The bane of retrospective amendments*
Shri. N. M. Ranka, Advocate
The author laments the prevalent tendency to enact retrospective legislation to nullify judgements that are unpalatable to the Finance Ministry. He argues that this tendency undermines the sanctity of the rule of law and shows scant respect to the judiciary.
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.
Where the law had been changed and was no longer the same, there was no question of the Legislature overruling the Supreme Court. Once the circumstances were altered by legislation, it neutralized the effect of the earlier decision of the Supreme Court. There are innumerable amendments, insertions, modifications, clarifications inserted and made many of them with retrospective effect, to set at naught the view expressed in judicial decisions. As analyzed hereinbefore, a fairly large numbers of amendments have been made after many years of the binding judicial decision.
2. Some instances of nullifying amendments in the past
In general law, any gain on transfer of a capital asset is a capital receipt and, therefore, was not liable to be taxed under the Income-tax Act. However, subclause (vi) was inserted in sub-sec. (24) of sec. 2 to include any capital gain chargeable u/s. 45 as income. Sec. 45 was enacted to provide liability to tax on capital gain. Sections 48 and 49 provide for mode of computation and cost with reference to certain modes of acquisition. The Gujarat High Court in Manubhai A. Sheth and Others vs. ITO (1981) 128 ITR 87 held that “Profits or gains on sale of agricultural land would be ‘revenue’ within the meaning of s. 2(1)(a) and hence not liable to capital gains. To nullify the said decision Explanation 1 was inserted by the Finance Act, 1989 with retrospective effect from 1-4-1970 declaring that revenue derive from land shall not include and shall be deemed never to have included any income arising from the transfer of any agricultural land.
The Supreme Court in CIT vs. Bai Shirinbai K. Kooka (1962) 46 ITR 86 held that if any asset which was held as investment and is subsequently converted into stock-in-trade of the business, the assessee’s assessable profits on such sale was the difference between the sale price and the market price prevailing on the date when converted and not the difference between the sale price and the price at which such asset was originally purchased by the assessee. To nullify the said decision and to tax the difference in between the sale price and the cost, sub-sec (2) in sec. 45 was inserted whereby the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration and assessed accordingly.
The Apex Court in Sunil Siddharthbhai vs. CIT (1985) 156 ITR 509 held that where a partner of a firm makes over capital assets which are held by him to a firm as his contribution towards capital, there shall be no liability to capital gain because the consideration which a partner acquires on making over his personal asset to the firm as his contribution to its capital account would not form as consideration in terms of sec. 48 and, therefore, no capital gain can be computed. To obviate such situation, sub-sec. (3) to sec. 45 was inserted whereby the amount recorded in the books of account of the firm, as the value of the capital asset shall be deemed to be the full value of the consideration for the purpose of sec. 48. Under the Partnership Act, when any asset is received by a partner in settlement of account on dissolution of the firm, there is no transfer and no liability to tax u/s. 45. To nullify such decision in Malabar Fisheries Co. vs. CIT (1979) 120 ITR 49, sub-sec. (4) was inserted deeming the fair market value of the asset on the date of distribution of capital assets to be deemed to be the full value of the consideration received or accruing as a result of the transfer.
The Apex Court in CIT vs. B. C. Srinivasa Setty (1981) 128 ITR 294 held that charging section and the computation provisions together constitute an integrated code and when there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. It held that when goodwill generated within a new business is sold and the consideration brought to tax, what is charged is the capital value of the asset and not any profit or gain and because it is not possible to determine the date when it comes into existence, there shall be no liability to capital gain. To nullify, sec. 55(2) was inserted to specify the cost of acquisition as nil and to bring such transfer in the fold of capital gain. The Hon’ble Supreme Court in K. P. Varghese vs. ITO (1981) 131 ITR 597 held that the recorded consideration cannot be enhanced for computation of capital gain unless and until the revenue proves that any amount over and above the recorded value was received in actuality. Sec. 50C was inserted by way of special provision deeming the value assessed by the Stamp Duty valuation authority for the purpose of payment of the stamp duty, as sale consideration for the purpose of sec. 48. The Hon’ble Supreme Court in Smt. Amiya Bala Paul vs. CIT (2003) 262 ITR 407 held that valuation by the Valuation Officer u/s. 55A cannot be for computing cost of construction. However, sec. 142A was inserted by the Finance Act, 2004 with effect from 15-11-1972 to nullify the said decision, empowering the Assessing Officer to obtain valuation report for purpose of any investment referred to in secs. 69, 69A, 69B etc.
The Hon’ble Supreme Court in P.R. Metrani vs. CIT (2006) 287 ITR 209 held that presumption u/s.132(4A) in respect of documents, papers, books of account etc. found in the course of the search shall not be available for purposes of regular or reassessment/assessment. Sec. 292C was inserted by the Finance Act, 2007 with effect from October 1, 1975 enacting that the presumption would be available for the purposes of assessment. The Finance Act, 2008 extended such presumption in respect of such documents found in the course of survey and with retrospective effect from 1st October 1975. The Hon’ble Supreme Court in CIT vs. Mahendra Mills (2000) 243 ITR 56 held that it is the sweet will of the assessee to claim or not to claim depreciation and depreciation cannot be thrusted upon an assessee by the Assessing Officer. Explanation 5 was inserted by the Finance Act, 2001 declaring that the provisions of depreciation shall apply whether or not the assessee claims the depreciation in computing his total income. Explanations 3C and 3D were inserted in sec. 43B by the Finance Act, 2006 with retrospective effect from July 1, 1989 to clarify that interest if converted but not actually paid shall not be deemed as actual payment for purposes of sec.43B.
Sec. 14A was inserted by the Finance Act, 2001 with retrospective effect from 1-4-1962 disallowing expenditure incurred in relation to income not includable in total income only to nullify the judgment of the Hon’ble S.C. in Rajasthan State Warehousing Corporation vs. CIT (2000) 242 ITR 650. The larger bench of the Supreme Court in Kerala State Co-operative Marketing Federation Ltd. vs. CIT (1998) 231 ITR 814 held that the exemption u/s. 80P(2)(a)(iii) was not restricted only to primary societies and that ‘produce of its members’ in that provision had to be construed as including the ‘produce belonging to’ a member society. Immediately thereafter, in 1999 the provisions of sec. 80P(2)(a)(iii), were amended by the Income-tax (Second Amendment) Act, 1998 (No. 11 of 1999), with retrospective effect from April 1, 1968, by substituting sub-clause (iii) to read ‘the marketing of agricultural produce grown by its members’.
Constitution validity of the retrospective amendment stands upheld by the Apex Court in National Agri. Coop. Mkg. Federation vs. U.O.I. (2003) 260 ITR 548 after holding that where the law, as in this case, had been changed and was no longer the same, there was no question of the Legislature overruling the Supreme Court. Once the circumstances were altered by legislation, it neutralized the effect of the earlier decision of the Supreme Court. There are innumerable amendments, insertions, modifications, clarifications inserted and made many of them with retrospective effect, to set at naught the view expressed in judicial decisions. As analyzed hereinbefore, a fairly large numbers of amendments have been made after many years of the binding judicial decision.
3. Amendments made by the Finance Act, 2008
The Constitution Bench of the Supreme Court in Addl. CIT vs. Surat Art Silk Cloth Mfrs. Assocn. (1980) 121 ITR 1 held that the promotion of commerce and trade in art silk, etc., was an object of public utility not involving the carrying on of any activity for profit within the meaning of s. 2(15) and that the assessee was entitled to exemption under s. 11(1)(a) of the Act. It followed C.I.T. vs. Andhra Chamber of Commerce (1965) 55 ITR 722 and approved of Andhra Pradesh State Road Transport Corp. vs. CIT (1975) 100 ITR 392 later affirmed in (1986) 159 ITR 1. It overruled its earlier decision in Indian Chamber of Commerce vs. CIT (1975) 101 ITR 796 (S.C.). Same view was expressed in CIT vs. Bar Council of Maharashtra (1981) 130 ITR 28 and very recently in CIT vs. Gujarat Maritime Board (2007) 295 ITR 561. Number of such public utility institutions, local authorities, improvement and development authorities claim and were granted exemption in larger public interest. Before mentioned institutions share the responsibility of the welfare State and continue to file returns and undergo scrutiny. They function within the framework, control and supervision of the Government and ultimate funds remain with the Government – not an individual. However, without any valid reason with effect from April 1, 2009, the scope of the term “any other object of general public utility” would be reduced to exclude entities which carry on activities in the nature of trade, commerce or business, or service in relation to trade, commerce or business for a cess or fee or any other consideration. This amendment may hit the entities such as sports associations, societies for the promotion of the art, heritage sites etc. which may have earlier enjoyed the tax exemption, if such entities are found to be carrying on activities in the nature of trade. This exclusion would apply irrespective of the nature of use or application of the income from such activities, or the retention of the income from such activities by that entity. With the proposed amendment, the Finance Minister has been uncharitable to the public charities which are sharing and discharging obligation of the welfare State. For such draconian amendment, representations were made but the Finance Minister instead of amending the proposed amendment, clarifying the provisions in Lok Sabha said the intention of the Government is to limit the tax benefits to entities engaged in relief to the poor, education and medical relief or any other genuine charitable purpose and ‘to deny the exemptions to purely commercial and business entities which bear the mask of a charity. He said that Agriculture Produce Marketing Committees and State Agriculture Marketing Boards will be exempted from tax’. He also clarified ‘Ordinarily, Chambers of Commerce and similar organizations rendering services to their own members, will not be affected by the amendment and their activities would continue to be regarded as advancement of any other object of general public utility’. (Source : The Economic Times, dated April 29, 2008).
It is saddening that in a country wedded to the rule of law, the sanctity of the rule of law and judicial decisions is nullified by amendments, insertions, modifications by the Parliament at the behest of the North Block and the Finance Ministry and that too not by the Amending the Act but by the Finance Act.
The Orissa High Court in CIT vs. Aloo Supply (1980) 121 ITR 680 held that there is no restriction for payment of Rs. 20 ,000 at a time more than once in a day. The Madhya Pradesh High Court in CIT vs. Triveniprasad Pannalal (1997) 228 ITR 680 held that sec.40A(3) of the Act only says that the amount exceeding Rs. 2500 as then, should not be paid except by way of cheque drawn on a bank or by a cross bank draft and if it exceeds that amount, then such expenditure shall not be allowed as deduction. It does not say that the aggregate of the amount should not exceed Rs.2,500. The words used are ‘in a sum’; i.e., single sum has been used. Therefore, irrespective of any number of transactions, where the amount does not exceed Rs. 2,500 as above, the rigours of sec.40A(3) will not apply. Now, the amount should not exceed Rs. 20,000. that apart, practicability of the payment has also to be judged from the point of view of a businessman. Same view was expressed by the Madras High Court in CIT vs. Kothari Sanitation and Tiles P. Ltd. (2006) 282 ITR 117. To nullify the said judicial decisions, sec. 40A(3) has been substituted to provide that where a payment or aggregate of payments made to a single person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, the disallowance of such expenditure shall be made under sub-section (3) of section 40A or the payment shall be deemed to be the profits and gains of business or profession under sub-section (3A) of section 40A, as the case may be.
Sections 153A and 153B were inserted by Finance Act, 2003 after omitting Chapter XIV-B. Subsequently, proviso 1 was inserted by Finance Act, 2005 with retrospective effect from 1-6-2003. Second proviso was again inserted by Finance Act, 2006 with effect from 1-6-2006. The Finance Act, 2007 inserted two new provisos in sub-sec.(1) of sec.153B with effect from June 1, 2007. By the Finance Act, 2008 w.e.f. 1-6-2003, Sec.153 has been amended to provide (i) if any proceeding initiated under section 153A or any order of assessment or reassessment made under sub-section (1) of this section has been annulled in any appeal or other legal proceeding, the abated assessment or re-assessment relating to any assessment year shall stand revived and if such order of annulment is set aside, such revival shall cease to have effect; (ii) that time limit for completion of such reassessment or assessment shall be one year from the end of the month in which the abated assessment revived or within the period already specified in section 153 or in sub-section (1) of section 153B, whichever is later; (iii) the period commencing from the date of annulment of a proceeding or order of assessment or reassessment referred to in sub-section (2) of section 153A till the date of the receipt of the order setting aside the order of such annulments by the Commissioner, shall be excluded in computing the period of limitation for the purposes of this section. New sec. 292BB has been inserted to provide that where an assessee has appeared in any proceeding or co-operated in any inquiry related to an assessment or reassessment, it shall be deemed that any notice under any provision of this Act has been duly served upon him in time in accordance with the relevant provision of the Act. Further, such assessee shall be precluded from taking any objection in any proceeding or inquiry under this Act that the notice was – (a) not served upon him; or (b) not served upon him in time; or (c) served upon him in any improper manner. One who abstains from attending would be at premium than who co-operates in the proceedings. Clause (ii) of sub-section (2) of section 143 has been amended to provide that the notice under sub-section (2) of section 143 shall be served on the assessee within a period of six months from the end of the financial year in which the return is furnished.
The Delhi High Court in CIT vs. Ram Commercial Enterprises Ltd. (2000) 246 ITR 568 held that satisfaction u/s. 271(1) of the Act must be arrived at by the Assessing Officer and such satisfaction must be express – mere mentioning ‘Issue notice for penalty u/s. 271(1)(c)’ will not give the jurisdiction to levy the penalty. Similar view has been expressed by other High Courts and approved by the Apex Court in Dileep N. Saraf vs. Joint Commissioner (2007) 291 ITR 519. To nullify the said judicial view, section 271(1B) has been inserted from 1-4-1989 to unambiguously provide that where any amount is added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment, and such order contains a direction for initiation of penalty proceedings under sub-sec. (1), such an order of assessment or reassessment shall be deemed to constitute satisfaction of the assessing officer for initiation of penalty proceedings under sub-sec. (1).
Thus, mere direction for initiation of penalty proceedings shall be deemed to constitute satisfaction. It may be mentioned that penalty is a quasi-criminal proceeding and express satisfaction is a condition precedent, which has been done away with. With the amendment, an assessee shall have to furnish detailed explanation for each and every addition or disallowance, though not concealed or inaccurate particulars furnished.
A proviso to sec. 148 of the income-tax Act has been inserted to provide that the assessing officer may assess or reassess an income which is chargeable to tax and has escaped assessment other than those income involving matters which are the subject matter of any appeal, reference or revision. An Explanation to sec. 151 has been inserted w.e.f. 1-10-1998 to provide that the Joint Commissioner, the Commissioner or the Chief Commissioner, as the case may be, being satisfied on the reasons recorded by the assessing officer about fitness of a case for the issue of notice under section 148, need not issue the notice himself. The view expressed by the Hon’ble Allahabad High Court in the case of Dr. Shashi Kant Garg vs. CIT (2006) 285 ITR 158 has been nullified.
The Hon’ble Supreme Court in ITO vs. M.K. Mohammed Kunhu (1969) 71 ITR 815 held that the Income-tax Appellate Tribunal has inherent power to grant stay of demand when an appeal is pending with it. Rule 35A was inserted about the procedure. Sec. 254(2A) was inserted by Finance Act, 1999 mandating the Appellate Tribunal to dispose of the appeal within a period of one hundred and eighty days from the date of stay order. Proviso 1 was inserted by the Finance Act, 2001 with effect from 1-6-2001 and substituted by the Finance Act, 2007 with effect from 1-6-2007 to provide that the Appellate Tribunal may, on an application made by the assessee and after considering the merits of the application, pass an order of stay in any proceedings relating to an appeal filed under sub-sec. (1) of sec. 253, for a period not exceeding one hundred and eighty days from the date of such order and the Appellate Tribunal shall dispose of the appeal within the said period of stay specified in that order. If such appeal is not so disposed of within the period of stay specified in the order of stay, the Appellate Tribunal may, on an application made in this behalf by the assessee and on being satisfied that the delay in disposing of the said appeal is not attributable to the assessee, extend the period of stay, or pass an order of stay for a further period or periods as it thinks fit; but the aggregate of the period originally allowed and the period or periods so extended or allowed shall not, in any case, exceed three hundred and sixty five days and the Appellate Tribunal shall dispose of the said appeal within the period of stay so extended or allowed. If the appeal is not so disposed of within the period of stay initially allowed or the period or periods of stay subsequently extended or allowed, the order of stay shall stand vacated after the expiry of such period or periods. The third proviso has been substituted to provide that if such appeal is not so disposed of within the period allowed under the first proviso or the period or periods extended or allowed under the second proviso, which shall not, in any case, exceed three hundred and sixty five days, the order of stay shall stand vacated after the expiry of such period or periods, even if the delay in disposing of the appeal is not attributable to the assessee. The last mentioned expression is unjust and unfair. Why the assessee should be at peril when delay is on the part of the Respondent or the Tribunal?
The Supreme Court in Berger Paints India Ltd. vs. CIT (2004) 266 ITR 99 held that if the Revenue has not challenged the correctness of the law laid down by the High Court and has accepted it in the case of one assessee, then it is not open to the Revenue to challenge its correctness in the case of other assessees without just cause. The Hon’ble Apex Court followed its earlier decisions in Union of India vs. Kaumudini Narayan Dalal (2001) 249 ITR 219(SC); CIT vs. Narendra Doshi (2002) 254 ITR 606 (SC) and CIT vs. Shivsagar Estate (2002) 257 ITR 59 (SC). Such view has been expressed to avoid discrimination infringing Article 14 of the Constitution. To nullify the said view, a new section 268A has been inserted whereby the authority shall not be precluded from filing an appeal or application for reference on the same issue in the case of other assessees and it shall not be lawful for an assessee to contend that the Income Tax authority has acquiesced in the decision on the disputed issue by not filing an appeal or application for reference in any case. It shall give laxity to the concerned authority to pick and choose. The said section has been inserted with retrospective effect from April 1, 1999 nullifying above referred judicial decisions of the Apex Court and followed by other High Courts.
It is saddening that in a country wedded to the rule of law, the sanctity of the rule of law and judicial decisions is nullified by amendments, insertions, modifications by the Parliament at the behest of the North Block and the Finance Ministry and that too not by the Amending the Act but by the Finance Act. The Finance Act is to be passed within a framework limited time and such amendments do not receive as much attention as is required and mature consideration on the part of the Finance Minister. It is apparent that the Finance Ministry through the Parliament is bent upon to nullify judicial decisions, which are unpalatable to the said Ministry. It appears that there is no respect for Law and by one wing for the other wing, though both wings are of equal importance for sustenance of democracy in the largest democracy of the World.
*Reproduced with permission from the AIFTP Journal – June 2008 issue.