TMI Blog2012 (9) TMI 1082X X X X Extracts X X X X X X X X Extracts X X X X ..... rt Advisory Committee of the Institute of Chartered Accountant of India - Held that:- Admittedly, the assessee’s submission is that it collects only those bottles which are left empty in front of liquor shops, which has not been controverted by the Revenue. So, there is no cost of acquisition as the same is not assessee’s property. Faced with this situation the ICAI advised it not to value the closing stock in the absence of acquisition as the principle of valuing the closing stock as market value, whichever is lower. So, the closing stock was not valued. Hence, on legality, we agree with the assessee. At the same time, we find from both Assessing Officer and CIT(Appeals)’s orders that there is neither any evidence referred qua proper verification of stock nor any findings of facts to this effect have been recorded. Faced with this situation, we remit the matter back to Assessing Officer to verify the factual position enumerated above after hearing the assessee in accordance with law. - Decided in favour of Revenue for statistical purpose. - I.T.A. Nos. 962/Mds/2010, 964/Mds/2011 and 07/Mds/2012 and I.T.A. Nos. 1202Mds/2010, 925/Mds/2011 and 258/Mds/2012 - - - Dated:- 18-9-2012 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghts of supplying whole sale Indian Made Foreign Liquor and Foreign Spirits (IMFL) throughout Tamil Nadu territory. The relevant provision of the Prohibition Act i.e., sec.17C(1A)(b) reads as follows :- 17-C. Exclusive privileges of manufacture, etc., may be granted [(1) It shall be lawful for the State Government to grant to any person or persons on such conditions and for such period as they may deem fir the exclusive or other privilege (a) X x x x x x x x x x x x x x x x x x x (b) X x x x x x x x x x x x x x x x x x x (1-A)(a) Notwithstanding anything contained in this Act, the Tamil Nadu State Marketing Corporation Limited, which is a Corporation wholly owned and controlled by the State Government, shall have the exclusive privilege of supplying, by wholesale, [Indian-made foreign spirits and foreign liquor], for the whole of the State of Tamil Nadu and no other person shall be entitled to any privilege of supplying, by wholesale, [Indian-made foreign spirits and foreign liquor] for the whole or any part of the State. Under sec.17-D of the Prohibition Act, State Govt. is further empowered to levy any sum or fees or both in lieu of grant of spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is Act have to be notified in the official Gazette which is also reproduced as under :- 55. Publication of rules and notifications All rules made and notifications issued under this Act shall be published in the Official Gazette and upon such publication, shall have effect as if enacted in this Act. 6. Under the provisions of Prohibition Act, the State of Tamil Nadu has also framed The Tamil Nadu IMFS (Supply by whole sale) Rules 1983 as per the powers vested in it under the Prohibition Act; prescribing the assessee to pay fo vend fees, additional vend fees and other related duties to the State on the quantities of IMFSL beer sold. Relevant Rule 15(3) of the above said rules in this regard is reproduced as follows :- 15(3) An additional vend fee at the rates specified below shall also be paid by the licensee on the quantities of IMFS and Beer sold. Rate of additional vend fee bulk litre (Rs. ) (i) Spirits, liquors, champagne and other wines classified by the Commissioner as sparkling wines containing more than 42 per cent of proof spirit. [57.72] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r transport of liquor for human consumption. Section 17C authorises the State Government to grant to any person or persons on such conditions and for such period as they may deem fit, the exclusive or other privilege of manufacturing, or selling by retail, country liquor or Indian-made Foreign Spirits. Sub-section (1A) of the section stipulates that notwithstanding anything contained in the Prohibition Act, the Tamil Nadu State Marketing Corporation Limited, which is a corporation wholly owned and controlled by the State Government, and which is the assessee before us, shall have the exclusive privilege of supplying, by wholesale, country liquor or Indianmade Foreign Spirits for the whole of the State of Tamil Nadu and no other person shall be entitled to the said privilege. Sub-clause (b) of sub-section (1A) of section 17C stipulates that notwithstanding anything contained in the Prohibition Act, the said Corporation shall be granted the licence, for the exercise of the said exclusive privilege, the license of course being subject to the rules made by the State Government and to the conditions and restrictions that might be imposed by the Commissioner appointed under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Entry 66 of the State List, or as a duty within the meaning of Entry 51A of the State List, or as a tax proper. 30. Such then is the conclusion on first principles. We may now see whether the conclusion is supported by authority. There is a long line of cases in which not only the status of the State Government as the sole and exclusive holder of rights and privileges in matters, connected with intoxicating drinks and liquors, but also its status as a seller of such rights have been recognised. In the case of State of Orissa v. Harinarayan Jaiswal AIR 1972 SC 1816, the highest bid in an auction held for granting the exclusive privilege of selling country liquor was not accepted by the State of Orissa; and the highest bidder challenged the said rejection, through a writ petition contending, inter alia, that the said rejection violated Articles 14 and 19(1)(g) of the Constitution. Dismissing the petition, the Supreme Court observed that the Government had the power to sell exclusive privileges and that secondly, it could not be contended that the owner of the privileges could not decline to accept the highest bid if it thought that the price offered was inadequate. In that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to intoxicants... ** ** ** ** Since rights in regard to intoxicants belong to the State, it is open to the Government to part with those rights for a consideration. By Article 298 of the Constitution, the executive power of the State extends to the carrying on of any trade or business and to the making of contracts for any purpose. ** ** ** ** The power of the Government to charge a price for parting with its rights and not the mode of fixing that price is what constitutes the essence of the matter. Nor indeed does the label affixed to the price determine either the true nature of the charge levied by the Government or its right to levy the same. (emphasis supplied). Dealing with the license fee or fixed fee charged by the State Government, the Supreme Court observed: The word 'fee' is not used in the Act or the Rules in the technical sense of the expression. By 'license fee' or 'fixed fee' is meant the price or consideration which the Government charges to the licensees for parting with its privileges and granting them to the licensees. As the State can carry on a trade or business, such a charge i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the characteristics of a tax, and in applying the provisions of section 43B of the Act. We, therefore, set aside the decisions of the lower authorities on this issue and direct the Assessing Officer to allow the assessee the benefit of revenue deduction in respect of the entirety of the sum of ₹ 9,83,30,732. 35. In the result, the assessee's appeal is allowed. In this manner, the co-ordinate bench was pleased to held that the fee paid by the assessee to the state Govt. in lieu of acquiring exclusive rights of liquor was neither a tax or a cess nor a duty. Basically, it was price paid by the assessee for enjoying the privilege granted by the Govt. qua liquor s whole sale supply rights. 8. Coming to the issue involved, on 13.11.2007, the assessee had filed its return stating income as ₹ 4,13,76,749. In scrutiny proceedings, the Assessing Officer noticed that the Assessee had been debiting Special Privilege Fees to Govt. of Tamil Nadu each year per Govt. orders. The assessee had show in its P L Account additional vend fee on monthly basis at the rate of ₹ 53.23 per litre of liquor from 1.4.2006 to 31.3.2007. Further, in view of the GO dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Tamil Nadu Government Gazette :- NOTIFICATION In exercise of the powers conferred by sections 17-D and 54 of the Tamil Nadu Prohibition Act, 1937 (Tamil Nadu Act X of 1937), the Governor of Tamil Nadu hereby makes the following amendment to the Tamil Nadu Indian Made Forweign Spirit (Supply by wholesale) Rules, 1983. 2. The amendment hereby made shall be deemed to have come into force on the 1st April 2006. AMENDMENT In the said Rules, in Rule 15, in sub-rule (3), for the expression 53.23, against item (i), the expression 57.72 shall be substituted. S. MALATHI SECRETARY TO GOVERNMENT Accordingly, the Assessee s submission before Assessing Officer was that since the special privilege fee had been increased retrospectively under the Prohibition Act and Rules framed thereunder (supra), it had no option but to make proviso regarding the revised rate of ₹ 57.72 per litre of liquor and claim the same in its profit and loss account as expenditure.. 9. The Assessing Officer in assessment order dated 14.12.2009 did not agree to assessee s contention and observed that the GO dated 20.7.2007 was not in operation as on 31.3.2007 (on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue s grievance is CIT(A) s directions issued to A.O. qua rate of ₹ 53.23 per litre for the whole of the previous year against ₹ 46.35/litre considered by the AO for the period 1.4.2006 to 24.10.2006 and ₹ 53.23/litre considered for the period from 25.10.2006 to 31.3.2007. 11. By drawing our attention to assessee s status, its privilege of having exclusive rights to supply Indian Made Foreign Liquors and foreign spirits in the entire State of Tamil Nadu, provisions of Prohibition Act, rules framed thereunder, GOs in question, assessee s making of provisions in compliance thereof and facts narrated hereinabove, the A.R. has justified assessee s action of making provision qua revised rates (supra) in its P L account in view of rates revised on 20/7/2007 by way of GO concerned. It has also been highlighted that the assessee follows mercantile system of accounting in which liability is allowable in the year of accrual even if the same is crystallized well beyond the previous year. More so, on the principle that under above system of accounting, the liability which has attained finality goes back to the year of accrual which in the instant case is A.Y. 2007-08 (t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... II Dept. dated 01.12.04 8.29 to 16.19 2005-06 2004.05 65 P E VIII Dept. dated 27.10.05 43.37 to 46.35 16.19 01.04.04 ( to 31.03.05) 2005-06 143(3) 2006-07 2005-06 74 P E VIII Dept. dated 25.10.06 46.35 to 53.23 16.19 01.04.05 ( to 31.03.06) 2006-07 143(3) The AR s submission is that the above assessments had been finalized u/s.143(3) of the Act allowing assessee s claim of liability which had arisen well after the relevant previous years were over. In support of this plea of consistency, the AR has placed reliance on case laws :- a) Laxmi Machine Works 241 ITR 53 Madras HC b) Ashoka Mills 52 TTJ 88, ITAT Ahmedabad c) Assam Roller Flour Mills v. CIT 227 ITR 43 Rajasthan HC d) Bharat Earth Movers 245 ITR 428 SC e) Bhojraj Textiles Mills Ltd. 2012 TIOL 381 Madras HC f) CIT v. Bokaro Steels Ltd. 236 ITR 315 13. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted as 42 ITD 349 titled as TASMAC v. CIT(supra) and submitted that though the decision still holds the field; but it only related to application of the provision of sec.43B of the Act and does not settle the liability s nature i.e. whether statutory or contractual. In the same breath, the DR has emphasized that a statutory liability arises only in case the State exercises its sovereign power of taxation by way of law whereas a contractual liability comes into picture only in case of an amount which becomes payable by way of a contractual obligation between the concerned parties. Thereafter, by taking us to Prohibition Act and Rules , he has laid stress in the plea that a licence thereunder is renewed each year on the basis of necessary application made by the assessee in lieu of Special Privilege Fee which shows that the liability is in fact contractual in nature and not statutory . 17. By further elaborating the nature and scope of contractual liability vis- -vis assessee s provision in question, the DR s contention is that the said payment is consideration for liquor rights is purely a commercial transaction and the same was payable @ Rs. 53.23 litre of li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to various contingencies (available in Paper Book) and submitted that the assessee s provision as made in P L account does not satisfy the contingencies in the form of conditions or situations existed in the balance sheet so as to warrant acceptance of claim. In his opinion, provision deserves to be made in P L account as it should have been there in balance sheet. Whilst making this submission, the case law referred is :- i) Morvi Industries v. CIT 82 ITR 35 (SC) ii) CIT v. Arvind Industries 201 ITR 821 (Gujarat HC) iii) CIT v. Alampally Brothers 50 DTR 325 (Karnataka) 20. The Revenue s next argument is that GO dated 20.72007 itself is invalid as no liability had accrued against the assessee in the absence of the so called amended rules since the same were never placed before the Tamil Nadu State Legislative Assembly nor they stand approved per specific provision in the Act and Rules and the GO dated 20.7.2007 is an executive order having no sanctity under the law. The case law relied upon in support is :- a) MCT Muthiah Chettiar Family Trust v. ITO (Mad) 86 ITR 284 b) Hukumchand v. VOI (1972) 2 SCC 601 21. The Revenue s next plea is that for all intents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also clarify here that the assessee s Chairman and Directors include Secretary of Department of Home, Prohibition and Excise of the Tamilnadu Govt. and other senior functionaries who also discharge the duties pertaining to the office of assessee s Managing Director. 25. Coming to the chronology of the events relevant to the case, it transpires that the provisions of Prohibition Act (supra) empowers the Tamil Nadu Govt. to impose certain fees and levies qua the liquor rights even with retrospective effect. The rates etc. to be paid are incorporated in the 1983 Rules . We notice that the rates contained in the rules are subject to provisions of the Act. By exercising this legislative authority, the State Govt. preferred to revise the whole sale rates in question with retrospective effect ie. from ₹ 46.35 per litre to Rs. 53.23 w.e.f. 1.4.2005 vide GO dated 25.10.2006. And from Rs. 53.25 per litre to Rs. 57.72 per litre w.e.f. 01.4.2006. The page 20 of Authorized Representative s 1st paper book (supra) further reveals that this has not been done for the first time as the very methodology is being followed since very many years. Therefore, we conclude it safely that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en assessee and Tamil Nadu Govt. clearly spelling out that there would be yearly revision of special privilege fee. At the same time, since the special privilege fee stood revised on 20.7.2007 and assessee was yet to finalize his account, so it had no other option but to make a provision (supra) in its profit and loss account. In this backdrop of facts of the instant case, we deem it appropriate to term the liability of special privilege fee as quasi-statutory in nature because every non-statutory liability cannot be called as contractual liability. 29. We also have duly considered Revenue s plea re validity of GO notification (supra). In this regard, the Authorised Representative has placed on record the relevant correspondence in support of the plea that the same had been duly put up before the Legislative Assembly of the Tamil Nadu State (supra). Meaning thereby that the GO dated 20.7.2007 has been validity legislated per the spirit of Prohibition Act Rules . Therefore, the legislative requirements of amendment incorporated in the rules framed under the Prohibition Act stand satisfied. 30. So far as plea of Revenue lifting corporate veil (supra) is concerned, it eme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Rule of consistency in such a case, cannot be given a go bye unless it contravenes a legal provision or the assessee s claim is apparently unallowable by its very nature. 32. Adverting to the voluminous case laws meticulously cited by ld. D.R., we hold that all these were instances where an assessee could not make even a provision during the relevant previous year due to lack of knowledge or awareness of liability even at the time of finalization of accounts and therefore forced to claim the same in the subsequent year. The dictum regarding accrual of liability referable to earlier years as held by various Hon ble Courts cannot be applied where the circumstances are exactly to the contrary. In our view, the case law of judicial pronouncements and precedents cannot be relied upon when facts and circumstances of the case in hand lead to a different conclusion. As in the instant case, the assessee has chosen to make a provision in its P L Account and claim the expenses in the same year itself. This in our opinion, is in consonance with the fundamentals of real income for the purpose of taxation. 33. In view of our above detailed examination of facts and relevant record, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he value of stock of bottles was ₹ 1.00 as on 31.03.2006 (supra). Per DR, the value of the opening stock as on 01.04.2006 also be adopted as at ₹ 1.00 as the assessee could not be allowed to vary the stock s computation above said. Accordingly, he prayed for acceptance of the issue in favour of the Revenue. 37. Opposing the arguments of the Revenue, the AR of the assessee, on the other hand, has made submissions that from Nov 03 Feb 05, the assessee had been collecting bottles of liquor sold. But, w.e.f. Feb 05, it has been computing the stock of bottles by estimating the value per net reasonable method. He has also clarified that no new bottles have been acquired during the Asst. Year and the stock is of old bottles which was computed as Rs. 1.00. In addition, he has also made submissions that for verification, the matter be sent back to Assessing Officer with direction to pass order afresh in accordance with law. 38. We have given our thoughtful consideration to the issue and also perused relevant facts and findings. Admittedly, the assessee s submission is that it collects only those bottles which are left empty in front of liquor shops, which has not been c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT(A) has directed the Assessing Officer to levy the minimum penalty in view of the order dated 23.04.2010 (supra). Therefore, both the assessee as well as Revenue are in appeal before us. 43. Both the representatives appearing for the assessee and the Revenue are ad idem that our findings in the main case i.e. I.T.A. Nos. 962 and 1202/Mds/2010 (supra) regarding quantum proceedings under section 143(3) of the Act squarely cover the instant appeals as well. 44. We have considered the fair submissions. Accordingly, we are of the opinion that in the quantum proceedings, since we have accepted the assessee s appeal qua the special privilege fee (supra) substituted vide G.O. dated 20.07.2007, we allow the assessee s appeal against penalty confirmed by the CIT(A) and dismiss the Revenue s appeal. Consequently, I.T.A. No.07/Mds/2012 filed by the assessee is allowed and I.T.A. No. 258/Mds/2012 filed by the Revenue stands dismissed. I.T.A. Nos. 925/Mds/2011 964/Mds/2011: Assessment Year 2008-09 45. These two cross appeals filed by the Revenue and the assessee respectively have been preferred against the order of the CIT(A) III, Chennai dated 18.03.2011 in ITA No ..... X X X X Extracts X X X X X X X X Extracts X X X X
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