Commissioner of Income Tax vs Mohinder Kumar and Party

This is an application u/s 256(2) of the IT Act, 1961, seeking a direction to the Tribunal, Jaipur Bench, Jaipur, to state the case and to refer following questions alleged to be question arising from the appellate order of the Tribunal, dt. 22nd March, 1994, which relates to the asst. yr. 1987-88 :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the "issue price" charged by the Excise Department does not come in purview of payment within the meaning of Section 43B of the IT Act and, consequently cannot be disallowed u/s 43B ?

If the answer to the question No. 1 is in the negative, whether the Tribunal is justified in holding that the sum of Rs. 2,39,527 is allowable as a deduction in spite of the fact that the assessee has not accepted this amount as liability and contesting the same ?"

The assessee is a liquor contractor and was holding licence for wholesale and retail sale of country liquor under the licence. The assessee was required to pay Rs. 80,15,872 as "issue price". This amount was payable by the assessee in 12 monthly instalments. The assessee has claimed a rebate of Rs. 2,39,527 from his aforesaid obligation, inter alia, on the ground that for certain period, the liquor shops had to remain closed on account of curfew during that year. The assessee did not pay the aforesaid amount to the Excise Department chargeable from him as a part of price under the contract. It has claimed a deduction in respect of the aforesaid amount also, which has not actually been paid by him, but on the basis of accrued liability, in computation of his taxable income.

The AO has considered the aforesaid amount payable under the licence as an amount of duty payable by way of a licence fees amounting to a tax and, therefore, not deductible unless actually paid in terms of Section 43B of the IT Act, 1961.

On appeal, CIT(A) found that although the aforesaid amount was not payable as excise duty on manufacture of liquor, yet it was a tax and hence was covered by the provisions of Section 43B and upheld the disallowance by the ITO.

The Tribunal in second appeal, found that the "issue price" payable under the contract in the instant case was neither a duty nor a tax and, therefore, Section 43B was not attracted. It was also held by the Tribunal that merely because of stay of proceedings, the liability under the contract did not cease to exist and, therefore, the claim to deduction on the basis of liability that had accrued under it should not have been disallowed.

Aggrieved with the aforesaid judgment, the Revenue had preferred an application u/s 256(1) of the Act before the Tribunal for making reference of the aforesaid two questions to this Court as question of law for its decision.

The Tribunal found that no question of law arose out of the appellate order, which could be referred to this Court for its decision and rejected the same. Hence, this application u/s 256(2) of the Act of 1961.

Having heard learned counsel and after considering the relevant provisions of the Act, we are of the opinion that the Tribunal has not committed any error in rejecting the application u/s 256(1) on the ground that no question of law arises (out) of its order because the answer to the question raised is so obvious that it does not call for consideration by this Court.

Section 43B has been inserted by the Finance Act, 1983 (11 of 1983), Section 18 (w.e.f. 1st April, 1984).

The provision was amended for the first time by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1st April, 1989.

Since the matter concerns about the asst. yr. 1987-88, Section 43B as it was in force in 1987, would only govern this case. The provision at the relevant time read as under :

"43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of--

(a) any sum payable by the assessee by way of tax or duty under any law for the time being in force, or

(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in Section 28 of that previous year in which such sum is actually paid by him :

Provided that nothing contained in this section shall apply in relation to any sum referred to in Clause (a) which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under Sub-section (1) of Section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return :

Provided further that no deduction shall, in respect of any sum referred to in Clause (b), be allowed unless such sum has actually been paid during the previous year on or before the due date as defined in the Explanation below Clause (va) of Sub-section (1) of Section 36."

In the aforesaid context, provisions of Section 43B, a bare perusal shows that "issue price" payable by the assessee under the UP Excise Act as he was holding licence under the UP Excise Act was neither a tax nor any amount payable by him in his capacity as an employer so as to fall in any categories covered by Section 43B, as it stood during the relevant asst. yr. 1987-88.

Apart from the aforesaid, the matter has received attention of this Court in DB IT Appeal No. 8 of 2002 (CIT v. Udaipur Distillery Co. Ltd--decided on 3rd Sept., 2003) It related to disallowance of deduction by the Revenue, the amount paid/payable by the assessee as bottling fees.

We may notice here that w.e.f. 1st April, 1989, Clause (a) was amended to read as under :

"Any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force."

The Division Bench of this Court after considering the connotation of the expression used in Clause (a) came to the conclusion that they are different specie of genus ''tax'' and made reference to sum payable by way of a tax, duty or fee as import envisaged under Article 265 of the Constitution, the levy and collection of which needed the authority of law. So far as the amount payable as licence fees or any amount payable under different licences under the Excise Acts of the different States does not fall within that specie, but such sums are price paid by the licensee to acquire exclusive privilege of the State to trade in liquor or other intoxicants.

After referring to number of decisions, the Court came to the following conclusion :

"It would be pertinent to note that the expression now used in Section 43B is "tax, duty, cess or fee, or by whatever name called". It denotes that items enumerated constitute species of the same genus and the expression ''by whatever name called'' which follows 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 expression ''tax'', ''duty'', ''cess'', or ''fee'' as a group of its specie belong viz., compulsory extraction 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. The ''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 Article 265 which uses only one expression that no ''tax'' shall be levied and collected except authorised by law.

Its elementary meaning conveys 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 Article 73 by the Union or Article 162 by the State. Under Article 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 settled characteristic of ''tax'' in its wider sense includes all imposts. Imposts in the context have following characteristics :

(i) the power to tax is an incident of sovereignty.

(ii) ''Law'' in the context of Article 265 means an Act of legislature and cannot comprise an executive order or rule without express statutory authority.

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(iii) the term ''tax'' under Article 265 r/w Article 366(28) includes imposts of every kind viz., tax, duty, cess or fees.

(iv) As an incident of sovereignty and in the nature of compulsory exaction, a liability founded on principle of contract cannot be a ''tax'' in its technical sense as an impost, general, local or special".

The consistent answer which the Hon''ble Supreme Court has given is that the expression "fee" is not used in the State excise laws or the Rules in the technical sense of the expression. By "licence fee" or "fixed fee" under the State excise laws relating to potable liquors/intoxicate is meant the price or consideration which the Government charges to the licenses for parting with its exclusive privileges and granting them the licenses.

These decisions establish beyond any manner of doubt that the expression licence fee or fixed fee used in the context of the State excise law relating to potable liquor is the amount of consideration receivable by the State Government for parting with its exclusive privilege or right in any of its manifestations in dealing with the liquor or intoxicants meant for human consumption including the manufacture, storage, export, import or possession or sale as an essential part of its exclusive right to carry on trade or business in intoxicating liquors meant for human consumption.

The Court, referring to the position prior to amendment in the provision w.e.f. 1st April, 1989, the period for which we are also concerned, held that :

"Prior to Clause (a) of Section 43B was substituted by Finance Act, 1988, w.e.f. 1st April, 1989, it read ''any sum payable by assessee by way of tax or duty under any law for the time being in force for asst. yr. 1988-89, with which this appeal is concerned, the unamended provisions governs the computation of taxable income.

The provision has expressly included only two species of taxation, namely, ''tax'' or ''duty'' and has also not used wider expression ''by whatever name called'' so as to make applicable the provisions of Section 43B to the tax in generic sense to include within expression all forms of imposts as defined under Article 366(28) of the Constitution of India.

It may be seen that under the substituted provisions, the legislature has extended the operation of Section 43B by using the expression "tax, duty, cess or fee, by whatever name called" opening way to construe the provisions by applying the principle of ejusdem generis which was absent in its first incarnation. In such circumstances, it is not possible to extend meaning of expression ''tax'' or ''duty'' as it existed during the relevant period in question, to include all other specie of taxation like cess or fee also within its ambit. It gives altogether restricted operation to it. In their nature tax, duty, cess and fees differ on the basis of purpose for which such levies are imposed. The difference between tax, duty, cess or fees is well known.

Therefore, in our opinion when inhibition contained in Section 43B was not extended to all the species of taxation but only to two of its species viz., tax and duty, the distinct nature of different form of levies became relevant for the purpose of applicability of Section 43B. Since ''fee'' as distinct from tax or duty has not been subjected to provisions of Section 43B prior to 1st April, 1989, the liability incurred on bottling fee during the accounting period relevant to the assessment year in question would not be subjected to Section 43B of the Act even if it be assumed to be ''fee'' in its technical sense as specie of taxation."

In view of the aforesaid conclusion of the jurisdictional Court and the obvious language of the provision of Section 43B as it existed then, the answer is apparent that no amount of consideration payable by the assessee as a "price fee" for securing exclusive privilege to deal in liquor from the State also by way of tax, duty, cess or fee, by whatever name called fell within the broader sense ''tax'' or ''duty'' u/s 43B so as to attract its applicability.

The answer being clear and governed by the decision of jurisdictional Court, does not call for making of reference to this Court.

The second question suggested by the Revenue, in our opinion also does not fall within the ambit of question of law. It is well settled that because of pendency of any litigation, the liability which accrues under a contract does not become a contingent liability nor does it result in keeping the liability in a suspended animus so as not to be accounted for in the books of account by any prudent businessman. It may further be noticed that if the amount is held to be not payable by the assessee, it will be a question inviting operation of Section 40 for including the amount so deducted in the assessment year in question in the taxable income of the assessee in assessment year when he is relieved of such liability in respect of which he has claimed deduction in earlier assessment year.

Accordingly, the application is rejected.