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Supreme Court Asks Madras HC To Decide Constitutional Validity Of Section 40(a)(iib) Of Income Tax Act

LIVELAW NEWS NETWORK
25 Nov 2020 2:28 PM GMT
Supreme Court Asks Madras HC To Decide Constitutional Validity Of Section 40(a)(iib) Of Income Tax Act
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The Supreme Court has directed the Madras High Court to decide the constitutional validity of Section 40(a)(iib) of the Income Tax Act.Tamil Nadu State Marketing Corporation Ltd. had approached the Apex Court challenging the High Court order dismissing the writ petition filed by it challenging the validity of Section 40(a)(iib) of the Income Tax Act, 1961.This provision deals with disallowance...

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The Supreme Court has directed the Madras High Court to decide the constitutional validity of Section 40(a)(iib) of the Income Tax Act.

Tamil Nadu State Marketing Corporation Ltd. had approached the Apex Court challenging the High Court order dismissing the writ petition filed by it challenging the validity of Section 40(a)(iib) of the Income Tax Act, 1961.

This provision deals with disallowance of royalty, licence fees, etc., in case of State Government Undertaking while computing income chargeable under the head "Profits and gains of business or profession.' It reads thus:

"Notwithstanding anything to the 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": -----------(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 Government.

Before the High Court, the Corporation had contended that that the amount which is deductible in computing the income chargeable in terms of the Income Tax Act is not being allowed under the garb of the aforesaid provision. It was contended that the said provision is discriminatory and violative of Article 14 of the Constitution of India, inasmuch as there are many Central Government undertakings which have not been subjected to any such computation of income tax and are enjoying exemption. The High Court, however, dismissed the said writ petition without deciding the validity of Section 40(a)(iib) of the Income Tax Act by observing that the issue of raising a challenge to the vires of the provision at this stage need not be entertained as the matter is still sub judice before the Income Tax Authority.

The Apex Court bench, while disposing the appeal filed by the Corporation, observed that the High Court ought to have decided the issue with respect to the challenge to the vires of Section 40(a)(iib) of the Income Tax Act on merits. The bench comprising Justices Ashok Bhushan, R. Subhash Reddy and MR Shah observed:

"When the vires of Section 40(a)(iib) of the Income Tax Act were challenged, which can be decided by the High Court alone in exercise of powers under Article 226 of the Constitution of India, the High Court ought to have decided the issue with regard to vires of Section 40(a)(iib) on merits, irrespective of the fact whether the matter was sub judice before the Income Tax Authority. Vires of a relevant provision goes to the root of the matter. The High Court has observed that the issue of raising a challenge to the vires of the provision at this stage need not be entertained, as the matter is still sub judice before the Income Tax Authority, even though it is open to the aggrieved party to question the same at the appropriate moment. Once the show cause notice was issued by the assessing officer calling upon the appellant – assessee to show cause why the VAT expenditure is not allowable as deduction in accordance with Section 40(a)(iib) of the Income Tax Act, while computing the income of the appellant, it can be said that the cause of action has arisen for the appellant to challenge the vires of Section 40(a)(iib) of the Income Tax Act and the appellant may not have to wait till the assessment proceedings before the Income Tax Authority are finalised. The stage at which the appellant approached the High Court and challenged the vires of Section 40(a)(iib) of the Income Tax Act can be said to be an appropriate moment. Therefore, the High Court ought to have decided the issue with respect to the challenge to the vires of Section 40(a)(iib) of the Income Tax Act on merits. The High Court has failed to exercise the powers vested in it under Article 226 of the Constitution of India by not deciding the writ petition on merits and not deciding the challenge to the vires of Section 40(a)(iib) of the Income Tax Act on merits."

Allowing the appeal, the bench remanded the case to the High Court to decide the writ petition on merits and decide the question with respect to challenge to the vires of Section 40(a)(iib) of the Income Tax Act on merits.

Case: M/s Tamil Nadu State Marketing Corporation Ltd. vs. Union of India [CIVIL APPEAL NO. 3821 OF 2020] 
Coram: Justices Ashok Bhushan, R. Subhash Reddy and MR Shah
Counsel: Sr. Adv Rakesh Dwivedi, ASG K.M. Natraj 

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