TMI Blog2003 (9) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... nsel for the parties. In this appeal against the judgment of the Income-tax Appellate Tribunal, Jodhpur Bench, Jodhpur, dated June 27, 2001, the following two questions were framed as substantial questions of law involved in the appeal vide order dated May 24, 2002: "(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in deleting the addition of Rs. 5,61,462 by holding that unpaid amount of bottling fee has, on furnishing of bank guarantee, to be treated as actual payment and, accordingly, the deduction in respect of the same cannot be denied under section 43B of the Income-tax Act, 1961? (2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in deleting the addition of Rs. 61,412 made by the Assessing Officer on account of disallowance of landscaping expenses not covered under section 35(1)(iv) of the Income-tax Act by wrongly relying on the decision in I. T. A. No. 1546/Jp of 1995 dated March 30, 2001?" By order dated August 26, 2003, while hearing of the appeal was going on, we have framed the following question No.3 also as substantial question of law in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oresaid decision and accordingly delete this disallowance of expenses on research and development." The Tribunal's order falls back upon its previous order relating to the assessment year 1992-93. In the previous year relevant to the assessment year 1992-93, it was found that the fast food business of assessee has been closed in relation to which the expenses in question for the year 1992-93 have been claimed. From a perusal of the aforesaid order, it appears that the order for the assessment year 1992-93, passed by the Tribunal related to the claim of the assessee for depreciation in respect of the assets of research and development employed in its fast food business which has since been closed. Moreover, we are neither concerned with the expenses related to a closed business nor with the claim to depreciation. We are concerned here with the assessment year 1988-89 and the claim for deductions of certain expenses incurred for landscaping and transportation of business of the assessee. There is no dispute about the fact also that during the assessment year 1988-89, the fast food business of the assessee was continuing business. In fact the relevant order would have been the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruction of building for the business of the assessee but for making the land fit for cultivation of vegetables. Thus, the expenses are directly related to the business activity of cultivation operations for growing vegetables and fruits, and not for creation of any asset of enduring nature. It cannot be termed as capital expenditure in any sense. Therefore, it ought to have been allowed as deduction under section 37(1) as expenses wholly and exclusively incurred for carrying on the business of the assessee. For the same reason the expenses also become deductible under section 35(1)(i) as it is permissible to claim revenue expenditure too as research and development expenses under section 35(1). He contended that the research and development activities related to cultivating and growing more and better quality of fruits and vegetables which are integrally related to the business of the assessee. About the nature of one of the assessee's business as fast food, there is no dispute. Alternatively, he contends that even if for any reason the landscaping expenses for levelling and making fit the land cultivable for growth of fruits and vegetables is held to be capital expenses, still it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven otherwise, treating it to be regular process of cultivation and not amounting to capital expenditure, expenses incurred on agriculture or cultivation activities are not allowable as such. As per the case of the petitioner, fruits and vegetables cultivated by him on the land in question are used by itself for its business relating to fast food and preserved food and the vegetables and fruits are not sold in the market. Under such circumstances, the expenses relating to agriculture activities as such are not allowable as deduction from the income of the assessee, but the income being composite partly agriculture and partly from business, it has to be dealt with in terms of rule 7 of the Income-tax Rules, 1962, which prescribes computation of income which is partly from agriculture and partly from business. If, on the other hand, fruits and vegetables grown on the land are sold in the market, income being agriculture and exempted from tax under section 10(1), no expenses relating thereto either revenue or capital become allowable as deduction from the income from the business. We have referred to these alternatives only because necessary facts about these are not on record. View ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestigation into the question of facts. The requirement of section 43B of the Act is actual payment and not deemed payment as condition precedent for laying the claim to the deduction in respect of any of the expenses incurred by the assessee during the relevant previous year specified in section 43B. Furnishing a bank guarantee cannot be equated with actual payment. Actual payment requires that money must flow from the assessee to the public exchequer as such as specified in section 43B. In our opinion, there cannot be two opinions on the requirements of section 43B. The Division Bench of this court in the case of CIT v. Rajasthan Patrika Ltd. [2002] 258ITR 300 has said that by no stretch of imagination can it be said that furnishing of a bank guarantee is actual payment of tax or duty in cash. A bank guarantee is only a guarantee for payment on some happening and that cannot be actual payment as required under section 43B of the Income-tax Act, 1961, for allowance as a deduction in the computation of profits. We are in agreement with the aforesaid ratio laid down in Rajasthan Patrika's case [2002] 258 ITR 300 (Raj). The statute does not confer power on the authority or th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the hon'ble Supreme Court in the case of Har Shankar v. Deputy Excise and Taxation Commissioner, AIR 1975 SC 1121; Panna Lal v. State of Rajasthan, AIR 1975 SC 2008; State of Haryana v. Jage Ram, AIR 1980 SC 2018 and State of U. P. v. Sheopat Rai, AIR 1994 SC 813. Our attention was also invited to a recent decision of the Calcutta High Court in the case of CIT v. Varas International P. Ltd. [1997] 225 ITR 831. The Calcutta High Court has held that bottling fee chargeable under the West Bengal Excise Act, 1909, read with rules 2 and 6 of the West Bengal Excise (Manufacture of Country Spirit in Labelled and Capsuled Bottles) Rules, 1979, could not be construed as fee or duty or cess or tax and deduction can be claimed by an assessee without paying the licence fee to the State Government. On the other hand it was contended by learned counsel for the Revenue that in the context of section 43B wherein any sum becomes payable as fee under any provision of the statute, it is not for the Assessing Officer as to what is the nature of such levy. He alleged that in the assessee's own case the Division Bench of this court held that there exists a quid pro quo to characterize bottling fee as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revious 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." It would be pertinent to note that the expression now used in section 43B(a) 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 nomenclature, but notwithstanding the name, they must fall within the genus "taxation" to which the expression "tax", "duty", "cess" or "fee" as a group of its specie belong, viz., compulsory exaction in the exercise of the State's power of taxation where levy and collection is duly authorised by law as distinct from an amount chargeable on principle as consideration payable under a contract. The principle of statutory interpretation is well known and well settled that when particular words pertaining to a class, category or genus are followed by general words, the general words are construed as limited to things ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the outset, we must refer to the controversy with reference to which decision was rendered by this court in the assessee's own case in Udaipur Distillery Co. Ltd. v. State of Rajasthan [1996] 2 WLC 413. The assessee which was a petitioner in the said decision is a manufacturer and vendor of Indian made foreign liquor which is an excisable article within the meaning of the Rajasthan Excise Act, 1950, and it has been issued licence to manufacture and vend Indian made foreign liquor. Indian made foreign liquor is potable liquor meant for human consumption. The assessee was also given a licence for bottling IMFL manufactured by it. The assessee challenged the levy of bottling fee as violative of the Constitution, inter alia, on the ground that the Industries (Development and Regulation) Act, 1951, has been enacted by Parliament and by the Amendment Act No.71 of 1956, "fermentation industries" were included in item No.26 in the Schedule appended to that Act and the control of which has been vested exclusively in the Union. On that premise, it was contended that the State Legislature has no power to control such industry. Fermentation industry will necessarily include the entire industry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llery [1996] 2 WLC 413 has not considered the question that has been raised before us as to the nature of liability which arises under the provisions of the Excise Act and the Rules, whether it is an impost in the nature of fees or consideration for parting with exclusive privilege as a part of contractual obligation arising out of trade activity of the State. It is apparent that no discussion finds place on the nature of the bottling fee chargeable under the Rajasthan Excise Act and the Rules. The question whether the real nature of the bottling fee is consideration for parting with exclusive privilege was left undecided having sustained the charge on one of the grounds raised by the parties. Merely because the levy of bottling fee can also be sustained as fee in its technical sense does not shut the enquiry into the real nature of the fee chargeable under State excise laws. Right from the decision of the hon'ble Supreme Court in the case of State of Bombay v. F. N. Balsara AIR 1951 SC 318 a number of Constitution Benches of the apex court had occasion to consider this aspect of the matter as and when the question about the validity of levy of licence fee under different State E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e State Government alone was competent to impose a tax or an excise duty under the Act and that power could not be delegated to the Financial Commissioner or any other officer. The argument on this question was that section 34 of the Act which empowered the Financial Commissioner to levy fee was not a charging section, but if it is construed as containing a delegation to him of the power of the State to levy taxes, no guidelines were laid down and thus, the delegation was excessive. Secondly, the fee which could be imposed by the Financial Commissioner under section 34 of the Act could only be justified if it had a reasonable relation to the services rendered to the licensees. If it was imposed solely or mainly for the purpose of collecting revenue, it was outside the ambit of item 66 of List II of the Seventh Schedule to the Constitution. The amounts realised in the auctions in the guise of licence fees were so exorbitant that they could not possibly be justified as fee under item 66. It may be noticed that the two questions were the same as had been raised by the challenger before this court in Udaipur Distillery's case [1996] 2 WLC 413 viz., that as a tax, levy of fee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it by sections 27 and 34 to grant leases of its rights and to issue the requisite licences, permits or passes on payment of such fees as may be prescribed by the Financial Commissioner. We may notice here that notwithstanding holding that trading in potable liquor is not fundamental right and it is the exclusive privilege which vests in the State, on the question of charges which are charged by the State Government for parting with its exclusive privilege, two different notes have been struck earlier thereto which have been considered in Har Shankar's case, AIR 1975 SC 1121. The first different note was struck by the hon'ble apex court in the case of Cooverjee B. Bharucha v. Excise Commissioner and the Chief Commissioner, AIR 1954 SC 220 in which Mahajan C.J., speaking for the court said that the fee imposed on the licensee was move in the nature of tax than a licence fee. Referring to this judgment, the court in Har Shankar's case AIR 1975 SC 1121, said that in Cooverjee's case, AIR 1954 SC 220. the impugned power having been exercised in respect of a centrally administered area, the power was not fettered by the legislative lists, loses its relevance in the view we are taking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness in liquor proceeded in that case, avowedly, from a desire to clear the confusion arising from the "different views" expressed by the two judges of the High Court. This may explain why the court restricted its final conclusion by holding that dealing in liquor is business and the citizen has a right to do business in that commodity. The court did not say, though such an implication may arise from its conclusion, that the citizen has a fundamental right to do trade or business in liquor. The judgment in Krishankumar's case, AIR 1967 SC 1368 does not negate the right of the State to prohibit absolutely all forms of activities in relation to intoxicants. The wider right to prohibit absolutely would include the narrower right to permit dealings in intoxicants on such terms of general application as the State deems expedient. From the aforesaid judgment it is clear that licence fee under the State excise statutes are charged for parting with the exclusive privilege of the State to deal in liquor which includes manufacture, storage, export, import, sale and possession. In all their manifestations, these rights are vested in the State and are related to exercise of right to char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upreme Court had said that "intoxicating liquor" in entry 8 of the State List includes all kinds of liquor including non-potable liquor and held it to be also part of exclusive privilege. To the extent the Supreme Court held that entry 8 in the State List extends to include industrial or non-potable liquor also was not approved and that power was also held to refer to potable liquors only as held by the Bombay High Court. However, no deviation was made from the view expressed by the Supreme Court that entry 8 of List II cannot support a tax, such power must exist independent of it. After the aforesaid two decisions another landmark judgment was delivered by the hon'ble Supreme Court in the case of State of U.P. v. Sheopat Rat, AIR 1994 SC 813. The case of Sheopat Rai, AIR 1994 SC 813 arose as a result of dispute having arisen under the U.P. Excise Act, 1910. After referring to the various provisions of the U. P. Excise Act, the court said that the term "licence fee" or the term "fixed fee" in the context of the U.P. Excise Act, the Ordinance with its preamble and the Excise (Amendment) Rules connotes the idea of payment of a sum by a person to the grantor of a licence as consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er entry 8, List II. Section 24A is, therefore, intra vires the State's power to legislate. The power exercisable by the Excise Commissioner in the matter of the mode of levy and collection of the "licence fee" and "fixed fee" under the Excise (Amendment) Rules is also intra vires. The court specifically posed the question and answered it in the negative as under: "The term 'licence fee' or 'fixed fee' used in the context of the U. P. Excise Act, the Ordinance read with the preamble and the Excise (Amendment) Rules, if, as indicated by us, are the amount of consideration receivable by the State Government for parting with its exclusive privilege or right in dealing with liquor or drugs including the exclusive privilege of vending foreign liquor in favour of a private party under a licence (contract), the next question is-whether such amount of consideration receivable by the Government could form the subject-'fee' or 'tax' or 'duty' or 'cess' referred to as such, in one or the other entry of List II of the Seventh Schedule to the Constitution, on which a State gets competence to legislate. Our answer to this question, ought to be in the negative." This judgment is in line wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adkumar Jayantikumar Pasawalla, AIR 1992 SC 2038 that: "In a fiscal matter it will not be proper to hold that even in the absence of express provision, a delegated authority can impose tax or fee. In our view, such power of imposition of tax and/or fee by a delegated authority must be very specific and there is no scope of implied authority for imposition of such tax or fee." 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 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. On this premise, the irresistible conclusion is that bottling fee chargeable under the Rajasthan Excise Act, 1950, read with rule 69 of the Rajasthan Excise Rules, 1956, cannot but be the consideration for parting with the State's ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the periodical licence for retail vend of foreign liquor granted on the basis of a 'fixed fee' or 'licence fee' connote and mean consideration received by the Government for parting with its exclusive privilege to deal in intoxicants and such fee is neither a tax, nor a fee, nor an excise duty nor cess and the same can only be levied under entry 8 of List II of Schedule VII to the Constitution. In that view of the matter, it now stands concluded that the fee or charges received by the Government for parting with its exclusive right to manufacture or vend intoxicants is neither a tax nor a duty nor a fee nor a cess. Section 43B of the Income-tax Act says that unless tax or duty or fee or cess, in whatever name the same may be called, is paid in fact during the concerned year the assessee shall not be entitled to the deduction in the matter of computation of his income. If the amount payable is neither tax nor duty nor fee nor cess, the question of applying the provisions of the said section does not and cannot arise." It was further observed that the Legislature in section 43B of the Income-tax Act has used the expression "by way of". Therefore, it is the obligation of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facture or for sale is a part of exclusive privilege of the State which can be parted with in favour of someone only by issuing licence in favour of him exclusively or with one or more manifestations depending upon granting authority under the Act. Significantly Chapter V deals with duty and fees. Section 28 deals with excise duty or a countervailing duty, as the case may be, at such rate or rates as the State Government shall direct, may be imposed either generally or for any specified local area, on any excisable article imported or exported or transported or manufactured, cultivated or collected under any licence granted under this Act or manufactured in any distillery, pot-still or brewery established or licensed under this Act. Section 29 provides for mode of levying duty chargeable under section 28 of the Act. Section 30 of the Rajasthan Excise Act, 1950, provides that instead of or in addition to any duty leviable under the Chapter, the Excise Commissioner may accept payment of a sum in consideration of the grant of the licence for exclusive privilege under section 24. Section 34 of the Rajasthan Excise Act states that the State Government reserves its right to can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions, the conclusion is irresistible that bottling fee was charged from the respondent-assessee by the State Government by way of consideration for parting with its exclusive privilege to bottle liquor, whether as part of manufacturing process or for facilitating its sale, it does not alter its character from price charged by the State for parting with its exclusive privilege of bottling potable liquor as one of the manifestations to deal in potable liquor to a charge by way of "fee" as an impost as a facet of taxation as defined in article 366(28). Consequently, if the assessee maintains his books of account as per the mercantile system, he is entitled to claim deduction of such expenses incurred by him by way of bottling fee for the accounting period when it becomes payable to the State Government as consideration. Such liability is allowable deduction as an expenditure in the year in which it is incurred even if actual payment is deferred. Section 43B is not attracted in such case. Lastly, it was contended that so far as the assessment year 1988-89, in this case, is concerned, the provisions of section 43B were extended only to the tax and duty. Cess and fees had not been inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or enjoyable by the individual from whom the fee is to be exacted. Quid pro quo need not be in exact proportion to benefit extended nor it necessarily means that any particular individual actually enjoys such benefit. Apparently, it is not the case before us by the Revenue that bottling fee can be described as tax or duty or cess properly so-called. The contention is that the bottling fee is a fee chargeable by the State for regulating the liquor trade and which is founded on quid pro quo. Therefore, in our opinion, when inhibition contained in section 43B was not extended to all species of taxation but only to two of its species, viz., tax and duty, the distinct nature of different form of levies become relevant for the purpose of applicability of section 43B. Since "fee" as distinct from tax or duty has not been subjected to the provisions of section 43B prior to April 1, 1989, the liability incurred on account of 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 assumes to be "fee" in its technical sense as specie of taxation. In this conclusion we are fortified by the Division ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be allowed as deduction in view of section 43B. The Madhya Pradesh High Court said: "Section 43B as it stood during the period relevant to the assessment year in question provided that notwithstanding anything contained in any other provision of the Act, a deduction otherwise allowable under the Act in respect of any sum payable by the assessee by way of tax or duty under any law for the time being in force shall be allowed only in computing the income of the previous year in which such sum is actually paid by the assessee. By an amendment by the Finance Act, 1988, sums payable towards cess and fee were also included which clearly indicates that the provisions as they stood at the relevant time did not include or encompass cess or fee. The short question that falls for our consideration, therefore, is whether the mandi tax or market fee is a tax or a fee as in case it is a fee, the provisions of section 43B, as it then stood, would not apply. The levy of tax is for the purpose of general revenue and there is no element of quid pro quo between a taxpayer and the public authority whereas a fee is generally levied for special services rendered. The Supreme Court in Kewal Krishan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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