2020 (3) TMI 638 - HC - Income Tax

Validity of Section 40(a)(iib) - Scope of the term Charges - Whether Value Added Tax (VAT) would be falling within the definition of a charge - petitioner Corporation contending 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 and for which learned Advocate General appearing for the petitioner / TASMAC has invited the attention of the Court to the order passed by the Assessing Authority dated 30.12.2019 - HELD THAT - It is in order to protect the tax base of the State Government undertakings that the provision came to be introduced. She has further narrated as to the manner in which the State Government by issuing retrospective Government Orders, had appropriated the amount as a privilege fee and therefore, in such circumstances, it had become imperative to introduce the aforesaid provision, which is ultimately to the benefit of the State Government undertakings and also ensures the correct appropriation of revenue to the Central Government. Having considered the submissions raised, the issue of raising a challenge to the vires of the provision at this stage, need not be entertained by us, 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. We are not inclined to entertain the writ petition at this stage without prejudice to the rights of the aggrieved parties to approach the appropriate forum in accordance with law in the event the occasion so finally arises.

Summary

Issues:
Challenge to the validity of Section 40(a)(iib) of the Income Tax Act, 1961 based on discrimination and violation of Article 14 of the Constitution of India. The denial of deductions and exemptions to the petitioner Corporation and other State Government undertakings under the impugned provision. The contention regarding interference with fundamental rights under Article 19(1)(g) of the Constitution of India. Opposing arguments by the Union of India regarding the timing of the challenge and the protective nature of the provision.

Analysis:

1. The petitioner Corporation challenged the validity of Section 40(a)(iib) of the Income Tax Act, 1961, arguing that the provision disallowed certain deductions in computing taxable income, specifically related to Value Added Tax (VAT). The petitioner contended that the Income Tax Authority's interpretation of VAT as falling under the provision was erroneous and violated principles of natural justice. The petitioner raised concerns about discrimination and violation of Article 14 of the Constitution of India, highlighting that Central Government undertakings enjoyed exemptions not granted to them.

2. The petitioner further argued that various fees deserving exemptions were also not allowed as deductions under the impugned section. The Income Tax Authorities' refusal to grant such exemptions led to financial burdens on the petitioner and other State Government undertakings. The petitioner claimed that the provision interfered with their fundamental rights to carry on trade and business under Article 19(1)(g) of the Constitution of India. The challenge to the constitutional validity of the provision was based on the lack of rational basis and intelligible differentia for denying deductions to State Government undertakings.

3. In response, the Union of India opposed the petition, citing the absence of an immediate cause of action as the matter was remitted back to the Income Tax Authority by a learned Single Judge. The Union argued that preempting the decision-making process or raising a premature challenge was unwarranted. The Union explained that the provision was introduced to protect the tax base of State Government undertakings and prevent revenue loss to the Central Government due to certain State Government actions regarding revenue appropriation.

4. The Court considered the submissions from both sides and decided not to entertain the writ petition challenging the provision's vires at that stage. The Court emphasized that the matter was still pending before the Income Tax Authority, and the aggrieved parties could challenge it at the appropriate time. Therefore, the Court dismissed the Writ Petition without costs, allowing the aggrieved parties to approach the appropriate forum in accordance with the law when necessary.

Overall, the judgment focused on the timing of the challenge, the protective intent of the provision, and the rights of the parties to pursue legal remedies at the appropriate juncture, without prejudice to their rights in the future.