Tamil Nadu State Marketing Corporation (Tasmac), considered a cash cow for the State government year after year through a monopoly over both wholesale purchase and retail sale of liquor, is in trouble as the Income Tax Department has begun demanding that it share the revenue with the Centre.
Tasmac challenged the constitutional validity of Section 40(a)(iib) of the Income Tax Act of 1961 on the premise that the legal provision “distorts federal polity” and was aimed at “unjustly” enriching the Centre, but a Bench led by Chief Justice of Madras High Court Amreshwar Pratap Sahi dismissed the writ petition.
He agreed with Hema Muralikrishnan, senior standing counsel for the I-T Department, that the official concerned was in the process of assessing whether Tasmac was liable to pay tax for ₹14,574.74 crore for the assessment year 2017-18 and hence a challenge to the statutory provision could not be entertained in the present stage.
Assessment order
A Deputy Commissioner of Income Tax had passed an assessment order (A.O.) on December 30, 2019 holding that Tasmac must pay tax for ₹14,574.74 crore. However, Justice Anita Sumanth of the High Court on February 26 set aside the A.O. on the ground that it appeared to have been passed in “a haste” and ordered a fresh inquiry.
In his order, the Deputy Commissioner said the State government was in the habit of taking away almost all the profit earned by Tasmac every year through liquor sales. Till 2013, the revenue was being appropriated under the guise of ‘privilege fee.’ Hence, Parliament introduced Section 40(1)(iib) to the I-T Act to avoid certain exemptions.
The Section states that money paid by way of “royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called” to a State government by its own undertaking shall not be liable for deduction while computing the taxable income under the head of ‘profits and gains of business or profession.’
Increased VAT
Immediately after Parliament introduced the Section, the Tamil Nadu government did away with the practice of charging privilege fee and instead began collecting revenue from Tasmac under the head of Value Added Tax (sales tax) after amending the Tamil Nadu VAT Act of 2006 and increasing the VAT rates on liquor to as high as 270%.
“Therefore, even while not levying the special privilege fee, the State government used yet another colourable device in the guise of VAT levy to appropriate this accumulated profit, which would have otherwise been assessable to tax as per the provisions of the Income Tax Act,” the Assessment Order passed by the Deputy Commissioner read.
Laying stress on the use of the words “fee or charge by whatever name called” found in Section 40(1)(iib) of the I-T Act, the official held that the “abnormal, exorbitant and arbitrary” amount of money shown as ‘VAT expense’ in the book of accounts of Tasmac could not be allowed to be deducted from its profits so as to avoid payment of income tax.
“VAT, in this case, is actually not 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. This State VAT levy is a weapon aimed at crucifying the legislative wisdom of Parliament. Therefore, the VAT amount claimed as allowable deduction is disallowed,” the officer had concluded.
