Madras High Court Rejects TN State Marketing Corporation’s Plea Against U/S 148 Income Tax Act Reassessment Orders

Madras High Court has ruled that the petition for writ filed by Tamil Nadu State Marketing Corporation Ltd challenging the assessment order for the year 2015-16 is invalid.

The court also clarified that the current order relates only to the maintainability of the motion for writ with reference to the notice under Section 148 of the Income Tax Act and objections thereto, and not the merits of the case.

In the present case, the applicant company alleged that when a notice was issued under section 148, the company responded with its objections. However, according to the petitioner, an assessment order was issued directly instead of an order to speak on the objections presented.

However, the first bank of Chief Justice Munishwar Nath Bhandari and Justice D. Bharatha Chakravarthy came to a contrary conclusion as follows:

“The arguments were raised without regard to the fact that when sending the show cause notice and draft assessment order on 24.09.2021the objections order has also been sent, after the objections have been dealt with. When no response to show cause notice with draft assessment order was received, the final assessment order was issued on 28.09.2021.“

The court upheld the decision of GKN Driveshafts (India) Ltd v ITO (2002) saying that when a notice under section 148 of the Act is given, the appropriate course of action for the assessee is to file a statement. The person assessed may also ask for the reasons for issuing the opinion. Then, the evaluation authority must justify the reopening of the evaluation. When the reasons are received by the assessee, he can file his objections to the said notice. If this is done, then the evaluator is required to dispose of it by issuing an order to speak.

The court noted that said established legal position was followed by the officer in handling the case of the company involved in the retail sale of liquor throughout the state.

“…Rathera detailed order was placed and finding no substance in the objections, a show cause notice accompanied by the draft assessment order was sent to the petitioner, which remains unanswered by the petitioner and accordingly, before the expiration of the review period, the assessment order was issued on 28.09.2021″, observed the court.

In the valuation year 2014-2015, the Company paid the VAT amount of Rs 11,491.97 Crore as per the Second Schedule of Tamil Nadu Value Added Tax Act 2006 and declared it as an expense in the profit and loss account. This was accepted in 2016 in an assessment order under Section 143(3) of the Income Tax Act.

The Chief Income Tax Commissioner of Chennai then issued an opinion under Section 263 as to why the earlier assessment order should not be considered detrimental to the interest of income. The notice stated that the burden of VAT levied on the state government enterprise falls under the provisions of Section 40(a)(iib) of the Act. Accordingly, it is not deductible for the purposes of computing the income of such businesses under the heading “profits and gains of a business or profession”.

The show cause notice was challenged by the petitioner and an interim order was passed in 2019. Prior to this, the petitioner had paid VAT amount of Rs 12,889.53 crores for 2015-16 and claimed it as expense in the profit and loss account like the previous one. year. The Company filed the original return income as NIL. This was dealt with under Section 143(1) and resulted in a refund of Rs.2,76,320/-. Subsequently, the respondent revenue officer issued a section 148 notice to reopen the income assessment for the 2015-16 tax year.

Subsequently, the applicant company filed the writ of quashing the assessment order. This was done by alleging that another show cause notice was issued without ruling on the objections submitted. The petitioner argued that there had been a procedural defect and that the motion in brief could be maintained in accordance with GKN Drive Shafts (India) Ltd.

It is pertinent to note that a plea filed by the Company challenging the validity of 40(a)(iib) of the Income Tax Act 1961 was returned to the High Court by the Supreme Court after setting aside the High Court’s original order dismissing the petition.

“The main question to consider is that of whether the objections raised by the applicant pursuant to the notice under section 148 of the Income Tax Act 1961 have been resolved or not and if not, the assessment order made under the section 148 notice would not be legally viable. However, we find that in the opinion of 24.09.2021, the objections raised by the petitioning company have been dealt with“added the court.

Before parting, the court also granted the petitioner freedom to seek redress by filing an appeal against the assessment order with the appeals authority within three weeks. However, the court also delved into the matter as shown below. The court mentioned that the appeal authority should decide quickly the legal question regarding the acceptance of VAT for expenditure on income may become clear as to whether it is admissible or not:

“However, taking note of the particularity of the case, the defendants will not take any enforcement action against the petitioner until the appeal is decided and the appeal authority is ordered to expedite the hearing and dispose of the appeal as soon as possible….. This order should not be taken as a precedent, as it is made after knowing the particular facts of the present case only”

Case title: M/s.Tamil Nadu State Marketing Corporation Ltd v. Additional/Spouse/Deputy/Deputy Commissioner of Income Tax and Anr.

Case no: WPNo.21995 of 2021 and WMP.Nos.23212 and 23213 of 202

Citation: 2022 LiveLaw (Mad) 123

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