JUST ON TIME AMENDMENT OF FISCAL LAWS IS DESIRABLE

[DEV KUMAR KOTHARI]

General Rule of interpretation:

The general rule of interpretation of any law is that it has to be interpreted considering the clear language used in the enactment, nothing can be added and nothing can be ignored. The legislative intention is to be gathered only from the language used in the enactment. Off-course some exceptions are there which enable to refer to the purpose and reasons of the enactment/ insertion or amendment  as reflected in the memorandum on proposals, speech of the mover  of the bill and, in case of any ambiguity. However, when the language used is plain and simple then such help in interpretation may not be permissible.

However, when the Government tend to amend the laws with retrospective effect as a routine and that too just to overcome judicial rulings, one has to think about reliability of the law, and the government and one may always be under clouds of un-certainty of the law being amended with retrospective effect and disturbing all planning which are being made as per plain reading of the law as it stands at the time of planning.

Change in Governments:

In democracy at certain intervals (generally five years in our country) general elections are held and  a new Government is formed which may have new ministers. It is the expectation of the public that the new government will bring in new policies in the interest of public. The next general elections are due some time in mid of 2009. It is expected that the policies of liberalization, globalization, and faith in general public - for voluntary compliances, and lessor control and suspicion shall be further boosted. Government's intervention shall be reduced.

However, we find that in every Finance Bill some proposals are placed which are on the basis of some presumptions as to tax avoidance, this is not good. For some tax avoiders , general rules of treating some receipts incomes as  income, or denying set off of genuine business loss, or making TDS compulsory in case of small contracts (not by splitting) is not proper, as it amounts to disbelieving public at large or considering the public at large as dishonest or tax avoiders. In almost every bill we also find some proposals to amend the law with retrospective effect to overcome decisions of courts. This is not expected from a government which represents the second larges democracy in the world.  

It is also expected that policies and legal frame work will have more durability and will be reliable so that one can plan his affairs considering the law as it is without any fear of the law being changed later on affecting to- days decisions.

Amendment in Tax Laws

Tax laws are very important source for molding fiscal policies of the Government to achieve many of the socio economic purposes oriented towards the nation as a whole as well as to certain specified geographical areas and class of persons. From time to time tax laws are amended to suit the then prevailing circumstances and requirement. In our county every year the Central Government, all State Governments and even local municipal corporations pass amendment in laws, changes provisions for tax, interest, penalty, as well as procedures.  It is supposed that this annual exercise is good enough to make the law suitable for the time being and for the prevailing circumstances. It is therefore, expected that whenever, it is found that a particular provision is not suitable it can be amended suitably to meet the present requirements and legislative intention in the annual budget exercise itself.

Besides the popular annual exercise of budget, many times tax laws are amended by other tax laws amendment enactments.

THUS, ONE CAN VERY WELL SAY THAT THE LAW ONCE AMENDED IN A YEAR REFLECTS THE TRUE INTENT AND PURPOSE OF THE LAW AND IT SHOULD NOT BE FURTHER AMENDED SO AS TO GO BEYOND THE DATE OF ENACTMENT OF THE LAST BUDGET OR THE LAST AMENDMENT.

RETROSPECTIVE AMENDMENTS:

 A brief review of past amendments in Tax Laws through the regular Finance Act popularly known as the Budget and several amendment Acts passed from time to time to amend tax laws, shows that many times tax laws are amended with retrospective effect. It is also noticed that amendments are made just for the sake of amending the law to overcome judicial pronouncements- this appears to be a show of power whereby the Bureaucrats (the people behind the scene- legislators - who hardly care for amendments) wants to show that they are above the judiciary. 

Besides the main enactments the subordinate legislations like The Rules and Procedures are also amended from time to time to amend the law. Therefore, there are ample opportunities to the Government to amend the law to make them in accord with the legislative intent as well as the need of the hour. THUS IT CAN BE SAID THAT THE PROCEDURE FOLLOWED IN OUR COUNUTRY IS TO MEET THE REQUIREMENT OF JUST ON TIME AMENDMENT.

Once there is a system of JUST ON TIME AMENDMENT   there should not be any need to amend the law with retrospective effect.

In the situation of just on time amendment, any amendments which takes place with retrospective effect can only be considered as indicator of IMMATURE, SLEEPING, AND HIGH HANDED GOVERNMENT.

Source for retrospective amendments - Generally it is seen that retrospective amendment is introduced with a view to overcome judicial pronouncements of the Supreme Court and some times that of high courts. Many times it is brought in after the Supreme Court settles the legal position - just to un-settle the settled things. Most of such amendments are against the public and taxpayers. There are very few instances where amendment with retrospective effect was brought on the basis of some decision of Income Tax Appellate Tribunal - which were reported in newspapers.

Thus, in some cases journalists has helped the Government to awake from sound sleep and make an early amendment. To illustrate these aspects of amendment, the following examples are relevant: -

a) Amendments after a news report was published:

(i)  Section 37 (1) of the Income Tax Act - Explanation was inserted by the Finance (No.2) Act, 1998 with retrospective effect from 1.4.1962 said to be for removal of doubts that any expenditure incurred by the assessee for any purpose, which is an offence or which is prohibited by law, shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. Although there were several judgments about allowability of penalties or fines however, this amendment was brought in after a Bench of ITAT, Bombay allowed expenses to the assessee a Builders, being sums paid to local goons while carrying out building activities to keep peace and carry on business smoothly. The decision was published in some newspapers. It attracted the attention of the Government (Bureaucrats) and amendment was brought in the Act just in the next budget.

(ii)  Definition of 'Plant' under Section 43(3) was amended WREF 1.4.62 vide the Finance Act 1995 to exclude Tea Bushes or live stock from definition of plant. This amendment also took place after a news was published in The Economic Times about order of ITAT, Kolkata in the case of The General Fibre Dealers P. Ltd V ITO 46 TTJ 596, holding that Tea Bushes are Plant, having durability and functionality in tea business and being depreciable asset were eligible for depreciation allowance u/s 32. The Tribunal has relied on several judgments of the Supreme Court and high Courts in this regard. It is worth to mention that more than one century old English ruling in Yarmouth V France & Co. (1887) 19 QBD 647 which was duly approved and adopted in India by the Supreme court in CIT V Taj Mahal Hotel (1971) 82 ITR 44 (SC) and was followed while holding that 'plant' is wide term and it includes any article or thing live or dead, fixed or movable, which is used as a tool for the purpose of the business or profession by the assessee.

(iii) Section 80HHC - In respect of deductions to Tea companies, a decision of Madras High Court dated 10.08.1971 in case of CAIT V Periakarmalai Tea and Produce Co. Ltd (1972) 84 ITR 643 (Mad.) was followed by appellate authorities almost all over India and deduction was allowed before application of Rule 8 i.e. while computing the composite income from cultivation, manufacture and selling of tea. A circular no. 600 dated 23.5.1991 (189 ITR (St.) 126 was issued by the Central Board of Direct Taxes (CBDT) directing that deduction should be allowed only from 40% of the composite income. That circular was challenged and the Calcutta High Court vide judgment and order DT. 24.9.1998 in case of Warren Tea Ltd V UOI  (1999) 236 ITR 492 (Cal) held that the circular was invalid.  The report was published in the Economic Times, just thereafter within few days, budget 1999 came and an amendment with retrospective effect was made by the Finance Act 1999 WREF 1.4.92 by insertion of Sub-Section (4B) in section 80HHC to provide that for the purpose of computing the total income under Sub-Section (1) or sub-section (1A) of section 80HHC, any income not chargeable to tax under the Act shall be excluded. Therefore, this amendment was also done promptly only after report in newspaper. However, it was after about 18 years from the date of the judgment of the Madras High court according to which the deduction was to be allowed before application of Rule 8. Thus the press reporter did harm to the Government - it awakes the sound sleeping authorities.

Had there been no press report, perhaps the amendment would not have taken place in 1999, may be, only after and in case the Supreme Court would have approved the Madras high Court's judgment.

Amendment after pronouncement by Supreme Court: -

There are numerous cases in which amendments have been introduced just to overcome ruling of the Apex court of our country that too retrospectively. Surprisingly some amendments are to withdraw very petty nature relief like expenses for tea, coffees, meals etc. provided to customers and guests. Few examples of amendment post Supreme Court ruling are as follows:

2) Entertainment expenses - Tea, coffee, snacks, meals, etc. were covered by the definition of entertainment after the Supreme Court decided that such expenses do not constitute entertainment. CIT V Patel Bros. & Co. Ltd (1995) 215 ITR 165(SC); [2008 -TMI - 5473 - SUPREME Court]

3) Depreciation made compulsory - Explanation 5 to Section 32(1) was inserted after the Supreme Court decided that depreciation allowance is optional in the case of CIT V Mahindra Mills and others  (2000) 243 ITR 56 (SC).

4) Interest payable by assessee - Amendment with retrospective effect was introduced to provide that interest shall be levied based on the 'assessed income' as against as per 'returned income' as held by the Supreme Court in Udayan Misthan Bhandar / Ranchi Club Ltd (2001) 247 ITR 209 (SC).

5) Penalty - After the Supreme Court decided in CIT V Prithipal Singh & Co. (2001) 249 ITR 670 (SC) that certain penalties can be levied only in addition to any income tax, means that there should be some tax payable by assessee to attract penalty. Thereafter, the law was amended to provide that penalty should be in addition to tax, if any, payable by the assessee. Thank god, at least this provision has not been made with retrospective effect.

The above examples are just to illustrate how amendments have been made after judicial pronouncement. Early amendment was brought in the law only, if the press report was published. This shows how slow is the process to clarify legislative intent.

CREDIBILITY OF GOVERNMENT MAY BE CALLED AT STAKE:

Retrospective amendments make law uncertain and can be considered as unethical - When every year law is amended several times, there should not be any need to make amendment with retrospective effect. In any case the date of retrospective effect should not go beyond the last amendment in the particular enactment.

Unfortunately our Government has considered the right to legislate as a right to unsettle settled matters with retrospective effect of any duration. Retrospective amendments are considered as a routine affair, that too, to overcome judicial pronouncement. In such situation, the credibility and reliability of the government, the law, the judicial system is at stake and therefore it is necessary that the retrospective effect of fiscal law should be stopped altogether. Some times law is amended with prospective effect but it is called as to clarify or explain and it is inserted by way of an explanation. This again leads to litigation. For example Explanation 5 to section 32(1) of the Income-tax Act 1961 has been inserted w.e.f. 01.04.2002 vide the Finance Act, 2001, but it starts with wordings "for the removal of doubts… thus the department is taking view that it is applicable for earlier years also. The matter has already reached up to some high courts, the Kerala high court in case of CIT V Kerala Electric Lamp Works Ltd (2003) 261 ITR 721 (KER.) and Madras high court in the case of CIT V Sree Senhavalli Textiles P. Ltd (2003) 259 ITR 77 (Mad.) have held that the explanation 5 cannot be applied retrospectively.

NEW APPRAOCH IS REQUIRED  - JUST ON TIME AMENDMENT:

 It is required that any desirable amendment should be brought as early as possible and that too with prospective effect. For that purpose, the field officers from the lowest rank, say, Income Tax Officer, Wealth Tax Officer, etc. should be vigilant to find out any claims made by assessee, which appears to them to be contrary to the legislative intent.

It is surprising that an ITO can write in the assessment order that such deduction or benefit is not admissible as per law or the legislative intent and disallow claim contrary to plain language used in the law.  However, his voice does not go to the legislators until the Supreme Court affirms his order. This is recognized only after several decades when the Supreme Court has affirmed the view of the ITO.

Therefore, it would be proper to give freedom to the Assessing Officers as well as other senior officers to have a direct access to the Finance Minister and his Secretariat to send his suggestions directly about any such claims which appears to be allowable but which are not as per the apparent legislative intention (or the intention of the Bureaucrats and Revenue Officials). Such suggestions should be carefully scrutinized and wherever necessary amendment should be brought as early as possible.

In view of fast communication facilities available to all officers, some email addresses can be reserved for this purpose. Any revenue officer or even tax practioner should be alloed to send his feedback to bring in concept of just on time amendment.

POWER TO LEGISLATE RETROSPECTIVELY SHOULD NOT BE USED AS A ROUTINE:

Unfortunately, the freedom of legislation to legislate retrospectively has been taken as a very handy tool by the Government to overcome any drafting error this also shows simply lethargy in the Department. Surprisingly the Supreme Court has also allowed such legislations very liberally in name of clarification of legislative intention. However, the fact remain that a retrospective amendment is nothing but an indicator of the fact that the policies, laws of the country and the government are not reliable. As they can be amended at any time giving retrospective effect without any limit. Therefore neither the judgment can be relied nor opinions of experts can be relied.

JUST TO NULLIFY JUDGMENT OF HIGH COURT IS NOT VALID:

RETROSPECTIVE AMENDMENTS

Retrospective amendments in Tax Laws has become a common feature and many times the amendment has been made to nullify order to overcome judgment not only of High Court but also of the Supreme Court where an amendment is made just to nullify or overcome a judgment of High Court or the Supreme Court and for no other reason the retrospective operation will not be valid.

JUDGMENT OF KARNATAKA HIGH COURT IN KARDICOPPAL ESTATE V State of Karnataka and another (2004) 266 ITR 20 (Kar.)

The Karnataka High Court has held that retrospective amendment of a provision must not be only for the purpose of nullifying a judgment where there was no lacuna or defect pointed out in the parent Act. In this case the court noticed that in an earlier judgment in Ashok Plantation Vs. Asst. Commissioner of Commercial Taxes. It did not find lacuna and on the other hand the court had noticed both the provisions and interpreted the law as it stood then in the light of judgment of the Supreme Court reported in 77 ITR 518 in case of CIT Vs Kulluvally Transport Co. Pvt. Ltd. Therefore the court held that retrospective effect given to the amendment in section 15 of the Karnataka Agricultural Income Tax imposing further conditions for carry forward of loss is not valid provision. This means that the amended provisions may be applied only with prospective effect and cannot cover earlier period.

D CAWASJI & CO. VS STATE OF MYSORE (1984) 150 ITR 648

IN THIS CASE THE high Court decided certain issue in favour of Taxpayers. The State Government passed legislation to amend the relevant Act with a view to nullify the effect of judgment of the High Court. The Supreme Court held that retrospective amendments takes away the right given to the petitioner that cannot be done in the case of curing a non existing lacuna by the respondent. In the words of Supreme Court it was observed and held as follows:

"The State, instead of seeking to test the correctness and effect of the judgment and order of the High Court, thought it fit to have the judgment and order nullified by introducing the impugned amendment. The amendment does not proceed to cure the defect or the lacuna by bringing in an amendment proving for exigibility of sales tax on excise duty, health cess and education cess. The impugned Amending Act may not, therefore, be considered to be a Validating Act. A Validating Act seeks to validate the earlier Acts declared illegal and unconstitutional by courts by removing the defect or lacuna which led to the invalidation of the law. With the removal of the defect or lacuna resulting in the validation of any Act held invalid by a competent court, the Act may become valid, if the Validating Act is lawfully enacted…

It appears that the only object of enacting the amended provision is to nullify the effect of the judgment which became conclusive and binding on the parties to enable the State Government to retain the amount wrongfully and illegally collected as sales tax and this object has been sought to be achieved by the impugned amendment which does not even purport or seek to remedy or remove the defect and lacuna…. The defect or lacuna is not even sought to be remedied and the only justification for the steep rise in the rate of duty by the amended provision is to nullify the effect of the binding judgment…. It may be open to the Legislature to impose the levy at a higher rate with prospective operation but the levy of taxation at higher rate which really amounts to imposition of tax with retrospective operation has to be justified on proper and cogent grounds".

Just on time amendment in all laws is desirable:

In view of these rulings it is better and in the interest of revenue as well as public at large that amendments with retrospective effect must be avoided. This is equally good for any other law of public importance as well. Thus the concerned authorities right from lower rank field officers must be vigilant and report any lacunae, loop hole or possibility of un-intended interpretation and report to the legislative wing the same for consideration of amendment if that is required to make law as per legislative intent.