Commissioner Of Income-Tax v. Varas International (P.) Ltd.

The Judgment of the Court was delivered by

Visheshwar Nath Khare, C.J:— In this reference at the instance of the Commissioner of Income-tax, West Bengal-Ill, Calcutta, the Income-tax Appellate Tribunal has referred the following three questions of law to this court for its opinion:

“(1) Whether, on the facts and in the circumstances of the case and on a correct interpretation of the amendment made by the Finance Act, 1988, to section 43B(a) of the Income-tax Act, 1961, which has been explained as clarificatory of legislative intention by the Explanatory Notes issued by the Government, the Tribunal was justified in law in not holding that the said amendment will be retrospective in its application?

(2) Whether, on the facts and in the circumstances of the case and on a correct interpretation of section 2(10) of the Bengal Excise Act, 1909, by applying the principles of ‘ejusdem generis’ the Tribunal was justified in law in holding that the priviledged and specified fee as mentioned in rules 2 and 6 of the Excise Rules cannot be construed as the fee used in section 43B(a) of the Income-tax Act, 1961?

(3) Without prejudice to questions Nos. (1) and (2) above, whether, on the facts and in the circumstances of the case and on a correct interpretation of the income-tax law and the State excise law, the Tribunal was justified in law in holding that the fees payable by the assessee was not excise duty and thereby deleting the addition made in the assessment in this regard?”

2. When this matter was taken up it was agreed between the parties that questions Nos. (2) and (3) be taken first and in case questions Nos. (2) and (3) are decided in favour of the Revenue, only then question No. 1 may be taken up and answered. Accordingly, we take up questions Nos. (2) and (3) first.

3. Briefly stated, the facts leading to this reference are that the assessee is engaged in the business of manufacture and vending of country liquor. Under the Bengal Excise Act, 1909 (hereinafter referred to as the Act), and the Rules framed thereunder, the Government of West Bengal settles the right of manufacture and vend of country liquor in favour of the licensee/contractor for a consideration. For the assessment year 1984-85, the assessee took a contract/licence for manufacture of country liquor on payment of price/licence fee. It appears that after the assessee took the contract/licence, he challenged the said charge by means of a petition under article 226 of the Constitution of India in the High Court of Calcutta and obtained an ad interim order by which the State of West Bengal was prohibited from collecting the price/licence fee from the assessee. After obtaining the ad interim order, the assessee in its return debited Rs. 2,78,465 as excise duty to its profit and loss account and further claimed deduction of the said liability. The Assessing Officer disallowed the deduction on the ground that the nature of levy/consideration is duty and, as such, no deduction can be allowed under section 43B of the Income-tax Act. Aggrieved the assessee filed an appeal to the Commissioner of Income-tax (Appeals) who upheld the order of the Assessing Officer. Thereafter, the assessee filed a second appeal before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal took the view that the price which the assessee is required to pay to the State Government and which has been stayed by the High Court of Calcutta, is not in the nature of duty and, as such, although such price has not been paid to the State Government, the assessee can claim deduction in respect thereof, and, consequently, the appeal was allowed. In pith and substance, questions Nos. (2) and (3) are as to whether the price/consideration/licence fee which the assessee is required to pay to the State Government in favour of the State Government for taking the permission/licence to manufacture country spirit is a tax or duty or cess or fee?

4. Section 43B provides that notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of any sum payable by the assessee by way of tax, duty, cess or fee shall be allowed only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him.

5. A reading of section 43B shows that if the charge/price which the assessee has to pay to the State Government for obtaining the licence/contract for manufacture of country liquor is not tax, duty or cess or fee, deduction can be claimed by him without paying the licence fee to the State Government.

6. Learned counsel appearing for the Department has urged that the licence fee which the assessee is required to pay to the State Government for the purpose of obtaining licence for manufacture of country spirit is in the nature of fee and in any case it is a duty and as such without payment of such fee to the Government the assessee cannot claim any deduction under section 43B of the Act.

7. This has been contested by learned counsel for the assessee. What he argues is that in fact the price/licence fee that the assessee is required to pay to the State Government for having permission/licence for manufacture of country liquor is neither a fee nor cess nor tax nor excise duty. In fact charge/consideration is something different from what has been enumerated in section 43B of the Income-tax Act and, as such, the assessee has rightly claimed deduction for the amount which has been stayed by the Calcutta High Court.

8. On the arguments of learned counsel for the parties the first question that arises for consideration is what is the nature of the consideration when the State Government parts with the exclusive privilege in favour of a licensee to manufacture or vend country liquor.

9. Section 2(10) of the Bengal Excise Act defines excise revenue—excise revenue means revenue derived or derivable from any duty, fee, tax payment (other than a fine imposed by a criminal court) or confiscation imposed or ordered under this Act or any other law for the time being in force relating to intoxicants.

10. Section 22 provides for grant of exclusive privilege of manufacture and sale of country liquor or intoxicating drugs. It is relevant here to extract section 22(1) below:

“The State Government may grant to any person, on such conditions and for such period as it may think fit, the exclusive privilege—

(a) of manufacturing, or supplying by wholesale, or

(b) of manufacturing, and supplying by wholesale, or

(c) of selling, by wholesale or retail, or

(d) of manufacturing or supplying by wholesale and selling retail, or

(e) of manufacturing and supplying drug within any specified retail, any country liquor or intoxicating drug within any specified local area:

Provided that public notice shall be given of the intention to grant any such exclusive privilege, and that any objections made by any person residing within the area affected shall be considered before an exclusive privilege is granted.”

11. In exercise of the power conferred by section 86 of the Act the State of West Bengal has framed rules known as West Bengal Excise (Manufacture of Country Spirit in Labelled and Capsuled Bottles) Rules, 1979 (hereinafter referred to as “the Rules”).

12. Rule 2 provides that no person shall undertake manufacture of country spirit in labelled and capsuled bottles unless he is a grantee of exclusive privilege of supply by wholesale of country spirit in labelled and capsuled bottles and holder of wholesale licence for the sale by wholesale of country spirit in labelled and capsuled bottles.

13. Rule 3 provides that no such person shall undertake the manufacture except in warehouse/warehouses set for the purpose or to be established for the purpose within the area of his exclusive privilege or outside thereof subject to specific approval of the Commissioner of Excise and endorsement to that effect in his licence for the sale by wholesale of country spirit in labelled and capsuled bottles.

14. Rule 5 provides that the grantee of the exclusive privilege and licensee for the sale by wholesale of country spirit in labelled and capsuled bottles shall not sublet or lease out the manufactory to any person nor shall take any person to become his partner.

15. Rule 6, over which much emphasis has been laid by learned counsel appearing for the Department provides that the manufacturer shall pay the fees at the rates hereinafter provided by adjustment to the credit of the State Government in personal ledger accounts in the manner provided in the table.

16. Learned counsel appearing for the Department on the strength of these rules argues that the nature of consideration is fee which is evident from a reading of rules 2, 3, 5 and 6 of the rules and, therefore, the consideration being fee the Assessing Officer has rightly decided not to allow the claim for deduction in respect of the dues which the assessee is required to pay to the State Government for which he has obtained an interim order from the High Court at Calcutta.

17. To appreciate the argument of learned counsel for the Department we may bear in mind that the right to carry on business in intoxicants is not a fundamental right and it has been branded as abnormous business and a citizen is not entitled to carry on such business as a matter of right. This right exclusively vests in the State and the State while parting with this exclusive privilege in favour of any private party can charge a fee or consideration.

18. These matters were examined by the Supreme Court in several decisions which we would like to advert hereinafter.

19. In Har Shankar v. Dy. Excise and Taxation Commissioner [1975] (1975) 1 SCC 737 : AIR 1975 SC 1121, a Constitution Bench of the Supreme Court held “since rights in regard to intoxicants belong to the State it is open to the Government to part with those rights for a consideration” and then observed “the distinction which the Constitution makes for legislative purposes between a ‘tax’ and a ‘fee’ and the characteristics of these two as also of ‘excise duty’ are well-known”. “A tax is a compulsory exaction of money by public authority for public purposes enforceable by law and is not a payment for services rendered”. “A fee is a charge for special services rendered to individuals by some Governmental agency and such a charge has an element in it of a quid pro quo. Excise duty is primarily a duty on the production or manufacture of goods produced or manufactured within the country”. The Constitution Bench of the Supreme Court in that case thereafter held that the amounts charged to the licensees in that case, i.e, the consideration for parting with the rights in regard to intoxicants, to the licensees, i.e, persons in whose favour such rights have been parted with, are evidently neither in the nature of a tax nor of excise duty and that the licence fee which the State Government charged to the licensees through the medium of auctions or the “fixed fee” need bear no quid pro quo to the services rendered to the licensees. It further says that the word “fee” is not used in the Act or the Rules in the technical sense of the expression. By “licence 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 is the normal incident of a trading or business transaction.

20. In Panna Lal v. State of Rajasthan (1975) 2 SCC 633; (1975) 2 SCC 633 : AIR 1975 SC 2008, three learned judges of the Supreme Court held that the licence fee stipulated to be paid by the licensees is the price or consideration or rental which the Government charges from the licensees for parting with its privilege in stipulated lump sum payment and is a normal incident of a trading or business transaction. It further Says that the State has the exclusive right to manufacture and sell liquor and to sell the said right in order to raise Revenue. The rental is the consideration for the privilege granted by the Government for manufacturing or vending liquor. The rental is neither a tax nor an excise duty. The rental is the consideration for the agreement for grant of the privilege by the State Government.

21. In State of Haryana v. Jage Ram, (1980) 3 SCC 599 : AIR 1980 SC 2018, three learned judges of the Supreme Court held that the amount which is paid by the vendors of intoxicants to the State Government for obtaining from the State Government the right to vend intoxicants is neither a fee nor excise duty but the price of the privilege which the State parted in favour of such vendors.

22. In Synthetics and Chemicals Ltd. v. State of U.P (1990) 1 SCC 109; (1990) 1 SCC 109 : AIR 1990 SC 1927, a Constitution Bench comprising of seven judges of the Supreme Court held that there is no fundamental right to carry on trade or business in liquor which affects public health or welfare of the people. The States do have the power to regulate the use of alcohol and that power must include the power to make provisions to prevent and/or check industrial alcohol being used as intoxicating or drinkable alcohol. A fee or levy which has no connection with the cost or expenses administering the regulation, can be imposed purely as a regulatory measure, but judged with the legislation impugned it can be definitely stated that these levies cannot be treated as part of regulatory measures. No attempt has been made by the State to establish the quid pro quo between the levy on industrial alcohol and the expenses incurred in denaturing the ethyl alcohol, the cost of denaturants, process and regulation, etc. The need to protect the community from the evil effects of drinking does not by itself empower the State to levy a duty or impost or fee not warranted by the Constitution nor sanctioned by the specific provisions of the Constitution and the laws. Entry 8 of List II containing the words “intoxicating liquor” cannot support a tax. Intoxicating liquor must mean liquor which is consumable by human beings.

23. In Government of Andhra Pradesh v. Anabeshahi Wine and Distilleries Pvt. Ltd., (1988) 2 SCC 25 : AIR 1988 SC 771, which was decided by two learned judges, some employees of the excise department were posted at the factory of the licensee carrying on the business of manufacture and sale of wine and other allied products, the licensee was liable to pay the salaries and allowances, etc., of the excise staff so appointed when demand for payment of the establishment charges was to be made by the Government. It was held that the establishment charges payable by the licensee are neither in the nature of tax nor excise duty, but constitute the price or consideration which the Government charges to the licensee for parting with its privileges and granting them to the licensees. The Supreme Court observed that the privilege to manufacture and sell wine and other allied products is exclusively vested with the Government and the business could not have been carried on by the licensee unless a licence had been granted to it under the Act and the Rules. It was further held that the licensee was not under any obligation to take the licence, it was open to it to have refrained from taking any licence under the Act and the Rules if it was not willing to pay the price as required by the Government for the grant of the privilege to manufacture and sell intoxicants.

24. All the aforesaid judgments were considered by the Supreme Court in State of Uttar Pradesh v. Sheopat Rai, 1994 Supp (1) SCC 8 : AIR 1994 SC 813, where it was held that 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 2 of Schedule VII to the Constitution.

25. 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.

26. 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.

27. The Legislature in section 43B of the Income-tax Act has used the expression “by way of”. Therefore, it is the obligation of the Assessing Officer to ascertain whether the amount payable is by way of tax or duty or fee or cess although the amount payable may not be described as tax or duty or fee or cess. Therefore, the conclusion is that where the amount is described as fee but in fact, is not, the question of applying section 43B in regard to such payment will not arise.

28. In that view of the matter, the answer to questions Nos. (2) and (3) is in the affirmative and against the Revenue.

29. In view of our opinion on questions Nos., (2) and (3) we need not answer question No. (1). Therefore, question No. (1) is sent to the Tribunal unanswered.

30. Let our opinion on question Nos. (2) and (3) be sent to the Tribunal forthwith.

31. In view of the facts and circumstances of the case, there shall be no order as to costs.

Barin Ghosh, J.:— I agree.