GLIMPSES OF SUPREME COURT RULINGS

Validity of provision – When the vires of any provision of any Act is challenged, it is the High Court alone which can decide the same in exercise of powers under Article 226 of the Constitution of India – Once the show cause notice is issued by the Authority calling upon the person to show cause why an action should not be taken under a particular provision of the Act, it can be said that the cause of action has arisen for that person to challenge the vires of that provision of the Act and the person need not wait till the adjudication by the adjudicating authority

A show cause notice was issued by the A.O. for the Assessment Year 2017-18 stating that the VAT expense levied on the appellant was an exclusive levy by the State Government and therefore was squarely covered by section 40(a)(iib) of the Income-tax Act, and therefore VAT expenditure was not allowable as deduction in accordance with section 40(a)(iib) while computing the income of the appellant. The A.O. finalised the assessment and passed the assessment order for the A.Y. 2017-18 vide order dated 30th December, 2019.

The High Court, vide judgment and order dated 26th February, 2020 in Writ Petition No. 538 of 2020, set aside the said assessment order insofar as disallowance in terms of section 40(a)(iib) was concerned, on the ground of violation of principles of natural justice.

During the pendency of the matter before the A.O., the appellant filed another writ petition before the High Court challenging the validity of section 40(a)(iib). It was the case on behalf of the appellant that the amount which was deductible in computing the income chargeable in terms of the Income-tax Act was not being allowed under the garb of the aforesaid provision. According to the appellant, the said provision was discriminatory and violative of Article 14 of the Constitution of India, inasmuch as many Central Government undertakings had not been subjected to any such computation and were enjoying exemption.

The High Court dismissed the said writ petition without deciding the validity of section 40(a)(iib) by observing that the issue of raising a challenge to the vires of the provision need not be entertained at this stage as the matter was still sub judice before the IT Authority even though it was open to the aggrieved party to question the same at the appropriate stage. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the High Court in dismissing the said writ petition without deciding the vires of section 40(a)(iib) on merits, the appellant preferred an appeal before the Supreme Court.

According to the Supreme Court, when the vires of section 40(a)(iib) was challenged, it was the High Court alone which could decide the same in exercise of powers under Article 226 of the Constitution of India. The Supreme Court held that the High Court ought to have decided the issue on merits, irrespective of the fact whether the matter was sub judice before the IT Authority. The vires of a relevant provision goes to the root of the matter. Once the show cause notice was issued by the A.O. calling upon the appellant to show cause why the VAT expenditure was not allowable as deduction in accordance with section 40(a)(iib) while computing the income of the appellant, it could be said that the cause of action had arisen for the appellant to challenge the vires of section 40(a)(iib) and the appellant need not wait till the assessment proceedings before the IT Authority were finalised.

According to the Supreme Court, the stage at which the appellant approached the High Court and challenged the vires of section 40(a)(iib) could be said to be the appropriate moment and the High Court ought to have decided the issue at that stage. Therefore, the Supreme Court remanded the matter to the High Court to decide the writ petition with respect to the challenge to the vires of section 40(a)(iib) on merits.