Kerala State Beverages (M&M) corporation Ltd, Trivandrum V. The ACIT, Trivandrum

ITA 66/COCH/2014

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81327 (ITAT-COCHIN)
• Duration Of Justice: 6 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-09-2014
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 23-07-2014
• Assessment Year: 2010-2011
• Appeal Filed On: 19-02-2014
• Court: TRIBUNAL
• Department Lawyers: M ANIL KUMAR
• Assessee Lawyers: K S MADHU
• Keywords: Capital asset; Revenue expenditure
• Section: 43B; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND CHANDRA POOJ ARI, AM I.T.A. NOS. 65 & 66/COCH/2014 ASSESSMENT YEARS : 2009-10 & 2010-11 KERALA STATE BEVERAGE (M&M) CORPORATION LTD. SASTHAMANGALAM, TRIVANDRUM-695 010. [PAN: AAACK 9431G] VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX,CIRCLE-1(1), TRIVANDRUM. (ASSESSEE -APPELLANT) (REVENUE-RESPONDEN T) ASSESSEE BY SHRI K.S. MADHU, CA REVENUE BY SHRI M. ANIL KUMAR, CIT(DR) DATE OF HEARING 23/07/2014 DATE OF PRONOUNCEMENT 28/08/2014 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THESE TWO APPEALS FILED BY THE ASSESSEE ARE DIRECT ED AGAINST THE COMMON ORDER DATED 16-01-2014 PASSED BY THE CIT(A), TRIVAN DRUM FOR THE ASSESSMENT YEARS 2009-10 AND 2010-11. 2. THE FIRST COMMON GROUND IN THESE TWO APPEALS IS WITH REGARD TO DISALLOWANCE OF SURCHARGE ON SALES TAX AND TURNOVER TAX PAID BY THE ASSESSEE. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A WHOLESALE TRADER OF INDIAN MADE FOREIGN LIQUOR AND BEER IN THE STATE OF KERALA. SUBSEQUENTLY, THE I.T.A. NOS. 65&66 /COCH/2014 2 GOVERNMENT OF KERALA ENTRUSTED THE ENTIRE RETAIL SA LE OF BOTH THE ABOVE ITEMS. THE ASSESSEE IS BOUND TO FOLLOW ALL THE PROVISIONS OF THE KERALA GENERAL SALES TAX ACT. THE ASSESSEE HAS BEEN PAYING VARIOUS DUTIE S AND LEVIES PAYABLE BY THE ASSESSEE AS PER THE PROVISIONS OF THE ABOVE ACT AS WELL AS OTHER ACTS SUCH AS KERALA AKBARI ACT. HENCE THE ASSESSEE HAS BEEN REGU LARLY REMITTING SALES TAX, TURNOVER TAX AND SURCHARGE ON SALES TAX TO THE GOVE RNMENT OF KERALA AS PER THE PROVISIONS OF THE KERALA GENERAL SALES TAX ACT, 196 3 AND THE KERALA SURCHARGE ON TAXES ACT,1957. THE ASSESSING OFFICER WHILE COM PLETING THE ASSESSMENT DISALLOWED THE AMOUNTS PAID BY THE ASSESSEE TOWARDS SURCHARGE ON SALES TAX AND TURNOVER TAX. 4. ON APPEAL, THE CIT(A) OBSERVED THAT IN USUAL COURSE OF ANY PAYMENT RELATING TO THE SALES MADE UNDER THE PROVISIONS OF SALES TAX ACT, IS AN INDIRECT TAX, BECAUSE SUCH TAXES ARE COLLECTED FROM THE PURC HASERS. ACCORDING TO THE CIT(A), IN THE INSTANT CASE, AND IN THIS PARTICULAR COMMODITY OF LIQUOR AND BEVERAGES, AN ARRANGEMENT HAS BEEN MADE BY THE GOVE RNMENT TO COLLECT THE SURCHARGE ON SALES TAX AS WELL AS THE TURNOVER TAX DIRECTLY FROM THE SELLER, WHICH IS THE ASSESSEE COMPANY, WHICH ENJOYS MONOPOLY, UND ER THE STATE LAW IN THIS TRADE. BUT, THE QUESTION IS WHETHER SUCH AN ARRANGE MENT COULD WITHSTAND VIS-- VIS THE CENTRAL LEGISLATION UNDER THE I.T. ACT, SO FAR AS DETERMINATION OF PROFIT FROM BUSINESS AND PROFESSION IS CONCERNED. THE CIT (A) OBSERVED THAT IT IS OBVIOUS UNDER THIS ARRANGEMENT UNDER THE PROVISIONS OF THE LAW ENACTED BY THE I.T.A. NOS. 65&66 /COCH/2014 3 STATE WOULD THE TAX ON ACTUAL PROFIT BE NOT FORGONE BECAUSE IF THE TAXES SO CHARGED AS SURCHARGE AND TURNOVER TAX (TOT), AND DE BITED TO P&L A/C, THE PROFIT WOULD BE REDUCED TO THAT EXTENT AND THE TAXES WOULD HAVE BEEN APPROPRIATED ONLY AFTER PAYMENT OF INCOME TAX ON THE PROFIT EARN ED BY THE ASSESSEE. ACCORDING TO THE CIT(A), THOUGH THE EXPRESS PROVISI ON HAS BEEN BROUGHT ON THE INCOME TAX STATUTE U/S. 40(IIB) W.E.F. 1/4/2014, DE NYING THEREBY CERTAIN AMOUNT WHICH ARE NOT DEDUCTIBLE IN COMPUTING THE INCOME CH ARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION, THE UN DERLYING PRINCIPLE IS BASED ON THE SUBJECT AS TO HOW TO CHARGE CERTAIN EXPENSES NO T AMOUNTING TO APPROPRIATION OF PROFIT. IN VIEW OF THE DISCUSSION OF THE FACTS A ND THE APPLICABILITY OF THE PROVISIONS OF SECTION 37 OF THE ACT, THE CIT(A) HEL D THAT THE ASSESSING OFFICER HAS RIGHTLY INFERRED THAT ANY PAYMENT ON ACCOUNT OF SUR CHARGE ON SALE TAX AND TURNOVER TAX CANNOT BE CLAIMED AS AN EXPENDITURE AL LOWABLE U/S. 37 OF THE ACT AND AS SUCH PAYMENT OF SURCHARGE AND TOT CANNOT BE A CHARGE ON THE INCOME TAX. IN VIEW OF THIS, THE CIT(A) CONFIRMED THE ADDI TION MADE BY THE ASSESSING OFFICER ON THIS COUNT. AGAINST THIS, THE ASSESSEE HAS FILED THE APPEALS BEFORE US. 5. THE LD. AR SUBMITTED THAT THE ASSESSEE IS BOUND TO PAY SURCHARGE ON THE SALES TAX PAID AS PER THE PROVISIONS OF THE KERALA SURCHARGE ON TAXES ACT, 1957 (ACT 11 OF 1957). THE SUB-SECTION 1 OF SECTIO N 3 OF THE SAID ACT STATES THAT THE TAX PAYABLE UNDER SUB-SECTION 1 OF SECTION 3 O F THE KERALA GENERAL SALES TAX ACT, 1963, BY A DEALER IN FOREIGN LIQUOR SHALL BE INCREASED BY A SURCHARGE AT I.T.A. NOS. 65&66 /COCH/2014 4 THE RATE OF TEN PERCENT AND THE PROVISIONS OF THE K ERALA GENERAL SALES TAX ACT, 1963 SHALL APPLY IN RELATION TO THE SAID SURCHARGE AS THEY APPLY IN RELATION TO THE TAX PAYABLE UNDER THE SAID ACT. HE FURTHER SUBMIT TED THAT THE SUB-SECTION 2 OF SECTION 3 OF THE SAID ACT SAY THAT NOTWITHSTANDING ANYTHING CONTAINED IN SUB- SECTION (1) OF SECTION 22 OF THE KERALA GENERAL SAL ES TAX ACT, 1963, NO DEALER REFERRED TO IN SUB-SECTION (1) SHALL BE ENTITLED TO COLLECT THE SURCHARGE PAYABLE UNDER THE SAID SUB-SECTION. THE SUB-SECTION 3 OF SECTION 3 OF THE SAID ACT STATES THAT ANY DEALER WHO COLLECTS SURCHARGE PAYABLE UND ER SUB-SECTION (1) IN CONTRAVENTION OF THE PROVISION OF SUB-SECTION (2) S HALL BE PUNISHABLE WITH FINE WHICH MAY EXTEND UPTO ONE THOUSAND RUPEES AND NO CO URT BELOW RANK OF A MAGISTRATE OF THE FIRST CLASS SHALL TRY ANY SUCH OF FENCE. THE LD. AR SUBMITTED THAT THE ABOVE PROVISIONS OF LAW CLEARLY STATES THA T ANY DEALER IN FOREIGN LIQUOR IS BOUND TO REMIT SURCHARGE AND CANNOT DO THE BUSINESS WITHOUT REMITTANCE OF SURCHARGE. HENCE THE CIT(A) OUGHT TO HAVE HELD THA T THE ABOVE PAYMENT WAS MADE PURELY FOR THE BUSINESS OF THE ASSESSEE AND FU RTHER THAT THE ASSESSEE WOULD BE EXPOSED TO PENAL PROVISIONS IF HE CARRIES ON THE BUSINESS WITHOUT PAYMENT OF SURCHARGE. HENCE THE LD. AR SUBMITTED T HAT THE ASSESSEE HAVE PAID SURCHARGE, A STATUTORY LIABILITY, WHOLLY AND EXCLUS IVELY FOR THE PURPOSE OF THE BUSINESS CARRIED ON BY THE ASSESSEE AND THEREFORE A LLOWABLE UNDER SECTION 37 OF THE INCOME TAX ACT, 1961. I.T.A. NOS. 65&66 /COCH/2014 5 6. AS PER THE PROVISIONS OF SUB-SECTION 1(B) OF SEC TION 5 OF THE KERALA GENERAL SALES TAX ACT, 1963, THE ASSESSEE IS SPECIF ICALLY MADE LIABLE TO PAY TURNOVER TAX AT THE POINT OF SALE. FURTHER SUB CLAU SE 1 OF SUB-SECTION 2 OF SECTION 5 OF THE SAID ACT STATES NOTWITHSTANDING ANYTHING CONTAINED IN SUB-SECTION (1) EVERY DEALER IN FOREIGN LIQUOUR, AS SPECIFIED HEREU NDER, SHALL PAY TURNOVER TAX ON THE TURNOVER OF FOREIGN LIQUOR AT ALL POINTS OF SAL E IN THE STATE... FURTHER SUB- CLAUSE(II) OF SUB-SECTION 2 OF SECTION 5 OF THE SAI D ACT SAYS THAT NOTWITHSTANDING ANYTHING CONTAINED IN SUB-SECTION (1)OF SECTION 22, NO DEALER SHALL COLLECT FROM HIS PURCHASER THE TURNOVER TAX PAYABLE BY HIM UNDER THE SUB-SECTION. THE ABOVE PROVISIONS OF LAW CLEARLY STATES THAT THE ASS ESSEE IS LIABLE TO PAY TURNOVER TAX AT THE POINT OF SALE AND THE BUSINESS CANNOT BE CARRIED ON WITHOUT THE REMITTANCE OF TURNOVER TAX. HENCE THE LD. AR SUBMI TTED THAT THE CIT(A) OUGHT TO HAVE HELD THAT THE ABOVE PAYMENT WAS MADE PURELY FO R THE BUSINESS OF THE ASSESSEE. THE LD. AR SUBMITTED THAT THE ASSESSEE HA VE PAID THE TURNOVER TAX A STATUTORY LIABILITY, WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS CARRIED ON BY THE ASSESSEE AND THEREFORE ALLOWABLE UNDER SE CTION 37 OF THE I.T. ACT, 1961. 7. THE LD. AR SUBMITTED THAT THE FINDING OF THE CIT (A) THAT THE ASSESSEE SHOULD HAVE APPROPRIATED THE SURCHARGE AND TURNOVER TAX AFTER OFFERING THE INCOME TO TAX IS AGAINST THE PRINCIPLES OF ACCOUNTI NG AND FACTS OF THE CASE. THESE AMOUNTS ARE PAID WHOLLY AND EXCLUSIVELY FOR T HE BUSINESS OF THE ASSESSEE I.T.A. NOS. 65&66 /COCH/2014 6 TO COMPLY WITH THE PROVISIONS OF STATUTES ENACTED B Y THE STATE GOVERNMENT FOR PERSONS CARRYING ON THE BUSINESS AS CONDUCTED BY TH E ASSESSEE. HENCE, THE LD. AR SUBMITTED THAT THE CIT(A) OUGHT TO HAVE CONCLUDE D THAT THE ABOVE PAYMENTS ARE REVENUE IN NATURE AND AN ALLOWABLE EXPENDITURE AS PER THE PROVISIONS OF THE INCOME TAX ACT, 1961. 8. THE LD. AR SUBMITTED THAT THE CIT(A) HAS OBSERVE D IN HIS ORDER AS A MATTER OF FACT AND IN USUAL COURSE OF ANY PAYMENT R ELATING TO SALES MADE UNDER THE PROVISIONS OF THE SALES TAX ACT, IS AN INDIRECT TAX, BECAUSE SUCH TAXES ARE COLLECTED FROM THE PURCHASERS. IN THE INSTANT CASE , AND IN THIS PARTICULAR COMMODITY OF LIQUOR AND BEVERAGES AN ARRANGEMENT HA S BEEN MADE BY THE GOVERNMENT TO COLLECT SURCHARGE ON SALES TAX AS WEL L AS TURNOVER TAX DIRECTLY FROM THE SELLER, WHICH IS THE ASSESSEE COMPANY WHIC H ENJOYS MONOPOLY, UNDER THE STATE LAW IN THIS TRADE. BUT THE QUESTION IS W HETHER SUCH AN ARRANGEMENT WOULD WITHSTAND VIS--VIS THE CENTRAL LEGISLATION U NDER THE INCOME TAX ACT SO FAR AS DETERMINATION OF PROFITS FROM BUSINESS AND PROFE SSION IS CONCERNED. IN THIS REGARD THE LD. AR RELIED ON THE JUDGMENT OF THE HON BLE APEX COURT IN THE CASE OF S KODAR S. STATE OF KERALA (1974) 34 STC 73(SC) WHEREIN THE SUPREME COURT HAS CONFIRMED ITS EARLIER DECISIONS IN J.K. JUTE MI LLS CO. VS. STATE OF U.P. AND IN KONDURI BUCHIRAJALINGAM VS. STATE OF HYDERABAD WHER EIN IT WAS HELD THAT IT IS NOT AN ESSENTIAL CHARACTERISTICS OF SALES TAX THAT THE SELLER MUST HAVE THE RIGHT TO PASS IT ON TO THE CONSUMER. I.T.A. NOS. 65&66 /COCH/2014 7 9. THE LD. AR FURTHER SUBMITTED THAT THE HONBLE AP EX COURT HAS IN HOECHST PHARMACEUTICALS LTD. VS. STATE OF BIHAR, JAMUNA FLO UR AND OIL MILLS VS. STATE OF BIHAR, PHARMA ASSOCIATES VS. STATE OF BIHAR (1985) 154 ITR 0064 HAS HELD THAT THAT A DEALER FALLING WITHIN THE CLASS DEFINED IN S. 5(1) OF THE BIHAR FINANCE ACT, 1981, VIZ. ONE WHOSE GROSS TURNOVER EXCEEDS RS. 5 L AKHS A YEAR, IS PREVENTED BY S. 5(3) FROM COLLECTING THE SURCHARGE IMPOSED BY S. 5(1) RECOVERED FROM HIM, DOES NOT EFFECT THE COMPETENCE OF THE STATE LEGISLA TURE TO MAKE A PROVISION LIKE S.5(3) NOR DOES THE SURCHARGE ON THAT ACCOUNT BECOM E A TAX ON HIS INCOME. 10. THE LD. AR SUBMITTED THAT THE CIT(A)S OBSERVAT ION THAT IT IS OBVIOUS THAT UNDER THIS ARRANGEMENT ALBEIT, UNDER THE PROVISIONS OF THE LAW ENACTED BY THE STATE WOULD THE TAX ON ACTUAL PROFIT BE NOT FOREGON E IS AGAINST THE FACTS OF THE CASE. THE SURCHARGE ON SALES TAX AND TURNOVER TAX A RE IN THE NATURE OF TAXES LEVIED ON EVERY DEALER OF FOREIGN LIQUOR AND ARE NO T AN APPROPRIATION FROM PROFITS BY THE STATE GOVERNMENT. MOREOVER, THE ASSESSEE HA S TO PAY THESE LEVIES BASED ON THE SALES IRRESPECTIVE OF THE FACT WHETHER THE A SSESSEE IS MAKING PROFIT OR NOT. THE LD. AR ALSO RELIED ON THE JUDGMENT OF THE HONB LE APEX COURT IN THE CASE OF S. KODAR VS. STATE OF KERALA (1974) 34 STC73 (SC) W HEREIN IT WAS HELD THAT WE ARE OF THE VIEW THAT ADDITIONAL TAX IS REALLY A TAX ON SALE OF GOODS. THE OBJECT OF THE ACT IS TO INCREASE THE TAX ON SALE OR PURCHASE OF GOODS IMPOSED BY TAMIL NADU GENERAL SALES TAX ACT, 1959AND THE FACT THAT Q UANTUM OF ADDITIONAL TAX IS I.T.A. NOS. 65&66 /COCH/2014 8 DETERMINED WITH REFERENCE TO THE SALES TAX IMPOSED WOULD NOT ALTER ITS CHARACTER. IT IS IN REALITY A TAX ON THE AGGREGATE OF SALES AF FECTED BY A DEALER DURING THE YEAR... THE DECISION IN ERNAKULAM RADIO COMPANY VS .STATE OF KERALA (1) WHICH WAS AFFIRMED BY A DIVISION BENCH OF THE KERALA HIGH COURT IN KILIKER VS. SALES TAX OFFICER (2) TOOK THAT VIEW. THE SAME VIEW WAS TAKE N BY ANDHRA PRADESH HIGH COURT IN THE CASE OF A.S. RAMACHANDRA RAO VS. STATE OF ANDHRA PRADESH WHICH IS THE CORRECT VIEW. ENTRY 54 IN LIST II AUTHORIZES THE STATE LEGISLATURE TO IMPOSE A TAX ON SALE OR PURCHASE OF GOODS. SO THE CONTENTION OF THE ASSESSEE THAT THE ADDITIONAL SALES TAX IS NOT A TAX ON SALES BUT ON T HE INCOME OF THE DEALER IS WITHOUT ANY BASIS. HENCE, THE LD. AR SUBMITTED THA T THE FINDING OF THE CIT(A) THAT PAYMENT OF SURCHARGE AND TURNOVER TAX CANNOT B E A CHARGE O INCOME TAX IS AGAINST THE FACTS OF THE CASE. 11. THE LD. AR FURTHER SUBMITTED THAT THE OBSERVATI ON OF THE CIT(A) THAT THE LEVIES ARE INFACT APPROPRIATED OUT OF PROFIT OF THE CORPORATION SINCE THESE ARE NOT PASSED ON TO CONSUMERS. IS WITHOUT PROPER EVALUA TION OF THE PROVISIONS OF THE STATUTES APPLICABLE TO THE PAYMENTS REFERRED IN THE APPEAL. THE LD. AR SUBMITTED THAT THE SALE PRICE OF THE PRODUCT IS FIXED CONSIDE RING EFFECT OF THESE LEVIES ALONG WITH OTHER EXPENSES. ACCORDING TO THE LD. AR, THE HONBLE SUPREME COURT IN THE CASE OF S KODAR VS STATE OF KERALA, CITED SUPRA HEL D THAT IT IS NOT NECESSARY THAT DEALER SHOULD BE ENABLED TO PASS ON THE INCIDENCE O F TAX ON SALE TO THE PURCHASER IN ORDER THAT IT MIGHT BE A TAX ON THE SALE OF GOOD S. ALTHOUGH THE LEGAL INCIDENCE I.T.A. NOS. 65&66 /COCH/2014 9 OF A TAX ON SALE OF GOODS UNDER THE ACT FALLS SQUAR ELY ON THE DEALER. IT MAY BE THAT HE CAN ADD THE TAX TO THE PRICE OF THE GOODS A ND THUS PASS IT ON TO THE PURCHASER. AS ALREADY STATED THE LEVIES ARE INDIR ECTLY PASSED ON TO THE CONSUMERS AS THESE LEVIES ARE CONSIDERED AS AN EXPE NDITURE OF THE ASSESSEE WHILE FIXING THE SALE PRICE OF THE PRODUCTS. THE ST ATUTES SPECIFICALLY STIPULATE THAT THE LEVIES SHOULD BE COLLECTED FROM THE CONSUMERS A ND HENCE THE LD. AR REQUESTED THAT IN VIEW OF THE ABOVE APEX COURT JUDG MENT, THESE ARE REVENUE EXPENDITURES OF THE ASSESSEE AND HENCE ALLOWABLE UN DER THE PROVISIONS OF THE I.T. ACT. 12. THE LD. AR SUBMITTED THAT THE OBJECT OF THE STA TE LEGISLATURE FOR SURCHARGE AND TURNOVER TAX IS TO INCREASE THE RATE OF TAX ON DEALERS AND NOT TO APPROPRIATE PROFITS. THE LEVY OF SURCHARGE AND TURNOVER TAX IS BASED ON ACTS ENACTED DURING 1957 AND 1963. THE ASSESSEE IS A COMPANY FORMED ON 23 RD FEBRUARY 1984 AND THE STATUTORY PROVISIONS FOR THE LEVY OF SURCHARGE AND TURNOVER TAX WERE IN FORCE WELL BEFORE THE INCORPORATION OF THE ASSESSEE COMPA NY. ACCORDING TO THE LD. AR AS PER SECTION 5 OF THE KERALA GENERAL SALES TAX AC T, THE PROVISIONS RELATED TO CHARGING OF TURNOVER TAX ARE ALSO APPLICABLE FOR PE TROLEUM PRODUCTS AND OTHER GOODS AND TO OTHER ASSESSEES INCLUDING BAR ATTACHED HOTELS, WHICH IS LICENSED UNDER FOREIGN LIQUOR RULES. SIMILARLY, AS PER THE P ROVISIONS OF THE KERALA SURCHARGE ON TAXES ACT, 1957, SURCHARGE IS ALSO CHA RGEABLE ON AGRICULTURAL INCOME TAXES. HENCE, THE LD. AR SUBMITTED THAT THE LEVY OF SURCHARGE AND I.T.A. NOS. 65&66 /COCH/2014 10 TURNOVER TAX IS NOT A LEGISLATIVE ARRANGEMENT BY TH E STATE GOVERNMENT TO APPROPRIATE PROFIT OF THE ASSESSEE COMPANY WHICH EN JOYS A MONOPOLY UNDER THE STATE LAWS IN ITS TRADE. 13. THE LD. AR RELIED ON THE JUDGMENT OF THE HONBL E CALCUTTA HIGH COURT IN THE CASE OF CIT VS. V.K.L. THIRANI & CO. LTD. (1996 ) 218 ITR 0149 WHEREIN IT WAS DECIDED THAT THE TURNOVER TAX IS AN EXPENDITURE ALL OWABLE UNDER SECTION 43B OF THE I.T. ACT. THE LD. AR SUBMITTED THAT SECTION 43 B OF THE I.T. ACT BEGINS WITH THE WORDS NOTWITHSTANDING ANYTHING CONTAINED IN AN Y OTHER PROVISION OF THIS ACT, A DEDUCTION OTHERWISE ALLOWABLE UNDER THIS ACT T HIS MEANS THAT EXPENDITURE ALLOWABLE UNDER SECTION 43B IS ALLOWABLE UNDER OTHE R PROVISIONS OF THIS ACT. HENCE THE LD. AR SUBMITTED THAT THE ABOVE EXPENDITU RE IS ALLOWABLE UNDER THE PROVISIONS OF THE I.T. ACT. 14. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORD ER OF THE CIT(A). 15. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORD. ADMITTEDLY, IN THIS CASE, THERE IS NO DISPUTE BY THE DEPARTMENT TH AT THE STATE GOVERNMENT HAS MADE ANY AMENDMENT TO THE ACT SO AS TO WRITE BACK T HE ENTIRE PROFIT OF THE ASSESSEE TO THE STATE GOVERNMENT. UNDER THE STATE GOVERNMENT ACT, PART OF SURCHARGE ON SALES TAX AND TURNOVER TAX IS TO BE PA ID BY THE ASSESSEE TO THE GOVERNMENT. THE MOMENT THE ASSESSEE MAKES SALES WH ICH ARE SUBJECT TO I.T.A. NOS. 65&66 /COCH/2014 11 SURCHARGE ON SALES TAX AND TURN OVER TAX, THE OBLIG ATION OF THE ASSESSEE IS TO PAY TAX AND TAX IS ATTRACTED. IN THE PRESENT CASE, THE ASSESSEE QUANTIFIED THE LIABILITY. IF IT IS PAID WITHIN THE DUE DATE, THE PAYMENT OF T HE SAME IS TO BE ALLOWED IN TERMS OF SEC. 43B OF THE I.T. ACT. THE ASSESSEE WH O FOLLOWS THE MERCANTILE SYSTEM OF ACCOUNTING IS ENTITLED TO DEDUCT SALES TA X FROM THE PROFIT AND GAINS OF THE BUSINESS WHICH HAD ACCRUED DURING THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR SUBJECT TO THE PROVISIONS OF SECTIO N 43B OF THE I.T. ACT. WHILE COMPUTING THE PROFIT AND GAINS OF THE BUSINESS, WHE THER THE ASSESSEE IS ENTITLED TO A PARTICULAR DEDUCTION OR NOT WILL DEPEND ON THE PROVISIONS OF LAW RELATING THERETO AND NOT ON THE VIEW WHICH THE ASSESSEE MIGH T TAKE OF ITS RIGHTS NOR CAN THE EXISTENCE OR ABSENCE OF ENTRIES IN ITS BOOKS OF ACCOUNT BE DECISIVE OR CONCLUSIVE IN THE MATTER. SINCE THE ASSESSEE IS FO LLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, THE ASSESSEE IS FULLY JUSTIFIED IN C LAIMING DEDUCTION TOWARDS SURCHARGE ON SALES TAX AND TURNOVER TAX WHICH IS PA YABLE IN THE FINANCIAL YEAR CORRESPONDING TO THE RELEVANT ASSESSMENT YEAR. ACC ORDINGLY, WE ARE INCLINED TO HOLD THAT THE CLAIM OF THE ASSESSEE IS TO BE ALLOWE D. 16. THIS HAS THE SUPPORT OF THE FOLLOWING JUDGMENTS OF THE HIGH COURTS AND SUPREME COURT: I) KEDARNATH JURTE MFG. CO. LTD. VS. CIT (82 ITR 363) (SC) II) CIT VS. KALINGA TUBES LTD. (218 ITR 164) (SC ) I.T.A. NOS. 65&66 /COCH/2014 12 III) KALPETTA ESTATES LTD. VS. COMMISSIONER OF AGRI CULTURAL INCOME-TAX (220 ITR 546) (KER.) IV) HAJI LAL MOHD. BIRI WORKS VS. CIT (224 ITR 591 ) (SC) 17. THE NEXT GROUND IN I.T.A NO. 66/COCH/2014 IS WI TH REGARD TO LABORATORY EXPENSES. THE LD. AR SUBMITTED THAT THE ASSESSEE H AS TO REGULARLY CONDUCT CHEMICAL ANALYSIS OF THE PRODUCTS AT THE GOVERNMENT CHEMICAL EXAMINERS LABORATORIES AT TRIVANDRUM, ERNAKULAM AND CALICUT. THERE WERE SEVERAL INSTANCES OF INORDINATE DELAY IN GETTING THE RESULT S WHICH HAD ALREADY AFFECTED THE BUSINESS OF THE ASSESSEE. IN VIEW OF THE SITUA TION THE ASSESSEE HAD TO CONTRIBUTE TO FOR ENHANCEMENT OF THE CAPACITY BY GI VING EQUIPMENTS REQUIRED FOR ANALYSIS TO THE ABOVE LABORATORIES. THE ASSESSING O FFICER DISALLOWED THE EXPENDITURE UNDER THIS HEAD STATING THAT THE PAYMEN TS MADE IN THIS RESPECT ARE CAPITAL IN NATURE. THE LD. AR SUBMITTED THAT THE A SSESSING OFFICER OUGHT TO HAVE SEEN THAT THE ABOVE PAYMENTS WERE MADE FOR THE FURT HERANCE OF THE BUSINESS OF THE ASSESSEE AND THAT THE ABOVE PAYMENT IS OF REVEN UE NATURE AS THE ASSESSEE DID NOT HAVE THE OWNERSHIP OF THE ITEMS. HENCE, TH E LD. AR SUBMITTED THAT IT SHOULD HAVE BEEN HELD THAT THE ABOVE PAYMENTS WERE MADE FOR THE BUSINESS PURPOSE OF THE ASSESSEE AND HENCE ALLOWED AS AN EXP ENDITURE. 18. ON APPEAL, THE CIT(A) OBSERVED THAT THE EQUIPME NTS RELATING TO LABORATORY INSTRUMENTS FOR CHEMICAL EXAMINATION OF LIQUOR SAMP LE ETC. WERE PURCHASED BY THE ASSESSEE AND GIVEN TO THE GOVERNMENT CHEMICAL EX AMINATION LABORATORY I.T.A. NOS. 65&66 /COCH/2014 13 WHICH IS A SEPARATE ENTITY. THE ASSESSEE HAS CLAIM ED THE SAME AS REVENUE EXPENDITURE BECAUSE THE PURCHASE OF LABORATORY EQUI PMENTS AND HANDING OVER THE SAME TO THE GOVERNMENT CHEMICAL EXAMINATION LABO RATORY WAS DONE UNDER A GOVERNMENT ORDER, BY THE STATE GOVT. OF KERALA. AC CORDING TO THE CIT(A), THE ASSESSING OFFICER HAS GONE FOR A STRICT INTERPRETAT ION OF THE ACT AND HAS ANALYSED FIRST AS TO WHETHER THE PURCHASE OF EQUIPMENT WAS A CAPITAL ASSET AND IF YES, THE SAME WAS NOT ALLOWABLE AS A REVENUE EXPENDITURE. T HE CIT(A) OBSERVED THAT WHEN THE ASSET IS A CAPITAL ASSET NOT OWNED IN THE NAME OF THE ASSESSEE, IN SUCH A CASE, THE ASSESSING OFFICER HAS RIGHTLY FOUND THA T THE CLAIM OF EXPENDITURE UNDER THE HEAD LABORATORY EXPENSES IS NOT AN ALLOWA BLE EXPENDITURE. ACCORDINGLY, THE CIT(A) UPHELD THE DISALLOWANCE MAD E BY THE ASSESSING OFFICER. AGAINST THIS, THE ASSESSEE HAS FILED THIS APPEAL BE FORE US. 19. THE LD.. AR SUBMITTED THAT THE ASSESSING OFFICE R HAS ADDED BACK AN AMOUNT OF RS. 62,44,649/- TOWARDS LABORATORY EXPENS ES PAID BY THE ASSESSEE COMPANY. THE ASSESSEE HAVE TO REGULARLY CONDUCT CH EMICAL ANALYSIS OF THE PRODUCTS AT THE GOVERNMENT CHEMICAL EXAMINERS LABORA TORIES AT TRIVANDRUM, ERNAKULAM AND CALICUT WHICH HAVE AN EXCLUSIVE DIVISI ON, EXCISE DIVISION, OT PROVIDE CHEMICAL ANALYSIS TO THE LIQUOR SAMPLES PRO VIDED BY THE ASSESSEE. MODERN ANALYTICAL INSTRUMENTS FOR THE ANALYSIS OF L IQUOR SAMPLES WERE NOT AVAILABLE IN THESE EXCISE DIVISION OF THE LABORATO RY AND THERE WERE SEVERAL INSTANCES OF INORDINATE DELAY IN GETTING THE RESULT S, WHICH HAD ADVERSELY AFFECTED I.T.A. NOS. 65&66 /COCH/2014 14 THE BUSINESS OF THE ASSESSEE. REALIZING THE LACK OF ESSENTIAL EQUIPMENTS AND FOR THE IMPROVEMENT AND QUALITY OUTTURN OF WORK IN THE EXCISE DIVISIONS, THE GOVERNMENT OF KERALA HAD ACCORDED SANCTION TO THE P ROPOSAL OF CHIEF CHEMICAL EXAMINER TO MODERNIZE THE LABORATORY, VIDE GOVERNMEN T ORDER NO. 1740/2008/HOME DATED 31-05-2008. IN THE ABOVE GOVER NMENT ORDER IT HAS BEEN STATED THAT THE KERALA STATE BEVERAGES CORPORATION (KSBC) WILL MEET THE EXPENDITURE FOR RS. 90 LAKHS (RUPEES NINETY LAKHS) FOR THE ABOVE PURPOSE. SUBSEQUENTLY, THE PRINCIPAL SECRETARY TO THE GOVERN MENT HAD DIRECTED THE ASSESSEE TO RELEASE THE PAYMENT FOR THE PURCHASES E FFECTED BY THE CHEMICAL EXAMINERS LABORATORIES DEPARTMENT AS PER THE LETTER NO. 21597/F3/09/TD DATED 19/10/2009. THE LD. AR SUBMITTED THAT THE ASSESSEE HAD MADE THE PAYMENT FOR THE FURTHERANCE OF ITS OWN BUSINESS AND AS THE EQUI PMENTS ARE NOT OWNED BY THE ASSESSEE THESE PAYMENTS ARE REVENUE IN NATURE. 20. THE LD. AR SUBMITTED THAT THE CIT(A) OUGHT TO H AVE SEEN THAT THE ABOVE PAYMENTS WERE MADE FOR THE FURTHERANCE OF THE BUSIN ESS OF THE ASSESSEE AND THAT THE ABOVE PAYMENT IS OF REVENUE NATURE AS THE ASSESSEE DID NOT HAVE THE OWNERSHIP OF THE ITEMS. IT WAS HELD BY THE HONBLE DELHI HIGH COURT IN SIMILAR CIRCUMSTANCES IN THE CASE OF CIT VS. D.T.T.D.C. LTD . (350 ITR 0001) THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON CONSTRUCTI ON OF FLYOVERS, PEDESTRIAN FACILITIES, ETC. WAS EXPENDITURE INCURRED BY THE AS SESSEE U/S. 37 OF THE INCOME TAX ACT, 1961. HENCE IT SHOULD HAVE BEEN HELD THAT THE ABOVE PAYMENTS WERE I.T.A. NOS. 65&66 /COCH/2014 15 MADE FOR THE BUSINESS PURPOSE OF THE ASSESSEE AND O UGHT TO BE ALLOWED AS EXPENDITURE. 21. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORD ER OF THE CIT(A). 22. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORD. IN THIS CASE, THE ASSESSEE HAD INCURRED EXPENSES FOR PURCHASING AND H ANDING OVER THE EQUIPMENT TO THE GOVERNMENT CHEMICAL EXAMINATION LABORATORY AT TRIVANDRUM, ERNAKULAM AND CALICUT. ACCORDING TO THE LD. AR THESE EXPENSES WERE INCURRED BY THE ASSESSEE FOR THE BUSINESS PURPOSE SO AS TO PROVIDE CHEMICAL ANALYSIS OF THE LIQUOR SAMPLES OF THE ASSESSEE AT THESE THREE LABOR ATORIES AND THESE EXPENSES INCURRED BY THE ASSESSEE ARE TO BE CONSIDERED FOR T HE PURPOSE OF BUSINESS. WE ARE NOT IN A POSITION TO AGREE WITH THE CONTENTIONS OF THE ASSESSEE BECAUSE THE NEXUS OF EXPENDITURE WITH THE BUSINESS CANNOT BE A REASON TO ALLOW THE EXPENDITURE. THE EXPENSES INCURRED SHOULD BE WHOLL Y AND EXCLUSIVELY LAID OUT OR EXPENDED FOR THE PURPOSE OF BUSINESS. THE EXPENDIT URE INCURRED BY THE ASSESSEE SHALL BE FOR CARRYING ON THE BUSINESS OF THE ASSESS EE, I.E., TO ENABLE THE ASSESSEE TO EARN PROFIT IN THAT BUSINESS. IT IS NOT ENOUGH THAT THE DISBURSEMENTS ARE MADE IN THE COURSE OF OR ARISE OUT OF OR CONCERNED WITH PROFITS MADE OUT OF THE BUSINESS. BUT IT MEANS ALSO IS TO BE FOR THE PURPOS E OF EARNING PROFIT FROM THE BUSINESS. A MERE LIABILITY TO SATISFY THE OBLIGATIO N BY THE ASSESSEE IS NOT EXPENDITURE, IT ONLY WHEN THE ASSESSEE SATISFIES THE OBLIGATION TO INCUR I.T.A. NOS. 65&66 /COCH/2014 16 EXPENSES FOR THE PURPOSE OF BUSINESS , IT IS BUSINE SS EXPENDITURE. IN OTHER WORDS, THE EXPENSES HAVE TO BE INCURRED FOR THE PUR POSE OF BUSINESS. THE LD. AR RELIED ON THE JUDGMENT OF THE DELHI HIGH COURT I N THE CASE OF CIT VS. D.T.T.D.C. LTD. (2013) (350 ITR 0001) WHEREIN THE A SSESSEE INCURRED EXPENSES FOR DEVELOPING INFRASTRUCTURE FACILITIES LIKE FLYOV ERS AND PEDESTRIAN FACILITIES AND THE HONBLE HIGH COURT HELD THAT EXPENSES INCURRED BY THE ASSESSEE WERE FOR THE PURPOSE OF BUSINESS. THOUGH THE EXPENSES WERE INCU RRED BY THE ASSESSEE, IT CANNOT BE SAID THAT THEY WERE INCURRED FOR THE PURP OSE OF BUSINESS OR EARNING GOODWILL. HOWEVER, AGAINST THIS JUDGMENT, SPECIA L LEAVE WAS GRANTED BY THE HONBLE SUPREME COURT AND AS SUCH THIS JUDGMENT IS NOT FOLLOWED BY US. ACCORDINGLY, WE ARE INCLINED TO DECIDE THIS ISSUE A GAINST THE ASSESSEE. 23. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IN I.T.A. NO. 65/COCH/2014 IS ALLOWED AND THE APPEAL IN I.T.A. NO. 66/COCH/201 4 IS PARTLY ALLOWED. PRONOUNCED ACCORDINGLY ON 28-08-2014. SD/- SD/- (N.R.S.GANESAN) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 28TH AUGUST, 2014 GJ COPY TO: 1. KERALA STATE BEVERAGE (M&M) CORPORATION LTD. SAS THAMANGALAM, TRIVANDRUM-695 010. I.T.A. NOS. 65&66 /COCH/2014 17 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE -1(1), TRIVANDRUM. 3. THE COMMISSIONER OF INCOME-TAX(APPEALS), TRIVAND RUM. 4. THE COMMISSIONER OF INCOME-TAX, TRIVANDRUM. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR)