The dispute between Income Tax (I-T) department and Tamil Nadu State Marketing Corporation (TASMAC), which holds exclusive licence for wholesale and retail sale of liquor, is far from over. The TASMAC has approached the Madras High Court against the I-T department’s demand of ₹8,310.07 crore for the financial year 2016-17.
Justices R. Mahadevan and Mohammed Shaffiq have granted time to Hema Muralikrishnan, standing counsel for I-T department, to respond to an appeal preferred by the corporation against Justice R. Suresh Kumar’s refusal to quash the assessment order passed on March 30 this year. The single judge had directed the corporation to approach the appellate authority under the I-T Act of 1961.
Assailing his order, TASMAC counsel R. Vijayaraghavan contended the assessing officer had erred in including over ₹14,000 crore paid by the corporation to the State government, towards Value Added Tax (VAT) in 2016-17, as its taxable income. He cited a Supreme Court judgement delivered, in a case from Kerala, on January 3 to support his contention.
On the other hand, the assessment order stated it to be a settled law that State government undertakings were separate legal entities liable to pay income tax. However, to circumvent such payment, the State government had been appropriating the profits of Tasmac under guise of levying a special privilege fee for providing monopoly over sale of liquor.
To curb such practice, the Parliament amended the I-T Act and inserted Section 40a(ii)(b) which states that deduction would not be allowed if a State government appropriates either directly or indirectly the profits of its undertakings by way of a fee, charge or by “whatever name it was called.” The amendment came into effect from the assessment year 2014-15 onwards.
To overcome this legal provision too, the Tamil Nadu government amended the Tamil Nadu VAT Act in November 2013 and increased exorbitantly the levy of VAT on sale of liquor from as low as 38% to as high as 270% with retrospective effect from April 2013. Subsequently, Tasmac filed the I-T returns for 2016-17 declaring a loss of ₹11.85 crore.
On finding that it had “wrongly” claimed deduction of ₹14,003.74 crore towards VAT expense, the assessment was reopened and show cause notices were issued. Tasmac filed a reply and claimed that Section 43B of the I-T Act permits deduction of any sum payable by an assessee by way of tax, duty, cess or fee.
However, the Assessing Officer rejected the justification by relying upon Section 40a(ii)(b) and especially the words “by whatever name it was called” and held that the “abnormal, exorbitant and arbitrary” levy of VAT ranging up to 270% had resulted in appropriation of the profit of TASMAC by the State government.
“This State VAT levy is a weapon aimed at crucifying the legislative wisdom of the Parliament... Even while not levying the special privilege fee, the Tamil Nadu State government used yet another colourable device in the guise of VAT levy to appropriate the accumulated profit which would otherwise have been assessable to income tax,” the assessment order read.
It went on to state: “It is for this very purpose, legal provisions such as General Anti Avoidance Rules (GAAR) were enacted by the Parliament to avoid any circumvention of just and fair payment of taxes due to the Central Government. VAT, in this case, is not actually an expense but only a book entry in the form of fiction created by a statute using the legislature in which the people had placed trust.”
Pursuant to the detailed assessment order adding around ₹14,000 crore to the taxable income of TASMAC, a demand notice was also issued on March 30 this year for ₹8,310.07 crore besides initiation of penalty proceedings separately.
