SC Orders High Court to Decide on Tamil Nadu State Marketing Corporation’s Tax Dispute

The Supreme Court of India ruled that the Madras High Court erred in dismissing a petition challenging the constitutional validity of Section 40(a)(iib) of the Income Tax Act, 1961. This section disallows certain deductions for state government undertakings while computing taxable income. The case, brought by the Tamil Nadu State Marketing Corporation Limited (TASMAC), questioned whether this provision violates the right to equality under Article 14 of the Constitution of India.

Background of the Case

TASMAC, a state-owned enterprise responsible for liquor sales in Tamil Nadu, challenged Section 40(a)(iib) of the Income Tax Act on the grounds that it unfairly targeted state government undertakings. According to TASMAC, this provision discriminated against state-run enterprises while similar levies on central government entities were treated differently.

The dispute began when the Income Tax Department issued a show cause notice stating that the Value Added Tax (VAT) levied on TASMAC was an exclusive charge by the state government and fell under the purview of Section 40(a)(iib). Consequently, the VAT expenses were deemed non-deductible while computing TASMAC’s income, increasing its tax liability.

TASMAC approached the Madras High Court, seeking a ruling on the constitutional validity of Section 40(a)(iib). However, the High Court dismissed the petition without examining the merits of the case, stating that the matter was still pending before the Income Tax Department.

Arguments by the Petitioner (TASMAC)

TASMAC, represented by senior counsel, presented the following arguments:

• Section 40(a)(iib) discriminates against state government enterprises, violating Article 14 of the Constitution.
• Central government undertakings are not subject to similar restrictions, creating an unfair advantage.
• The High Court was the appropriate forum to decide on the constitutional validity of the provision, regardless of pending tax proceedings.
• The Income Tax Department’s interpretation of the provision would lead to an unjust tax burden on state enterprises.

Arguments by the Respondent (Union of India)

The Union of India defended the provision, arguing:

• Section 40(a)(iib) was enacted to prevent the state from inflating expenses through levies on its own enterprises to reduce taxable income.
• The provision was designed to ensure fair tax treatment for all businesses, including government undertakings.
• The High Court was correct in dismissing the case, as the matter was still under consideration by the Income Tax authorities.

Supreme Court’s Observations

The Supreme Court criticized the High Court’s decision to dismiss the petition without addressing the constitutional challenge. The Court noted:

“When the vires of Section 40(a)(iib) were challenged, the High Court alone had the jurisdiction to decide the issue under Article 226 of the Constitution. The High Court ought to have decided the matter irrespective of the pending proceedings before the Income Tax Department.”

1. High Court’s Duty to Address Constitutional Challenges

The Supreme Court emphasized that constitutional questions cannot be deferred indefinitely while administrative proceedings continue. It stated:

“Once a show cause notice is issued questioning the deductibility of VAT expenses under Section 40(a)(iib), the cause of action arises, allowing the petitioner to challenge the provision’s validity.”

2. Violation of Natural Justice

The Court found that TASMAC had a legitimate grievance regarding the discriminatory nature of the provision. The High Court should have examined whether the provision treated state enterprises unfairly compared to central government undertakings.

3. Necessity of Judicial Review

The Supreme Court reiterated that judicial review is a fundamental right under the Constitution, ensuring that legislative provisions comply with constitutional principles. It ruled that:

“The High Court must exercise its jurisdiction under Article 226 and decide the matter on its merits.”

Final Judgment

The Supreme Court set aside the High Court’s order and remanded the case for fresh consideration. It directed the High Court to examine the constitutional validity of Section 40(a)(iib) and determine whether the provision unfairly discriminates against state government undertakings.

Conclusion

This judgment reaffirms the judiciary’s role in ensuring that tax laws comply with constitutional principles. The ruling underscores that High Courts must address constitutional challenges without delay, particularly when tax provisions potentially discriminate against specific entities. TASMAC’s case now returns to the Madras High Court, where the validity of Section 40(a)(iib) will be thoroughly examined.

Petitioner Name: Tamil Nadu State Marketing Corporation Ltd..
Respondent Name: Union of India & Others.
Judgment By: Justice Ashok Bhushan, Justice R. Subhash Reddy, Justice M.R. Shah.
Place Of Incident: Tamil Nadu, India.
Judgment Date: 25-11-2020.

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