1. These appeals by the revenue arise out of the consolidated order of the C.I.T.(A), Nashik dated 1-7-1988 wherein he held that "Market Cess" was not covered by the provisions of Section 43B and therefore, could not be disallowed thereunder. Further he was of the opinion that as the assessee had maintained the accounts as per mercantile method of accounting, the expenditure claimed was admissible in the relevant previous years themselves. Thus, it can be seen that the conclusion drawn by the C.I.T.(A) that the expenditure is admissible as a deduction is based on the finding that the market fees is not covered by the provisions of Section 43B of the Income Tax Act, 1961.
2. Revenue has taken common grounds to urge that the C.I.T.(A) erred in holding that provisions of Section 43B are not applicable in respect of Market Cess and therefore, he erred in interpreting the provisions of Section 43B ofthe Income TaxAct, 1961. Therefore, it was prayed that the order of the C.I.T.(A) should be vacated and that of the Assessing Officer restored.
3. The assessee is a registered firm which is carrying on business as commission agent of agricultural produce. It follows mercantile method of accounting and the accounting year followed is samvat year. For the purpose of carrying on business, the assessee has to pay Market Cess to the Market Yard Committee of Pune, weighing charges under the head Total charges etc. The assessee has shown, inter alia, market cess liability of Rs. 34,071 for the assessment year 1985-86, whereas for the assessment year 1986-87 a sum of Rs. 39,857 was debited to the profit and loss account, but it was not actually paid to the Market Yard Committee. According to the assessee, though the market cess has been separately collected from the customers none the less it did not form part of income of the assessee. Therefore it was contended that the market cess collected by the assessee was not duty in terms of Section 43B of the Income Tax Act, 1961 and consequentially does not fall within the mischief of Section 43B. These contentions of the assessee were not accepted by the Assessing Officer for the following reasons. Market cess was collected from the customers in accordance with the provisions of the Maharashtra Agricultural Produce Marketing (Regulation) Act. The market cess collected was to be paid to the Market Yard Committee and therefore, it was in the nature of "duty" as contemplated by the provisions of Section 43B of the Income Tax Act, 1961. He pointed out that the market cess was collected from the customers along with the commission and therefore, it formed part and parcel of the commission receipts and deduction shall be allowed only if actual payment was made as required by Section 43B of the Income Tax Act, 1961. Since payments were not actually made during these years under consideration, the Assessing Officer disallowed the claims for deduction and added back to the total income for these years as shown separately in the assessment orders.
4. On appeal, the C.I.T.(A) agreed with the contentions raised by the counsel of the assessee, namely, market cess collected by the assessee was not covered by Section 43B because it was not duty in nature. In this connection, he has relied on the decision of the Tribunal, Hyderabad Bench in the case of ITO v. Sree Dhanalakshmi Rice Co.
wherein it has been held that market cess is not covered by Section 43B of the Income Tax Act, 1961. After concluding that market cess was not duty covered by Section 43B, he directed that the expenditure claimed was to be allowed as a deduction as the assessee was maintaining the accounts according to mercantile method of accounting.
5. At the time of hearing, Mrs. G.V. Samant, learned departmental representative reiterated the common ground taken by the revenue and supported the orders of the Assessing Officer for the reasons given by him.
6. The learned counsel for the assessee, Shri K.A. Sathe, on the other hand, supported the decision of the C.I.T(A). According to him, the decision of the Andhra Pradesh High Court in the case of Srikakollu Subba Rao & Co. v. Union of India [1988] 173 ITR 708 squarely covers the common issue involved in these appeals wherein it has been held that market cess is not in the nature of either tax or duty and therefore, provisions of Section 43B were not applicable to "Market cess". He further contended that the ambiguity or uncertainty that prevailed as to whether market cess or fee could be considered as tax or duty was statutorily cleared by the Finance Act, 1988 which has inserted the words "cess or fee" under Clause (a) of Section 43B of the Income Tax Act, 1961 which is effective from 1-4-1989. Therefore, he urged that the market cess or fee would attract the provisions of Section 43B(a) for the assessment year 1989-90 onwards and not earlier as in the case of the assessee.
7. We have duly considered the submissions of the parties and the decisions cited. In the case of Srikakollu Subba Rao & Co. (supra) the main challenge was whether the provisions of Section 43B was voilative of Articles 14 and 19(1)(g) of the Constitution, i.e. whether it is discriminatory or imposes restriction on the right of carrying on business activities. On both these questions, the Andhra Pradesh High Court upheld the validity and rejected the contentions of the petitioner. However, the point in issue, namely, market cess, came up for consideration and the contention of the petitioner was that market cess was not in the nature of either tax or duty and therefore, could not be disallowed on the ground of non-payment under Section 43B. This contention was upheld by the Andhra Pradesh High Court as the issue was directly covered by the decision of the Supreme Court in the case of Om Parkash Agarwal v. Giri Raj Kishori [1987] 164 ITR 376. Therefore, it was concluded that the claim of deduction of market cess could not be disallowed on the ground that it was not paid before the close of the accounting year because the provisions of Section 43B have no application to market cess. Therefore, the issue involved in these appeals stands covered by the aforesaid judgment of the Andhra Pradesh High Court.
8. The Supreme Court in the case of Om Parkash Agarwal (supra) laid down the essential characteristics of tax as distinguished from "fee".
According to the Supreme Court, tax is imposed for public purposes without reference to special benefit to taxpayers, whereas fees should on the face of the statute be correlated to the expenses incurred by the Government in rendering services. According to the Supreme Court, "the primary meaning of taxation is raising money for purposes of Government by means of contributions from individual persons, a compulsory exaction of money by a public authority for public purposes enforceable at law and not a payment for services rendered. The three principal characteristics of a tax are: (i) that it is imposed under statutory power without the taxpayer's consent and the payment is enforced by law; (ii) that it is an imposition made for public purposes without reference to any special benefit to be conferred on the payer of the tax; and (iii) that it is a part of the common burden, the quantum of imposition upon the taxpayer depending generally upon the capacity of the taxpayer to pay. The essential qualification of a fee is that it is absolutely necessary that the levy of a fee should, on the face of the legislative provision, be correlated to the expenses incurred by the Government in rendering services".
9. In that case, under Section 3 of the Haryana Rural Development Fund Act, 1983, an ad valorem cess was levied on dealers at the rate of one per cent of the sale proceeds of agricultural produce bought or sold or brought for processing in a notified market area. It was to be credited to a fund vesting in the State Government. The State Government could under Section 4(5) of the said Act apply the Fund to meet expenditure incurred in connection with development of roads, hospitals, means of communication, water supply, sanitation facilities and for the welfare of agricultural labour or for any other approved scheme in rural areas.
It was held by the Supreme Court that the Fund created under the said Act was a mere cloak to cover the true character of the levy because when the amount was spent from the Fund the interest of the dealers was not at all kept in view even generally. There was no other restriction imposed on the manner in which the Fund could be spent. Therefore, it was held that the cess, partook the character of a part of the common burden which had to be levied and collected only as a tax. The Supreme Court held that in such a situation, it was difficult to hold that there existed any correlation between the amount paid by way of cess under the Act and the services rendered to the person from whom it was collected. Therefore, it concluded that the levy was not a fee but was a tax not leviable by the State Legislature and as a consequence the entire Act was unconstitutional and the levy of the cess was liable to be quashed.
10. We shall now consider the relevant provisions of the Maharashtra Agricultural Produce Marketing (Regulation) Act, 1963, which is applicable 'to the whole of the State of Maharashtra. As per Section 11 of the said Act, the State Government shall establish for every market area a Market Committee for regulating the marketing of different kinds of agricultural produce for the same market area or any part thereof.
The Market Committee shall have all such powers and discharge all such functions as are vested in it by or under the said Act. According to Section 12(1) of the said Act, it is a body corporate which shall have perpetual succession and a common seal, and may in its corporate name sue and be sued, and shall be competent to contract, acquire and hold property, both movable and immovable and to do all other things necessary for the purposes for which it is established. Subsection (1) of Section 29 prescribes the powers and duties of the Market Committee.
Briefly, the Market Committee shall provide such facilities for marketing of agricultural produce therein as the Director, State Marketing Board or the State Government, as the case may be, may, from time to time, direct, do such other acts as may be required in relation to the superintendence, direction and control of markets or for regulating marketing of agricultural produce in any place in the market area, and for purposes connected with the matters aforesaid, and for that purpose may exercise such powers and perform such duties and discharge such functions as may be provided by or under the Act.
Sub-section (2) specifies various activities of the Market Committee.
Clause (xvii) empowers the Market Committee to levy, take, recover and receive charges, fees, rates and other sums or money for which the Market Committee is entitled. In the case of the assessee, the levy of market cess is governed by Section 31 of the said Act. Section 31 of the Act empowers the Market Committee to levy fees and also the rates of commission to be charged. Section 31 reads as under: Section 31: It shall be competent to a Market Committee to levy and collect fees in the prescribed manner at such rates as may be decided by it (but subject to the minimum and maximum rates which may be fixed by the State Government by notification in the Official Gazette in that behalf), from every purchaser of agricultural produce marketed in the market area.
Section 36 deals with market fund. All monies received by a Market Committee together with other items with which we are not concerned shall form part of a fund to be called the Market Fund. Sub-section (1) of Section 37 lays down the purposes for which the market fund may be expended. The important purposes are (a) the acquisition of a site or sites for the market; (b) maintenance, development and improvement of the market; (c) construction of, and repairs to, buildings necessary for the purposes of such market and for the health, convenience and safety of persons using it; (d) the provision and maintenance of standard weights and measures; (h) the collection and dissemination of information regarding matters relating to crop statistics and marketing in respect of the agricultural produce notified under Section 4; (i) propaganda in favour of agricultural improvement and orderly marketing; (f) giving grant or donation to any institution or body conducting any educational or welfare activities for the benefit of agriculturists in the market area, subject to the condition that the amount of such grant or donation does not exceed in the aggregate ten per cent of the net amount remaining after deducting the expenditure from the revenues of the year immediately preceding the year in which such grant or donation is made; (l) the payment of expenses incurred in auditing the accounts of Market Committee; (m) the payment of such contribution to State Marketing Board as may be notified under Sub-section (2); (n) the making of any contribution to any scheme for development of agricultural marketing; (o) the provision of facilities, like grading services and communication of market information to agriculturists in the market area; (q) the incurring of expenses for research, extension and training in marketing of agricultural produce; (r) the prevention, in conjunction with other agencies, State and Central Government, of distress sale of agricultural produce; (s) the promotion of co-operative marketing of agricultural produce; (t) the promotion of warehousing finance for benefit of small and marginal farmers; etc.
Sub-section (2) of Section 37 provides for annual contribution notwithstanding 10% of the gross annual income of the previous market year to the State Agricultural Marketing Board. Section 39A of the Act provides for establishment of State Agricultural Marketing Board.
Section 39J lays down the power and functions of the State Agricultural Marketing Board. The main function of the Board is to co-ordinate the functioning of the Market Committees including programmes undertaken by such Market Committee for the development of markets and market areas, to give advice to Market Committees in general or any Market Committee in particular with a view to ensuring improvement in the functioning thereof; to supervise and guide the Market Committee in the preparation of plans and estimates of construction programme undertaken by the Market Committee; to make necessary arrangement for propaganda and publicity on matters relating to marketing of agricultural produce; to grant subventions or loans to Market Committees for the purposes of the Act on such terms and conditions as it may determine; to arrange or organise seminars, workshops or exhibitions on subjects relating to agricultural marketing etc. Section 45 of the Act empowers the State Government to supersede such Market Committee or remove the member, as the case may be, if it is not competent to perform or commits default in performance of duties imposed on it by the Act.
11. We shall now see whether the ratio of the Supreme Court in the case of Om Prakash Agarwal (supra) is applicable so far as the essential characteristics of the levy collected by the Market Committee vis-a-vis the services rendered by it and the utilisation of the funds collected by it. We have already extracted the relevant services rendered by the Market Committee and the purposes for which the fund is utilised. After carefully considering all the relevant provisions of the Act extracted above, we are of the considered opinion that the levy made by the Market Committee is in the nature of fee collected for the innumerable services rendered for the development of market area in which the transactions are carried on. There is, therefore, quid pro quo relationship between the levy and the services rendered to the agriculturists which are enumerated above. Even the utilisation of market fund is for the betterment of the marketing areas. Even the market fund consists of sums realised by way of penalty, or loans raised by the Committee, all grants, loans or contributions made by the State Government to the Committee etc. and the contribution not exceeding 10 per cent made to State Agricultural Marketing Board also goes to improve and develop the marketing areas and provision of various facilities as enumerated above. After considering all the relevant provisions of the Act, we are satisfied that the levy made by the Market Committee is in the nature of fee and not tax or duty so as to attract the provisions of Section 43B of the Income Tax Act, 1961.
Therefore, we are satisfied that the ratio of the Supreme Court will not apply to the case of the assessee as the facts of the assessee's case could be distinguished to the facts of that case. Therefore, there is no question of the Market Committee or the State Government indirectly through the Market Committee levying a tax or duty in the disguise of a fee so as to attract the mischief of Section 43B of the Income Tax Act, 1961. The Item 66 of the State List of the Seventh Schedule of the Constitution of India would be applicable in the facts and circumstances of the case enumerated, rather than Item 52 of the State List which deals with taxes on the entry of goods into a local area for consumption, use or sale therein. In any case, the amendment made by the Finance Act, 1988 is applicable only from 1-4-1989 and therefore not applicable prior to assessments for 1989-90. In the facts and circumstances of the case, we uphold the order of the C.I. T(A) and reject the common ground taken by the revenue.