2022 INSC 0004
C.A.@S.L.P.(C)No.12859  of 2020 etc.
  REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION 
CIVIL APPEAL NO.  11 OF 20    22
[Arising out of S.L.P.(C) No.12859 of 2020]
Kerala State Beverages Manufacturing & 
Marketing Corporation Ltd. ...Appellant
v.
The Assistant Commissioner of Income Tax
Circle 1(1) ...Respondent
 
W I T H
CIVIL APPEAL NO.  12 OF 20    22
[Arising out of S.L.P.(C) No.12162 of 2020]
CIVIL APPEAL NO.  13 OF 20    22
[Arising out of S.L.P.(C) No.12768 of 2020]
AND
CIVIL APPEAL NO.  14 OF 20    22
[Arising out of S.L.P.(C) No.14150 of 2020]
J U D G M E N T     
R. SUBHASH REDDY, J .   
1. Leave granted.
2.    These   appeals   are   preferred,   by   the   State­owned   Undertaking,
Kerala State Beverages Manufacturing & Marketing Corporation Ltd., a
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C.A.@S.L.P.(C)No.12859  of 2020 etc.
company   registered   under   the   Companies   Act,   1956,   engaged   in   the
wholesale   and   retail   trade   of   beverages,   aggrieved   by   the   common
judgment and order dated 30.04.2020 passed in I.T.A. No.135; 146 and
313   of   2019   by   the   High   Court   of   Kerala   at   Ernakulam.     The   Civil
Appeal arising out of S.L.P.(C)No.12859 of 2020 is filed by the assessee
and other three appeals are preferred by the revenue.
3.    For the assessment year 2014­2015, the Deputy Commissioner
of   Income   Tax,   Circle­2(1),   Thiruvananthapuram   finalised   the
assessment   of   income   of   the   appellant   under   Section   143(3)   of   the
Income­tax Act, 1961 (in short, ‘the Act’) vide Assessment Order dated
14.12.2016.     The   Principal   Commissioner   of   Income   Tax,
Thiruvananthapuram   has   exercised   power   of   revision   as   contemplated
under Section 263 of the Act and set aside order of assessment on the
ground that 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
&   Loss   Account   of   the   assessee,   with   respect   to   the   amount   of
surcharge on sales tax and turnover tax paid to the State Government,
which ought to have been disallowed under Section 40(a)(iib) of the Act.
Against   order   of   the   Principal   Commissioner,   Income   Tax,   dated
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25.09.2018,   the   appellant   herein   filed   appeal   before   the   Income   Tax
Appellate Tribunal (in short, ‘the Tribunal’) in ITA No.536/Coch/2018.
4. With   respect   to   Assessment   Year   2015­2016   assessment
against the appellant was completed under Section 143(3) of the Act by
the   Assistant   Commissioner   of   Income   Tax,   Circle­1(1),
Thiruvananthapuram   vide   order   of   assessment   dated   28.12.2017.
Debits   contained   in   the   Profit   &   Loss   Account   of   the   appellant   with
respect   to   payment   of   gallonage   fee,   licence   fee,   shop   rental   ( kist )   and
surcharge   on   sales   tax,   amounting   to   a   total   sum   of
Rs.811,90,88,115/­ were disallowed under Section 40(a)(iib) of the Act.
Aggrieved by the said order, appellant herein has filed appeal before the
Commissioner   of   Income   Tax   (Appeals),   Thiruvananthapuram   and   the
same   was   dismissed.     The   appellant   carried   the   matter   by   way   of
second appeal before the Tribunal in ITA No.537/Coch/2018.  
The   Tribunal   has   dismissed   the   ITA   Nos.536­537/Coch/2018   by   a
common  order  dated  12.03.2019.     The   appellant  herein   thereafter   has
filed miscellaneous application in MP No.47/Coch/2019 on the ground
that   the   Tribunal   had   failed   to   consider   the   issue   agitated   against   the
disallowance   of   the   surcharge   on   sales   tax.     The   said   miscellaneous
application   was   allowed   by   recalling   earlier   order   dated   12.03.2019
passed   in   I.T.A.No.537/Coch/2018   and   a   fresh   order   was   passed   on
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11.10.2019, finding the issue against the appellant and dismissing the
appeal.     Aggrieved   by   the   aforesaid   three   orders,   the   appellant   herein
has filed Income Tax Appeals before the High Court in ITA Nos.135; 146
and 313 of 2019 which are disposed, by the common impugned order.
In the common impugned order passed by the High Court, the question
of law raised, was answered partly  in favour  of the assessee/appellant
and   partly   in   favour   of   the   revenue.     Para   23   and   24   of   the   judgment
read as under :
“23.   While   summing   up   the   conclusions,   we   are
persuaded to answer the question of law raised, partly in
favour   of   the   revenue   and   partly   in   favour   of   the
assessee. We hold that the levy of Gallonage Fee, Licence
Fee   and   Shop   Rental   (kist)   with   respect   to   the   FL­9
licences   granted   to   the   appellant   will   clearly   fall   within
the purview of Section 40 (a) (iib) and the amount paid in
this   regard   is   liable   to   be   disallowed.   The   amount   of
Gallonage   Fee,   Licence   Fee,   or   Shop   Rental   (kist)   paid
with   respect   to   FL­1   licences   granted   in   favour   of   the
appellant,   with   respect   to   the   retail   business   in   foreign
liquor, is not an exclusive levy on the appellant, which is
a   state   government   undertaking.   Therefore   the
disallowance made with respect to those amounts cannot
be   sustained.   The   surcharge   on   sales   tax   and   turnover
tax   is   not   a   'fee   or   charge'   coming   within   the   scope   of
Section   40   (a)   (iib)   and   is   not   an   amount   which   can   be
disallowed   under   the   said   provision.   Therefore   the
disallowance made in this regard is liable to be set aside. 
24.   In   the   result   the   assessment   completed   against   the
appellants   with   respect   to   the   assessment   years   2014­
2015,   2015­2016   are   hereby   set   aside.   The   matter   is
remitted   to   the   Assessing   Officer   to   pass   revised   orders,
after   computing   the   I.T.   Appeal   Nos.   135,   146   &
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313/2019   ­32­   liability   in   accordance   with   the   position
settled   hereinabove,   on   affording   an   opportunity   of
hearing to the appellant. The needful steps in this regard
shall   be   completed   at   the   earliest,   at   any   rate,   within
three   months   from   the   date   of   receipt   of   a   copy   of   this
judgment.”
5. For the purpose of disposal, we refer to the parties, as arrayed
in   the   appeal   filed   by   Kerala   State   Beverages   Manufacturing   &
Marketing Corporation Ltd. (KSBC).
6. We  have  heard  Sri   S.  Ganesh,  learned  senior   advocate   for   the
appellant   and   Sri   N.   Venkataraman,   learned   Additional   Solicitor
General appearing for the respondent.  
7. Section 40 of the Income­tax Act, 1961 is the provision dealing
with ‘amounts not deductible’.   The amounts as detailed in the Section
are not deductible, in computing the income chargeable under the head
“Profits and gains of business or profession”.  By the Finance Act, 2013
(Act 17 of 2013), Section 40 of the Act is amended by inserting Section
40(a)(iib),   which   has   come   into   force   from   01.04.2014.     The   said
provision under Section 40(a)(iib) reads as under :  
“ 40.   Amounts   not   deductible. ­   Notwithstanding   any ­
thing   contrary   in   sections   30   to   38,   the   following
amounts shall not be deducted in computing the income
chargeable under the head “Profits and gains of business
or profession”,­
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(a)   in the case of any assessee­
(i) … … … …
  … … … …
(iib) any amount ­ 
(A)     paid   by   way   of   royalty,   licence   fee,   service   fee,
privilege   fee,   service   charge   or   any   other   fee   or
charge, by whatever name called, which is levied
exclusively on; or
(B)     which   is   appropriated,   directly   or   indirectly,
from,
a   State   Government   undertaking   by   the   State   Gov ­
ernment.
Explanation. ­ For   the   purposes   of   this   sub­clause,   a
State Government undertaking includes ­
    (i)     a corporation established by or under any Act of
the State Government;
  (ii)     a   company   in   which   more   than   fifty   per   cent   of
the   paid­up   equity   share   capital   is   held   by   the
State Government;
(iii)     a   company   in   which   more   than   fifty   per   cent   of
the paid­up equity share capital is held by the en ­
tity referred to in clause (i) or clause (ii) (whether
singly or taken together);
(iv)    a company or corporation in which the State Gov ­
ernment   has   the   right   to   appoint   the   majority   of
the   directors   or   to   control   the   management   or
policy   decisions,   directly   or   indirectly,   including
by   virtue   of   its   shareholding   or   management
rights   or   shareholders   agreements   or   voting
agreements or in any other manner;
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  (v)     an  authority, a board or an  institution or a body
established or constituted by or under any Act of
the   State   Government   or   owned   or   controlled   by
the State Government;".
8. While   it   is   the   case   of   the   assessee/appellant   that   the
gallonage fees, licence fee and shop rental ( kist ) for FL­9 licence and FL­
1 licence, the surcharge on sales tax and turnover tax do not fall within
the purview of the abovesaid amended Section, the case of the revenue
is that all the aforesaid amounts are covered under Section 40(a)(iib) as
such, such amounts are not deductible for the purpose of computation
of income, for the assessment years 2014­2015 and 2015­2016.
9. During   the   assessment   years   2014­2015   and   2015­2016   the
appellant was holding FL­9 and FL­1 licences to deal in wholesale and
retail of, Indian Made Foreign Liquor (IMFL) and Foreign Made Foreign
Liquor   (FMFL)   granted   by   the   Excise   Department.   FL­9   licence   was
issued to deal in wholesale liquor, which they were selling to FL­1, FL­
3, FL­4, 4A, FL­11, FL­12 licence holders.  The FL­1 licence was for sale
of   foreign   liquor   in   sealed   bottles,   without   privilege   of   consumption
within the premises.  The gallonage fee is payable as per Section 18A of
the   Kerala  Abkari   Act  and   Rule   15A  of   the   Foreign   Liquor   Rules.     The
appellant was the only licence holder for the relevant years so far as FL­
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9   licence   to   deal   in   wholesale,   and   so   far   as   FL­1   licences   are
concerned,   it  was   also   granted   to   one   other   State   owned   Undertaking,
i.e.,   Kerala   State   Co­operatives   Consumers’   Federation   Ltd..     By
interpreting   the   word   ‘exclusively’   as   worded   in   Section   40(a)(iib)(A)   of
the   Act,   High   Court   in   the   impugned   order   has   held   that   the   levy   of
gallonage   fee,   licence   fee   and   shop   rental   ( kist )   with   respect   to   FL­9
licences   granted   to   the   appellant   will   clearly   fall   within   the   purview   of
Section   40(a)(iib)   of   the   Act   and   the   amounts   paid   in   this   regard   is
liable to be disallowed.   At the same time the amount of gallonage fee,
licence   fee   and   shop   rental   ( kist )   paid   with   respect   to   FL­1   licences
granted   in   favour   of   the   appellant   for   retail   business,   the   High   Court
has   held   that   it   is   not   an   exclusive   levy,   as   such   disallowance   made
with   respect   to   the   same   cannot   be   sustained.     With   regard   to
surcharge   on   sales   tax   and   turnover   tax,   it   is   held   that   same   is   not   a
‘fee’ or ‘charge’ within the meaning of Section 40(a)(iib) as such same is
not an amount which can be disallowed under the said provision.
10. Sri Ganesh, learned senior counsel appearing for the appellant
by referring to Explanatory Note to the Finance Act, 2013, and Section
40(a)(iib)   of   the   Act,   has   submitted   that   the   levy   of   gallonage   fees,
licence   fee   and   shop   rental   ( kist )   on   FL­9   licence   is   not   on   any   State
Government   Undertaking   but   same   is   a   levy   on   the   licensee.     It   is
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submitted   that   the   levy   was   on   the   licence   holder   whoever   he   or   it
might   be   and   only   in   view   of   the   Abkari   Policy   of   the   relevant   years
licences   were   granted   to   the   appellant   as   such   it   cannot   be   said   that
same was exclusive levy on the appellant attracting Section 40(a)(iib) of
the  Act so  as to  disallow  the  same.    It is  submitted that the mere fact
that   in   a   particular   year,   the   licence   holder   happens   to   be   State
Government   Undertaking   does   not   make   the   levy,   one,   which   is
imposed directly and exclusively on the State Government Undertaking.
It   is   submitted   that   High   Court   has   failed   to   appreciate   that   the
decision  as  to   whom  FL­9  licences  are  to  be  granted,  depends  only  on
the   State   Government’s   Abkari   Policy,   which   may   vary   from   year   to
year.   It is submitted that said submission also holds good with regard
to   gallonage   fee,   licence   fee   and   shop   rental   for   FL­1   licence,   which
issue is already decided in favour of appellant, by the High Court.  With
regard to surcharge on sales tax and turnover tax, it is submitted that
taxes levied, are completely outside the ambit of Section 40(a)(iib) of the
Act.   It is submitted that the Kerala Surcharge on Taxes Act, 1957 (for
short, ‘KST Act’) is enacted only to increase the taxes,   inter alia , on the
sale or purchase of goods, as such it is nothing but an increment to the
basic   sales   tax   levied   under   Section   5(1)   of   Kerala   General   Sales   Tax
Act,   1963   (for   short,   ‘KGST   Act’).     It   is   submitted   that   surcharge   on
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sales tax is nothing but an enhancement of tax itself.  In support of the
said   submission,   the   learned   counsel   has   placed   reliance   on   the
judgments  of  this  Court in  the case of   C.I.T.   v.   K.  Srinivasan 1
  and in
the case of   Sarojini Tea Co. Ltd.   v.   Collector, Dibrugarh 2
.   Reference
is   also   made   on   the   CBDT   Circular   No.3/2018   dated   11.07.2018,   to
buttress   the   said   submission.     Learned   counsel,   by   drawing   our
attention   to   the   distinction   between   ‘fee’   and   ‘taxes’   which   is
maintained throughout the scheme under Section 40(a) has submitted
that, the sales tax and turnover tax is outside the scope of Section 40(a)
(iib)   of   the   Act.     Lastly   it   is   submitted   that   for   the   assessment   year
2014­2015,   the   assessing   officer   has   allowed   deductions   in   respect   of
surcharge on sales tax and turnover tax, the Commissioner interfered,
in   exercise   of   power   of   revision   under   Section   263   of   the   Act.     It   is
submitted   that   the   view   taken   by   the   assessing   officer   was   a   possible
view,   as   such   the   very   invocation   of   revisional   power   was   not
permissible, to interfere with the order of the assessing officer.  
With   the   aforesaid   submissions,   learned   counsel   has   submitted   to
allow the appeal filed by the assessee and dismiss the appeals filed by
the revenue.  
1
 (1972(4) SCC 526
2
 (1992) 2 SCC 156
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11. Sri Venkataraman, learned ASG appearing for the revenue, by
drawing   our  attention  to   the   provisions  under  Articles  285  and  289  of
the   Constitution   of   India,   has   explained   the   intent   behind   the
amendment   to   Section   40   of   the   Income­tax   Act,   1961,   by   Act   17   of
2013.   It is submitted  that in terms of Article 289 of the Constitution,
the   property   and   income   of   a   State   is   exempted   from   Union   taxation.
The   constitutional   protection   under   Article   289   had   led   the   States   in
shifting   income/profits   from   the   State   Government   Undertakings   into
Consolidated   Fund   of   the   States.     It   is   submitted   that   State
Government Undertaking – KSBC, which in this case is a company like
any   other   commercial   concern,   is   engaged   in   trade   and   business   and
commercial   activity,   therefore,   is   to   be   treated   like   any   other   business
entity.   However, when it came to  filing of Return of Income, the State
as   the   only   shareholder   or   major   shareholder   in   this   type   of
undertakings, exercise control over it and shift profits by appropriating
the   whole   of   the   surplus   or   a   part  of   it  by   way   of   taxes,   fee   or   similar
such   appropriations.     It   is   submitted   that   this   resulted   in   erosion   of
profits in the hands of State Government Undertakings leading to lesser
payment   of   taxes,   since   these   appropriations   by   the   respective   States
from   their   State   Government   Undertakings   were   accounted   for   as
allowable   expenditure   under   Section   40(a)   and   these   undertakings
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claimed deduction of the same from the income earned, therefore could
not be taxed in the hands of the State Government Undertakings.  It is
further   submitted   that   the   shifted   profit,   upon   its   transfer,   went   into
the   Consolidated   Fund   of   the   States   and   on   this   basis   constitutional
protection   under   Article   289   were   claimed   as   a   result   of   which,   these
amounts could neither be taxed in the hands of the State Government
Undertakings   nor   in   the   hands   of   the   respective   States.     Precisely   the
underlined   spirit   in   bringing   out   the   said   amendment   by   inserting
Section 40(a)(iib), is to  plug the possible diversion or shifting  of profits
from   these   undertakings   into   State’s   treasury.     Learned   counsel   also
referred to the Memorandum attached to the Finance Bill of 2013 which
explains the provisions relating to direct taxes.   The relevant portion of
the Memorandum reads as under :
“ Disallowance of certain fee, charge, etc. in the case of
State Government Undertakings
The   existing   provisions   of   section   40   specifies   the
amounts   which   shall   not   be   deducted   in   computing   the
income   chargeable   under   the   head   “Profits   and   gains   of
business   or   profession”.   The   non­deductible   expense
under   the   said   section   also   includes   statutory   dues   like
fringe benefit tax, income­tax, wealth­tax, etc. 
Disputes have arisen in respect of income­tax assessment
of   some   State   Government   undertakings   as   to   whether
any  sum   paid  by   way  of  privilege  fee,  license   fee,  royalty,
etc. levied or charged by the State Government exclusively
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on its undertakings are deductible or not for the purposes
of   computation   of   income   of   such   undertakings.   In   some
cases,   orders   have   been   issued   to   the   effect   that   surplus
arising   to   such   undertakings   shall   vest   with   the   State
Government.   As   a   result   it   has   been   claimed   that   such
income   by   way   of   surplus   is   not   subject   to   tax.   It   is   a
settled   law   that   State   Government   undertakings   are
separate   legal   entities   than   the   State   and   are   liable   to
income­tax. 
In   order   to   protect   the   tax   base   of   State   Government
undertakings vis­à­vis exclusive levy of fee, charge, etc. or
appropriation   of   amount   by   the   State   Governments   from
its undertakings, it is proposed to amend section 40 of the
Income­tax Act to provide that any amount paid by way of
fee,   charge,   etc.,   which   is   levied   exclusively   on,   or   any
amount   appropriated,   directly   or   indirectly,   from   a   State
Government undertaking, by the State Government, shall
not   be   allowed   as   deduction   for   the   purposes   of
computation   of   income   of   such   undertakings   under   the
head   “Profits   and   gains   of   business   or   profession”.   It   is
also proposed to define the expression “State Government
Undertaking” for this purpose. 
This amendment will take effect from 1st April, 2014 and
will, accordingly, apply in relation to the assessment year
2014­15 and subsequent assessment years.”
11.1. With   regard   to   gallonage   fees,   licence   fee   and   the   shop   rental
(kist),   it   is   submitted   that   High   Court   has   upheld   the   disallowance   in
favour of the revenue with regard to FL­9 licence on the ground that the
appellant – KSBC is the exclusive licence holder, so far as FL­9 licences
are   concerned.       It   is   submitted   that   so   far   as   FL­1   licences   are
concerned   only   on   the   ground   that   similar   licences   are   also   given   for
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another   licence   holder,   viz.,   to   Kerala   State   Co­operatives   Consumers’
Federation Ltd., the High Court has held that there is no exclusivity so
far  as FL­1 licences are  concerned.   It  is the contention of the learned
counsel that the disallowance under Section 40(a)(iib) is not contingent
upon the nature of licence.   The test should be whether levy under the
Abkari   Act   is   exclusive   or   not   and   in   this   case   it   is   exclusive.     It   is
submitted that the restricted interpretation made by the High Court to
the   extent   of   FL­1   licences   issued   in   favour   of   the   appellant   runs
contrary to object and intent of Section 40(a)(iib) of the Act and makes
the  said  provision  redundant and   otiose .    It is  the  case  of  the  revenue
that   the   aspect   of   exclusivity   used   under   Section   40(a)(iib)   of   the   Act,
has   to   be   viewed   from   the   nature   of   undertaking   on   which   levy   is
imposed   and   not   on   the   number   of   undertakings   on   which   levy   is
imposed.     It   is   further   submitted   that   the   KSBC   and   the   Kerala   State
Co­operatives Consumers’ Federation Ltd. are undertakings of the State
of   Kerala,   therefore,   the   levy   is   an   exclusive   levy   on   such   State
Government Undertakings which are licensees. 
11.2. So   far   as   surcharge   on   sales   tax   is   concerned,   again   it   is
submitted   that   such   a   levy   is   an   exclusive   levy   on   KSBC   alone,
therefore, attracts Section 40(a)(iib)(A) itself.   Alternatively, it is further
submitted that even assuming that such tax is not attracted by Section
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40(a)(iib)(A), it would fall under Section 40(a)(iib)(B) for the reason that
surcharge   on   sales   tax   is   a  ‘tax’   and   tax   is   a   form   of   appropriation   by
the  State  from KSBC.   It is submitted that the  surcharge  levied  under
Section 3(1) of the KST Act is on the tax payable by a dealer in foreign
liquor   under   Section   5(1)   of   the   KGST   Act.     It   is   the   contention   of   the
learned counsel that, the cumulative reading of Section 3(1) of the KST
Act and Section 5(1)(b) of the KGST Act would reveal that surcharge is
levied on the tax payable by a dealer in foreign liquor under Section 5(1)
of  KGST   Act.     It  is  submitted   that  Section   3(1)   does   not  deal   with   any
other category and specifically pertain only to a dealer in foreign liquor.
It is submitted that as much as Section 5(1)(b) of the KGST Act refers to
trade   in   foreign   liquor   and   it   applies   specifically   and   exclusively   to
KSBC and further surcharge levied under Section 3(1) of KST Act is on
the   sales   tax,   exclusively   payable   by   KSBC   under   Section   5(1)(b)   of
KGST   Act.     As   such,   the   inevitable   conclusion,   therefore   is   that   it
qualifies as an exclusive levy attracting Section 40(a)(iib) of the Act.  To
show   that   the   distinction   between   a   ‘tax’   and   a   ‘fee’   has   substantially
been   effaced   in   the   development   of   constitutional   jurisprudence,
learned counsel, has placed reliance on a recent judgment of this Court
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in   the   case   of   Jalkal   Vibhag   Nagar   Nigam   &   Ors.   v   Pradeshiya
Industrial and Investment Corporation and Another 3
. 
11.3. With   regard   to   turnover   tax,   it   is   submitted   that   unlike
surcharge   which   is   an   exclusive   levy   on   KSBC,   it   is   fairly   submitted
that  such   tax   was   imposed   not   only   on   KSBC   under   Section   5(1)(b)   of
the   KGST   Act,   but   also   was   being   imposed   on   various   other   retail
dealers  specified under  Section 5(2)  of KGST  Act.   It is submitted that
as   the   issue   has   not   been   dealt   and   examined   in   detail   by   the   High
Court, made a request to leave it open for fresh adjudication since facts
and figures need to be verified.
With   the   above   submissions,   learned   ASG   has   pleaded   to   allow   the
appeals filed by the revenue and dismiss the appeal filed by the KSBC.
12. Having   heard   the   learned   counsels   on   both   sides   we   have
perused the impugned order and other material placed on record.
13. Section   40   of   the   Income­tax   Act,   1961   is   a   provision   which
deals   with  the  amounts  which  are  not deductible   while  computing   the
income   chargeable   under   the   head   ‘Profits   and   gains   of   business   or
profession’.     Section   40   of   the   Act   is   amended   in   the   year   2013,   and
40(a)(iib) is inserted by Amending Act 17 of 2013, which has come into
force   from   01.04.2014.     In   terms   of   Article   289   of   the   Constitution   of
3
 2021 SCC OnLine SC 960
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India,  the   property   and  income   of   a  State  shall   be  exempt  from  Union
taxation.     Therefore,   in   terms   of   Article   289,   the   Union   is   prevented
from   taxing   the   States   on   its   income   and   property.     It   is   the
constitutional protection granted to the States in terms of the abovesaid
Article.     This   protection   has   led   the   States   in   shifting   income/   profits
from the State Government Undertakings into Consolidated Fund of the
respective States to have a protection under Article 289.  In the instant
case   the   KSBC,   a   State   Government   Undertaking,   is   a   company   like
any   other   commercial   entity,   which   is   engaged   in   the   business   and
trade   like   any   other   business   entity   for   the   purpose   of   wholesale   and
retail   business   in   liquor.     As   much   as   these   kind   of   undertakings   are
under   the   control   of   the   States   as   the   total   shareholding   or   in   some
cases majority of shareholding, is held by States.  As such they exercise
control   over   it   and   shift   the   profits   by   appropriating   whole   of   the
surplus   or   a   part   of   it   to   the   Government   by   way   of   fees,   taxes   or
similar   such   appropriations.     From   the   relevant   Memorandum   to   the
Finance Act, 2013 and underlying object for amendment of Income­tax
Act by Act 17 of 2013, by which Section 40(a)(iib)(A)(B) is inserted, it is
clear that the said amendment is made to plug the possible diversion or
shifting   of   profits   from   these   undertakings   into   State’s   treasury.     In
view of Section 40(a)(iib) of the Act any amount, as indicated, which is
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levied exclusively on the State owned undertaking (KSBC in the instant
case),   cannot   be   claimed   as   a   deduction   in   the   books   of   State   owned
undertaking, thus same is liable to income tax.  
14. In   the   instant   case   the   gallonage   fee,   licence   fee,   shop   rental
( kist ),   surcharge   and   turnover   tax   are   the   amounts   of   which   assessee
claims   that  they   are   not   attracted   by   Section   40(a)(iib)   of   the   Act.     On
the other hand it is the case of the respondent/revenue that all the said
components   attract   the   ingredients   of   Section   40(a)(iib)(A)   or   Section
40(a)(iib)(B), as such they are not deductible.   Broadly these levies can
be   divided   into   three   categories.     Gallonage   fee,   licence   fee   and   shop
rental   ( kist )   are   in   the   nature   of   fee   imposed   under   the   Abkari   Act   of
1902.     These   are   the   fees   payable   for   the   licences   issued   under   FL­9
and   FL­1.     In   the   impugned   order,   the   High   Court   has   held   that   the
gallonage   fee,   licence   fee   and   shop   rental   ( kist )   with   respect   to   FL­9
licence are not deductible, as it is an exclusive levy on the Corporation.
Further   a   distinction   is   drawn   from   FL­1   licence   from   FL­9   licence,   to
apply   Section   40(a)(iib),   only   on   the   ground   that,   FL­1   licences   are
issued   not   only   to   the   appellant/KSBC   but   also   issued   to   one   other
Government   Undertaking,   i.e.,   Kerala   State   Co­operatives   Consumers’
Federation   Ltd.     High   Court   has   held   that   as   there   is   no   other   player
holding   licences   under   FL­9   like   KSBC   as   such   the   word   ‘exclusivity’
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used in Section 40(a)(iib) attract such amounts.  At the same time only
on the ground that FL­1 licences are issued not only to the KSBC but
also   to   Kerala   State   Co­operatives   Consumers’   Federation   Ltd.,   High
Court   has   held   that   exclusivity   is   lost   so   as   to   apply   the   provision
under Section 40(a)(iib).   If the amended provision under Section 40(a)
(iib)   is   to   be   read   in   the   manner,   as   interpreted   by   the   High   Court,   it
will   literally   defeat   the   very   purpose   and   intention   behind   the
amendment.  The aspect of exclusivity under Section 40(a)(iib) is not to
be   considered   with   a   narrow   interpretation,   which   will   defeat   the   very
intention   of   Legislature,   only   on   the   ground   that   there   is   yet   another
player,   viz.,   Kerala   State   Co­operatives   Consumers’   Federation   Ltd.
which   is   also   granted   licence   under   FL­1.     The   aspect   of   ‘exclusivity’
under   Section   40(a)(iib)   has   to   be   viewed   from   the   nature   of
undertaking   on   which   levy   is   imposed   and   not   on   the   number   of
undertakings on which the levy is imposed.  If this aspect of exclusivity
is viewed from  the nature of undertaking, in this particular case, both
KSBC   and   Kerala   State   Co­operatives   Consumers’   Federation   Ltd.   are
undertakings of the State of Kerala, therefore, levy is an exclusive levy
on   the   State   Government   Undertakings.     Therefore,   we   are   of   the
considered   view   that   any   other   interpretation   would   defeat   the   very
object behind the amendment to Income­tax Act, 1961.  
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14.1. It   is   fairly   well   settled   that   the   interpretation   is   to   be   in   the
manner   which   will   subserve   and   promote   the   object   and   intention
behind   the   legislation.     If   it   is   not   interpreted   in   the   manner   as
aforesaid it would defeat the very intention of the legislation.  To defeat
the   said   provision,   the   State   Governments   may   issue   licences   to   more
than one State owned undertakings and may ultimately say it is not an
exclusive   undertaking   and   therefore   Section   40(a)(iib)   is   not   attracted.
The submission of Sri Ganesh, learned senior counsel for the appellant
is   that   the   gallonage   fee,   licence   fee   and   the   shop   rental   ( kist )   are   the
levies under the Abkari Act on all the licence holders, as such it cannot
be   said   that   same   is   an   exclusive   levy   on   the   appellant/KSBC.     It   is
submitted that because of the Abkari Policy in particular year, licences
are   issued   in   favour   of   the   appellant   –   State   owned   Undertaking,   as
such   it   cannot   be   said   that   the   statutory   levies   under   the   Abkari   Act
are on the State Government Undertaking  and such levies are only on
the licensees but not on the State­owned Undertakings like KSBC.  The
said   submission   cannot   be   accepted   for   the   reason   that   by   virtue   of
licence   which   is   granted   in   favour   of   State­owned   Undertaking,   the
statutory fees etc., viz., gallonage fees, licence fee and shop rental ( kist )
are   payable   by   the   appellant­Undertaking,   i.e.,   KSBC.     Once   the   State
Government   Undertaking   takes   licence,   the   statutory   levies   referred
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above   are   on   the   Government   Undertaking   because   it   is   granted
licences.     Therefore,   we   are   of   the   view   that   the   finding   of   the   High
Court that gallonage fee, licence fee and shop rental ( kist ) so far as FL­1
licences are concerned, is not attracted by Section 40(a)(iib), cannot be
accepted   and   such   finding   of   the   High   Court   runs   contrary   to   object
and intention behind the legislation.  
14.2.   Further, because  another  State Government Undertaking, i.e.,
Kerala   State   Co­operatives   Consumers’   Federation   Ltd.   was   also
granted   licences   during   the   relevant   years,   as   such   exclusivity
mentioned in Section 40(a)(iib) is lost, also cannot be accepted, for the
reason   that   exclusivity   is   to   be   considered   with   reference   to   nature   of
licence   and   not   on   number   of   State   owned   Undertakings.     If   the
interpretation,   as   held   by   the   High   Court,   is   accepted,   the   legislative
intent   can   be   defeated   by   issuing   licences   in   FL­1   to   several   State
Government Undertakings and then make a contention that exclusivity
is   lost.     Said   interpretation   runs   contrary   to   the   intent   of   the
amendment.  
14.3. So far as surcharge on sales tax is concerned, the High Court
has held in favour of KSBC and against the revenue.   The reasoning of
the High Court is that surcharge on sales tax is a tax and Section 40(a)
(iib) does not contemplate ‘tax’ and surcharge on sales tax is not a ‘fee’
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or   a   ‘charge’.     Therefore,   High   Court   was   of   the   view   that   surcharge
levied   on   KSBC   does   not   attract   Section   40(a)(iib)   of   the   Act.     The
submission of Sri Venkataraman, learned ASG with regard to surcharge
on sales tax is two­fold.   One is that the levy of surcharge on sales tax
is also  an  exclusive levy on  KSBC,  therefore, attracts Section  40(a)(iib)
(A) itself.  Secondly, it is submitted, as an alternative submission that if
the   same   is   not   covered   by   Section   40(a)(iib)(A)   it   would   fall   under
Section   40(a)(iib)(B)   of   the   Act,   for   the   reason   that   the   surcharge   on
sales  tax is a tax and tax  is  a form of appropriation by the State from
KSBC.     The   learned   counsel   placed   reliance   on   a   recent   judgment   of
this Court in the case of  Jalkal Vibhag Nagar Nigam and Others 3
.  On
the   other   hand   it   is   the   case   of   the   appellant/assessee   that   the   sales
tax   is   outside   the   scope   of   Section   40(a)(iib)   and   the   surcharge   is
nothing but is an enhancement of the tax.   By referring to words used
in Section 40(a)(iib), learned counsel Sri Ganesh has submitted that the
said provision is to be interpreted by applying the doctrine of   ejusdem
generis .     It   is   submitted   that   the   words   ‘any   other   fee   or   charge’
immediately   following   the   words   ‘royalty,   licence   fee,   service   fee,
privilege fee, service charge’ relate to such similar charges and none of
the terms can possibly cover a tax, like sales tax or surcharge on sales
tax.     With   regard   to   surcharge   on   sales   tax,   we   are   in   agreement   with
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the   submission   of   Sri   Ganesh,   learned   senior   counsel   appearing   for
appellant.     The   ‘fee’   or   ‘charge’   as   mentioned   in   Section   40(a)(iib)   is
clear   in   terms   and   that   will   take   in   only   ‘fee’   or   ‘charge’   as   mentioned
therein or any fee or charge by whatever name called, but cannot cover
tax or surcharge on tax and such taxes are outside the scope and ambit
of   Section   40(a)(iib)(A)   and   Section   40(a)(iib)(B)   of   the   Act.     The
surcharge which is imposed on KSBC is under Section 3(1) of the KST
Act which reads as under : 
“ 3. Levy of surcharge on sales and purchase taxes.   –  
(1)   The   tax   payable   under   sub­section   (1)   of   section   5   of
the   Kerala   General   Sales   Tax   Act,   1963,   by   a   dealer   in
foreign   liquor   shall   be   increased   by   a   surcharge   at   the
rate   of   ten   per   cent,   and   the   provisions   of   the   Kerala
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.
Provided  that where  in  respect  of  declared  goods  as
defined in clause (c) of section 2 of the Central Sales
Tax Act, 1956 the tax payable by such dealer under
the   Kerala   General   Sales   Tax   Act,   1963   together
with   the   surcharge   payable   under   this   sub­section,
exceeds   four   per   centum   of   the   sale   or   purchase
price, the rate of surcharge in respect of such goods
shall be reduced to such an extent that the tax and
the   surcharge   together   shall   not   exceed   four   per
centum of the sale or purchase price.”
Section   5(1)(b)   of   the   Kerala   General   Sales   Tax   Act,   1963   reads   as
under : 
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5. Levy of tax on sale or purchase of goods : ­ (1) Every
dealer   (other   than   a   casual   trader   or   agent   of   a   non­
resident   dealer   or   the   Central   Government,   or
Government   of   Kerala   or   the   Government   of   any   other
state   or   of   any   Union   Territory,   or   any   local   authority)
whose total turnover for a year is not less than two lakhs
rupees and every casual trader or agent of a non­resident
dealer,   the   Central   Government,   Government   of   Kerala,
the   Government   of   any   other   state   or   of   any   Union
Territory,   or   any   local   authority   whatever   be   its   total
turnover  for  the  year  in  respect  of  goods  included  in  the
Schedule at the rate mentioned against such goods,­ 
(a) … … … …
(b) in respect of Foreign liquor, at the point of sale by the
Kerala   State   Beverages   (Manufacturing   and   Marketing)
Corporation   Limited   and   at   the   point   of   first   sale   in   the
State   by   a   dealer   liable   to   tax   under   this   section   except
where   the   sale   is   to   the   Kerala   State   Beverages
(Manufacturing and Marketing) Corporation Limited. 
(c) … … … …”
14.4. A reading of preamble and Section 3(1) of the KST Act, make it
abundantly clear that the surcharge on sales tax levied by the said Act
is   nothing   but   an   increase   of   the   basic   sales   tax   levied   under   Section
5(1) of the KGST Act, as such the surcharge is nothing but a sales tax.
It is also settled legal position that a surcharge on a tax is nothing but
the   enhancement   of   the   tax.     In   this   regard,   in   support   the   said   view,
ready reference can be made to the judgments of this Court in the case
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of   K. Srinivasan 1
  and   Sarojini Tea Co. Ltd. 2
.   Para 7 of the judgment
in the case of  K. Srinivasan 1
 reads as under :
“ 7.   The   above   legislative   history   of   the   Finance   Acts,   as
also the practice, would appear to indicate that the term
“Income   tax”   as   employed   in   Section   2   includes   sur ­
charge   as   also   the   special   and   the   additional   surcharge
whenever   provided   which   are   also   surcharges   within   the
meaning of Article 271 of the Constitution. The phraseol ­
ogy   employed   in   the   Finance   Acts   of   1940   and   1941
showed   that   only   the   rates   of   income   tax   and   supertax
were   to   be   increased   by   a   surcharge   for   the   purpose   of
the   Central   Government.   In   the   Finance   Act  of   1958  the
language   used   showed   that   income   tax   which   was   to   be
charged was to be increased by a surcharge for the pur ­
pose   of   the   Union.   The   word   “surcharge”   has   thus   been
used to either increase the rates of income tax and super
tax or to increase these taxes. The scheme of the Finance
Act  of  1971  appears  to  leave  no  room   for  doubt that the
term   “Income   tax”   as   used   in   Section   2   includes   sur ­
charge.”
Para 20 of the judgment in the case of   Sarojini Tea Co. Ltd. 2
 reads as
under :
“ 20.   For the reasons aforesaid, we are unable to endorse
the   view   of   the   High   Court   that   surcharge   on   land   rev ­
enue   payable   under   the   Surcharge   Act   is   not   land   rev ­
enue   but   a   levy   which   is   distinct   from   land   revenue.   In
consonance with the law laid down by this Court in   Vish ­
wesha   Thirtha   Swamiar   case   [(1972)   3   SCC   246   :   (1972)
1 SCR 137 : AIR 1971 SC 2377] it must be held that the
surcharge   on   land   revenue   levied   under   the   Surcharge
Act, being an enhancement of the land revenue, is part of
the   land   revenue   and   has   to   be   treated   as   such   for   the
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purpose   of   assessing   compensation   under   Section   12   of
the Ceiling Act.”
14.5.   Further, CBDT itself has issued circular in Circular No.3/2018
which   is   issued,   as   a   measure   for   reducing   litigation,   by   revision   of
monetary limits for filing appeals by the Department before the Income­
tax Appellate Tribunal, High Courts and SLP/appeals before this Court.
In the said circular it is clearly mentioned that for considering tax effect
it   includes   applicable   surcharge   and   cess.     Same   will   also   strengthen
the stand of the assessee.   Thus it is clear that the surcharge which is
sought to be levied is nothing but the enhancement of sales tax, which
is levied under Section 5(1) of the KGST Act.   When the basic sales tax
paid   by   KSBC   under   Section   5(1)(b)   of   the   KGST   Act,   deduction   was
allowed, there is no reason not to allow deduction of surcharge on sales
tax.   If the revenue does not consider Section 40(a)(iib) is applicable to
the basic sales tax paid by KSBC under Section 5(1)(b) of the KGST Act,
it   is   not   known   how   the   surcharge   on   sales   tax,   which   is   nothing   but
the sales tax, can be brought in the net of Section 40(a)(iib)(A) or 40(a)
(iib)(B) of the  Act.   Further  a clear  distinction between ‘fee’ and ‘tax’ is
carefully maintained throughout the scheme under Section 40(a) of the
Act   itself.     Wherever   the   Parliament   intended   to   cover   the   tax   it
specifically mentioned as a tax.  Section 40(a)(i) and 40(a)(ia) specifically
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C.A.@S.L.P.(C)No.12859  of 2020 etc.
relate   to   tax   related   items.     Section   40(a)(ic)   refers   to   a   sum   paid   on
account of fringe benefit tax.  At the same time, Section 40(a)(iib) refers
to   royalty,   licence   fee,   service   fee,   privilege   fee   or   any   other   fee   or
charge.  If these words are considered to include a tax or surcharge like
sales tax, the distinction so carefully spelt out in Section 40 between a
tax and a fee will be obliterated and rendered meaningless.  It is settled
principle   of   interpretation   that   where   the   same   Statute,   uses   different
terms   and   expressions,   then   it   is   clear   that   Legislature   is   referring   to
distinct and different things.   To support the said view ready reference
can   be   made   to   judgments   of   this   Court   in   the   case   of   DLF   Qutab
Enclave Complex Educational Charitable Trust   v.   State of Haryana
&   Ors. 4
;   Kailash   Nath   Agarwal   &   Ors.   v.   Pradeshiya   Industrial   &
Investment   Corporation   of   U.P.   Ltd.   &   Anr. 5
;   and   Shri   Ishar   Alloy
Steels   Ltd.   v.   Jayaswals   Neco   Ltd. 6
.     The   judgment   relied   on   by   the
learned   ASG   in   the   case   of   Jalkal   Vibhag   Nagar   Nigam   and   Others 3
would   not   render   any   assistance   to   support   the   case   of   the   revenue.
The  said  judgment only  considers  whether  the levy of water  tax  under
Section   52A   of   the   U.P.   Water   Supply   and   Sewerage   Act   is   a   fee   or
whether it is a tax covered by Entry 49 of List II of the seventh schedule
4
 (2003) 5 SCC 622
5
 (2003) 4 SCC 305
6
 (2001) 3 SCC 609
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to the Constitution.   The said judgment in fact maintains and does not
take   away   the   basic   constitutional   distinction   between   ‘fee’   and   ‘tax’.
Having regard to language used in Section 40(a)(iib), we are of the view
that the aforesaid judgment does  not support the case  of the revenue.
Even   the   other   alternative   submission   of   the   learned   counsel   that   it
may attract Section 40(a)(iib)(B) also cannot be accepted for the reason
that wherever the Parliament intended to include tax, referred clearly to
taxes   clearly   in   the   very   Section   40.     That   itself   indicates   that   the
surcharge   or   tax   were   never   intended   to   be   included   in   the   net   of
amended   Section   40(a)(iib)(A)   or   40(a)(iib)(B)   of   the   Income­tax   Act,
1961.
15. So   far   as   turnover   tax   is   concerned   it   is   submitted   by   the
learned ASG appearing for the revenue that such tax was imposed not
only on KSBC in terms of Section 5(1)(b) of KGST Act, but it is imposed
on   various   other   retail   dealers   specified   under   Section   5(2)   of   the   said
Act.     Further   turnover   tax   is   also   a   tax.     The   very   same   reason   which
we have assigned above for surcharge, equally apply to the turnover tax
also.   As such turnover tax is also outside the purview of Section 40(a)
(iib)(A) and 40(a)(iib)(B). 
16. For   the   aforesaid   reasons,   we   hold   that   the   gallonage   fee,
licence fee and shop rental ( kist ) with respect to FL­9 and FL­1 licences
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granted to the appellant will, squarely fall within the purview of Section
40(a)(iib) of the Income­tax Act, 1961.   The surcharge on sales tax and
turnover tax, is not a fee or charge coming within the scope of Section
40(a)(iib)(A)  or  40(a)(iib)(B),  as such same is  not an  amount which  can
be   disallowed   under   the   said   provision   and   disallowance   made   in   this
regard is rightly set aside by the High Court.
17. Accordingly, the civil appeal filed by the assessee is dismissed
and   the   civil   appeals   filed   by   the   revenue   are   partly   allowed   to   the
extent   indicated   above.     In   result,   the   assessments   completed   against
the   assessee   with   respect   to   assessment   years   2014­2015   and   2015­
2016 stand set aside.  The assessing officer to pass revised orders after
computing   the   liability   in   accordance   with   the   directions   as   indicated
above.     As   the   dispute   relates   to   assessment   years   2014­2015   and
2015­2016, the assessing officer shall pass appropriate orders, within a
period of two months from the date of receipt of this judgment.
 
              ………………………………J.
[R. Subhash Reddy] 
………………………………J.
[Hrishikesh Roy]
New Delhi.
January 03, 2022.
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