Income Deduction For State Govt Undertakings - 'Exclusivity' Under S. 40(a)(iib) of Income Tax Act Not Based On Number Of Undertakings : Supreme Court

The facts of the case pertained to appeals filed by Kerala State Beverages Manufacturing & Marketing Corporation Ltd.(KSBC), a state-owned undertaking that was aggrieved by a Kerala High Court order that was only partially in favour of KSBC which was charged with a total sum of INR 811,90,88,115 in taxes with respect to payment of gallonage fee, license fee, shop rental(kist) and surcharge on sales tax by Principal Commissioner of Income tax. Hence, this combination of appeals was preferred by both parties.

The case before the bench from the appellant's side was that the gallonage fee, license fee, shop rental (kist)), surcharge on sales tax and turnover tax did not fall within the purview of Section 40 of Income Tax Act which talks about amounts that are not deductible from income while calculating tax while the case of the respondents (The Assistant Commissioner of Income Tax) was that all the aforementioned amounts are covered under S. 40(a)(iib) and as such are not deductible for the purpose of income computation for the years 2014-2015 and 2015-2016.

The bench looked at all the above-mentioned fees and charges separately to deduce which ones will be included under S. 40(a)(iib). The bench noted that Article 289 of the Constitution exempts property and income of a state from Union taxation and this protection has led to the diverting of profits by the states from state-owned undertakings to Consolidated funds of respective states and S. 40(a)(iib) was inserted in 2013 to plug this diversion of profits from such undertakings to State's treasury. And thus, in view of that, any amount which is levied exclusively on state-owned undertaking could not be claimed as deduction and would be liable to income tax.

The bench then divided the levies into three categories and looked into gallonage fee, license fee and shop rental (kist) payable for licenses issued under FL-9 and FL-1 and while commenting on the High Court's order stated that, "The High Court has held that gallonage fee, license fee and shop rental (kist) with respect to FL-9 license are not deductible as it is an exclusive levy on the corporation. High court has also held that as there is no other player holding licenses under FL-9 like KSBC as such the word 'exclusivity' used in S. 40(a)(iib) attract such amounts. At the same time only on the ground that FL-1 licenses are issued not only to the KSBC but also to Kerala State Co-operatives Consumers Federation Ltd., High Court has held that exclusivity is lost so as to apply the provision under S. 40(a)(iib). If the amended provision under S.40(a)(iib) is to be read in the manner, as interpreted by the High Court, it will literally defeat the very purpose and intention behind the amendment."

The bench further added that, "The aspect of exclusivity under S. 40(a)(iib) is not to be considered with a narrow interpretation, which will defeat the very intention of legislature, only on the ground that there is yet another player, viz., Kerala state cooperatives consumers federation Ltd. which is also granted license under FL-1. The aspect of 'exclusivity' under S. 40(a)(iib) has to be viewed from the nature of undertaking on which levy is imposed and not on the number of undertakings on which the levy is imposed."

Thus, the bench observed that the findings of the High Court that gallonage fee, license fee and shop rental (kist) would not be attracted by S. 40(a)(iib), could not be accepted as it ran contrary to the object and intention behind the legislation.

Regarding surcharge, the bench agreed with the view of senior counsel appearing for appellants and stated that, "the 'fee' or 'charge' as mentioned in S. 40(a)(iib) is clear in terms and that will take in only 'fee' or 'charge' as mentioned therein or any fee or charge by whatever name called but cannot cover tax or surcharge on tax and such taxes are outside the scope and ambit of S. 40(a)(iib)(A) and S. 40(a)(iib)(B) of the Act."

The bench thus, set aside the assessments made against assesse for assessment years 2014-2015 and 2015-2016 and directed the assessing officer to pass appropriate orders within a period of two months from date of receipt of judgment.

Case name:  Kerala State Beverages Manufacturing and Marketing Corporation Ltd versus Assistant Commissioner of Income Tax

Citation: 2022 LiveLaw (SC) 4

Case no.: CA 11 of 2022

Coram: Justices R. Subhash Reddy and Hrishikesh Roy