M/S.tamilnadu State Marketing Corpn. Ltd.,4[Th] Floor, Cmda Tower –Ii,Gandhi Irwin Bridge Road,Egmore, Chennai – 600 008Represented By Its Managing Director,Shr v. The Deputy Commissioner Of Income Taxcorporate Circle – 3(1)

DATED: 26.02.2020 CORAM THE HONOURABLE DR. JUSTICE ANITA SUMANTH W.P.No.538 of 2020and WMP No.629 of 2020 M/s.Tamilnadu State Marketing Corpn. Ltd.,4[th] Floor, CMDA Tower –II,Gandhi Irwin Bridge Road,Egmore, Chennai – 600 008Represented by its Managing Director,Shri.R.Kirlosh Kumar ...Petitioner Vs The Deputy Commissioner of Income TaxCorporate Circle – 3(1),121, Mahatma Gandhi Road,Chennai – 600 034. .. Respondent Prayer: PETITION filed under Article 226 of The Constitution ofIndia praying for the issuance of Writ of Certiorari, to callfor the records of the petitioner on the file of respondent andquash the impugned order in ITBA/AST/S/143(3)/2019-20/1023480068(1) dated 30/12/2019 in PAN: for the Assessment Year2017-18 issued by the Respondent. For Petitioner : Mr.R.VijayaraghavanFor Respondent : Mrs.Hema Muralikrishnan Senior Standing Counsel O R D E R The petitioner is the Tamil Nadu State Marketing CorporationLimited (TASMAC) and challenges an order of assessment dated30.12.2019 for Assessment Year (AY) 2017-18, passed in terms ofthe Income Tax Act, 1961 (in short ‘Act’). The assessment isassailed both on the alleged violation of the principles of thenatural justice as well as on the merits of the disallowancemade. https://hcservices.ecourts.gov.in/hcservices/ 2. When the matter had come up for admission, this Courthad passed an order after hearing Mr.Vijayaraghavan, learnedcounsel for the petitioner and Ms.Hema Muralikrishnan, learnedSenior Standing Counsel for the respondents on 10.01.2020restricting the scope of the Writ Petition only to thedisallowance under Section 40(a)(iib) of the Act and relegatingthe petitioner to statutory appeal in respect of the otherissues. 3. Today, learned counsel for the petitioner confirms thatan appeal has been filed in respect of other issues arising fromassessment and what is assailed in the Writ Petition are theviolation of the principles of natural justice as well as thedisallowance effected under Section 40(a)(iib). 4. The submissions of the petitioner are that the return ofincome filed on 31.10.2017 was taken up for scrutiny for thefirst time by notice under Section 143(2) dated 21.09.2018 only.The petitioner had made certain high value cash deposits duringthe period of demonetization and on 18.11.2018, a questionnairewas issued calling for certain information that includingdeposits made during demonetization period that were suppliedunder cover of letter dated 28.12.2018. The next communicationwas only on 23.08.2019 by way of a questionnaire again wheredetails of deposits of demonetized notes were sought along withdetails of expenses falling under the purview of Section 40(a)(iib) and VAT expenses claimed. A response was filed on13.09.2019 furnishing all details as sought for. This wasfollowed by yet another notice under Section 143(2) dated27.09.2019, to which also, detailed responses dated 15.10.2019and 02.11.2019 were filed with supporting annexures. Thepetitioner also responded to questionnaires under Section 142(1)dated 09.11.2019, 20.11.2019 and 28.11.2019 furnishing alldetails called for, vide responses dated 19.11.2019 and tworesponses, both dated 29.11.2019. 5. A show cause notice came to be issued on 21.12.2019calling specifically for response in regard to (i) proposedaddition under Section 40(a)(iib) and (ii) proposed addition ofunexplained investment under Section 69 of the Act. The showcause notice was challenged in W.P.No.35820 of 2019, but sinceno stay of proceedings was granted by this Court, the assessmentcame to be completed on 30.12.2019 by confirming both theproposals enumerated under the show cause notice. With thepassing of the impugned order of assessment, W.P.No.35820 of2019 is rendered infructuous and is closed as such. 5. A show cause notice came to be issued on 21.12.2019calling specifically for response in regard to (i) proposedaddition under Section 40(a)(iib) and (ii) proposed addition ofunexplained investment under Section 69 of the Act. The showcause notice was challenged in W.P.No.35820 of 2019, but sinceno stay of proceedings was granted by this Court, the assessmentcame to be completed on 30.12.2019 by confirming both theproposals enumerated under the show cause notice. With thepassing of the impugned order of assessment, W.P.No.35820 of2019 is rendered infructuous and is closed as such. 6. The first argument of Mr.Vijayaraghavan is that theprovisions of Section 40(a)(iib) have been erroneouslyinterpreted and applied in the impugned order. This provision https://hcservices.ecourts.gov.in/hcservices/ states that certain expenses are not liable to be taken intoaccount for the grant of deduction in computing taxable income.One such category is enumerated under clause (iib) thereof,being any amount paid by way of royalty, licence fee, servicefee, privilege fee, service charge or any other fee or charge bywhatever name called which is levied exclusively on or which isappropriated directly or indirectly from a State Governmentundertaking by the State Government. According to him, theValue Added Tax (VAT) remitted by the petitioner does not findplace in the list of exclusions and would hence stand outsidethe reach of the section, whereas, according to the revenue, VATwould be covered by the phrase ‘any other fee or charge’contained in Section 40(a)(iib). 7. Submissions have been advanced by learned counsel insome detail on this aspect and reference made to case law aswell. For the sake of completion, the case law cited by thepetitioner and the respondent respectively, are tabulated below:- 8. However, I need hardly go to the adjudication of theissue on merits since a perusal of the sequence of dates andevents circulated by the parties leaves me no doubt that theprinciples of natural justice have been given a go-by in thepresent case. 9. The petitioner filed its return on 31.10.2017. Therevenue places on record another return of income dated29.12.2018, also stated to be an original return. This returnhas not been referred to in the impugned order by the AssessingOfficer and in any event, all figures, of gross total income,total income, net tax payable, interest payable and total taxand interest payable as also advance tax, TDS, TCS and self-assessment tax remain identical in both returns of income. The first return filed by the petitioner was itself takenup for assessment only by issue of notice under Section 143(2)dated 21.09.2018. There is thus a yawning gap between the dateof filing of return and the date when proceedings were firstcommenced. Though this is sought to be explained by the revenueby production of the second return, the Assessing Authority doesnot appear to have proceeded on the basis of the second returnat all, since there is no reference to the same in the order ofassessment. Thus, I am of the view that nothing turns upon thesecond return of income filed by the petitioner except perhapsthat a second notice dated 27.09.2019 was issued by theassessing officer in terms of Section 143(2) of the Act, whichreally is of no relevance. https://hcservices.ecourts.gov.in/hcservices/ 10. Questionnaires were issued on 23.08.2019, and13.09.2019 raising various issues again after the elapse ofnearly eight months from the last exchange of communication, andat points 10 and 11, specifically calling for details of VATexpenses and expenses falling under the purview of Section 40(a)(iib) and disallowed by the petitioner, for the relevantassessment year. In response, the petitioner vide reply, alsodated 13.09.2019, answers query Nos.10 and 11 as follows: https://hcservices.ecourts.gov.in/hcservices/ 10. Questionnaires were issued on 23.08.2019, and13.09.2019 raising various issues again after the elapse ofnearly eight months from the last exchange of communication, andat points 10 and 11, specifically calling for details of VATexpenses and expenses falling under the purview of Section 40(a)(iib) and disallowed by the petitioner, for the relevantassessment year. In response, the petitioner vide reply, alsodated 13.09.2019, answers query Nos.10 and 11 as follows: ‘Q.10. Kindly give the details of the VAT Expensesclaimed for the AY 2017-18 You are requested to furnish detailed explanation on thereason cited above along with supporting documents andevidences in support of your claim as per the return ofIncome furnished by you for AY 2017-18. Reply Tamil Nadu State Marketing CorporationLimited (TASMAC), is a company, wholly owned by theGovernment of Tamil Nadu. The VAT (Value Added Tax) waspaid as per the Tamil Nadu Value Added Tax Act, 2006.The Value Added Tax paid during the period isRs.14,575.74 crores. Q.11. Kindly give the details of expenses fallingunder the purview of 40(a)(ii)b and disallowed for theAY 2017-18. You are requested to furnish detailed explanation on thereason cited above along with supporting documents andevidences in support of your claim as per the return ofIncome furnished by you for AY 2017-18. Reply The Tamil Nadu State Marketing CorporationLimited (TASMAC) has made payment of Rs.6,06,700/-u/s.40(a)(ii)b of the Income Tax Act, 1961, to theCommissioner of Prohibition and Excise, Prohibition andExcise Department, Government of Tamilnadu, for renewalof License for 43 IMFS Depots and exclusive privilege ofretail vending of License for 43 IMFS Depots andexclusive privilege of retail vending of India MadeForeign Spirit in shops. No other fee or expenses fallsunder section 40(a)(ii)b. The above payment ofRs.6,06,700/- has been disallowed in Memo of Income forthe Assessment Year 2017-18.’ 11. Thus the petitioner had clearly brought to the noticeof the Assessing Authority as early as on 13[th] September, 2019that it had incurred VAT expenses of an amount of Rs.14,574.74 https://hcservices.ecourts.gov.in/hcservices/ crores and what had been disallowed in terms of Section 40(a)(iib) was only a sum of Rs.6.00 lakhs (approx.), being paymentmade to the Commissioner of Prohibition and Excise for renewalof licence fee and exclusive privilege of retail vending of IMFLin shops. 12. A notice under Section 143(2) had come to be issued on27.09.2019 when certain other particulars were sought for, andduly furnished by the petitioner. The issue of disallowanceunder Section 40(a)(iib)/VAT was not raised. Againquestionnaires were issued on 23.10.2019, 25.10.2019, 05.11.2019and 07.11.2019 that were duly responded to. It is not necessaryto elaborate on the same, since they do not touch upon the issuein question. Finally on 09.11.2019 a questionnaire was issuedonce again calling for details of VAT expenses with computationof VAT, copies of VAT returns, Input Tax Credit (ITC) claimedand supporting evidences. 13. The petitioner responded on 19.11.2019 reiterating thatthe payment of VAT, amounting to a sum of Rs.14,574.74 crores,had been claimed as expenditure on actual basis in terms ofSection 43B of the Act in the return of income. In support ofits submission, the petitioner extracted the second schedule ofthe Tamil Nadu Value Added Tax Act (in short ‘TNVAT’) thatprovided for the remittance of VAT and the provisions of Section43B that provided for a deduction to be claimed on actualpayment. No ITC had been claimed in line with the prescriptioncontained in Section 3(5) of the TNVAT Act. VAT returns in FormWW were annexed. Questionnaires were issued on 14.11.2019,20.11.2019 and 28.11.2019 touching upon the aspect ofdemonetization only, that were also replied to, on 29.11.2019. 14. On 07.12.2019, summons had been issued for personalattendance. This was followed by a show cause notice (SCN)dated 21.12.2019 wherein for the first time, the petitioner wascalled upon to respond to the proposal for disallowance underSection 40(a)(iib), since the Assessing Authority was of theview that the said provision was attracted to the VATremittances effected by the petitioner. His reasoning, as seenfrom the SCN, is this. TASMAC is a wholly owned undertaking ofthe State. VAT, remitted by TASMAC enures directly andexclusively to the benefit of the State. Thus, according to theofficer, the levy was itself a camouflage, in any event directlycovered by the provisions of Section 40(a)(iib). 15. The State had originally imposed a privilege fee forthe exclusive retail vending of IMFL that had been granted toTASMAC under the Tamil Nadu Prohibition Act. The appropriationof surplus of special privilege fee attracted the provisions ofSection 40(a)(iib) after its amendment with effect from https://hcservices.ecourts.gov.in/hcservices/ 01.04.2017. For this reason, according to the officer, the levyof special privilege fee had been withdrawn, only to be replacedby the levy of VAT. The timing of the withdrawal of privilegefee and introduction of VAT is no doubt curiously aligned to theamendment to Section 40(a)(iib) of the Act. This modusoperandi, the Officer states, is nothing but a sham to escapethe levy of tax. However, lauding the wisdom of the Legislaturethat had anticipated such innovative methods for appropriatingsurplus, the officer notes that the provision included ‘anyother fee or charge by whatever name called which is leviedexclusively on or which is appropriated directly or indirectlyfrom a State Government undertaking by the State Government’which encompasses the levy of VAT as well. 16. The petitioner was called upon to file a reply to theSCN on or before 24.12.2019. Some time was sought by thepetitioner and a detailed reply came to be filed on 27.12.2019.This has culminated in the impugned order of assessment, whereinthe Officer confirms the proposal in the SCN, albeit by way of ashort order. The length of an order is hardly a parameter toindicate application of mind or otherwise by an AssessingAuthority. However, in the present case, the impugned orderinsofar as it relates to this issue is seen to be a mererepetition of the entire show cause notice and the legalarguments raised by the petitioner in reply dated 27.12.2019 andcase-law referred to, have not been adverted to at all. Anaddition of a sum of Rs.14,574.74 crores, in my considered view,does merit some amount of detailed discussion on the legalaspects involved, particularly in the light of the allegationregarding collusion between the State and TASMAC. In effect, theargument of the Officer is that the identity of TASMAC and theState are one and the same and the levy of VAT being within thecontrol of the State has been used as a convenient/colourabledevice to get over the amendment to Section 40(a)(iib). 17. These issues should have been addressed in some detailby the Officer after examining the contentions of the petitioneras well but have been dealt with in haste, perhaps since theissue was itself crystallized only under show cause notice dated21.12.2019 issued at the eleventh hour. 18. The SCN soliciting a response could well have beenissued in a timely manner particularly when the contentiousissue had been identified as early as on 23.08.2019 and13.09.2019 when queries had been put to the petitioner and itsresponses solicited. Valuable time has elapsed between13.09.2019 and 21.12.2019 when the SCN was issued which couldhave been put to good use had the notice been issued well inadvance on this issue at least. After all it is not necessarythat all issues arising from the return are fully assimilated 18. The SCN soliciting a response could well have beenissued in a timely manner particularly when the contentiousissue had been identified as early as on 23.08.2019 and13.09.2019 when queries had been put to the petitioner and itsresponses solicited. Valuable time has elapsed between13.09.2019 and 21.12.2019 when the SCN was issued which couldhave been put to good use had the notice been issued well inadvance on this issue at least. After all it is not necessarythat all issues arising from the return are fully assimilated and crystallized for a comprehensive show cause notice to beissued. Specific issues, as and when identified, may be put tothe assessee then and there to ensure timely and proper responseand finalisation. 19. For the aforesaid reasons, the assessment insofar as itrelates to disallowance in terms of Section 40(a)(iib) is setaside. The petitioner will appear before the Assessing Officerwith its replies already filed as well as any other informationthat it has in its possession to defend the stand of therevenue, on Thursday, the 5[th] March, 2020 at 10.30 a.m. withoutexpecting any further notice in this regard. After hearing thepetitioner and consideration of all material filed/to be filed,a detailed order of assessment on this issue shall be passed denovo by the Officer within a period of six (6) weeks from dateof conclusion of the personal hearing. 20. This Writ Petition is allowed in the aforesaid terms.No costs. Connected Miscellaneous Petition is closed. s/d- Assistant Registrar(CS-III) True Copy Sub-Assistant Registrar Sl To The Deputy Commissioner of Income TaxCorporate Circle – 3(1),121, Mahatma Gandhi Road,Chennai – 600 034. +1 CC to M/s. Subbaraya Aiyar, Advocate sr 16858 +1 CC to Mrs.Hema Muralikrishnan, Advocate sr 16657. W.P.No.538 of 2020 BS(CO)SP(28/02/2020) https://hcservices.ecourts.gov.in/hcservices/