a) Assessee-company was an undertaking of the Government of Karnataka engaged in the business of canalization of liquor, beer and rectified spirit.
b) It had entered into agreement with the Government of Karnataka to pay ‘Privilege Fee’ for renewal of lease related to its liquor licence.
c) Assessing Officer (AO) while making assessment disallowed privilege fee by holding that it was not an expenditure incurred towards earning of income.
d) He further held that the Government Order to levythe privilege fee was nothing but the appropriation of the income.
e) Aggrieved-assessee filed writ petition before the High Court against the order of AO. High Court held in favour of assessee as under:
1) In the instant case, the character of liability to pay privilege fee was not only by virtue of the contract but was by way of a statutory obligation once lease was granted in favour of the assessee-company.
2) It was on account of the lease so granted, Company was in a position to undertake the business of the liquor as per the terms and conditions of the licence.
3) If any businessman or a professional had incurred expenses by way of discharge of statutory obligation to get a licence to do business, it can be termed as an expenditure on account of necessity of the business or profession.
4) AO have power to examine the commercial expediency for the expenditure incurred but it cannot be said that he will have jurisdiction to disallow the expenditure incurred for necessity or with a view to have a direct benefit in the business of liquor.
5) AO being a statutory authority is bound to respect all the laws may be made by the Parliament or may be made by the State Legislature. He had no jurisdiction to examine the constitutional validity of any Act or the statute or a subordinate legislation which creates statutory liability upon the assessee to make the payment by way of an expenditure incurred.
6) Therefore, disallowance of the expenditure for payment of privilege fees was without jurisdiction and ultravires to the power of AO. -  79 taxmann.com 125 (Karnataka)