A Full Bench of the Supreme Court held that the validity of a provision is a serious matter which could only be decided by the High Courts and not lower courts. Even when a parallel case was pending elsewhere, the High Court must decide the matter on merits. The Supreme Court considered this issue, in the matter of Tamil Nadu State Marketing Corporation v. Union of India.
Brief Facts of the Case
While computing the income of the Appellant, the Assessing Officer stated that the VAT expense levied on the Appellant was an exclusive levy by the State Government. Therefore, it was squarely covered by Section 40(a)(iib) of the Income Tax Act. Therefore, VAT expenditure is not allowable as a deduction under Section 40(a)(iib) of the Income Tax Act.
The High Court set aside the assessment order insofar as disallowance in terms of Section 40(a)(iib), on the ground of violation of principles of natural justice. Thus, the matter was pending before the Assessing Officer.
The Appellant, thereafter filed the present writ petition before the High Court challenging the validity of Section 40(a)(iib) of the Income Tax Act being ultra vires Articles 14, 19, and 265 of the Constitution of India.
The High Court dismissed the said writ petition without deciding the validity of Section 40(a)(iib) of the Income Tax Act. It observed that the issue of raising a challenge to the vires of the provision at this stage need not be entertained as the matter was still sub-judice before the Income Tax Authority.
Aggrieved by the High Court’s order, the Appellant has filed the present appeal.
Court’s Observations
The Bench, at the very outset, stated that the High Court’s order was not sustainable.
It stated that the vires of Section 40(a)(iib) of the Income Tax Act could be decided by the High Court alone in the exercise of powers under Article 226 of the Constitution of India. In such a case, the High Court ought to have decided the issue concerning vires of Section 40(a)(iib) on merits, irrespective of the fact whether the matter was sub-judice before the Income Tax Authority.
When the Assessment Officer had issued a show-cause notice to show why the VAT expenditure was not allowable as a deduction, the cause of action to challenge the vires of Section 40(a)(iib) had arisen. The Appellant may not have to wait till the assessment proceedings before the Income Tax Authority were finalized.
The Bench observed that the High Court has failed to exercise the powers vested in it under Article 226 of the Constitution of India by not deciding the challenge to the vires of Section 40(a)(iib) of the Income Tax Act on merits.
Court’s Decision
The Bench ordered the High Court to decide the validity of Section 40(a)(iib) of the Income Tax Act on its merits.
Click here to view the decision in Tamil Nadu State Marketing Corporation v. Union of India.
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