The Supreme Court directed the Madras High Court to preside over the question of Constitutional Validity of Section 40(a)(iib) of the Income Tax Act.
The appellant, M/s Tamil Nadu State Marketing Corporation Ltd. who is an original writ petitioner filed the writ petition before the High Court challenging the validity of Section 40(a)(iib) of the Income Tax Act, 1961.
It was the case on behalf of the original writ petitioner 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.
According to the original writ petitioner, 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 Coram consisting of Justice Ashok Bhushan, R. Subhash Reddy, and M.R. Shah stated that 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,” the Apex court said.
The Apex court clarified that 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 a 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 finalized. 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 Court 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 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.
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