Retrospective amendment - legislative intent or bureaucratic whims imposed in name of explanation or clarification. Proposal to disallow cess with retrospective effect is one such amendment which is not rational, and logical and will impair image of the GOI

[DEV KUMAR KOTHARI]

Earlier article about allowability of cess on income tax:

Cess on income tax - s.40.ii not applicable hence not disallowable for this provision alone - should be allowed liberally and without restrictions.

An Article By: - DEV KUMAR KOTHARI  May 15, 2020

In the above article author discussed provisions and judgments on the issue of allowability of “cess”  levied on amount of income tax. The circular of Board, and some reported judgments and case status before the Supreme Court  on the issue were also considered. It was pointed out that even before the Supreme Court question of law was not properly drafted.

Courts and Tribunals have allowed Cess based on legislative intention expressed clearly in Circular and history of  provisions for imposition of Cess right from stage of consultative documents, bill and changes in bill.

Therefore it cannot be said that  legislative intention was not to allow Cess levied as a percentage of amount of income tax.

The following Circular was also considered:

Circular - Income Tax

CIRCULAR F. NO. 91/58/66-ITJ(19)

Interpretation of provision of s. 40(a)(ii) of IT Act, 1961-Clarification regarding

18/05/1967

BUSINESS EXPENDITURE

SECTIONS 40(a)(ii),

Recently a case has come to the notice of the Board where the ITO has disallowed the ‘cess' paid by the assessee on the ground that there has been no material change in the provisions of s. 10(4) of the old Act and s. 40(a)(ii) of the new Act.

2. The view of the ITO is not correct. Clause 40(a)(ii) of the IT Bill, 1961 as introduced in the Parliament stood as under:

"(ii) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains".

When the matter came up before the Select Committee, it was decided to omit the word ‘cess' from the clause. The effect of the omission of the word ‘cess' is that only taxes paid are to be disallowed in the assessments for the years 1962-63 and onwards.

3. The Board desire that the changed position may please be brought to the notice of all the ITOs so that further litigation on this account may be avoided.

Status before the Supreme Court:

It appears that the matter is still pending before the Supreme Court on the following question as found in the order of the Supreme Court:

2019 (3) TMI 742 - SC ORDER

JOINT COMMISSIONER OF INCOME TAX RANGE –II VERSUS CHAMBAL FERTILIZERS AND CHEMICALS LTD.

Special Leave Petition (Civil) Diary No.6047/2019

Dated: - 11 March 2019

Notice issued for consideration of following substantial question of law :

“Whether the Hon’ble High Court and the ITAT under the facts and circumstances of the case have erred in holding that the education cess is disallowable expenditure u/s 40(a)(ii)?"

Judgment / Order

HON'BLE MR. JUSTICE UDAY UMESH LALIT And HON'BLE MS. JUSTICE INDU MALHOTRA

For the Petitioner : Mr. Amit Sharma, Adv.Mr. H.R. Rao, Adv. Mrs. Anil Katiyar, AOR

For the Respondent : Mr. Rohit Jain, Adv. Ms. Kavita Jha, AOR Mr. Aniket D. Agrawal, Adv. Ms. Manisha Sharma, Adv.

ORDER

Learned counsel for the petitioner confines the present case only to the following substantial question of law framed at page no.60 of the paper book:

“Whether the Hon’ble High Court and the ITAT under the facts and circumstances of the case have erred in holding that the education cess is disallowable expenditure u/s 40(a)(ii) of the I.T. Act?

Delay condoned.

Issue notice on the above question.

Let this matter be listed with SLP (C) Diary No.4414 of 2019.

Citations: in 2019 (3) TMI 742 - SC ORDER

1. 2018 (10) TMI 589 - RAJASTHAN HIGH COURT

As discussed in earlier article question framed is wrong. In fact ITAT had disallowed cess but it was allowed by High Court.

Readers may refer to earlier article and various cases laws reported on this website.

Recent amendments with retrospective effect are  drafted in very broad manner:

We find that during tenure of Smt. Nirmala Sitharaman, as  Honorable FM   retrospective amendments have been made / proposed in provisions in a new style with use of  words and phrases  like 

1.  Explanation,
2.  For  removal of doubts
3.  shall be deemed to have always .. etc.

For example vide THE.  FINANCE ACT, 2021 dated 28-03-2021 in S.36.1.va a new Explanation was inserted as follows:

[Explanation 2.––For the removal of doubts, it is hereby clarified that the provisions of section 43B shall not apply and shall be deemed never to have been applied for the purposes of determining the “due date” under this clause;]

According to the language used the amendment is from inception of S.36.1.va, however the Notes to Clauses in Finance Bill  it is stated that it will apply from 01.04.2021.

This has already started a new cycle of disputes because department is applying the amended  provision with retrospective effect however, some Benches of ITAT has held that in view of notes this will apply from 01.04.2021.

Amendment about Cess of Income tax:

In the Finance Bill 2022 an amendment to s.40 is proposed as follows:

 FINANCE BILL, 2022

Amendment of section 40.

13. In section 40 of the Income-tax Act, in clause (a), in sub clause (ii), after Explanation 2, the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 2005, namely:––

‘Explanation 3.–– For the removal of doubts, it is hereby clarified that for the purposes of this sub-clause, the term “tax” shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax.’.

From memorandum:

Clause 13 seeks to amend section 40 of the Income-tax Act relating to amounts not deductible.

Sub-clause (ii) of clause (a) of the said section provides that any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains shall not be deducted in computing the income chargeable under the head “profits and gains of business or profession”.

It is proposed to insert a new Explanation 3 to sub-clause (ii) of clause (a) of the said section to clarify that for the purposes of sub-clause (ii), the term “tax” shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax.

This amendment will take effect retrospectively from 1st April, 2005 and will, accordingly, apply in relation to the assessment year 2005-2006 and subsequent assessment years.

From speech of FM

Clarification in relation to ‘Health and Education cess’ as business expenditure

135. The income-tax is not an allowable expenditure for computation of business income. This includes tax as well as surcharges. The ‘Health and Education Cess’ is imposed as an additional surcharge on the taxpayer for funding specific government welfare programs. However, some courts have allowed ‘Health and education ‘cess’ as business expenditure, which is against the legislative intent. To reiterate the legislative intent, I propose to clarify that any surcharge or cess on income and profits is not allowable as business expenditure.

Present provision:

Amounts not deductible.

40. Notwithstanding anything to the contrary in sections 30 to ¹[38], the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",-

(a) in the case of any assessee-

(ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains.

⁶[Explanation 1.-For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.]

⁷[Explanation 2.-For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A;]

We find that there is clear mention about any rate or tax  which is levied n the profits of gains of any business or profession or which is assessed at a proportion or otherwise on the basis of , any such profits or gains. Therefore, on plain reading of the provision we find that what is disallowed are  :

                     any sum paid on account of  :

                              rate

                                        or tax levied on the profits or gains of any business or profession

                                        or assessed at a proportion of,

                                       or otherwise on the basis of, any such profits or gains

The preconditions for disallowance are that it should be a rate or tax and that rate or tax is levied on the profits or gains of any business or profession

The assessment can be at a proportion means expressed in terms of a part of profit or gain it can be any part if it is 1/100 the part it will be equal to 1%  if it si 1/4^th part, it will be equal to 25% and so on we can create examples.

Or otherwise on the basis of any such profits or gains means expression in term so percentage or it can be based on volume or capacity  of business  or any other basis which indicates profits of business or profession.

Surcharge and cess are not computed on basis of profits or gains:

Surcharge and cess are computed on the amount of amount of income tax levied on any assesse who has income from business and profession.

 These are not computed based on profits or gains of any business or profession in any manner either as a proportion , as a percentile or otherwise.

There can be profits or gains from business, still there may not be any tax payable due to deductions, weighted deductions accelerated deductions, exemptions and incentives. In such cases in absence of rate or tax, there will not be levy of surcharge and cess.  

Therefore, it is wrong to say that the proposed amendment is to clarify legislative intention.

Cess is levied on tax payers who do not have income from business and profession, so in those cases the amendment will have no effect.

RETROSPECTIVE AMENDMENT

Whether, result of mistakes, carelessness, lack of vision or just bureaucratic whim to show power?

Regular amendments in Indian Fiscal Legislation:–

In fiscal legislation every year at least once amendments are made by way of Finance Bill for the year.  In the preparation of the Finance Bill, an extensive exercise is undertaken to amend the law to suit present circumstances, changes in circumstances, fiscal policy, changes due to change in legislative intention, some specific requirements arising due to interpretation of law and also to clarify any confusion or ambiguity which has remained in the drafting of the law.  Therefore, a view reasonably can be taken that any amendment should not be with retrospective effect but prospective only or at best the extent of retrospective ness should not go beyond the last Finance Bill and only the amendment which were made in the last Finance Bill, may be modified to remove ambiguities, confusions and to provide clarifications. Any other amendment should be prospective.

Legislative intention – Legislative intention can be and should be ascertained only from the words used in the legislation.  This is the basic fundamental of interpretation of law about legislative intent.  Legislative intention is expressed when a law is passed.  It is collectively expression of intention by the legislature. If after sometime there is a change in legislative intention, that change can be only from the day when the legislatures so consider and amend the law and therefore changed legislative intention should be reflected for the future only.

Even in case of expression of intent by one person to other person in any deal, which is formally entered into in written agreements, parties are not allowed to change the agreement on the ground of intention which was in mind, which could not be expressed in the agreement, any change if at all can be made with the consent of all the parties to the agreement. 

Parties in the fiscal legislation – In case of fiscal legislation, we find that the direct parties involved are:

              a. the government and

              b. the taxpayer.

In form of any fiscal legislation, the government places its policy and intention before the public of the world at large.  They are part of public documents and not any internal matter or personal matter of any person.  In this connection public would also include not only the public of India but also the public of the world because people, resident in other countries may also have a dealing from abroad or within India which is subject matter of application of some of fiscal legislations applicable in any case.  As a public, one can rely  on the law and it stands on the date when he considers it and accordingly takes a decision  effecting his fiscal affairs.

Therefore, how suddenly the law can be changed and the people are asked to say that legislative intention has been clarified and therefore, the amendment will apply to earlier period also? As noted earlier, even in case of agreement between two parties any changes in written agreement may not be permitted by unilateral action of any party, then how the government is taking changes with retrospective effect routinely?

Such amendments are really very harmful to the reliability and the dependability on the law as it stands at a particular point of time because who knows that the law may be changed any time in future (period being indefinite) with retrospective effect.

In the Finance Bill 2022 also there are many retrospective amendments proposed to be explanatory, clarificatory of legislative intention. This is in spite of fact that in past sometimes retrospective amendments were held invalid and some were withdrawn or reversed also.

How legislative intention of 2005 is ascertained in 2022:

For ascertaining legislative intention golden rule is that it is to be as per words used in law, nothing can be added or omitted if language is clear and admit no ambiguity.

As observed in earlier article Courts have already ascertained legislative intention from the words used in provisions as well as legislative process adopted before making provision for cess, and also provision of disallowance us 40.

When cess was levied initially and revised from time to time, there have been changes in composition of members of parliament. The amendment is made w.e.f. 01.04. 2005.

At the time of 2005 and 2022 there are lot of changes in government policies, representation,  composition  and majority of political parties in the Parliament and its various committees, there is change of concerned ministers, there may not be many members in 2022 who were also members in 2005.

It will be okay, if FM says that it is no longer intention to allow cess levied on income tax as allowable expenditure but that expression of intention  can only be for future and not for all times in past.  

The retrospective effect is illegal for the following reasons:

It cannot be called  expression of legislative intention prevailing in 2005 on wards, as discussed above.

It imposes many things and actions which are impossible for example:

1. It is not possible for a tax payer to revise a return of income and withdraw claim for cess which was claimed and  has been allowed in past.
2. Ay income tax authority cannot also  take steps to withdraw deductions allowed in past. There are limitations for rectification, revision, reassessment and any other proceeding also.
3. How a tax and interest can be levied  based on law which was not in force at the time when liability was to be ascertained that is on 1^st April of any assessment year of past. Even for AY 2022-23 one cannot consider budget proposal for not claiming deduction if he wants to compute income as per law in force as on 1^st April 21 for AY 2021-22 for which ROI are yet to be filed and will be filed before the proposed amendment is enacted.  

 It creates discrimination –

1.  tax payers in whose case cess has been allowed and any proceedings is not pending and limitation has lapsed for any action to withdraw deduction will be saved from amendment  whereas ,
2. tax payer in whose case matter is pending even before the supreme Court, can face adverse judgment in view of proposed amendment if it becomes law before  the supreme court decided the pending matters. This is because in an appeal even Supreme Court will consider amended law. A challenge to law or its amendment cannot be made in an appeal and has to be challenged separately by way of a Writ Petition under provisions of the constitution of India.
3. Tax payers against whom assessment is pending, appeal is pending, or there are limitation period available for initiation and disposal of proceedings can be adversely affected.
4. A tax payer can have both situations in some years he may not be adversely effected and in some years ( particularly recent past years) he can be adversely effected in course of assessment, appeal etc.

Such discriminations are not based on any intelligent differentia. Therefore, the amended  provision will be discriminatory and not valid.

Therefore, the proposed amendment is not valid and honorable FM is requested to withdraw the same.

Penny wise pound foolish:

A retrospective amendment tarnish image of GOI. Is it worth to make such amendment which are against promises of GOI / BJP  and expectation of public and tax payers.

Besides it can also be said that the proposed retrospective amendment is not logical and not result oriented. In our circles we know that  there are not many assesses who had claimed Cess as allowable expenditure. Furthermore, assesses who do not have income from business and profession did not claim and cannot claim cess as allowable expenditure against incomes chargeable under other heads of income. Therefore, total amount of cess collected in past and collectible in future will not be significant.

Expenses on litigation and new proceedings to disallow cess and  collect additional tax on disallowance of cess will be  very high and net gains, if at all will not be significant.  

Author recall that long ago a retrospective amendment was made to clarify that even provisions for tea, coffee, snacks etc. in course of business will be considered as entertainment and shall be subject to disallowance. This amendment was also made after ruling of the Supreme Court in favor of tax payers that such expenses are not entertainment and are not disallowable as entertainment expenses. This also showed BUREAUCRATIC WHIMS AND PENNY WISE AND POUND FOOLISH attitude.

Post budget comments of FM:

As per news reports honorable FM has commented that  "Some courts are coming up with a verdict which is contrary to the intent of the legislature. We needed to come out with an explanatory amendment. There are times when you have to be retrospective just so that we are being fair. It is not to go with any other intent,"

She noted that not doing it retrospectively would have become an issue for execution and would have been unfair for two sets of taxpayers.

Ms. Sitharaman said at a post-budget interaction organised by industry body Ficci.

It is not understandable as to how  

1. the proposed amendment if given effect from 01.04.2005 will be fair to all taxpayers? And
2. how it will be implemented?
3. What will be cost benefit if amendment is given retrospective effect. A study should be made to ascertain how much amount will be disallowed and how much  additional tax can be collected and what will be costs to revenue and taxpayers. In implementation.

The amendment also put a big question mark on Circulars of CBDT and status of High Courts and the Supreme Court. Such amendments only create uncertainties.

Therefre honorable FM is requested to reconsider the issue and the proposed amendment must be dropped to save image of CBDT and honorable Courts.