Dear Finance Minister, Will You Listen To Nani Palkhivala Before It is Too Late?

Shri. N. A. Palkhivala

The Maddening Instability of Income-tax Law

Late Nani A. Palkhivala, Senior Advocate

In 1991, Nani Palkhivala called the Income-tax Act “a national disgrace” because of its “maddening instability“. He expressed anguish at the “pathological change mania” that had gripped the Finance Ministry which caused it to make repeated and mindless amendments to the Law. He also expressed disappointment with the Indian public who endured injustice and unfairness with “feudalistic servility” and “fatalistic resignation“. 20 years later and in the wake of the storm that the proposed retrospective amendments in the Finance Bill 2012 have caused, it is finally time for the Government and the Nation to pay attention to what he was saying.

On 25th January 1991 the Income-tax Appellate Tribunal completed fifty years of its existence. On its Golden Jubilee it is but fair to record that it has won golden opinions on all sides throughout the half a century that it has functioned. There is no doubt that over this long period, the Tribunal has been manned by some very able individuals. Quite a few of them were fit to adorn any High Court Bench. No other Tribunal in India his won such well-deserved popularity and confidence of the public as the Income-tax Appellate Tribunal.

Administrative justice demands compromise. There is no pre-determined solution to the problem of tempering power with justice. The Tribunal has rightly earned the reputation of tempering judicial power with justice. It has evolved a cheap, quick and informal procedure for doing justice as between the State and the citizen, to the great satisfaction of the litigating public. In other words, it has acted as a Court of law in everything but name, while avoiding the regular process of civil law which is too cumbersome, technical and expensive.

The cardinal error of our times is to mistake amendment for improvement and change for progress. The Finance Ministry has become almost pathological in its “change mania”. A stable fiscal policy is to a nation what a stable family life is to an individual. But stability is anathema to the North Block. The obsessive attitude that the exercise of power must take the form of churning out new laws and regulations is shared by the legislature and the rule-making authority alike

The work and reputation of the Income-tax Appellate Tribunal afford a striking illustration of what Professor H.W.R. Wade said at the end of his book “Towards Administrative Justice”! “No class of people stands to benefit more in the long run from just administration than the administrators themselves, because the State is permeated from top to bottom with the truth that government depends upon the approval of the governed. Fair play in administration will enlist the citizen’s sympathies and will enormously reduce the friction with which the machinery of government works. All good administrators should take care that the machinery is properly tended and that the lubricant of justice is supplied in the right quantity at the right points“.

On this happy occasion I would like to deal with one topic to which I attach the greatest importance from viewpoint of the nation’s progress and well-being and which I have been emphasizing and re-emphasizing over the last thirty years.

Today the income-tax Act, 1961, is a national disgrace. There is no other instance in Indian jurisprudence of an Act mutilated by more than 3300 amendments in less than thirty years.

Simple provisions like sections 11 to 13 (which deal with exemption of the income of charitable trusts) have suffered no less than fifty amendments.

The tragedy of India is the tragedy of waste – waste of national time, energy and manpower. Tens of millions of man-hours, crammed with intelligence mild knowledge – of tax gatherers. tax-payers and tax advisers – are squandered every year in grappling with the torrential spate of mindless amendments. The feverish activity achieves no more good than a fever.

A striking example is the withdrawal of development rebate and the introduction of initial depreciation in 1974, the withdrawal of initial depreciation and the introduction of investment allowance in 1976, the withdrawal of investment allowance and the introduction of investment deposit account in 1986, and the restoration of Investment allowance in 1989. Simple continuance of development rebate would have undoubtedly ensured far more beneficial results both to the exchequer and to the public. But we stubbornly refuse to learn that the acid test to be applied to every fiscal amendment as to every economic policy, is – how far will it bend the talent, energy and time of our people to productive ends and how far will it dissipate them in coping with legal inanities and quarter-baked changes?

The cardinal error of our times is to mistake amendment for improvement and change for progress. The Finance Ministry has become almost pathological in its “change mania”. A stable fiscal policy is to a nation what a stable family life is to an individual. But stability is anathema to the North Block. The obsessive attitude that the exercise of power must take the form of churning out new laws and regulations is shared by the legislature and the rule-making authority alike. It has become normal to have amendments to Income-tax Rules more than half a dozen times in a single year. Various forms are changed overnight. Can this country, where crores of school children and adults have to go without writing paper, afford the luxury of throwing away millions of pages of printed Forms which are consigned to the scrap heap so nonchalantly?

The rot begins when wild actions are received calmly by society. These are people that have lost the power of astonishment at their own actions. When they give birth to a fantastic passion or foolish law, they do not start or stare at the monster they have brought forth… These nations are really in danger of going off their heads en masse, of becoming one vast vision of imbecility

Year after year, the Finance Bill continues the fatuous tradition of introducing experimental provisions some of which are truly whimsical and most of which need amendment in a short time. We legislate first, and think afterwards. Sections are introduced which never come into force. because they are repealed or substituted before the date they are scheduled to come into operation. In the event, complexity is heaped upon complexity and the confusion becomes worse confounded.

Legislative work expands so as to fill the time available for its completion. This is a branch of Parkinson’s Law and its operation has caused Parkinson’s Disease in the body of our fiscal code.

At an International Tax Conference held in Singapore a few years ago, the experts pointed out that a tax administration which disposes of appeals promptly and reaches a fair and final settlement speedily, is itself be classed as a tax incentive. The deplorable record of India in this connection was cited as a warning. The avalanche of ill-conceived changes and complications, which may be compendiously called “legal litter”, is mainly responsible for the poor quality of our tart administration.

In the United Kingdom there are less than 29 million income-tax payers but the number of references filed in the High Court is only around thirty in a year. In India there are only five to seven million income-tax payers but the number of references filed in our High Courts is around 6,500 a year, in addition to about 1,500 writ petitions. These figures reflect the tremendous public dissatisfaction with the quality of the law and of fiscal administration. Our Law Reports bear witness to the fact that generally a case reaches hearing in the High Court twenty years and in the Supreme Court thirty years, after the relevant assessment year. The situation is continuously aggravated by the deluge of new amendments – the indigestible verbiage; and the flood of litigation is heavier today than ever before.

G. K. Chesterton, in his brilliant essay “The Mad Official“, analyses how a society goes mad. The rot begins, he says, when wild actions are received calmly by society. “These are people that have lost the power of astonishment at their own actions. When they give birth to a fantastic passion or foolish law, they do not start or stare at the monster they have brought forth… These nations are really in danger of going off their heads en masse, of becoming one vast vision of imbecility.” India is one such country in respect of budgeting and fiscal laws. Today the monster of our direct tax structure has become more monstrous than ever before.

Two things strike the student of Indian income-tax law with trepidation and amazement – the precipitate and chronic tinkering with the law by bureaucrats who are the unacknowledged legislators of India, and the anaesthetized patience of the Indian public. Truly, we Indians are a “low arousal” people. We endure injustice and unfairness with feudalistic servility and fatalistic resignation. The poor of India endure inhuman conditions which would have led to a bloody revolution n any other country. The rich endure foolish laws and unending amendments which benefit none except the legal and accountancy profession, and instinctively prefer to circumvent the law rather than to fight for its repeal.

One of the main reasons for India’s backwardness and stunted development is that we as a nation have no sense of time at all. We are individually intelligent and collectively foolish. It is characteristic of us that in our national language the word ‘kal‘ is used both to denote yesterday and tomorrow. I attribute this absence of time sense to two factors. We were the first country in the world to evolve the concepts of eternity and infinity: against the backdrop of eternity what does the waste of even several decades matter? Secondly, we were the first to evolve the doctrine of reincarnation: if you waste this life you will have several ‘ more in which to make good.

A telling example of the total absence of a sense of time in our tax administration is afforded by the Supreme Court’s decision rendered last November in the case of Sutlej Cotton Mills vs. CIT (1990) 2 SCALE 931. It was a case under the Business Profits Tax Act, 1947. The accounting period was 1946-47. The amount involved was a paltry sum of a few lakhs of rupees. The High Court’s judgment was rendered in I965. The Supreme Court sent the matter bark to the Income-tax Appellate Tribunal to re-hear the appeal 44 years after the close of the accounting period. Is there any other civilized country where a tax-payer would not know the quantum of his liability for 44 years?

Taxes are the life-blood of any government, but it cannot be over-emphasized that the blood is taken from the arteries of the tax-payers and, therefore, the transfusion has to be accomplished with the principles of justice and fair play.

India is waiting for a Finance Minister who will have the courage, caliber and vision to put a stop to the maddening instability of out income-tax law.

Let us never forget the wise words of Justice Hughes who observed that no democracy can survive without respect for laws and institutions, but that in a free democracy laws and institutions will command that degree of respect which they deserve.

Reproduced with permission from the ITAT Golden Jubilee Souvenir 1941

19 comments on “Dear Finance Minister, Will You Listen To Nani Palkhivala Before It is Too Late?
  1. vswami says:

    To perforce revert:
    Attention may be drawn to the directly related and closely connected proposals in the 2015 Budget. Those are in the form of amendments to inter alia section 9 (1), obviously to cover like issues as in Vodafone case. As closely viewed and perceived, the development in the realm of international taxation is seen to illustratively belie the common expectation of a welcome change in the extant scenario, so as to usher in a “stable and predictable taxation regime”. For independent brief reactions, as updated, if care to, may look up, -

  2. CA Niraj Mahajan says:

    Brilliantly written!! Even after 2 decades the maddening effect of the tax laws are still felt today, or rather more intensively. The FM maintains in his latest Budget speech to keep the tax rates stable to attract more confidence amongst investors but fails in stabilising the overall tax law with numerous amendments every year. The DTC chapter only added to the fracas wherein the publishers and authors analysing it earned heftly.



  4. dr. g. balakrishnan phd(economics) says:

    IT IS true Nani Palkiwala is one of the doyens in taxation this one can clearly see his thick volume on Taxation. I act FMs have relaxation when they charge like a mad horse and make fellow bureaucrats to follow them on the very tax payers when the treasury is drying up, after all Akhshaya patra is tax payer to Governments and in fact they function in the proverbial Dog eating the manger… well narrated by Nani in his write up on 16 Jan 1984… ‘ I just think about all these (dog’s happy living) and it suddenly hit me like a brick in the head..’My Dog is like Indian politician’.
    Indeed he very correctly said in fact FMs and taxmen between jan to april some how rob the tax payers by their ludicrous laws, Germany Supreme court struck the irrational retrospective law while UK, Australia and US are fine with such laws.
    People of india when these worthies beg for votes tell sternly and curtly ‘Look Man make a manifesto of your party that if his party is to be elected first the party in power after election immediately scrap the Income tax law and rules and make a law with with simple very low taxes no taxes together can be more than 5% of a any tax payer whether direct or indirect put to gether and the governments need to be run with just 5% tax only as revenue’ whether there is economics of economic reform is there or not, after all today in 21st century we are in a participatory democracy and no more representative democracy’ after all every citizen can participate in any deliberation of any govt in india thanks to Intenet revolution which made all people to be netizens.

    Also voters ask political workers coming for votes need to ensure that their manifestos should show how they will curtail unnecessary expenses to zero while essentials need to be keep very minimum

    they also make a commitment in their 5 year term ensure no price goes over more than 4% over total five year term and how politicans in government in opposition intend to work the five year term they have to give detailed plans for the five year period which could be curtailed by people voters by Recall procedure and also they shd state in clear terms how they will bring in india all black money say about Rs40,000 crores within the first year of government or slse the government need to step down’ that also may be a mandatory condition to fulfill by all parties together.
    then My dog will become faithful to the Master – the voter!

    • Mukund Pathak says:

      Did Dr. Palkhiwala write that “Dog” comment ?

      I have gone through the Introduction in ‘We, the People: India– the largest Democracy’ published in 1984 where the preceding paragraph about the state of moral decay appears ending with words ‘black money, red tape and scarlet corruption’. There is no mention of the dog in next para or for that matter, in that context, anywhere in the book.

      Even the difference in language between two paras is obvious.

  5. dr. g. balakrishnan phd(economics) says:

    Hopefully, Justice Huges perception prevail. Tax is blood of perpetual transfusion to any government. If governments behave as they do in budgeting and finance, soon the governments will face the music from people like Glorious revolution. See Our great Economic policy of great touted development is no where as the infusion blood is lost some where for ever with perpetual burdenon tax payers in India. GK Chesterton ‘The Mad Official’ the wild ways of bureaucrats.
    Then we will have cases like Sutlej Mills v/s CIT, (1990) 2 scale 921…case to run over 44 years under natural justice for a case of 1947 on accounting period of 1946-1947.. cooling of case tax payer suffers but ministers talk perpetually without any substance with their half backed laws and rules with amendments over amendments. that is the great indian economic growth.

  6. dr. g. balakrishnan phd(economics) says:

    Nani is right that Maddening instability indeed a National disgrace. Yes it is pathological maniac that is found in all finance ministers just because the party to which he or she belongs has an agenda and to fulfill it needs revenues right and left. Problem is voters do not understand the party manifesto when the party approaches voters what is their agenda, that means the very voter sign his or her own death warrant without reading the content of the manifesto. True unread manifesto cannot be considered as a contract to be accepted but parties jumps to. See FM did not say a word about 2G spectrum allocations by A Raja but he had the temerity to say that PM is aware when very elected representative can go against very other representative in the cabinet where is the sanctity. Similarly Kapil sibal supported Raja after sibal took over the telecom. it means these representatives mangle and further helped by Kurshid from law and Moily earlier, Chidambaram i his earlier avatar seems to have given tacit approval for unexplained reasons for Rajas dances, that means all ministers really not concerned of electors from whom they extract taxes for all kinds of manipulations. So it is obvious Maddening instability in their thinking process that mad act itself is pathological problems of unstable changes such changes are called as maniac like a murderer as he is used to murder he will continue to murder some one else just for heck of it. that way the finance bills emerge and the parliamentarians are just concerned to talk and talk without substance so that his constituency sees him/her in parliamentary debates but these worthies debate nothing and finance and like bills pass through by a sheepish ‘Ayes’ instead of meaningful ‘Noes’. the ultimate sufferer is one who is directly affected by the relevant Act but this man never moves a PIL against such irrational bills and Acts but simply suffers like a slave. That is the pity every bill exploits the poor affected persons. True but freedom loving need to test the law at the anvils of constitution. After all some stability of any law is a definite must else that law is no law but just arbitrary tyrrany to be well countered by people who think and such think what J W Watson IBM called is the mission of Think Think and Think found on IBM in USA, after all all human are rational creatures. So they must per force question else they are supposed to have lost their critical think faculty.That will be in ultimate analysis!

  7. Naresh Balodia says:

    Article published in Hindustan Times on 22 April reads:

    “Is it right for India to enact a retrospective law if other countries do so? This is a tricky question, as it leaves the onus of individual decision to a wider community of sovereigns. It, therefore, allows other countries’ lawmakers to influence ours. When I spoke to former finance minister Yashwant Sinha about Mukherjee’s tax, I was surprised by his response. “He (Mukherjee) is right,” Sinha told me. “This is a standard practice across the world. We have no objection to such an amendment.” When I double-checked this, I found that UK enacted such a law in 2008, on a case similar to Vodafone’s, popularly known as the Padmore case. A similar law in Germany was struck down by its Supreme Court in June 2011 on grounds of effectivity – not retrospectivity. Two cases in Australia (Poniatowska case in August 2011 and Payara case in November 2011) show retrospectivity is alive and well Down Under. And in the US, where investors are jumping with angst, retrospectivity is not unconstitutional.”

    Similar facts were reported by Times Of India also few days back.

    The fact is at similar retrospective amendments have been done in UK, Australia and Germany and the companies are paying taxes.

    Then why such and hue and cry for similar action in India?

    I am unable to find any reasonable answer to this unless the facts reported by the news papers are wrong.

  8. Ravindranath Nalam says:

    Where can you find an erudite finance minister to understand such innovative thoughts?

    This was published in 1991 and we are in 2012. The ignorance continues for many decades to come in this country of individually intelligent and collectively foolish people with low arousal.

  9. Vijay Bhatt says:

    A brillant article which is not supposed to be only read by all Policy and Law makers but to be followed in letter & Spirit in making Laws and policies

  10. vswami says:

    The ongoing controversy on the recent budget proposals seeking to rewrite the extant law, in several material respects, – according to a count numbering over 30, so also the case law developed over decades is inherently an endless one; albeit quite vexing as ever before in the history of income-tax legislation.

    The FM and the coterie,- for that matter also , besides commoners, a few professionals, who dictated by individualistic wisdom have preferred to jump on the bandwagon,- keeping the tradition alive, have spared no pains to vociferously defend and justify that the referred proposals are fault/safe-proof; in any event good for the nation’s economy.

    According to an independent but objectively balanced view, however, there is a sane case to urge that, in formulating such ideas, the men at the helm of affairs and responsible there for have, unwittingly or otherwise, misled self ; misconceived or misconstrued the concept of ‘intention’ itself, no guess – is it
    intentional or otherwise, by not understanding the fundamental grouse of the taxpaying community. That is, that it is not against the legislators exercising its powers to legislate. But it is that, even in doing so, and on the first occasion itself, to ‘express its intentions’ clearly and truthfully , thereby giving no room, -for either the taxpayers to speculate or make a guess, or for the judiciary to having been obligated to ‘interpret’.

    To put it succinctly, any enactment must bear out, upfront, in unmistakable terms, the ‘intention’; not, what was intended but not simply and clearly expressed to be so. Thereby, save the nation from a relentlessly useless, foolhardy exercise of trying to understand what was the ‘intended’ ‘intention’- not just the intention; OR when it was going to be made clear, that too once for all. From a common sense point of view, what has been sought to be sacrificed is the wisdom, the wisdom underlying the facts of life : Taking cue from the fundamental principle of law, the letter of the law and its spirit can conceivably be gathered, with no alternative left to human faculty, one can gather the intention only from what is simply and clearly said; not the other way round.

    On the concept of ‘intention’, judged by its very inherent nature, is a highly dubious or nebulous one. That being so, an extension of it i.e. ‘intended intention’, – left to be expressed (i.e. clarified) only at a later point in time, – cannot but be all the more dubious or nebulous. Especially, after an enactment has been taken through due legal process, and finally interpreted and adjudicated upon by courts, after years, any enactment can, in no way, be subjected to a retroactive (= retrograde) legislation.

    That the FMs in power from time to time, for decades now, have nonetheless ruthlessly/mindlessly chosen to use it as a shield, and/or to rely on it as a fail proof defence is, to put it mildly, nothing short of a national tragedy. All the more it is so, that the present FM is noted to have brazenly sought to stick to his gun, by relying on the fictional concept, by hanging on it his newly- stitched-coat.

    For a critique on the related aspects throwing more light, the viewpoints in the article @ (2008) 169 Taxman pg. 14, 18 may make for a useful read.

    A recent write-up (published in Indiacorplaw Blog) on – “Substance vs. Form Conflict in True Sale | Hong Kong Court Goes by the Language Used by the Parties” may serve as a ‘side dish’.

  11. CA DD BANSAL says:

    In my v humble opinion, the lament of palkiwala needs to be read in the context of DTC also. In my view, no useful purpose is going to be served by heaping on us practisioners the proverbial old wine in a new bottle, because, in any case, they are going to amend the same with equal vigour and zeal, immediately after it sees the light of the day, and claim that they are only clarifying the intention of the provisions. Perhaps a more practical way forward would be to review the existing Act, and cleanse it of all dirt and dust which has accumulated because of the “madness of FMs and babus.

  12. ram babu says:

    I am sure our FM will not care. If he is a man who cares to hear any comments on those who ?s the ambiguity in IT Law he would not have brought the amendment that those whose taxable income does not exceed need not file Income Tax Return With so many ‘if’ s and ‘but’s.

  13. nilesh chawda says:


  14. Kishor Satwick says:

    Nani Palkhiwala wrote on 16 January 1984.

    “The picture that emerges is that of a great country in a state of moral decay. The immediate future seems to belong to the doomsayers rather than to cheer mongers. We suffer from a fatty degeneration of conscience, and the malady seems to be not only persistent but prone to aggravation. The life style of too many politicians and businessmen bears eloquent testimony to the truth of dictum that the single minded pursuit of money impoverishes the mind, shrivels the imagination and desiccates the heart. The tricolour fluttering all over the country is black, red and scarlet – black money, red tape and scarlet corruption.”

    “My dog sleeps about 20 hours a day. He has his food prepared for him. He can eat whenever he wants, 24/7/365. His meals are provided at no cost to him. By the way he does not need to pay for medical insurance He visits the doctor once a year for his checkup, and again during the year if any medical needs arise. For this he pays nothing, and nothing is required of him. He lives in a nice neighborhood in a house that is much larger than he needs, but he is not required to do any upkeep. If he makes a mess, someone else cleans it up. He has his choice of luxurious places to sleep. He receives these accommodations absolutely free. He is living like a King, and has absolutely no expenses whatsoever. All of his costs are picked up by others who go out and earn a living every day. I was just thinking about all this, and suddenly it hit me like a brick in the head……My dog is like an Indian POLITICIAN!”

    • Mukund Pathak says:

      Did Dr. Palkhiwala write that “Dog” comment ?

      I have gone through the Introduction in ‘We, the People: India– the largest Democracy’ published in 1984 where the preceding paragraph about the state of moral decay appears ending with words ‘black money, red tape and scarlet corruption’. There is no mention of the dog in next para or for that matter, in that context, anywhere in the book. The introduction is signed and dated 16th Jan 1984 (the date you mentioned).

      Can you tell me where does that Dog allegory written by Dr. Palkhiwala appear ?

  15. Vikram Aggarwal says:

    I hope the Finance Minister reads all this!!! I hope the leading business journals and newspapers reproduce what is said and written above. I hope that the media which enjoys such a great power takes up the responsibility to make our public aware of the ill effects of bad law enactments.

    I hope the eminent lawyers join their hands together to ensure speedy and timely justice and be a part of good legislation drafting.

    We Indians can only hope.

  16. vinod says:

    The political class hand in gloves with the bureaucrats will not heed what has been said by Nana Palkhivala.These people have their own axe to grind and to hell with nation.We are heading towards becoming a Banana Republic.

  17. Sukhraj Singh says:

    This article actually brings into urgent need of extravagant reforms in the Indian Income Tax Act.
    The Act should be reformed to make the law productive both for the public and the exchequer.

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