supreme Court held that APSRTC is a distinct statutory corporation and the property and income of APSRTC is not the income of the State.
45. The chargeability of the income to tax is as per the charging section contained u/s 4 of the IT Act, 1961. The retrospective amendment made to the APHB Act by Act 12 of 2010 cannot dilute the effect of the provisions contained under the income-tax Act, which is an Act of the Parliament hence has overriding effect over an Act of the State Legislature. It is a fact on record that the plea taken by the assessee that Board's income is the income of the state Government was not there until introduction of sub-section (7) to section 58 of the APHB Act in 2010. That is the reason the assessee had never taken this stand all these years. In fact the assessee had all along filed returns declaring income and claiming deduction u/s 80-IB of the Act. Deduction u/s 80-IB 63 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
can only be claimed by an assessee who is an industrial undertaking having income from profits and gains from business specified therein. Therefore, assessee's own conduct goes to show that the income from housing projects were treated as business by the assessee. The assessee has not revised this stand by filing any revised return. Only after the amendment was made to the APHB Act in the year 2010, the assessee came forward with a claim that its income is the income of the state Government therefore immune from income-tax Act in view of the Article 289(1) of the Constitution of India. As has been held by the Hon'ble Supreme Court in case of APSRTC V/s. ITO (supra) which was subsequently approved by the Constitution Bench decision of the Hon'ble Supreme Court in case of New Delhi Municipal Council V/s. State of Punjab [1997] 7 SCC 339 and followed by the Hon'ble Bombay High Court in case of Vidarbha Housing Board V/s. ITO (supra), immunity under Article 289 of the Constitution is subject to fulfillment of the conditions laid down in sub-clauses (1), (2) & (3) of Article 289 which are interrelated. As per Article 289, only income or property of the state cannot be taxed under any other law.
46. As can be seen from the facts on record the assessee is having its distinct and separate identity from the state Government, hence, it cannot claim immunity under Article 289 of the Constitution of India. That besides both the AO as well as the CIT(A) have observed that the assessee Board is paying taxes and duties to the State Government wherever it is due. This finding has not been controverted by the assessee. That being, the case the assessee is also required to discharge its liability under the Income Tax Act. Even section 58(7) cannot be construed in a manner to mean that the income of the Board is the income of the State. On the contrary, what sub-section (7) of section 58 says that after meeting all expenditures, the surplus revenue shall vest with the consolidated fund of the State Government, but, that does not make the income of the Board the income of the State Government. The learned AR has relied upon a number of decisions of the Apex Court in his submissions. However, in none of the decisions, the ratio laid down is in the context of chargeability of income under the Income-tax Act 64 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
vis-à-vis Article 289(1) of the Constitution of India. Therefore, though there is no dispute with regard to the ratio laid down in those decisions, however, they are not applicable to the facts of the case of the assessee. It will be pertinent to mention here that the learned AR placed strong reliance upon the judgment of Hon'ble Supreme Court in case of Housing Board of Haryana Vs. Haryana Housing Board Employees Union and Others [1996] 1 SCC 95. In this context, the learned AR drawing a parallel between the provisions of Haryana Housing Board Act, 1971 and APHB Act, 1956 submitted that the Hon'ble Supreme Court on considering the provisions of Haryana Housing Board Act has held that the control of the Government is so pervasive that the Board does not have even a semblance of independence. It was submitted that in assessee's case also due to the control of the State Government the assessee does not have any independent existence. The aforesaid decision of the Hon'ble Apex Court is not applicable to the assessee firstly because the observation made by the Hon'ble Supreme Court was in the context of whether Haryana Housing Board is a local authority and secondly the Hon'ble Supreme Court was not considering the issue whether income of the Board is the income of the State Government. On the other hand, the decision of the Hon'ble Supreme Court in case of APSRTC Vs. ITO (supra) and of the Hon'ble Bombay High Court in case of Vidarbha Housing Board Vs. ITO (supra) are directly on the issue. In aforesaid view of the matter, we hold that assessee's income cannot be held to be the income of the state and as such cannot be exempt from taxation under Article 289 of the Constitution of India. As a corollary the income earned is the income of the assessee board and as such is assessable at its hands only.
47. Diversion of Income by Overriding Title The assessee in his written submissions has also taken the plea that there being diversion of income by overriding title the income cannot be taxed at the hands of the assessee. In this regard, the assessee has submitted as under:
65ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
"In the written submission of the original grounds, as also in the written submissions in the additional grounds, the appellant had argued that the income of APHB is diverted to the government of Andhra Pradesh by overriding title and is never a part of its taxable income. The CIT(A) has referred to section 58(7) of the Andhra Pradesh Housing Board Act, which mandates that surplus net revenue after meeting the expenditure of APHB shall vest in the consolidated fund of the Andhra Pradesh, and that such surplus net revenue shall be transferred to the State Government on quarterly basis, as the State Government from time to time may instruct or advise APHB. The CIT(A) has held that State Act cannot override the Central enactment in Income Tax Act. Therefore, the above provisions should be interpreted that the surplus revenue after meeting all expenditure including income tax can alone be transferred to the Government of Andhra Pradesh. While dealing with this issue, the CIT(A) has completely overlooked the following rulings cited by the appellant in the rejoinder and written submission on the original grounds. In CIT vs. Sitaldas'Iirathdas (1961) 41 ITR 367 (SC) and MotiLal ChhadamiLal Jain v. CfT [1991J 190 ITR 1 (SC) , the Supreme Court has held that where the obligation is not self-imposed or gratuitous, and it flows out of an antecedent and independent title, it will constitute diversion of income by overriding title. In CfT vs. Nizam Sugar Factory Ltd. (2002) 253 fTR 68 (AP), under Molasses Control Order, 1972, one third of the sale price of molasses was required to be set apart from construction of storage tanks. The amount was claimed by the assessee as not taxable having been diverted by overriding title under the authority of the law. The High Court found that the assessee had no control over the fund, and the same was diverted from the source and did not reach it. Therefore, it was not taxable. Similar view was taken in the following cases:
• SomaiyaOrgeno-Chemicals Ltd. vs. CIT (1995)
216 ITR 291
• CIT vs. New Horizon Sugar Mills (P) Ltd.
(2003) 128 Taxman 300 (Mad) : (2000) 244
ITR 738 (Mad) Commissioner of' Income-
tax vs.
PandavapuraSahakaraSakkareKharkane Ltd,
(1992) 198 ITR 690 (Kar.)
In CIT vs. New Horizon Sugar Mills P. Ltd., (2004) 269 ITR 397 (SC) and CIT vs. Ambur Co-op. Sugar Mills Ltd., (2004) 269 ITR 398 (SC), the Supreme Court has dismissed civil appeals by the 66 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
Revenue on this issue. It should be noted that in all these cases, there was no plea the amount was taxable on the ground that Income Tax Act will prevail over the Molasses Control Order. Income tax law applies to income recognised by the above principle considered by the court. The CIT(A) should not have ignored the importance of these rulings on the plea taken by the appellant on the issue of diversion of income by overriding title."
48. The learned Departmental Representative has submitted that there is no diversion of income by overriding title as the income has already accrued to the assessee board and after meeting its expenditure whatever surplus revenue remains is transferred to consolidated fund of the State Government of AP. Therefore, it is only an application of income after its accrual to the assessee.
49. We have considered the submissions of both the parties on this issue. From the facts on record, it is quite obvious that the income accrues to the assessee. Section 58(4) of APHB Act is very clear on this aspect, which reads as under:
"All moneys received by or on behalf of the Board by virtue of this Act, all proceeds of land or any other kind of property sold by the Board, all rents, betterment charges and all interest, profits and other moneys accruing to the Board shall constitute the fund of the Board."
50. It may be a fact that by the operation of section 58(7) or by way of Government directive the surplus income or some fund has been diverted to the consolidated fund of the state Government or any other Government corporation, but, that by no means would amount to diversion of income by overriding title. Section 58(7) of the APHB Act, which was brought to the APHB Act in 2010 with retrospective effect from 01/04/2002 reads as under:
"(7) Now withstanding anything contained in subsections (1), (4) and (5) of this section, the surplus net revenue after meeting the expenditure of the Board shall vest in Consolidated fund of the State of Andhra Pradesh. Such surplus revenue shall be transferred 67 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
to the State Government of Andhra Pradesh into such account on quarterly basis, as the State Government from time to time instruct or advice the Board in this behalf. As amended by Act No. 12 of 2010 and provisions shall be deemed to have come into force with effect from 1 s t April, 2002."
51. A reading of the aforesaid provision would make it clear that only after accrual of income to the assessee and after meeting all its expenditure the surplus net revenue shall vest in consolidated fund of the Government. It further provides that such surplus revenue shall be transferred to the state Government of AP on quarterly basis as per the instruction or advice of the Government. Therefore, so far as the accrual of income is concerned, there is no dispute to the fact that the income has already accrued to the assessee. Only after the accrual of income to the assessee the surplus has been diverted to the Government account. The Hon'ble Supreme Court in case of CIT V/s. Sri Sitaldas Tirathdas, 41 ITR 367 (SC) held as follows:
"There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable."
52. The same principle has also been reiterated in other decisions relied upon by the assessee. Therefore, considering the principles laid down in the aforesaid decision the assessee having diverted a part of the income after it has accrued to it the diversion of such income can only be considered to be an application of income and not diversion of income by overriding title. Therefore, we are unable to accept the contention of the 68 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
assessee, which is accordingly rejected. In the result, this issue is decided against the assessee.
53. The next issue is with regard to disallowance of infrastructure expenditure amounting to Rs. 1180 crores. This issue is common to assessment years 2006-07 and 2008-09.
54. The assessee in its written submissions has submitted as under:
"The CIT(A) was not justified in holding that the expenditure in question was not an allowable business expenditure. Under Govt. order, APHB had remitted Rs.1180 crores to A.P. State Housing Corporation who was to provide infrastructure facilities on the land assigned to the appellant. [The appellant had similarly transferred Rs.285 crorers in A.Y. 2006-07.] The land assigned by A.P. Govt. was held by APHB, on which A.P. State Housing Corporation was to provide housing and infrastructure facilities to the residents of the State, mainly belonging to lower and middle income groups. Since inception of APHB, Govt. of A.P. has been allotting/assigning land without or at nominal cost which was used for constructing and providing housing accommodation to the public. This was the first time that the Govt. had demanded payment of which was complied with. The appellant is a wholly owned government organization and it is to obey the dictates of its master. The purpose of the expenditure is within the mandate of the appellant. Unless it carries out the orders of its sole owner, the State Government, its business will be in jeopardy.
The appellant is not a commercial organization but developmental organization. Its structure and function are like that of the government though given a separate shape. Generation of some surplus in course of its operation does not necessarily make this wholly owned government body an organization with profit motive. This aspect has also been explained in detail in the rejoinder on the remand report of A.O. with supportive case laws. Funding of the infrastructure created by the A.P. State Housing Corporation at the behest of State Government is incidental to the main activity of the appellant. It did directly benefit from this expenditure as such infrastructure was meant for the houses sold by it. Its existence and purpose are served as long as it plays direct or indirect role in dealing with and satisfying the need of housing accommodation in the State. The expenditure in question is in course of its normal business operation which, though, had not taken place previously. The appellant is 69 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
working in a dynamic socio-economic environment and keeping in view the changing need the necessity of such expenditure had arisen.
In the earlier proceedings, the A.O. and CIT(A) have wrongly concluded that the amount paid to A.P. State Housing Corporation under the order of the State Government was capital expenditure. Development of housing facility is the purpose for which the appellant has been constituted. The State Government has set up several executing agencies to provide housing accommodation and create housing infrastructure. It is the ultimate decision making authority as to which agency is to execute which work for this purpose. The State Government, in its wisdom, had decided that certain housing infrastructure facilities are to be developed by A.P. State Housing Corporation, and that the appellant would transfer the stipulated amount to the Corporation for this purpose. Therefore, the purpose for which the amount is to be spent is very much connected with the activities undertaken by the appellant.
In Lakshmiji Sugar Mills Co. P. Ltd. vs. CIT (1971) 82 ITR 376 (SC), the assessee was a private company, carrying on the business of manufacturing and sale of sugar, paid to the Cane Development Council certain amounts by way of contribution for the construction and development of roads between the various sugarcane producing centres and the sugar factories of the assessee. This expenditure was incurred under an obligation to make the aforesaid contribution under the provisions of U'P. Sugarcane Regulation of Supply and Purchase Act, 1953. The roads remained the property of the Government and there was no finding that the assessee would get an enduring benefit from those roads. The Supreme Court held that apart from the element of compulsion, the development of roads facilitates the business and the expenditure was revenue in nature. In L.H. Sugar Factory and Oil Mills (P.) Ltd. vs. CIT, (1980) 1251TR 293 (SC), the assessee had contributed towards cost of construction of roads in the area around the factory. The argument of the Revenue was that the newly constructed roads, though not belonging to the assessee, brought to the assessee an enduring advantage for the benefit of its business and, therefore, the expenditure was capital in nature. Rejecting this argument, the Supreme Court held that it is no doubt true that the advantage secured for the business was of a long duration, but it was not an advantage in the capital field, because no tangible or intangible asset 70 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
was acquired by the assessee, nor there was any addition to or expansion of the profit making apparatus of the assessee.
In CIT vs. Coats Viyella India Ltd. (2002) 253 ITR 667 (Mad.), the assessee had made payment to the Government for construction of new bridge, providing access to the assessee's factory for its workmen and movement of goods. The High Court held that the assessee did not acquire any ownership over the bridge and there was no addition to the value of the assets owned by it. Therefore, the payment made to the Government was revenue expenditure. In Navsari Cotton and Silk Mills Ltd. (1982) 135 ITR 546 (Guj.), the assessee discharged an effluent causing health hazard, which was protested by the citizens of the area. Apprehending a spate of suits therefrom, and in view of the Municipality being unable to remedy the situation, and prevent litigation, the assessee made contribution to the Municipality for providing underground pipeline through the municipal land for disposal of effluents. It was argued that the purpose of this expenditure was to avoid losing market, customers and goodwill. The High Court accepted this and held that the expenditure was allowable under section 37 the LT. Act. In Joint Commissioner of Income Tax vs. Deverson Industries Ltd. (2007) 290ITR (A.T.) 287 (ITAT - Ahm), the assessee had paid an amount to the State Government to help villagers affected by effluent discharged from the assessee's factories and such amounts were paid to Municipal Corporation for treating effluents. It was argued by the assessee that the expenditure was laid out to protect its business as an ongoing entity and to avoid possible protracted litigation. The Tribunal held that the assessee had business reasons to participate in a scheme framed by the High Court to make contributions for this social cause. Therefore, the entire expenditure incurred was deductible. In view of these rulings, the appellant would submit that the amount paid to A.P. State Housing Corporation was not capital, but revenue expenditure.
The CIT(A) had observed that the amount paid to A.P. State Housing Corporation was application of income and the order of the State Government was not a legal charge. The appellant would submit that section 79(1) of the A.P. Housing Board Act provides that the Government may give the appellant such direction as and when necessary or expedient for carrying on the purposes of this Act. Therefore, such direction had statutory force. The appellant would not have 71 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
been able to continue its activities lawfully without obeying the order of the State Government to pay the amount to A.P. State Housing Corporation. In this context, the appellant would cite the following observation of the Gujarat High Court in U.K. Acharya vs. State of Gujarat, AIR 1989 Gujarat 81, in which similar provision in the Gujarat State Housing Board was examined:
Disposal of Property Regulations cannot be said to be merely contractual in character nor can they be said to be framed for merely regulating internal affairs of the statutory body, as, with respect, wrongly assumed by the learned Judge. It has also to be kept in view that members of the public for whom housing schemes are floated by the Board have no control over the implementation of the regulations by the Board. Hence, these housing regulations have to be considered as mandatory in character, having binding statutory force. We are, therefore unable to agree with T.U. Mehta, J's conclusion that Disposal of Property Regulations framed by the Housing Board in exercise of its statutory power under S.74(b) are not statutory in character. We hold that they are, of necessity, to be treated as statutory in character for the reasons aforesaid. However, that does not advance the case of the learned Advocate for the petitioners an inch further. Even though' regulation 33 of the Regulations is statutory in character, the directions issued by the State of Gujarat in exercise of its statutory powers under S.82 cannot be said to be in any way inconsistent with this regulation.
The second reason is that under S.82 of the Act, the State of Gujarat is entitled to give directions to the Housing Board for the purposes of the Act and if these directions are not found to be arbitrary or illegal, they are binding on the Housing Board and they would supersede any of the earlier contrary decisions of the Housing Board and impose a special obligation on the Housing Board to comply with such directions. As seen earlier, by S.24 of the Act, it is the duty of the Housing Board to incur expenditure and undertake works of such housing schemes as it may consider necessary from time to time, subject to the control of the State Government. Thus, control of the State Government is all pervasive in connection with any of the housing schemes undertaken by the Board.72
ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
Thus, the payment to A.P. State Housing Corporation was done in the manner prescribed in the A.P. Housing Board Act, under which the appellant has been constituted. Therefore, such payment is part and parcel of its regular business. Accordingly, the amount should be treated as revenue expenditure laid out wholly for the purpose of its business under section 37 of l.T. Act.
This expenditure is definitely a charge on income and not an application of income as held by the CIT(A). In case of application of income, there is discretion with the person making the payment as to pay it or otherwise, whereas in case of obligatory or compulsory payment the same has to be charge on income. In the instant case, the payment by the appellant to A.P. State Housing Corporation as per the order of Government was nothing but statutory obligation in nature flowing from section 79(1) of A.P.H.B. Act. This expenditure is also in the nature of diversion of income by overriding title. The Government of A.P. through its Govt. Order required the appellant to treat the amount paid to A.P. State Housing Corporation as its expenditure. This further shows that the appellant had no discretion in retaining the amount and there was legal compulsion in diverting the amount to A.P. State Housing Corporation. The infrastructure expenditure incurred by the appellant is clearly an allowable expenditure on two grounds; one is on commercial expediency and second being of legal impost by virtue of Govt. order.
The Hon'ble ITAT had remanded the appeals for the A.Ys. 2004-05,2005- 06 and 2006-07 to the CIT(A) for fresh consideration. Hearing had taken place for these years on additional grounds. The A.O. has submitted remand report on these submissions and the appellant has submitted rejoinder on the remand report. Further, the appellant had submitted written submissions on the original grounds taken in these appeals as the orders of the CIT(A) no longer exist in the eyes of the law. The A.O. has also not submitted any remand report for these years as also for the A.Y. 2008-09 for which the CIT(A) has passed the appeal order. In this situation, the CIT(A) should not have relied upon verbatim reproduction of the part of the earlier order for the A. Y. 2006-07 in his order for A.Y. 2008-09. The appellant finds that the language of paragraphs 6.14 to 6.20 of the present order has been copied from the paragraphs 6.13 to 6.17 of the earlier appellate order for the A.Y. 2006-
07, which has been remanded. Observations and conclusions 73 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
in the earlier order passed on 30.10.2009 of the CIT(A) cannot be expected to take into account the submissions made and rulings relied upon by the appellant in the present proceeding. In this process, some errors have crept into the appeal order:
i. At paragraph 6.17 of the appeal order for A.Y.2008-09, the CIT(A) has, mentioned that Government orders quoted by the appellant does not in any way indicate that any money is to be paid to the State Government in lieu of lands provided. But the CIT(A) has missed out the content of the letter dated 23.12.2005 from the Government of Andhra Pradesh, extracted by him at page 39 of his order. The heading of this letter states" Utilisation of an amount to the extent of value of Government lands to be paid to the Government by the APHB for infrastructure development of Rajiv GruhaKalpa". At paragraph 3 in this letter, it is stated that infrastructure cost up to the extent of value of land to be paid to the Government by the APHB will be utilised for infrastructure development under Rajiv GruhaKalpa scheme. In the event of shortfall, the Government will allot additional land to APHB. Further, in the Minutes of Meeting held in chamber of Hon 'ble Chief Minister, extracted at page 41 of the order of the CIT(A), it is noted that APHB would remit Rs.150 crore in October and Rs.400 crore in Nov. and another Rs.400 crore in December by leveraging land allotted to it. At page 55-56 of the appeal order, the CIT(A) has extracted GORT No.432 of Government of Andhra Pradesh. At paragraph 2 to 4 in this, it is mentioned that land has been allotted to APHB for which it has to pay the land value to the Government, which will bear the cost of infrastructure. In the event of shortfall, the Government will allot additional land. The significance of these have been missed out by the CIT(A) for the simple reason that his discussion and conclusion have been copied from an order passed in 2009.
ii. At paragraph 6.20, the CIT(A) has stated that the appellant had argued that it is a local authority. In the submissions made by the appellant for the A.Y. 2008-09, there was no such pleading. This observation and elaborate discussion along with citations of rulings on what constitutes a local authority by the CIT(A) have found place in the order only because several paragraphs have been copied from the earlier order dated 30.10.2009 of the CIT(A) for the A.Y. 2006-07.
iii. The appellant has made submissions on allowability of deduction under section 80-1B. Without considering the same, 74 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
the CIT(A) has relied upon the findings of his order dated 31.10.2009 for the A.Y. 2006-07 for upholding the disallowance of deduction claimed under section 80-IB. The appellate order for the A.Y. 2006-07 has already been set aside by the IT A T for fresh consideration.
Therefore, the submissions made by the appellant on this issue has not been considered by the CIT(A).
The CIT(A) at paragraph 5.7.9 has extracted section 13 of APHB Act, and at paragraph 5.7.10 he has stated that APHB is fully competent to enter into contracts in its own capacity and has referred to section 14 to state that the Vice Chairman shall make every contract on behalf of APHB. However, he has not referred to several other provisions which are important to decide the extent of autonomy enjoyed by APHB. The proviso to section 14 mandates that no contract involving expenditure of Rupees more than the limitation as may be fixed by the Government shall be made without the previous sanction of the Government. This amount was mentioned in this proviso as Rs.3,0001- till the amendment of the Act in 2010. The CIT(A) has given the finding that APHB is controlling its own affairs and is independent in entering into contracts and taking loans. Therefore, in paragraph 5.8.1 and 5.8.2, he has argued that APHB is not functioning as an agent of the State Government. He has not referred to section 21 of the APHB Act, which clearly states that subject to the control of the Government, Board may incur expenditure and undertake works for framing and execution of housing schemes. Section 60 allows APHB the freedom to incur expenditure not exceeding Rs.10,0001- in extreme urgency, which is not included in the annual programme sanctioned by the Government. Section 62(1) permits APHB from time to time, with the previous sanction of the Government and subject to the provisions of the APHB Act and to such conditions as may be prescribed in this behalf, burrow any sum required for the purpose of the Act. Section 79 empowers the State Government to give direction to APHB and overrule any decision or order of it. These provisions, severely restricting the freedom to operate, spend, enter into contracts and borrow money have not been referred to or discussed in the order of the CIT(A)."
55. The CIT(A) while upholding the disallowance of the aforesaid expenditure has opined that for claiming a particular expenditure it is to be examined whether there is any nexus between the main activity of the assessee and the expenditure in 75 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
question. It was further held by the CIT(A) referring to various govt orders, as per which according to the claim of the assessee an amount of Rs. 1180 crores was transferred to AP State Housing Corporation, that the main objective of the APHB to make and implement schemes for providing of housing accommodation is by selling the houses to prospective buyers at the market rate. For this purpose, it acquires lands, develops and sales houses build on those lands. The govt. orders directing transfer of funds to AP State Housing Corporation is only an administrative instruction and no legal charge is created. Therefore, the amount transferred since does not fall within the category of taxes, cess, or legal charges they cannot be considered as expenditure. It was further held by the CIT(A) that there is no nexus between the amount paid by the assessee to the state govt and the actual activity of the assessee. It was further observed that the assessee has also not proved that the payment has been for business expediency.
56. On considering the submissions of the parties in the light of the materials on record and also the ratios cited before us, we are constrained to hold that it is not an allowable expenditure but only an application of income. It is not in dispute that the amount of Rs. 1180 crores is stated to have been given to the AP State Housing Corporation on the directive of the Government. However, that would not amount to an expenditure incurred for the purpose of business. An expenditure which is exclusively laid out for the purpose of business is a revenue expenditure and, therefore, allowable. On appreciation of the facts on record, it is quite evident that the amount of Rs. 1180 crores was not spent by the assessee board for the purpose of its business. The said amount was transferred to AP State Housing Corporation at the directive of the Government for implementing certain housing projects. The assessee is no way connected with implementing the project. This cannot be said to be an expenditure laid out wholly and exclusively for the purpose of business. The decisions relied upon by the learned AR are factually distinguishable as in those cases there 76 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
was nexus between the expenditure incurred and the business of the assessee. Therefore, in our view the revenue authorities were correct in disallowing such expenditure. "
27. Though the learned AR had submitted that the ratio laid down in case of APHB(supra) would not be applicable to the facts of assessee's case in view of factual difference, but on deeper examination, we are of the view that principles decided therein would also apply to the facts of the present case. In aforesaid view of the matter, all the contentions of the assessee with regard to non taxability of the amount paid towards privilege fee and special privilege fee etc., fails. The assessee has also assailed the order passed by the CIT (A) by contending that since the Tribunal had directed the CIT (A) only to consider the amendment she was not competent to the validity of amendment. However, such contention of the learned AR is not acceptable. Even if we accept that the CIT (A) is not competent to go into the validity of the amendment but it has no direct bearing on the ultimate conclusion reached by her. The assessee has raised a further ground that the CIT has dropped the proceeding u/s 263 of the Act for the assessment year 2001-02 therefore a different view could not have been taken by the department for the impugned assessment year. This contention of the assessee is not acceptable as principles of res judicata do not strictly apply to the income-tax proceedings. Even otherwise also as can be seen from facts on record, the CIT has revised the assessment order by invoking his powers u/s 263 of the Act for the assessment year 2006-07. Therefore, the assessee's contention that proceedings initiated u/s 263 for the assessment year 2001-02 having been dropped, different view can be taken is not acceptable. It was also contended by the learned AR that the Tribunal had remitted the matter back to the CIT (A) for a limited purpose of examining the amendments made to Excise Act by inserting new provisions 4A, 4B and 4C. therefore the CIT (A) is not competent to go into the other aspects of 77 ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
application of income and disallowance of expenditure as the Tribunal has rejected such findings of CIT (A). On a perusal of the order passed by the Tribunal while remanding the matter back to the CIT (A), it is to be noted that the Tribunal has directed the CIT (A) to decide the matter de novo after taking into consideration the amendments made to the Excise Act. Nowhere the Tribunal has made any observation with regard to the merits of the addition. Therefore the contention of the learned AR is not acceptable. In view of our finding hereinabove, ground nos.1-15 are dismissed.
28. In ground No.16, the assessee has challenged the disallowance of provision for leave encashment of Rs.30,90,849/- by contending that the CIT (A) has not decided the aforesaid ground. On perusal of the assessment order, it is to be noted that the Assessing Officer has disallowed the aforesaid amount by observing that the authorised representative was not able to explain the same. As can be seen from the order of the CIT (A), she has not decided the issue. We therefore remit the issue back to the file of the Assessing Officer to consider it afresh after affording due opportunity of being heard to the assessee.
29. In the result, the assessee's appeal is treated as partly allowed for statistical purposes.
ITA Nos. 303 AND 545/HYD/2013:
Facts being similar and issues raised in the grounds being identical to ground Nos. 1 to 15 raised in appeal No.302/Hyd/2013 pertaining to the assessment year 2006-07, we follow the reasoning given therein in this order while deciding the aforesaid grounds and dismiss all the grounds in these two appeals also.78
ITA nos.302-303 &545 of 2012 AP Beverages Corporation, Hyd.
30. In the result, ITA No.302/Hyd/2013 is treated as partly allowed for statistical purposes while ITA Nos. 303 and 545/Hyd/2013 are dismissed.
Order pronounced in the court on 21 -01-2014.
Sd/- Sd/-
(CHANDRA POOJARI) (SAKTIJIT DEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad,
Dated the 21st January, 2014.
Jmr*
Copy to:-
1) C/o S/Sri K. Vasant Kumar and A.V. Raghu Ram,
Advocates, 610, 6th Floor, Basheerbagh, Hyderabad.
2) The ITO, Ward-(1), Aayakar Bhavan, Hyderabad.
3) CIT (A)-II, Hyderabad.
4) CIT-I, Hyderabad.
5) The Departmental Representative, I.T.A.T.,
Hyderabad.
79
ITA nos.302-303 &545 of 2012
AP Beverages Corporation, Hyd.