2020 (2) TMI 1291 - HC - Income Tax

Court sets aside assessment under Section 40(a)(iib) due to violation of natural justice. Petitioner to provide info for new assessment.

M/s. Tamilnadu State Marketing Corpn. Ltd. Versus The Deputy Commissioner of Income Tax Corporate Circle – 3 (1), Chennai

The court set aside the assessment regarding the disallowance under Section 40(a)(iib) due to the violation of natural justice and lack of detailed ... Disallowance u/s 40(a)(iib) - VAT remittances effected by the petitioner - Scope of specific restrictions on deduction u/s 40(a)(iib) - HELD THAT:- The State had originally imposed a privilege fee for the exclusive retail vending of IMFL that had been granted to TASMAC under the Tamil Nadu Prohibition Act. The appropriation of surplus of special privilege fee attracted the provisions of Section 40(a)(iib) after its amendment with effect from 01.04.2017. For this reason, according to the officer, the levy of special privilege fee had been withdrawn, only to be replaced by the levy of VAT. The timing of the withdrawal of privilege fee and introduction of VAT is no doubt curiously aligned to the amendment to Section 40(a)(iib) of the Act. This modus operandi, the Officer states, is nothing but a sham to escape the levy of tax. Lauding the wisdom of the Legislature that had anticipated such innovative methods for appropriating surplus, the officer notes that the provision included ‘any other fee or charge by whatever name called which is levied exclusively on or which is appropriated directly or indirectly from a State Government undertaking by the State Government’ which encompasses the levy of VAT as well. Petitioner was called upon to file a reply to the SCN on or before 24.12.2019. Some time was sought by the petitioner and a detailed reply came to be filed on 27.12.2019. This has culminated in the impugned order of assessment, wherein the Officer confirms the proposal in the SCN, albeit by way of a short order. The length of an order is hardly a parameter to indicate application of mind or otherwise by an Assessing Authority. In the present case, the impugned order insofar as it relates to this issue is seen to be a mere repetition of the entire show cause notice and the legal arguments raised by the petitioner in reply dated 27.12.2019 and case-law referred to, have not been adverted to at all. An addition of a sum of ₹ 14,574.74 crores, in my considered view, does merit some amount of detailed discussion on the legal aspects involved, particularly in the light of the allegation regarding collusion between the State and TASMAC. In effect, the argument of the Officer is that the identity of TASMAC and the State are one and the same and the levy of VAT being within the control of the State has been used as a convenient/colourable device to get over the amendment to Section 40(a)(iib). These issues should have been addressed in some detail by the Officer after examining the contentions of the petitioner as well but have been dealt with in haste, perhaps since the issue was itself crystallized only under show cause notice dated 21.12.2019 issued at the eleventh hour. SCN soliciting a response could well have been issued in a timely manner particularly when the contentious issue had been identified as early as on 23.08.2019 and 13.09.2019 when queries had been put to the petitioner and its responses solicited. Valuable time has elapsed between 13.09.2019 and 21.12.2019 when the SCN was issued which could have been put to good use had the notice been issued well in advance on this issue at least. After all it is not necessary that all issues arising from the return are fully assimilated and crystallized for a comprehensive show cause notice to be issued. Specific issues, as and when identified, may be put to the assessee then and there to ensure timely and proper response and finalisation. Assessment insofar as it relates to disallowance in terms of Section 40(a)(iib) is set aside. The petitioner will appear before the Assessing Officer with its replies already filed as well as any other information that it has in its possession to defend the stand of the revenue, on Thursday, the 5th March, 2020 at 10.30 a.m. without expecting any further notice in this regard. Issues Involved:1. Alleged violation of principles of natural justice.2. Disallowance under Section 40(a)(iib) of the Income Tax Act.3. Other issues relegated to statutory appeal.Detailed Analysis:1. Alleged Violation of Principles of Natural Justice:The petitioner, Tamil Nadu State Marketing Corporation Limited (TASMAC), challenged the assessment order dated 30.12.2019 for AY 2017-18, citing a violation of natural justice principles. The court observed that the sequence of events indicated a lack of adherence to these principles. The return filed on 31.10.2017 was taken up for scrutiny only on 21.09.2018, with significant gaps in communication. Despite multiple responses from the petitioner, a show cause notice (SCN) was issued on 21.12.2019, just days before the assessment order was finalized. The court noted that the SCN was issued at the eleventh hour, and the assessment order merely repeated the SCN without addressing the petitioner’s detailed legal arguments and case law references. This hasty approach suggested a lack of detailed consideration, leading to a violation of natural justice.2. Disallowance under Section 40(a)(iib) of the Income Tax Act:The core issue in the writ petition was the disallowance under Section 40(a)(iib). The petitioner argued that VAT remitted did not fall under the exclusions listed in Section 40(a)(iib), while the revenue contended that VAT was covered by the phrase 'any other fee or charge.' The court noted that the petitioner had clearly informed the Assessing Authority about VAT expenses of Rs. 14,574.74 crores and the disallowed amount of Rs. 6.00 lakhs for license renewal fees. However, the SCN issued on 21.12.2019 proposed disallowance of VAT under Section 40(a)(iib), suggesting that the levy of VAT was a camouflage to escape tax. The court found that the Assessing Officer’s order lacked detailed discussion on this issue and was a mere repetition of the SCN. The court emphasized that the argument of collusion between the State and TASMAC required thorough examination, which was not done.3. Other Issues Relegated to Statutory Appeal:The court had earlier restricted the scope of the writ petition to the disallowance under Section 40(a)(iib) and relegated the petitioner to statutory appeal for other issues arising from the assessment. The petitioner confirmed that an appeal had been filed for these other issues.Conclusion:The court set aside the assessment regarding the disallowance under Section 40(a)(iib) due to the violation of natural justice and lack of detailed consideration. The petitioner was instructed to appear before the Assessing Officer on 5th March 2020 with all relevant information. A new detailed order of assessment was to be passed within six weeks from the date of the personal hearing. The writ petition was allowed, and connected miscellaneous petitions were closed.