2020 (11) TMI 876 - SC - Income Tax

Validity of Section 40(a)(iib) - vires of Section 40(a)(iib) - HELD THAT - 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 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. As the High Court has not decided the issue with respect to vires of Section 40(a)(iib) of the Income Tax Act on merits, the matter is required to be remanded to the High Court to decide the writ petition on merits and decide the question with respect to challenge to the vires of Section 40(a)(iib) of the Income Tax Act on merits. The present appeal succeeds. The impugned judgment and order passed by the High Court is hereby quashed and set aside and the matter is remitted to the High Court to decide the writ petition on merits with respect to challenge to the vires of Section 40(a)(iib) - However, it is made clear that we have not expressed any opinion on merits with respect to legality and validity of Section 40(a)(iib) of the Income Tax Act and we have remanded the matter on the aforesaid ground alone.

Summary

Issues involved:
Challenge to the validity of Section 40(a)(iib) of the Income Tax Act, 1961 before the High Court. High Court's dismissal of the writ petition without deciding the issue on merits.

Analysis:

Issue 1: Challenge to the validity of Section 40(a)(iib) of the Income Tax Act
The original writ petitioner challenged the validity of Section 40(a)(iib) of the Income Tax Act, arguing that it discriminates and violates Article 14 of the Constitution of India. The assessing officer disallowed VAT expenditure as a deduction under this provision for the Assessment Year 2017-18. The High Court previously set aside the assessment order for violating principles of natural justice. The High Court, in the present case, dismissed the writ petition without deciding the validity of Section 40(a)(iib) on merits, stating that the issue should not be entertained while the matter is pending before the Income Tax Authority. However, the Supreme Court held that the High Court should have decided the challenge to the vires of Section 40(a)(iib) on merits as it goes to the root of the matter. The cause of action for challenging the provision arose when the assessing officer issued a show cause notice, and the High Court should have exercised its powers under Article 226 of the Constitution to decide the issue.

Issue 2: High Court's dismissal of the writ petition without deciding the issue on merits
The Supreme Court found the High Court's judgment unsustainable as it did not address the challenge to the vires of Section 40(a)(iib) on its merits. The High Court's reasoning that the matter was sub judice before the Income Tax Authority and could be questioned at a later stage was deemed insufficient. The Supreme Court emphasized that the High Court should have decided the issue irrespective of the ongoing assessment proceedings. Therefore, the matter was remanded to the High Court to decide the writ petition on merits and address the challenge to the vires of Section 40(a)(iib) of the Income Tax Act comprehensively. The Supreme Court clarified that its decision to remand the matter was solely based on this ground, without expressing any opinion on the legality or validity of Section 40(a)(iib).

In conclusion, the Supreme Court allowed the appeal, quashed the High Court's judgment, and remitted the matter for a detailed consideration of the challenge to the vires of Section 40(a)(iib) of the Income Tax Act.