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Retrospective Law Shown A Red Flag

Published on Wed, Sep 17,2014 | 19:15, Updated at Wed, Sep 17 at 19:15Source : 

By: Girish Vanvari, Co-head- Tax, KPMG India

India’s economic reforms in terms of trade & industrial policy, liberalisation of FDI norms, etc. have paved the way for increased participation from foreign players. With the pro-business approach of the new government in the chair, the sentiments of investor community have turned pleasant.

One of the hurdles in restoring the belief of the foreign investors in the India market is the retrospective taxation. Though no bold initiatives are carved out to put an end to the retrospective taxation, what could act as a sigh of relief is the recent landmark judgment of the Supreme Court (‘SC’) settling a prolonged controversy on the levy of surcharge on the total undisclosed income of the block period as prospective or retrospective in nature, ruling in favour of Vatika Township Private Limited (‘the taxpayer’).

The SC held that unless contrary intention appears, legislation is presumed not to be intended to have retrospective effect. The SC promoted the principle of fairness striking down the division bench judgment of considering the provision to levy surcharge as retrospective in nature.

The dispute dates back to the assessment of undisclosed income of the block period post search and seizure operation at the premises of the taxpayer. The tax authorities sought to levy a surcharge on the assessed income, in light of a proviso inserted vide the subsequent Finance Act.

The taxpayer contended that the legislation has specified a later date from which the proviso would be effective and in absence of any ambiguity, the proviso is to be applied prospectively.

The SC referred to notes on clauses to the Finance Bill proposing the insertion of the proviso to levy surcharge with a prospective date in contrast to certain amendments specifically stated as clarificatory or retrospective, depicting the clear intention of the legislature. The reference was also made to the circular issued by the Central Board of Direct Taxes demonstrating as to which amendments are retrospective in operation and which are prospective with the levy of surcharge held to be prospective.

In light of the transparent intention of the legislature, the SC ruled in favour of the taxpayer treating the proviso to levy surcharge having a prospective effect.

The verdict of the SC lays emphasis on one of the fundamental rule of law i.e. “lex prospicit non respicit: law looks forward not backward” that no statute shall be construed to have a retrospective operation unless appears clearly.
The SC in its judgment has categorically made certain significant observations:-
(a)    A law passed today cannot apply to events of the past.
(b)    A retrospective legislation is contrary to the general principle that legislation when introduced for the first time ought not to change the character of past transaction.

This is a welcome judgment by the SC, which will be a great relief not only for the taxpayers in dispute on the similar issue, but also lower the burden of the mounting litigation involving retrospective taxation.Further, the ruling will also send out a very strong positive signal to the investing community restoring their confidence on non –applicability of law retrospectively unless the legislature intends to and reaffirming faith in Indian judicious system.

(The views expressed in this article are personal views of the authos and do not constitute professional advice.)


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