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.