‘Privilege Fee’ is allowable as Expenditure u/s 37 of Income Tax Act: ITAT Hyderabad [Read Order]


In a recent ruling, the ITAT, Hyderabad observed that the amount paid as “privilege fee” to the Government is an allowable expenditure under section 37 of the Income Tax Act. The division bench also noted that payment made to the CM’s relief fund, in pursuance of the letter from the Principal secretary is deductible from the total income of the assessee under section 80G of the Income Tax Act, 1961.

The assessee, in the instant case, is engaged in the business of manufacture and trading of liquor in the State of A.P. by the Govt. of A.P. for a privilege fee.The assessing Officer had disallowed the assessees’ claim towards the expenses in connection with the payment of privilege fee on ground that the “privilege fee” is not revenue expenditure. The AO further rejected the claim of deduction of the amount paid as voluntary contribution towards the CM’s Relief Fund by finding that the contribution to the fund was not “voluntary” since it was paid in pursuance of a letter of the Principal Secretary to the Government and therefore, it cannot be deducted under section 80G of the IT Act.

The Revenue relied upon the decisions of the Karnataka High Court and the Tribunal, in which it was held that the payment of surplus/margin/privilege is only partly of the profit of the assessee corporation to the State and therefore, it cannot be anything else but application of income and therefore, not allowable as an expenditure.

The bench noticed the decision of the Karnataka High Court in the case of Karnataka State Beverages Corporation Ltd, has considered all the aspects of the issue and has held that the payment of privilege fee/special privilege fee etc., by whatever name called is an allowable expenditure. Based on the above decision, the bench held that the amount paid as privilege fee is an expenditure allowable u/s 37 of the Act.

With regard to the disallowance of amount paid to the CM’s relief fund, the bench noted that “the CM’s Relief Fund is an approved fund u/s 80G of the Act but the assessee is required to pay the privilege fee, special privilege fee etc, after setting off its expenditure only from the receipts and we have already held that privilege fee is an allowable expenditure. In these circumstances, the assessee would not be left with any fund to make a donation to C.M’s Relief Fund. Even otherwise, the contribution is an allowable deduction. Therefore, we are of the opinion that this ground of the Revenue becomes infructuous in view of our finding above.”

Read the full text of the order below.