Case Note & Summary
The appellant, M/s Tamil Nadu State Marketing Corporation Ltd., filed a writ petition before the Madras High Court challenging the constitutional validity of Section 40(a)(iib) of the Income Tax Act, 1961, alleging that it was discriminatory and violative of Articles 14, 19, and 265 of the Constitution. The challenge arose after the assessing officer issued a show cause notice for Assessment Year 2017-18 disallowing VAT expenditure as a deduction under Section 40(a)(iib). The High Court dismissed the writ petition without deciding the vires on merits, observing that the matter was still sub judice before the Income Tax Authority and that the petitioner could raise the challenge at an appropriate moment. The Supreme Court, hearing the appeal, held that the High Court erred in not deciding the vires issue. It noted that vires goes to the root of the matter and that the cause of action arose upon issuance of the show cause notice. The Supreme Court set aside the High Court's order and remanded the matter for a decision on merits, clarifying that it expressed no opinion on the validity of Section 40(a)(iib). The appeal was allowed with no order as to costs.
Headnote
A) Constitutional Law - Vires of Statute - Article 226 of the Constitution of India - High Court's Duty to Decide - When the vires of a statutory provision is challenged, the High Court ought to decide the issue on merits irrespective of pending proceedings before the statutory authority, as vires goes to the root of the matter. The High Court failed to exercise its jurisdiction under Article 226 by not deciding the challenge to Section 40(a)(iib) of the Income Tax Act, 1961 on merits. (Paras 4-6)
B) Income Tax Act - Section 40(a)(iib) - Challenge to Vires - Cause of Action - The cause of action to challenge the vires of Section 40(a)(iib) arises upon issuance of a show cause notice by the assessing officer invoking the provision, and the assessee need not wait for finalisation of assessment proceedings. (Para 5)
Issue of Consideration
Whether the High Court was justified in dismissing the writ petition challenging the vires of Section 40(a)(iib) of the Income Tax Act, 1961 without deciding the issue on merits, on the ground that the matter was sub judice before the Income Tax Authority
Final Decision
Supreme Court allowed the appeal, quashed the High Court's order, and remanded the matter to the High Court to decide the writ petition on merits regarding the challenge to vires of Section 40(a)(iib) of the Income Tax Act, 1961. No opinion expressed on the validity of the provision. No order as to costs.
Law Points
- High Court must decide vires of a statutory provision when challenged under Article 226
- irrespective of pending proceedings before statutory authority
- cause of action arises upon issuance of show cause notice based on the provision
Case Details
2020 LawText (SC) (11) 39
Civil Appeal No. 3821 of 2020 (Arising from S.L.P.(Civil) No.10613/2020)
Ashok Bhushan, R. Subhash Reddy, M.R. Shah
Shri Rakesh Dwivedi (for appellant), Shri K.M. Natraj (for respondents)
M/s Tamil Nadu State Marketing Corporation Ltd.
Union of India and others
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Nature of Litigation
Civil appeal against High Court order dismissing writ petition challenging vires of Section 40(a)(iib) of Income Tax Act without deciding merits
Remedy Sought
Appellant sought quashing of Section 40(a)(iib) as ultra vires Articles 14, 19, and 265 of the Constitution and direction to allow VAT expenditure as deduction
Filing Reason
Assessing officer issued show cause notice disallowing VAT expenditure under Section 40(a)(iib); appellant challenged the provision's validity
Previous Decisions
High Court in Writ Petition No. 538 of 2020 set aside assessment order for AY 2017-18 on natural justice grounds; present writ petition (No. 6284/2020) dismissed without deciding vires
Issues
Whether the High Court was justified in dismissing the writ petition challenging vires of Section 40(a)(iib) without deciding merits on the ground that assessment proceedings were pending
Whether cause of action to challenge vires arises upon issuance of show cause notice under the provision
Submissions/Arguments
Appellant argued that Section 40(a)(iib) is discriminatory and violative of Article 14, as Central Government undertakings enjoy exemption; High Court ought to have decided vires on merits
Respondent (Union of India) argued that the matter was sub judice before Income Tax Authority and challenge at that stage was premature
Ratio Decidendi
When the vires of a statutory provision is challenged under Article 226 of the Constitution, the High Court must decide the issue on merits irrespective of pending proceedings before the statutory authority, as vires goes to the root of the matter. Cause of action arises upon issuance of a show cause notice invoking the provision.
Judgment Excerpts
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.
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.
Procedural History
Appellant filed Writ Petition No. 6284/2020 before Madras High Court challenging vires of Section 40(a)(iib) of Income Tax Act. High Court dismissed the petition on 11.03.2020 without deciding merits, observing that matter was sub judice before Income Tax Authority. Appellant filed SLP (Civil) No. 10613/2020 before Supreme Court, which was converted into Civil Appeal No. 3821/2020. Supreme Court allowed the appeal on 25.11.2020 and remanded the matter to High Court for decision on merits.
Acts & Sections
- Income Tax Act, 1961: 40(a)(iib)
- Constitution of India: 14, 19, 226, 265
