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IT Act: SC Settles The Dust On Retrospective Interpretation

Published on Wed, Sep 24,2014 | 21:14, Updated at Wed, Sep 24 at 21:14Source : 

By: Pravat Jena, Tax Partner - EY India

With the recently announced Union Budget, the new Government conveyed its commitment to provide stable and predictable tax regime and asserted that the sovereign right of the Government to undertake retrospective legislation should be exercised with “extreme caution and judiciousness”. This was certainly a step to restore the ducked confidence of the foreign investors pursuant to the retrospective amendments brought by the former policy makers. The latest decision of the Constitutional Bench of Supreme Court appears to be in affirmity with the Government on the assurance of retrospective amendments under the Income-tax Act.

The Constitutional Bench of Supreme Court introspects into certain principles concerning retrospective taxation while dealing with a question of law as to whether the proviso dealing with levy of surcharge in case of block assessments is prospective and curative in nature.

Applying the general principle of law to look forward and not backward(i.e. lexprospicit non respicit), unless a contrary intention appears, the Constitutional Bench observed that “every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset”. Further, addressing the question of retroactive application, the Constitutional Bench relying on the principle of fairness held that legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disability, have to be treated as prospective unless the legislative intent is clearly to give the enactment a retrospective effector to supply an obvious omission in a former legislation or to explain a former legislation.

However, procedural provisions may be given a purposive construction to be treated as retrospective, if the intention of legislature is to confer a benefit on some person but without inflicting a corresponding detriment on some others.

The present case before the Constitutional Bench relates to the block assessment provisions which are contained in Chapter XIV-B of the Income-tax Act, a complete code in respect of assessment of undisclosed income. The essence of block assessment procedure is a separate single assessment of the undisclosed income detected as a result of search and this separate assessment is undertaken in addition to normal assessment covering the same period. Further, it also lays down the procedure for taxing that income. Considering the insertion of proviso to section 113 of the Income-tax Act on levy of surcharge, the Constitutional Bench noticed that the said provision is not beneficial but rather onerous to the assesse, hence, it cannot be given effect retrospectively. Further, literal interpretation of the notes to the clauses of Finance Bill, 2002, clearly depicts the intention of the legislature which is to give effect to the amendment from a specified date.

The Constitutional Bench observed that in the absence of authority under law prior to insertion of proviso, no surcharge was leviable, it was evident that where the rate of tax is not stipulated, it would be difficult to tax a personas laid out in various rulings by the Hon’ble Supreme Court. It also emphasized that where the statute is ambiguous and vague, the interpretation which favours the tax payer over revenue has to be preferred. Thus, it  held that proviso levying surcharge is substantive provision creating charge for the first time for block assessment w.e.f. 1 June, 2002 and accordingly is prospective.

Considering the innate principles of interpretation of fiscal statues particularly on the scope of retrospective nature of provision , the Constitutional Bench settles the controversy over retrospective applicability of the proviso levying surcharge in case of block assessment by holding that the same is prospective - a substantive provision creating charge for the first time for block assessment w.e.f 1 June, 2002.

Various committees set up by the Government, sound and recommend similar sentiments on the application of retrospective tax law. The Damodaran Committee in its report had recommended that retrospective taxation has an undesirable effect of creating major uncertainties in the business environment and constituting a significant disincentive for persons wishing to do business in India. Further, the Shome Committee in its report on indirect transfer stated that such retrospective application of tax law should occur in exceptional cases, i.e., to correct apparent mistakes/ anamolies in the Statute; to remove technical defects. It should be confined to matters that are genuinely of a clarificatory nature, or to protect the tax base by countering highly abusive tax planning schemes, rather than “expand” the tax base.

By addressing the question on retrospective taxation and over ruling the earlier decision of the Divisional Bench which held that the above proviso was clarificatory/ declaratory in nature and gave it a retrospective effect, the Constitutional Bench decision has not only delivered certainty but also boosted the confidence of the tax payers. For the time being, this decision could be considered as settling the dust on the interpretation of application of retrospective taxation laws, till the time the Government brings in another amendment.

(Madhavi Muppala, Senior Tax Professional, EY contributed to the article.)

(Views expressed are personal)


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