Income Tax Appellate Tribunal – Cochin
Kerala State Beverages M&M;) … vs The Acit, Cir-1(1), Trivandrum on 11 October, 2019 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN
BEFORE S/SHRI ABRAHAM P. GEORGE, AM & GEORGE GEORGE K., JM I.T.A. No.537/Coch/2018 & S.P. No. 38/Coch/2019 Assessment Year : 2013-14 Kerala State Beverages Vs. The Assistant Commissioner of
(M&M) Corporation Ltd., Income-tax, Circle-1(1),
Sasthamangalam, Trivandrum
Trivandrum-695 010.
[PAN:AAACK 9431G] (Assessee-Appellant) (Revenue-Respondent) Assessee by Shri R. Vijayaraghavan and Shri Anil D. Nair, Adv. Revenue by Shri Shantam Bose, CIT(DR) Date of hearing 14/08/2019 Date of pronouncement 11/10/2019 ORDER
PER CHANDRA POOJARI: AM Originally, this appeal was directed against the order of the CIT(A), Trivandrum dated 05/11/2018 which was disposed off by the Tribunal vide order dated 12/03/2019. Later the assessee filed Miscellaneous Petition in M.P. No. 47/Coch/2019 stating that the ground relating to addition u/s. 40(a)(iib) of the Act with regard to surcharge on sales tax was not adjudicated by the Tribunal. Accordingly, the earlier order of the Tribunal dated 12/03/2019 was recalled vide
2 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 M.P. No. 47/Coch/2019. Hence, it is for adjudicating this issue that the appeal has come up for hearing.

2. The Ld. AR has filed petition for admission of additional evidence/documents as follows:

“In the above appeal pending before the Income Tax Appellate Tribunal, one of the issues is disallowance of surcharge on sales tax under section 40(a)(iib). Among other arguments, the Appellant had submitted that levy of surcharge has not been levied exclusively on the Appellant as is required u/s. 40(a)(iib). In the course of appeal hearings, the Tribunal directed the Appellant to file evidence to show that other Assessees dealing in liquor have also paid Surcharge on Sales Tax. In that connection. the Appellant would like to submit the following documents evidencing payment of Surcharge on Sales Tax under Kerala Surcharge on Taxes Act, 1957 and Turnover Tax u/s. 5(2)(b) of the Kerala General Sales Tax Act, 1963.

Sl. No. Name of Assessee Page No. 1. Muthoot Hotels Pvt. Ltd., Vivanta by Taj 1-11 2. M/s. Hotel Vivanta by Taj Vazhuthacaud 12-22 3. Vivanta By Taj Green Cove, Kovalam 23-26 4. MPD Hotels and Infrastructures Pvt. Ltd. 27-28 5. Malayalam Industries, Vytilla 29-31 6. M/s. Vivanta by Taj, Taj Malabar 32-33 As this goes to the root of the matter, it is prayed that the Income Tax Appellate Tribunal may be pleased to admit and take into consideration the above documents, while deciding the appeal on merits. ”
3. We have gone through the petition for admission of additional evidence/documents. We find bona fide reasons in the act of the assessee in not raising the additional ground on an earlier occasion by placing reliance on the judgment of the Supreme Court in the case of National Thermal Power
3 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 Corporation Ltd. vs. CIT (229 ITR 383) wherein it was held that Tribunal has the discretion to allow or not to allow additional ground to be raised for the first time before the Tribunal. Accordingly, we admit the additional ground for adjudication.

4. The Ld. AR submitted that the CIT(A) has disallowed the surcharge on sales- tax payable by the under Section 40(a)(iib).

Section 40(a)(iib) reads as under:-

(iib) any amount-

(A) paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which is levied exclusively on; or (B) which is appropriated, directly or indirectly, from, a State Government undertaking by the State Government.

Explanation.-For the purposes of this sub-clause, a State Government undertaking includes-

i) a corporation established by or under any Act of the State Government; (ii) a company in which more than fifty per cent of the paid-up equity share capital is held by the State Government;

(iii) a company in which more than fifty per cent of the paid-up equity share capital is held by the entity referred to in clause (i) or clause (ii) (whether singly or taken together);

(iv) a company or corporation in which the State Government has the right to appoint the majority of the directors or to control the
4 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 management or policy decisions, directly or indirectly, including by virtue of its shareholding or management rights or shareholders agreements or voting agreements or in any other manner;

(v) an authority, a board or an institution or a body established or constituted by or under any Act of the State Government or owned or controlled by the State Government;”.

4.1 According to the Ld. AR, the wording of the section would clearly show that type of expenditure sought to be disallowed under this section are only such expenditure which is incurred in consideration of obtaining some benefits or rights or license by the State Government in connection with conduct of business. For example, Royalty for grant of mining rights, Privilege Fees for grant of license for distribution of Liquor etc. Therefore, it was submitted that the expenditure contemplated in section 40(a)(iib) are payments/expenditure incurred in connection with rights granted or parted with by the Government in favour of the assessee for the purpose of the asessee carrying on his business i.e in exchange for some benefits accruing specifically for the assessee and there is an element of Quid Pro Quo in payments.

4.2 The Ld. AR submitted that AO and CIT(A) had extended the type of expenditure mentioned in sec. 40(a)(iib) to cover Surcharge on Sales Tax also, on account of the phrase “by whatever name called” used in the section. According to them, Surcharge on Tax is also to be categorized along with and treated on par with royalty, license fee, service fee, privilege fee, service charge
5 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 or any other fee or charge by whatever name called. It was submitted that for extending the meaning to expenditure other than those specified in the section on the basis of the phrase “by any other name called”, it would require the application of the legal principle of Ejusdem generis which means “of the same kind”. Therefore, it was submitted that there should be an underlying thread of common characteristic between the various types of charges specified in sec 40(a)(iib) and the expenditure sought to be roped into the ambit of the section. According to the Ld. AR, the section refers to various charges for completely different types of services and the only underlying thread of common characteristic amongst all fees/charges mentioned in the section is that all of the charges are payments for some benefits or rights conferred by the Government on the specific assessee paying such charges.

4.3 The Ld. AR submitted that. Surcharge on Sales Tax is nothing but Sales Tax and in the charging Act, the Kerala Surcharge on Taxes,1957, It is provided that “The tax payable under sub-section (1) of section 5 of the Kerala General Sales Tax Act, 1963, by a dealer in foreign liquor shall be increased by a surcharge at the rate of ten per cent, and the provisions of the Kerala General Sales Tax Act, 1963 shall apply in relation to the said surcharge as they apply in relation to the tax payable under the said Act”. Thus, surcharge which is nothing but an increment of sales tax payable under sec 5(1) of the KGST and therefore, is part of Sales Tax. (K. Srinivasan 83 ITR 346 (SC) had not disallowed sales tax payable
6 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 by the assessee but only the increment to the sales tax in the form of surcharge on sales tax. It was submitted that sales tax was imposed on the sales or purchases made by any assessee. and levy of sales tax does not confer any special or specific benefit to the assessee who pays the sales tax nor can the payer of sales tax demand any specific privileges from the State Government on account of payment of sales and surcharge. The Ld. AR relied on the judgment of the Supreme Court in the case of The Commissioner, Hindu Religious Endowments, Madras vs. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt (1954 SCR 1005) pointing out the difference between tax and fee as follows: “A tax is a compulsory exaction of money by public authority for public purposes enforceable by law and is not payment for services rendered.

There are various kinds of fees. But a fee may generally be defined as a charge for a special service rendered to individuals by some governmental agency.

The distinction between a tax and a fee lies primarily in the fact that a tax is levied as part of a common burden, while a fee is a payment for a special benefit or privilege.”
4.4 Thus, it was submitted that tax is a compulsory payment levied by the government on its citizens and various business firms. As payment of tax is compulsory, refusal to pay tax invites punishment. There is no direct quid pro quo relationship between the taxpayer and the tax-levying authority. A taxpayer cannot demand any reciprocal benefits for paying taxes. According to the Ld. AR, a fee is a voluntary payment to the government for the special services
7 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 rendered by it in the public interest, but conferring a specific advantage on the person paying it and fee is payable only when a benefit is conferred/ agreed to be conferred, on the payer. It was submitted that the provisions of sec 40(a)(iib), which refer to various fees payable in connection with rights granted/parted with by the Government cannot be extended by applying the principle of ejusdem Generis to taxes. They are totally different in nature, character and application and source of the right to levy is also different. The Ld. AR relied on the judgment of the Delhi High Court in the case of Dalmia Cement (Bharat) Ltd. (357 ITR 419) wherein it was held that levy of additional cess and cess surcharge under the Tamil Nadu Panchayat Act, 1958 is not tax and hence, will not attract provisions of sec 43B which, before amendment in 1989, was applicable to Taxes and Duties. Therefore, it was submitted that the provisions of sec 40(a)(iib) cannot be applied to any taxes (including tax based on Turnover) or surcharge of such taxes. The Section also requires for such levy should be exclusively on the State undertaking.

4.5 The Ld. AR referred to the phrase “exclusively on the state Government undertaking” which meant that levy should be directly on the State undertaking i.e., levy should state that fees is payable only by specified State Government undertakings. According to the Ld. AR, sales tax is levied on license holders under the appropriate rules. It may be that assessee is the only license holder but that would not mean that levies are exclusively on the assessee merely
8 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 because, the assessee is the sole license holder and the levy is on the License holder under that classification. For example, tax is levied on License holder holding F9 License on their sale of foreign liquor. It was submitted that though the assessee is the sole F9 License holder, the levy is not assessee specific. It is specific on the License holder, whoever it may be. Sales Tax is levied on holders of other types of Licenses also and levies are transaction specific and not assessee specific.

4.6 The Ld. AR submitted that the surcharge on sales-tax as well as turnover tax are levied in addition to the sales-tax and is payable by all the persons who is carrying out sales and purchase of goods. Further, the turnover tax and surcharge are part of the sales-tax and are not different independent levies. It was submitted that under the VAT regime, items mentioned in Sch IV were excluded from the VAT and was subject to tax by the State viz., KGST and sales tax is payable by all persons dealing In Sch IV goods. Surcharge payable I not only persons dealing with liquor paying sales tax but also added to agricultural income tax. The Ld. AR submitted that surcharge sales tax, and consequently, surcharge and turnover tax, are payable, all persons dealing in liquor at the point of sale specified in the Schedules. Apart from the assessee, there are other entities which retail IMFL and which pay surcharge on sale of liquor to their clients/ members, under the Kerala Surcharges Act. Thus, it was submitted that surcharge on sales tax and turnover tax is part of the KGST (Sec. 5(2).
9 ITA No.537/Coch/2018 &
S.P. No. 38/Coch/2019 Surcharge and turnover tax cannot therefore be considered as a levy specifically on State Government Undertakings as others also pay sales tax, surcharge on sales tax and turnover tax under the respective Acts. 4.7 It was submitted that as directed by the Tribunal, sample returns of some of the hotels which are dealing in liquor which is liable to pay turnover tax and surcharge on sales tax, have been submitted which show that surcharge and turnover tax have been levied and paid by them in connection with sale of liquor (items in Sch IV of the VAT Act, which are excluded from VAT and included in KGST which clearly shows that surcharge and turnover tax are not levied exclusively on the assessee alone but are levied on other persons who are dealing in liquor to whom sec 5(1) of KGST applies. It was submitted that the character of Surcharge on Sales Tax would not change merely because it is borne by the seller and it cannot be recovered from the client. 4.8 The Ld. AR submitted that the CIT(A) has referred to a GO(P) No 139/2011/TD dt 27.09.2011, wherein an earlier GO(P) No.78/2004/TD dt 14.5.2004 was rescinded, to that levy of surcharge is specific to the assessee. It was submitted that apart from the fact Surcharge is payable and had been paid all persons dealing in foreign liquor to whom sec 5(1) of the KGST applies, in 2004 the Govt. thought it fit to give concession to the assessee by reducing the surcharge payable by the asessee from 10% to 5%. and other assessees
10 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 continued to pay 10% Surcharge. It was submitted that in 2011, the Govt. withdrew the concession given to the assessee and restored the surcharge liable by assessee on par with the others. According to the Ld. AR grant of concession to a specific assessee and thereafter, withdrawing the same would not lead to a conclusion “at the levy itself is exclusively on the assessee and the levy of surcharge was and continues to be transaction specific applicable to all assessees entering into theie specified transaction viz., sale of Liquor on retail and not levied exclusively on the assessee alone.

4.9 The next issue for consideration is whether levy of Surcharge on sale tax can be considered as appropriation by the State Government so as to bring it within the ambit of Limb (B) of the section. Appropriation under accounting parlance means the allocation of the profits after setting off the expenditure among various reserves and dividend. Thus, the accounts of the company, the net profit for the year after provision for tax together with credit balance to the Profit and Loss account, is considered as profit available for appropriation. This is appropriated towards Redemption Reserves, Capital reserve, General reserve and balance to the credit of the Profit and Loss account. According to the Ld. AR appropriation means allocating or taking away funds for a specific purpose and it is an application of income. According to the Ld. AR, it will not cover levies made on sales which is and always has been a deduction while arriving at the net profits and such deductible expenditure cannot be considered as an
11 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 appropriation/ application of income. Further, it was submitted that it is a charge on profits and is based on the type of transaction and not a particular assessee. For example the levy is on the different types of License holders without reference to whom or how many persons, may have been granted that type of License. Individual holders of the license may vary, but the levy is constant for all such License holders and such a common levy on sale of goods applicable to all sellers cannot be considered as an appropriation in the case of assessee alone. Surcharge on sales Tax is part of the sales tax and when sales tax is not disallowed under this section, surcharge on sales tax cannot be considered as appropriation to be disallowed under this section. The Ld. AR submitted that when surcharge on sales tax is considered as part of sales tax and allowed as a charge (deduction) against profits in all other cases of sellers dealing in foreign liquor, the same cannot be considered as an appropriation in the case of State Government Undertakings. Character of levy, which is applicable to all sellers as a deduction against profits, does not change to one seller alone and become an appropriation. Thus, it was submitted that surcharge on sales tax payable by the assessee is part of sales tax and it is neither in the nature of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called nor is it a levy exclusively on the assessee nor can it be considered as appropriation by the State Government. Therefore, it was submitted that surcharge on sales tax and turnover tax would
12 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 not attract the provision of sec. 40(a)(iib) and hence, is allowable u/s. 37 r.w.s. 43B of the Act.

5. The Ld. DR submitted that there is no disputing the fact that M/s. Kerala State Beverages (Manufacturing & Marketing) Corporation Ltd (BEVCO) is a “Dealer” as per the Kerala Sales Tax Act 1963. However, the fact remains that the assessee-BEVCO, is a Kerala State Government undertaking fully owned by the State Government of Kerala, which has a monopoly over wholesale and retail vending of alcohol in Kerala. It was submitted that Kerala State Government in 1984 amended the Abkari Act and set up a Public Sector Corporation-BEVCO, to procure spirit and arrange blending, bottling, sealing and distribution of arrack and sale of IMFL. The assessee company is the only company holding FL 9 license under the Abkari Act as detailed in the website of Kerala State Excise Department. According to the Ld. DR, from the plain reading of Sec. 40(a)(iib) of the Income-tax Act, 1961, it is evident that the language used by the legislature is any fee or charge which is levied exclusively on a State Government undertaking by the State Government” but not the sentence “any fee or charge which is levied exclusively on the assessee by the State Government”. Therefore, any fee or charge which is exclusively levied only on State Government undertakings by the State Governments is covered by the provisions of Sec. 40(a)(iib) of the Income Tax Act, 1961. By bringing in a colourable device, the intention of the State Government is to take away the profit from trading in
13 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 liquor as Surcharge or by any other name. Assessse’s contention that surcharge of sales tax is an increment on sales tax only and therefore is not an exclusive levy is against the facts. The Kerala Surcharge on Taxes Act is a separate legislation, distinct from Kerala General Sales Tax Act. The legislations were independently enacted by the State Legislature. Various levies have been made on various classes of tax payers. The levy u/s. 3(1) is solely for the distributor of foreign liquor in the state, being the assessee company, Kerala State Beverages (M&M) Corporation Ltd. The enactment of distinct legislations fundamentally points to the levy and charging of independent taxes. The contention that surcharge is subsumed by sales tax is unacceptable. The incidence of surcharge and sales tax are wholly different and the tax-base, being the classes of tax payers for both the levies is different.

5.1 The Ld. DR submitted that the intention of the State Government is to apportion the profits from State Government undertaking BEVCO by bringing in colourable devices like Surcharge, which is not tantamount to tax. Hence, the principle of ejusdim generis does not arise. Thus, according to the Ld. DR, Section 40(a)(iib) is very much applicable in the case of assessee, especially limb 2 by which amount is being appropriated directly or indirectly from a State Government undertaking by the State Government from trading in liquor as Surcharge or by any other name. According to the Ld. DR, the assessee company is the only company holding FL 9 license under the Abkari Act as
14 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 detailed in the website of Kerala State Excise Department. It was submitted that the Government of Kerala has granted the license solely to the assessee. Hence, the Ld. DR contended that it is the sole taxpayer falling within the ambit of the levy and regarding Vivanta by Taj Green Cove, they are neither a State Government undertaking nor they hold FL 9 License. Thus, it was submitted that in the case of the assessee BEVCO, there is a congruence of natural monopoly and taxability, leading to exclusivity. Therefore, it was submitted that the surcharge paid by the assessee is covered by provisions u/s. 40(a)(iib) of the Income-tax Act.

5.2 The Ld. DR submitted that the benefit of being the sole distributor of foreign liquor is enjoyed by the assessee company and it is a wholly state government owned company. The levies are made by the State Government. Hence, according to the Ld. DR, an implied quid pro quo exists in these circumstances. It was submitted that the concession to the surcharge or restoration of the surcharge levied in the case of assessee itself is self explanatory regarding the exclusivity status enjoyed by the assessee and hence, it is fundamentally wrong to juxtapose the assessee to other dealers. The contextual circumstances need to be considered while assigning and understanding the meaning and purpose of the levy.
15 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 5.3 Further, the Ld. DR referred to the conditions which lead to the enactment of Sec. 40(a)(iib) of the Income-tax Act. State Government undertakings are separate legal entities distinct from the State Government and are liable to income tax. If they pay dividends to the State Government which owns them, then the tax consequences are:

(i) Dividend is not a deductible expense and (ii) Dividend attracts dividend distribution tax under section 115-O. So, it was submitted that State Governments instead of taking profits from their undertakings in the form of dividends opt to take it in the form of royalty, privilege fee, etc. exclusively levied by them on the State Government undertakings. Such colourable devices are used by the State Governments to reduce the taxable profits of their undertakings and also to escape DDT. Thus, it was submitted that amounts are appropriated directly or indirectly from the State Government undertakings by the State Government.

5.4 The Ld. DR referred to the legislative intent behind the enactment of Sec. 40(a)(iib) of the Income Tax Act has been detailed in the Circular No.3/2014[F.No.l42/24/2013-TPL]- Finance Act2013-Explanatory notes to the provisions of Finance Act of CBDT dated 24.01.2014; The relevant excerpts of read as follows:

“..Disputes have arisen in respect of income-tax assessment of some State Government undertakings as to whether any sum paid by way of privilege fee, license fee, royalty, etc. levied or charged by the State Government exclusively on its undertakings are deductible or not for the purpose of
16 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 computation of income of such undertakings. In some cases orders have been issued to the effect that surplus arising to such undertakings shall vest with the State Government. As a result, it has been claimed that such income by way of surplus is not subject to tax. It is a settled law that State Government undertakings are separate legal entities than the State are liable to income- tax. Hence, in order to protect the tax base of the State Government undertakings vis-a-vis exclusive levy of fees, charge, etc. Or appropriation of amount by the State Governments from its undertakings, Section 40 of the Income-tax Act was amended to provide that any amount paid by way of fee, charge, etc., which is levied exclusively on, or any amount appropriated, directly or indirectly, from a State Government undertaking, by the State Government, shall not be allowed as deduction for the purpose of computation of income of such undertakings under the head “Profits and gains of business or profession”…

5.5 From the above, it was submitted that surcharge is a colourable device used by the Kerala State Government to appropriate amount directly or indirectly from the assessee, a State Government undertaking, in whose case there is a congruence of natural monopoly and taxability, leading to exclusivity. Thus, it was submitted that the scope of Sec. 40(a)(iib) is very much applicable on the assessee and surcharge is not a deductible amount.

5.6 The Ld. DR relied on the Kerala Surcharge on Taxes Act, 1957 as follows: THE KERALA SURCHARGE ON TAXES ACT, 1957 (Act 11 of 1957) [Amended by Acts 12 of 1960, 2 of 1966, and 10 of 1968 and 16 of 1970] An Act to provide for levy of surcharges on certain taxes.
17 ITA No.537/Coch/2018 &
S.P. No. 38/Coch/2019 Preamble.- WHEREAS it is considered necessary to increase the taxes on agricultural income, taxes on the sale or purchase of goods and taxes on profession, by the levy of a surcharge on such taxes;

BE it enacted in the Eighth Year of the Republic of India as follows:- 1. Short title, extent and commencement- (1) This Act may be called the Kerala Surcharge on Taxes Act, 1957.

(2) It extends to the whole of the State of Kerala.

(3) It shall come into force on such date as the Government may, by notification, in the Gazette, appoint.

2. Levy of surcharge on agricultural income-tax.- The [“Agricultural income tax”] payable by any person [“other than a company”] assessed to such tax under the [“The Kerala Agricultural Income Tax Act, 1991”] shall be increased by a surcharge at the rate of [ten per centum] of the tax payable each year, and the provisions of the [“The Kerala Agricultural Income Tax Act, 1991”] shall [apply in relation to the said surcharge as they apply in relation to the [“Agricultural income tax “] payable under the said Act] [Explanation.- In this section, company shall have the same meaning as in the Agricultural Income-tax Act, 1950.] 3. Levy of surcharge on sales and purchase taxes.- [“(1) The tax payable under sub-section (1) of section 5 of the Kerala General Sales Tax Act, 1963, by a dealer in foreign liquor shall be increased by a surcharge at the rate of ten per cent, and the provisions of the Kerala General Sales Tax Act, 1963
18 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 shall apply in relation to the said surcharge as they apply in relation to the tax payable under the said Act”.] Provided that where in respect of declared goods as defined in clause (c) of section 2 of the Central Sales Tax Act, 1956 the tax payable by such dealer under [the Kerala General Sales-Tax Act, 1963] together with the surcharge payable under this sub-section, exceeds [four per centum] of the sale or purchase price, the rate of surcharge in respect of such goods shall be reduced to such an extent that the tax and the surcharge together shall not exceed [four per centum] of the sale or purchase price. (2) Notwithstanding anything contained [in sub-section (1) of section 22 of the Kerala General Sales Tax Act, 1963] no dealer referred to in sub-section (1) shall be entitled to collect the surcharge payable under the said sub- section.

[“(3) Any dealer who collects the surcharge payable under sub-section (1) in contravention of the provision of sub-section (2) shall be punishable with fine which may extent to one thousand rupees and no court below the rank of a Magistrate of the first class shall try any such offence.”] [‘4. Penalty for illegal collection of surcharge.- (1) If any person collects any sum by way of surcharge or purporting to be by way of surcharge in
19 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 contravention of sub-section (2) of section 3, he shall be liable to pay penalty not exceeding five thousand rupees and any sum so collected by the person shall be liable to be forfeited to the Government by an order issued by the assessing authority after giving such person an opportunity to show cause why penalty or forfeiture shall not be ordered: Provided that no penalty or forfeiture shall be ordered under this subsection if the assessing authority is satisfied that the sum so collected has been returned to the person from whom it was collected.

(2) Where any sum is forfeited to the Government under sub-section (1) if any person from whom the amount was collected in contravention of the provisions of sub-section (2) of section 3 may apply to the assessing authority for reimbursement of such sum and the amount shall be reimbursed to such person and the procedure prescribed for reimbursement of the tax forfeited under subsection (1) of section 46A of the Kerala General Sales Tax Act 1963 (15 of 1963) shall mutatis mutandis apply to such reimbursement.

(3) No prosecution for an offence under sub-section (3) of section 3 shall be instituted in respect of the same facts one which a penalty has been imposed or forfeiture has been ordered under this section.”.] [*****************************************]
20 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 6. Removal of difficulties- If any difficulty arises in giving effect to the provisions of this Act, the Government may, as occasion may arise, by order do anything which appears to them necessary for the purpose of removing the difficulty.

7. Power to make rules- The Government may, by notification in the Gazette make rules for carrying out the purposes of this Act. 8. Amendment to the Madras Elementary Education Act, 1920- (1) The Chapter 111 (sections 32 to 40, both inclusive) of the Madras Elementary Education Act, 1920, as in force in the Malabar District referred to in sub- section (2) of section 5 of the States Reorganisation Act, 1956, shall be omitted.

(2) As soon as may be after the commencement of this Act, the elementary education fund constituted for each local authority under the said Act shall be transferred to the Government by such local authority and the same shall vest in the Government free of all trusts, liabilities and encumbrances. Thereupon it shall be competent for the Government to utilize the said fund in such manner as they may deem fit. 6. We have heard the rival submissions and perused the record. The first contention of the Ld. AR is that expenditure mentioned in section 40(a)(iib)
21 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 covers only expenditure which is incurred in consideration of obtaining some benefits or rights or license by the State Government in connection with conduct of business. In other words, it covers the expenditure incurred in connection with rights granted or parted with by the Government in favour of the assessee for the purpose of carrying on the business of the assessee. There should be an element of quid pro quo in payments. According to the ld. AR, payments incurred by way of surcharge is only a statutory payment and it is not covered by section 40(a)(iib) of the Act. In our opinion, the assessee has been granted FL 9 license under the Abkari Act and the assessee is liable to pay surcharge to the State Government. This surcharge is exclusively levied only on State Government undertaking and the FL 9 license was not given to any undertaking other than the assessee for carrying on business. Being so, the payment was incurred for obtaining specific benefits from the State Government and it cannot be said that there is no element of quid pro quo in the payments. With regard to the additional evidence filed by the assessee on levy of surcharge in respect of assessees mentioned in para 2 above, these assessees are not granted FL 9 license under the Abkari Act and only the assessee before us is granted FL 9 license under the Abkari Act. Hence, the additional evidence is of no assistance to the assessee and the same is rejected. Thus, the argument of the assessee’s Counsel is rejected.
22 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 6.1 The next argument of the Ld. AR is that surcharge is nothing but sales tax paid by the assessee to the State Government. In our opinion, this argument of the Ld. AR has no merit on the reason that sales tax is collectable or recoverable from the customers to whom the goods are sold or services are rendered. In the present case, there is prohibition on collection of surcharge from the customers and it should be borne by the assessee itself. As per the Kerala Surcharge on Taxes Act, 1957, there is prohibition for levy of surcharges on certain taxes as follows:

[“(3) Any dealer who collects the surcharge payable under sub-section (1) in contravention of the provision of sub-section (2) shall be punishable with fine which may extent to one thousand rupees and no court below the rank of a Magistrate of the first class shall try any such offence.”] [‘4. Penalty for illegal collection of surcharge.- (1) If any person collects any sum by way of surcharge or purporting to be by way of surcharge in contravention of sub-section (2) of section 3, he shall be liable to pay penalty not exceeding five thousand rupees and any sum so collected by the person shall be liable to be forfeited to the Government by an order issued by the assessing authority after giving such person an opportunity to show cause why penalty or forfeiture shall not be ordered:
23 ITA No.537/Coch/2018 &
S.P. No. 38/Coch/2019 Provided that no penalty or forfeiture shall be ordered under this subsection if the assessing authority is satisfied that the sum so collected has been returned to the person from whom it was collected.
Hence, it cannot be said that surcharge is equivalent to sales tax. This argument of the Ld. AR is rejected.

6.2 The next argument of the Ld. AR is that surcharge is not exclusively levied by State Government on the assessee. Hence, it cannot come under the purview of section 40(a)(iib) of the Act. In our opinion, FL 9 license under the Abkari Act was exclusively given to the assessee and no other undertaking has been granted such license. Being so, it is exclusively levied on the assessee. This argument of the Ld. AR is rejected.

6.3 The next argument of the assessee’s Counsel is that surcharge is charged to the P&L account and not to the appropriation of P&L account. His argument is that it cannot be considered as appropriation of profit so as to attract the second limb of section 40(a)(iib) of the Act. In our opinion, it is a flow back of the profits of the assessee by way of payment of surcharge to the government account which is nothing but a colourable device used by the State Government so as to reduce the taxable profits of the assessee. Thus, it amounts to appropriation of the profits of the assessee directly or indirectly to the State
24 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 Government. The word ‘appropriation’ used in section 40(a)(iib) of the Act does not mean that it should be charged to P&L appropriation account. In the present case it was charged to P&L account by way of colourable device, hence, the provisions of section 40(a)(iib) of the Act are applicable. 6.4 For this proposition, we refer to the Budget speech of the Finance Minister of Kerala for the FY 2011-12 which highlights the purpose of the surcharge levied as under:

Surcharge 359. In 2004 when KSBC had incurred losses, the surcharge payable on foreign liquor was reduced from 10% to 5%. Since the Corporation is profitable now, the original rate of 10% will be restored. The additional revenue expected to be generated through this is Rs.192 crores.
6.5 Further, the explanatory note issued on the surcharge following the budget speech for FY 2011-12 is as under:

KERALA GAZETTE EXTRAORDINARY PUBLISHED BY AUTHORITY Vol. LVI Thiruvananthapuram, Tuesday 27 th September, 2011 No 1818 GOVERNMENT OF KERALA TAXES (B) DEPARTMENT NOTIFICATION
G.O.(P) No. 139/2011/TD Dated, Thiruvananthapuram 27th September,2011 S.R.O. No, 614/2011 – In exercise of the powers conferred by sub-Section
(3) of section 10 of the Kerala General Sales Tax Act. 1963 (15 of 1963) read
25 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 with sub-section (1) of section 3 of The Kerala Surcharge on Taxes Act, 1957 (11
of 1957), the Government of Kerala having considered it necessary in the public
interest so to do, hereby rescind the notification issued under G.O.(P) No.
78/2004/TD dated 14th May, 2004 and published as S.R.O. No. 499/2004 in the
Kerala Gazette Extraordinary No. 1064 dated 18th May, 2004.

By Order of the Governor, sd/- V. P. Joy Secretary to Government Explanatory Note (This does not form part of the notification, but is intended to indicate the
general purpose) As per notification issued under G.O.(P) No. 78/2004/TD dated 14th May, .2004
Published as S.R.O. NO. 499/2004 in the Kerala Gazette Extraordinary No. 1064
dated 18th May, 2004, the Government had reduced the rate of surcharge
payable by the Kerala State Beverages Corporation, being the dealer holding FL
9 license under the Abkari Act and the rules made there under from 10% to 5%.
As per Para 39 of the Budget Speech 2011-11, it has been announced to restore
the original rate of ten percent surcharge payable on foreign liquor. Therefore,
the Government have decided to rescind the said notification issued earlier in this
behalf.

The notification is intended to achieve the above object. 6.6 Therefore, it is evident from the budget speech and explanatory note, as above, that the surcharge levied under section 3(1) of the Kerala Surcharge on Taxes Act, 1957 is an exclusive levy by the State Government on a State Government undertaking and the same is covered by the provisions of section 40(a)(iib) of the Act. In view of the same, we uphold the disallowance of
26 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019 surcharge for Rs.551,61,01,115/-. Thus, the grounds of appeal of the assessee are dismissed.

7. Since we have disposed off the appeal of the assessee, the Stay Petition filed by the assessee in S.P. No. 38/Coch/2019 has become infructuos and is dismissed as such.

8. In the result, both the appeal and the Stay petition of the assessee are dismissed.

Order pronounced in the open court on 11th October, 2019. sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER Place: Kochi
Dated: 11th October, 2019
GJ
Copy to:
1. Kerala State Beverages (M&M) Corporation Ltd., Sasthamangalam,
Trivandrum-695 010.
2. The Assistant Commissioner of Income-tax, Circle-1(1), Trivandrum
3. The Commissioner of Income-tax(Appeals), Trivandrum.
4. The Principal Commissioner of Income-tax, Trivandrum
4. D.R., I.T.A.T., Cochin Bench, Cochin.
5. Guard File.
By Order (ASSISTANT REGISTRAR) I.T.A.T., Cochin
27 ITA No.537/Coch/2018 & S.P. No. 38/Coch/2019

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