Why The Retrospective Amendments in Finance Bill 2012 May Not Be Valid
Shri. K. C. Singhal, Advocate, VP, ITAT (Retd)
The author, a former Vice-President of the Tribunal & now a practicing advocate, explains why the retrospective amendments proposed in the Finance Bill 2012 may not meet the test of law. He also points out that retrospective amendments to reverse settled principles of law result in enormous harassment for the tax payer and send out an adverse message to citizens & foreign investors that the India does not play fair
A bare look at the Finance Bill reveals that various amendments are proposed with retrospective effect from the date the provisions were enacted originally in the Income Tax Act 1962. The competence of the legislature to enact or amend the law with retrospective effect is not in doubt but exercise of such power was rare. It used to be an exception rather than the rule. But this time, the retrospective amendments are being proposed just to nullify the effect of judicial decisions rendered by the courts and the tribunal. All the retrospective amendments are proposed in the guise of removing doubts as if the proposed amendments were the intent of the legislature from the inception. No objection can be raised if the decisions had been rendered overruling such legislative intent. But if no such legislative intent can be inferred then such proposals cannot be said to be bonafide. Nothing has been pointed out to indicate such intent in the year 1962 when the Act was enacted.
Computer software is a new invention and could not have been the subject matter of legislation in the year 1962. Similarly, transmission of signal by satellite or any other technology was never heard of in the year 1962. Therefore, how any retrospective amendment can be proposed in the name of legislative intent?
When a bill is introduced for the first time in the parliament, usually, a memorandum is issued by the finance ministry explaining the relevant provisions which can be an instrument indicating the legislative intent. It can also be indicated from the circulars issued by the CBDT from time to time. However, nothing has been pointed out to prove the justification of making the retrospective amendments in the name of legislative amendment.
On the contrary, it can be shown that proposed retrospective amendments could never be the legislative intent. For example, section 9(1)(vi) is being proposed to be amended with retrospective effect from 1.4.62 so as to include the consideration received in respect of transfer of all or any right to use a computer software within the definition of ‘Royalty’. Computer software is a new invention and could not have been the subject matter of legislation in the year 1962. Similarly, transmission of signal by satellite or any other technology was never heard of in the year 1962. Therefore, how any retrospective amendment can be proposed in the name of legislative intent?
Section 9(1)(i) is also proposed to be amended with retrospective effect from 1.4.62 in the name of legislative intent. It is more than clear that amendment is proposed only to nullify the effect of the decision of the Hon’ble SC in the case of Vodafone. The apex court has pointed out various flaws in the contentions of the revenue which are being proposed to be removed by retrospective amendments without pointing out how the decision is contrary to the legislative intent. On the contrary, the decision of the apex court is based on the existing legal position. Long back, in 1965, the apex court held in the case of CIT vs. Mugneeram Bangur 57 ITR 299 that in the case of lump sum sale of undertaking/business, there is no sale of underlying assets. This judgment was accepted by the revenue and holds the field till date. On the basis of this judgment, the court has held that there is no sale of underlying assets when shares are sold. Therefore, how an amendment can be proposed with retrospective effect in the name of legislative intent?
retrospective amendment from inception of the enactment gives a wrong signal to the global business community to the effect that either accept the interpretation of the enactment in the manner in which the tax authorities interpret or face the consequences in the form of retrospective amendment. The government may be able to collect the revenue by making such retrospective amendment but it may have a far reaching adverse effect on the Indian economy in as much the foreign investors may pull out from Indian market and the adverse effect would be much more than the collection of tax
It is no doubt true that the government is not happy with the judgment of the SC in the case of Vodafone 341 ITR 1 and other cases. The Parliament has right to amend the law and there cannot be any objection to the amendment if made prospectively. But retrospective amendment from inception of the enactment gives a wrong signal to the global business community to the effect that either accept the interpretation of the enactment in the manner in which the tax authorities interpret or face the consequences in the form of retrospective amendment. The government may be able to collect the revenue by making such retrospective amendment but it may have a far reaching adverse effect on the Indian economy in as much the foreign investors may pull out from Indian market and the adverse effect would be much more than the collection of tax.
The memorandum issued by the finance ministry for explaining the proposed amendment shows that amendments are being proposed as the decisions rendered by the tribunal or the courts are not in consonance with the spirit of the enactment. Does it not mean that the government is indirectly showing disrespect to the judiciary which is one of the important organs of our system? It is as important as other organs i.e. legislature and executive. Mutual respect is condition precedent of a healthy system. The government, if not happy with the decisions of the court, may amend the law prospectively.
The apex court, in Re Cauvery Water Tribunal 1993 SCC Suppl.(1) 96, has held that “the legislature can change the basis on which a decision is given by the courts and thus change the law in general but it cannot set aside an individual decision inter parties and affect their rights and liabilities alone.” According to the above decision, such an act on the part of legislature would amount to exercising the judicial powers which is not permissible. But the Finance Bill 2012 proposes to set aside the judgment of SC in Vodafone case by inserting clause 113. The validity of this clause is likely to be tested before apex court.
By virtue of the proposed retrospective amendments, assessments which have become final would be reopened and put the assessees under harassment. Saving clause has been inserted only with reference to the second proviso to section 92C wherein it has been provided that assessments completed before 1.10.09 would not be reopened. There is no reason why such saving clause is not inserted with reference to other proposed retrospective amendments.
A discriminative approach has also be adopted in proposing retrospective amendments in as much as the proposed amendments in section 40(a)(ia) and section 201 which are being made to remove the hardship caused to the assessees are not being made retrospectively even though the apex court and other courts have held that such curative amendments should be considered to be applicable to all pending cases. Though it is a welcome step from the government side, the unnecessary litigation can be avoided by amending such provisions retrospectively.
Last year tax base was widened by introducing the levy of “alternate minimum tax” in new chapter XII-BA on the income of LLP. This year, the provisions of chapter XII-BA are proposed to be extended to all assessees other than companies. The only saving is that such provisions would not be applicable where the income of individual/HUF/AOP/BOI/artificial juristic person does not exceed Rs. 20 lakhs. Further where, AMT is in excess over the regular income tax payable on the total income then such excess shall be allowed as credit in the subsequent years in accordance with the provisions of section 115JD. Sub section (5) provides that credit shall be allowable to be set off to the extent of the excess of regular income tax over the AMT. This is likely to create problem/hardship to various genuine assessees. There may be cases where, in initial years, the assessees may be claiming deduction under chapter VI-A under the heading ‘C’ or section 10AA and AMT would be leviable and assessees would be entitled to credit to be set off in subsequent years but in subsequent years, such assessees may not have any income in respect of which deduction under chapter VI-A under the heading ‘C’ or section 10AA could be claimed. In such cases, no AMT would be leviable and consequently, the formula of excess of regular tax over AMT would become unworkable and AO may not allow the credit to be set off against the regular income tax. Therefore, the provisions of section 115JD(5) need amendment so that hardship is not caused to the assessees.
A new mechanism, on the line of Advance Authority, is being proposed by inserting two new sections namely 92CC and 92CD. This will be called Advance Pricing Agreement between tax payer and tax authority. The Board is given power to enter in to an advance agreement with tax payer for determining the arms length price of an international transaction or the manner in which ALP shall be determined. However, this agreement would be made with prior approval of the central government. A scheme is to be prescribed by the Board. Such agreement would be binding upon the tax payer as well as the tax authorities. The intentions of the government are good since it may avoid the litigation between the parties. But the experience of the tax payers with the Dispute Resolution Panel is not encouraging since in most of the cases, orders are found lacking application of mind and non speaking one by the Tribunal and courts. Unless the tax payers have faith in a system, the scheme may not prove to be successful since neither the panel will be headed by a senior judicial person like in the case of AAR nor assessee would have a right of appeal. It is suggested that panel under this scheme should be headed by a retired Supreme Court judge.
An amendment is proposed in section 56(2) to the effect that where any consideration for issue of shares is received by a closely held company and such consideration is over and above the fair market value of such shares then such excess consideration shall be assessed as income from other sources. On the other hand, section 68 is proposed to be amended by inserting a proviso which provides that where any sum is credited in the books of closely held company on account of share application money and share premium, such company would be under obligation to explain not only the nature and source of such credit but also the source of the source. Both these amendments are opposed to each other. If the company is able to explain satisfactorily in terms of the proviso to section 68 then such credit is to be considered as genuine capital receipt not chargeable to tax. But, as per the proposed amendment in section 56(2), the excess of such consideration in excess over the fair market value is to be assessed as income which amount to double taxation. Further, such excess being on capital account cannot be assessed as income in the absence of amendment in the definition of income u/s 2(24).
It is hoped that the Govt. would take into consideration all these aspect and make suitable amendments in the Finance Bill 2012.
Mr. Singhal has explained the concept of retrospective amendments in a very convincing and rational perspective. How one should look and the intention of the legislature and the background in which the same should be examined has been brought out most convincingly.
Let us fervently hope such arguments and reasoning is adopted by our Members of Parliament and effectively portrayed on the floor of the House when the Finance Bill is discussed before being passed by both the Houses of Parliament.
If you analyze the commercials then my view is that Vodafone / Hutch should not be taxed in India as it may result into double taxation in the hands of taxpayer / Foreign Investor. The rationale for the same is as under:
1) Vodafone India would be paying tax in India on its business profits at maximum marginal rate;
2) Going forward / in future years, Vodafone India would be paying tax on its business profits at maximum marginal rate
3) In any business /share value deal the underlying value of shares is dervived by following DCF method of valuation which in turn is computed by discounitng the Profit After Tax of the company
So in the instance case as the Foreign investor / taxpayer he would be required to pay tax on its business profits in India at maximum marginal rate and further he would be also expected to pay tax on transfer of shares whose underlying value is dervied considering the Profit After Tax of the Company.
I can understand the technical interpretation of law that Company and Shareholders are different Person and accordingly both should be taxed – But the Bureaucrat should analyse / wear the shoes of businessmen before drafting harsh tax laws which could have far reaching impact on the Indian Economy and pull out of genuine foreign investors from India economy
Dear Rashmi,
am not against the proposal to levy tax on a transaction yielding income accrued or deemed to accrue under the provisions of the Act. If there is any lacuna in the Act, it must be removed at the earliest possible by making the suitable amendment by the legislature. The apex court is final authority on the interpretation of existing provisions of law. So many, not one, lacunas have been pointed out by the SC in Vodafone’s case. the concept of underlying assets was negatived by the SC decades ago in Mugneeram’s case and the deptt had accepted the said decision and did not think of amending the existing provisions of law. It is also the settled law that every assessee is permitted to make tax planning within the framework of law. If the SC says that the transaction was outside the scope of existing law, then due respect should be given to the decision of the highest court of law.
It is not only the prerogative but also the duty of the legislature to amend the law so that such transactions are brought within the net of taxation. what pinches the judicial mind is the nullifying the decision of such highest court of law retrospectively and that too in the name of removal of doubt i.e. the legislative intent. the finance ministry has failed to point out anything that legislative intent was to tax such transaction. After accepting the decision of SC mentioned above, it does not lie in the mouth of the government to say that it was the legislative intent.
The question is whether the government should be allowed to disturb the existing legal position retrospectively merely because the decisions rendered by the courts do not suit the deptt. If the govt can show that the legislative intent was otherwise, the govt. would be justified in making the retrospective amendment.
There is proposal to amend provisions of section 9(1)(vi) with retrospective effect from inception even though such legal position could not even be imagined as discussed in the article.
The message is being given that the govt does not care the decisions of the courts. The proposed amendments will put various assessees to harassment whose cases have become final since no saving clause has been proposed.
The sentiments cannot be the basis for interpreting the law. The only remedy is to amend the law prospectively and retrospective amendment should be in rare of the rarest cases so that dignity of court as well as faith of the tax payer is sustained.
Very Good Article by Shri. K. C. Singhal, Advocate, VP, ITAT (Retd). Mainly the Retrospective Amendments and its far reaching adverse effect on the Indian economy. Sir, you wrote that the foreign investors may pull out from Indian market and the adverse effect would be much more than the collection of tax.
If we talk about the Vodafone. Sir we wish that if such Investor or MNCs shall not allowed to operate in our country. One thing is clear that whatever way they have adopted, but their intention was not to pay the any Taxes for that transaction. You just think an an Indian that how we can say that they the most honest persons who doesn’t want to pay a single penny Tax to the country from where they finally earning for the huge Income. To the best of my knowledge neither Vodafone nor Hutichesen has paid any Tax for this Transaction anywhere else in the world also.
Sir, if because of some lacuna in Law if we allow this kind of persons to play with the same and making huge loss to the Treasury and when Government is taking corrective measures we say that this send an adverse message to foreign investors that the India does not play fair, I think, being an Indian it is shameful for us.
Vodafone transaction was 100% sham transaction & they must pay the Tax to our country for that.
Vodafon is sham and colourable notithstanding the battery of corporate lawyers say . Plain truth is that the assessent {followed by the world over ) was based on parent companies tall claims as to hhow they screwed up Indian counterpart .
OUR POSITION IS SO PRECARIOUS THAT IF THIS CONTINUES THEN ONCE AGAIN WE WILL SEE BRAIN DRAIN FROM OUR COUNTRY. FOR THE LAST MANY YEARS OUR INTELLECTUALS HAVE STARTED COMING BACK TO INDIA. BUT WITH SUCH UNCERTAINTY OF LAW ONE CAN NOT EXPECT EVEN OUR PEOPLE TO COME BACK FORGET FOREIGN INVESTORS. YESTERDAY SEBI HAS RELAXED BANK OF RAJASHTHAN PROMOTERS CASE. IN OUR COUNTRY IF YOU HAVE MONEY YOU CAN DO ANYTHING. TALK OF AADARSH HOUSING SCAM. WE FAIL TO UNDERSTAND WHY ALL THE ALLOTEES WHO ARE NOT ELIGIBLE CAN BE ALLOTED . THEY SHOULD FIRST PUT BEHIND BAR AND HEARING AT ALL. ALL WHO HAVE BEEN ALLOTED VERY WELL KNEW THAT THIS SOCIETY IS FOR KARGIL VICTIMS FAMILY ONLY THEN HOW CAN THEY BE ALLOTED.
The discrepancies and dichotomy pointed out in respect of newly inserted provisions in section 56(2) vis-a-vis section 68 appear to be glaring. The taxpayers may suffer some unintended consequences.
Vodafone’s case is a high profile one ! It must be appreciated that no taxpayer could be encouraged to adopt a “scheme” lacking in commercial substance, merely intending to obtain a tax benefit and manipulating the extant tax laws.
Regarding various amendments proposed for tansactions concerning multiple tax jurisdictions, it may be seen that the proposals are very much in line with tested principles of some well known sovereign countries abroad. The intention of the legislature should not be doubted at the very first instance. Plugging the ‘gaps’ in existing laws could only augur well for our nation !