1. Importance of Subject

In process of legislative drafting of new laws and making changes in earlier laws (for example in Income Tax Act on annual basis, changes are made through Finance Act), it is quite natural that number of areas may require legitimate clarification in the form of delegated/subordinate legislation viz. circulars/instructions etc. In fact, in areas where legislation is at nascent stage (for example , fringe benefit tax in income tax), there may be number of grey areas in parliamentary legislation where for benefit of masses, avoiding litigation and creating certainty etc, clarifications at the end of legislature may be desired. In particular context of annual changes made by Finance Act, we have seen for past more than past 50 years, CBDT (in area of Income Tax- Apex Admin Body) or for that matter CBEC (in area of customs, excise, service tax – Apex Admin Body) through Finance Ministry clarifies by way of corresponding Memorandum Circular (refer www.indiabudget.nic.in), the legislative intent and interpretation (many times) behind the changes made. This executive understanding of changes as introduced by Finance Act act as a major source of clarification, in so far as, subsequent conduct by tax payers is concerned.

In aforesaid connection, an attempt has been made by the author in this article to highlight whether revenue authorities are allowed to challenge their own understanding (Circulars etc), in light of latest Constitution Bench SC ruling in Ratan Melting case.

The topic, “Judicial activism or judicial tyranny” is selected by me when Mr. M.V. J. K. Kumar has asked me for an article. The term “judicial tyranny” one may think tends to convey frustration and disappointment against the process of Judicial Activism. Various High Courts and Supreme Court have been disturbed by the recent trend of abusing the process of law by unscrupulous persons frequently under the garb of Public Interest Litigation (PIL) or Social Interest Litigation (SIL) to sub-serve their own interest, not public interest or social interest. Generally speaking, no person has a right to waiver of the locus standi rule and Court should permit only when it is satisfied that the carriage of proceedings is in the competent hands of a person, who is genuinely concerned in public interests and is not moved by other extraneous considerations, so also the Court must be careful to ensure that the process of the Court is not sought to be abused. This is the solemn duty of the Court to protect the society from the so called protectors of the society and, thus, while entertaining PIL, the Court should be conscious and try to ascertain the bona fides of the petitioner and further find out whether he is really a public spirited person or he has approached the Court to settle his ulterior score through the legal process. It is settled law that when a person approaches the Court of equity in exercise of its extraordinary jurisdiction under Article 226 of the Constitution of India, he should approach the Court not only with clean hands but with clean mind, clean heart and with clean objectives. The Courts must do justice by promotion of good faith and prevent the law from crafty evasions. Courts must maintain the social balance by interfering where necessary for the sake of justice and refuse to interfere where it is against the social interest and public good. No litigant has a right to unlimited drought on the Court time and public money in order to get his affairs settled in the manner as he wishes. Easy access to justice should not be misused as a licence to file misconceived and frivolous petitions.

1. Introduction

1.1 I have been requested to focus in this paper on burning issues on the subject. Whether income from shares and securities transactions is to be taxed as business income or as capital gains has been the hot topic in this subject, ever since the CBDT came out with draft instructions of May 2006, trying to bring out the distinction between investment transactions resulting in capital gains and trading transactions resulting in business income. If that were to be discussed in this paper, there would be not much time left to discuss any other issue. Besides, so much has been written and said about this issue in various professional forums regarding factors to be considered for this purpose, and given the fact that the determination of whether particular transactions are in the nature of trading or are in the nature of investments is a mixed question of fact and law, mainly depending upon the circumstances and facts of each case, no purpose would be served by adding further to the discussion that has taken place on this issue. There have been a few recent Tribunal decisions on this issue and I am sure that there will continue to be many more decisions on this issue alone, which will provide ample scope for discussion in the near future.

1.2 The other burning issue on the subject is the controversy in the Vodafone case, as to whether gains on sale of shares of a foreign company by one non-resident to another non-resident can be subjected to capital gains tax in India, if the foreign company is an investment company merely holding the shares of an Indian company. The matter has been argued at length before the Bombay High Court, and its verdict is long awaited. I am sure the High Court decision can be the subject matter of an entire paper.

Let us refresh our understanding of Double Tax Avoidance Agreement System (DTA) from plain basics to a controversy. There are some basic concepts on which this system of Eliminating Double Tax (EDT) is based. Normally, the phrase “Elimination of Double Tax” is not used too often. Hence there are no popular short forms for the same. I am using this phrase in the current presentation too often. Hence the short form: EDT.

Any conceptual discussion becomes easy & interesting if we take an illustration. So we will take the illustration of the Chettiar’s case decided by the Honourable Supreme Court. The Chettiar HUF, an Indian Resident had incomes from Malaysia. Honourable Court has held that once the income is taxed in Malaysia, Indian Government loses its rights to tax the income again. India has almost always adopted the “Credit System” of Elimination of Double Tax. Honourable Supreme Court has converted it into the “Exemption System”.

The Issue: Is this decision correct!

Does any Court have the power to change a legal system! Especially in the given circumstances!

Today, International Law refers to those rules and norms which regulate the conduct of States and other entities which at any time are recognized as being endowed with international personality, for example international organizations and individuals in their relations with each other. States, although remain the primary subject of International Law, are no longer its exclusive subjects as they once were. International Law was initially concerned exclusively with regulating interstate relations and then only in respect of diplomatic relations and the conduct of the war. International Law has expanded both in terms of its subjects and its contents. Major problems of international concern have been tackled collectively by States. The consequence has been a proliferation in the international organizations in the years since 1945. Modern technology has brought states and other populations into closer and more frequent contact with each other and rules have evolved to regulate such contact. The subject matter of International Law has correspondingly extended and International Law now has within its ambit issues which were traditionally regarded as being exclusively within a state, domestic jurisdiction, for example is treatment of one’s own nationals. This has had repercussions for individuals. They are now recognized as possessing some, albeit limited, international personality. The traditional definition of International Law, namely a body of rules governing the relations of independent states in times of peace and war, is too rigid and outmoded. Definition of International Law must accommodate the developments which the International Legal System has witnessed in the 20th century and must reflect International Law as it is today.

My esteemed Brother Justice B. Prakash Rao, Mr. Bharatji Agrawal, Mr. P.V. Subba Rao, Dr. M.V.K. Murthy, V. Narendra Prasad, delegates of the Conference, and distinguished invitees, guests, ladies and gentlemen.

I am very glad to be associated with this National Tax Conference on “Tax Profession, Challenges and Opportunities” organized by All India Federation of Tax Practitioners, South Zone and other Tax Bar Associations connected with this Conference.

I congratulate the organizers for selecting the theme — Tax Profession, Challenges and Opportunitites. In legal profession, in my opinion, the tax practice is a real challenge and it gives ample opportunities to mint money to the professionals.

I say this as a challenge for the reason that one has to be upto date in the subject. Every year, the law is changing. Of course, the society is dynamic and the law is bound to go on changing periodically. But in the case of taxation practice, the law changes very fast every year. Therefore, it is a very good opportunity for all lawyers who are practising on taxation side. With a changed law, in my opinion, normally no assessee will be comfortable with filing his return, He has to approach a tax practitioner and that will be a very good opportunity to a tax practitioner.

We, the people of India, that is Bharat, resolved to constitute India into a SOVEREIGN SOCIALIST SECULAR DEMOCRTIC REPUBLIC in order to secure to all our citizens : Justice, social, economic and political; Liberty of thought, expression, belief, faith and worship; Equality of status and of opportunity; and to promote among all of us Fraternity, assuring the dignity of the individual and the unity and integrity of the Nation. The Legislature, the Executive, and the Judiciary are its three limbs; and they draw their powers, privileges and limitations from the Constitution. To govern is the duty of the Executive, headed by the President. To legislate is the duty of the Parliament and State Legislatures. It is for the judiciary to keep a watch, vigil and see that the freedoms enshrined in the Constitution reach to every citizen and is not jeopardized or tinkered with or obstructed by the executive or any person in authority or otherwise. Rule of Law is fundamental to maintain social order. Obedience and respect for law should be commended and commanded through the force of law and not by the law of force. Article 265 of the Constitution mandates that no tax shall be levied or collected except by the authority of law. The Constitution puts some limitations by specific articles. Many amendments have been/are made by the Finance Acts.

Mr. Vimal Gandhi, President of the Income Tax Appellate Tribunal, Mr. Justice Rebello, Mr. Justice J. S. Narang, Mr. Dastur, President of the Income Tax Appellate Tribunal Bar Association, Mr. Sunil Talati, President, of the Institute of Chartered Accountants of India. It is my pleasure to be here today and interact with you and it is my pleasure also to inaugurate this very important conference which is taking place today.

Having retired from Income Tax Department after having served for long years, one can look back and reminisce some very interesting incidents and episodes which stick on in one’s memory as images which just do not go away!

One such episode dates back to the time in late sixties when I was posted as a Senior Grade Income Tax Officer in Companies Circle-I, in Calcutta West Bengal (now-Kolkata). This was sometimes in 1967. Earlier I had worked in a Company Circle at Kanpur and had already honed my skills as an enthusiastic young officer seeking to make a mark in the service.

Introduction

The importance of above ruling is highlighted by the fact that same is first Indian judicial and that too from SC, in context of Fringe Benefit Tax (FBT) provisions introduced in the Income Tax Act (Act) by Finance Act, 2005 with effect from AY 2006-2007.

Background in brief

Assessee (R& B Falcon) incorporated in Australia, is engaged in business of supplying Mobile Offshore Drilling Rig (MODR) along with off-shore supporting staff, to units operating in oil and gas industry like ONGC etc. Word “off-shore” here signifies operating in off-shore area. In relation to the subject MODR’s, assessee provided staff/crew to operate the same and since the conditions in MODR are not congenial to working, employees (here residents of foreign country), worked on the MODR on “commuter basis” that is, they come to India and stay in the Rig (MODR) for 28 days and go back to their country of residence and so on and so forth. The transportation costs for commutation in terms of provision of air tickets was borne by employer. In this connection, assessee in relation to its subject contract with ONGC applied to Authority for Advance Ruling (AAR) seeking its views on:

“Whether transportation cost incurred by R and B Falcon (A) Pty Limited (hereinafter referred to as the “Applicant”) in providing transportation facility for movement of offshore employees from their residence in home country to the place of work and back is liable to Fringe Benefit Tax (‘FBT”)?