Tamil Nadu State Marketing Corporation Ltd. v. UOI
& Ors. [CA No. 3821 of 2020 (Arising from SLP (Civil) No. 10613/2020), dt.
25-11-2020] : 2020 TaxPub(DT) 4997 (SC)
Ultra vires of section 40(a)(iib) before High Court
Facts:
Assessee a state owned marketing federation having
exclusive licence to distribute liquor products was disallowed VAT/licence on
liquor which was paid by the assessee. The claim of the assessee that what was
a genuine business expense was being disallowed vide section 40(a)(iib) thus was
violative of Article 14, 19 and 265 of the Constitution of India. The
disallowance of the department was first challenged by means of a writ which
was remanded to the assessing officer for fresh consideration. Based on this
remand the High Court dismissed a second writ filed by the assessee where in
the ultra vires of section 40(a)(iib) was claimed. On higher appeal by the
assessee on the dismissal of the writ to the Apex Court.
Held in favour of the assessee that the High Court cannot
simply dismiss the writ citing that the case is sub-judice without hearing the
ultra vires issue raised by the assessee. The Madras High Court was ordered to
rehear the remanded case on ultra vires of the said section.
Editorial Note:
Reference be also made to the enclosed verdict of Odisha State Beverage
Corpn. Ltd. v ACIT [ITA No. 03/CTK/2019, A.Y. 2015-16, dt. 23-11-2020] : 2020
TaxPub(DT) 4961 (Ctk-Trib) where in the purpose of section 40(a)(iib)
was discussed. Unfortunately, the case went against the assessee basing its earlier
year verdict. The issue of ultra vires of this section is certainly a new
development worth noting.
Section 40(a)(iib), as explicitly revealed from
memorandum and Explanatory Notes to Finance Act, 2013, is to curb tax avoidance
practices in the form of appropriation of surplus by state government
undertaking to the State Government. The relevant extract of the Memorandum in
this regard is produced below for sake of ready reference :--
"Disallowance of certain
fee, charge, etc. in the case of State Government Undertakings. The existing
provisions of section 40 specifies the amounts which shall not be deducted in
computing the income chargeable under the head "Profits and gains of
business or profession", The nondeductible expense under the said section
also includes statutory dues like fringe benefit tax, income-tax, wealth-tax,
etc. Disputes have arisen in respect of income-tax assessment of some State
Government undertakings as to whether any sum paid by way of privilege fee,
license fee, royalty, etc. levied or charged by the State Government
exclusively on its undertakings are deductible or not for the purposes of
computation of income of such undertakings. In some cases, orders have been
issued to the effect that surplus arising to such undertakings shall vest with
the State Government. As a result it has been claimed that such income by way
of surplus is not subject to tax. It is a settled law that State Government
undertakings are separate legal entities than the State and are liable to
income-tax. In order to protect the tax base of State Government undertakings
vis-a-vis exclusive levy of fee, charge, etc. or appropriation of amount by the
State Governments from its undertakings, it is proposed to amend section 40 of
the Income-tax Act to provide that any amount paid by way of fee, charge, etc.,
which is levied exclusively on, or any amount appropriated, directly or
indirectly, from a State Government undertaking, by the State Government, shall
not be allowed as deduction for the purposes of computation of income of such
undertakings under the head "Profits and gains of business or
profession". It is also proposed to define the expression "State
Government Undertaking" for this purpose. This amendment will take effect
from 1-4-2014 and will, accordingly, apply in relation to the assessment year
2014-15 and subsequent assessment years."
9. Thus, the intention is to curb tax avoidance
practice. The intention is not to disallow the licensee fees, which is payable
to be able to carry on the business of liquor trade, which the State Government
has the power to levy under Entry No. 8, 51 and 66 of List II of Schedule VII
of the Constitution of India. Accordingly, unless the intention behind making
payment of license fee is proved to be a diversion of surplus for avoidance of
tax base of the assessee, the disallowance under section 40(a)(iib) should not
be attracted".