Surcharge on Sales Tax and Turnover Tax is not a ‘Fee or Charge’: Kerala HC quashes Income Tax Assessments against Kerala Beverage Corporations [Read Judgment]

Kerala - income tax assessment - Beverage Corporations - substantial rights - Ground - Technical Lapse - Kerala HC - Taxscan

The High Court of Kerala has recently quashed the income tax assessment orders against the Kerala State Beverage Corporations where the Court held that the surcharge on sales tax and turnover tax is not a ‘fee or charge’ coming within the scope of Section 40 (a) (iib) of the Income Tax Act, 1961 and is not an amount which can be disallowed.

The Appellant, Kerala State Beverages Corporation Limited is a company registered under the Companies Act, engaged in wholesale and retail trade of beverages within the State of Kerala, and is a ‘State Government Undertaking’ falling within the ‘Explanation’ provided under Section 40 (a) (iib) of the Income Tax Act, 1961.

The Deputy Commissioner of Income Tax finalized the assessment of income tax against the appellant, under Section 143 (3) of the Act, through the order of assessment. But, the Principal Commissioner of Income Tax, Thiruvananthapuram initiated proceedings under Section 263 of the Act and set aside the order of assessment, on holding that the same is erroneous and is prejudicial to the interest of the revenue, to the extent it failed to disallow the debits made in the Profit and Loss Account of the assessee with respect to the amount of surcharge on sales tax and turn over tax paid to the State Government, which ought to have been disallowed under Section 40 (a) (iib) of the Act. Against the order of the Principal Commissioner of Income Tax, issued under Section 263 of the Act, the appellant approached the Tribunal, which dismissed the petition.

The common question of law arising in the case is that, whether the Gallonage Fee, Licence fee, Shop rental (Kist) and Surcharge on sales tax and turnover tax, with respect to which debits were made by the assessee in their Profit and Loss Account, are liable to be disallowed while computing the income derived as “profit and gains of business or profession”, under Section 40 (a) (iib) of the Act, by treating them as amounts paid “by way of royalty, license fee, service fee, privilege fee, service charge or any other fee or charge by whatever name called, which is levied exclusively on” by the assessee.

The division bench consisting of Justice C.K. Abdul Rahim and Justice T.V. Anil Kumar held that the surcharge on sales tax and turnover tax is not a ‘fee or charge’ coming within the scope of Section 40 (a) (iib) of the Income Tax Act, 1961 and is not an amount which can be disallowed. Therefore the disallowance made is liable to be set aside.

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