APPLICABILITY OF NEW PROVISIONS OR AMENDMENT- a new dimension vide ruling of Allahabad high Court.

[Uma Kothari]

Summary:

As per a recent ruling of the Allahabad High Court amendments which have been enacted after a previous year has commenced cannot be applied to the previous year which has already begun and can apply to a previous year which is yet to begun. Thus, amendment of section 64 vide the Taxation Laws (Amendment) Act,1975 which became law on 07.08.1975 when  the President assented to it was held to be not applicable to the income of previous year which has already commenced on 01.04.1975 and thus could not be applied to the assessment year 1976-77. As per the court the obvious reason is that the assessee must be made aware of applicable law before the commencement of the previous year to which it is intended to apply.  

Previous year and assessment year in simple terms Ss 2(9), 2 (34) and 3.

Example of previous year.

Basis of assessment.

Obligations during previous year.

General perception about effective date of commencement of a provision.

Situation when an amendment is made after 1^st April.

Analysis of  Krishna Mohan Agrawal v. CIT 2007 -TMI - 13644 - (ALLAHABAD High Court).

The provisions of the annual budget.

A new dimension about effective date.

Previous year and assessment year in simple terms:

In the context of the Income-tax 1961 {The Act}, as per provisions of section 3 since assessment year 2000-01, the previous year means the financial year or a part of the financial year (in case of new business or source of income) ending on 31^st of March of any calendar year. And the term assessment year means the financial year beginning thereafter from the 1^st April of the same calendar year. Thus P.Y.E. on 31.03.07 will include full financial year 2006-07 as well as any period starting from or after 01.04.06 and ending on 31.03.07 in case of new assessee or new source of income. The provisions in this regard can be referred to in sections 2 (9), 2(34) and 3 of the Act.

Example of previous year:

For example for an existing old company the period 01.04.06 -31.03.07 is the previous year and for a newly incorporated company the period from the date of incorporation say 01.01.07 to 30.03.07 will be the previous year for the assessment year 2007.08. Similarly in case of a new business or source of income the previous year will be from the date of setting up of business to 31^st March.   

Basis of assessment:

Income earned in a previous year is assessed in the assessment year. For this purpose, net income up to the end of the previous year (12 pm of 31^st March) is to be ascertained. Just for illustration we can take an example of valuation of commodities, suppose gold price at close of normal office hours on 31.03.07 was Rs.10000/- per ten gram, however, at close of commodities exchange say at 12 PM the price fell to Rs.9500/- per ten grams. In this case for valuation purposes, the market value will have to be considered @ Rs.9700/- per ten grams and not Rs.10,000/- . Now suppose cost per ten gram is Rs.9900/- then market value being lower than cost is to be taken and stock will have to be valued @Rs.9700/- per ten grams.  

As another example we take a case of a professional person who maintains his books of account on cash basis. Suppose some clients in India and /or from abroad, deposit/ transfer funds in his account on account of professional fees after 5.30 Pm (IST) but before 12.00 PM IST of 31^st March. In this case all payments received on 31^st March till 12PM have to be considered for the purpose of income of the previous year 2006-07 and assessment year 2007-08.

Obligations during previous year:

The assessee is obliged to pay advance tax on the income of the previous year during the previous year itself, thought tax is imposable after the end of the previous year in the relevant assessment year. Therefore, the assessee must be aware about the applicable provisions, rate of tax etc. before commencement of the previous year so that he can properly plan his affairs and meet obligations. 

General perception about effective date of commencement of a provision:

Generally it is considered that law as on 1^st April of the assessment year is applicable to that assessment year or in connection with computation of income of the previous year which precede such assessment year. However, for meeting obligations to be discharged during the previous year, the assessee must know the relevant provisions.

In this regard it is also interesting to note that in case of change in rate of depreciation many times the effective date is given as 2^nd April, meaning thereby that new rates will apply to assessment year which starts after the effective date. Therefore as per general understanding an amendment in rate of depreciation made with effect from 01.04.2005 will apply from assessment year 2005-06 and   amendment made effective from 02.04.2005 will apply to assessment year 2006-07 on wards.

The reason is that the taxpayer must have prior information about the law and tax rates etc. which will apply to the computation of income of a previous year. That is the law applicable should be known to the taxpayer before the previous year commences.

 Situation when an amendment is made after 1^st April:

Some times an amendment is made or a new provision is framed with effect from 1^st April of a year however, the enactment itself is passed or becomes a law after 1^st April of a financial year for theoretical purposes let us suppose a proposals made in budget 2007 on 28^th February, 2007 was to take effect from 01.04.2008 (assessment year 2008-09 relevant to PYE 31.03.08) however the provision is passed / notified after 01.04.07 that is after commencement of the previous year 2007-08.  In such a case it can be said that as on commencement of the previous year the provision did not become effective law. Therefore, having been made effective after 01.04.2007 it should be applied only from previous year 2008-09 and not from PY 2007-08.

In Krishna Mohan Agrawal v. CIT 2007 -TMI - 13644 - (ALLAHABAD High Court)  amendment to section 64 which was to take effect from 1-4-1976 came for consideration. The court held that it is not applicable to assessment year 1976-77 but will apply only from assessment year 1977-78. The court considered and reasoned on the following aspects:

A. when the Finance Act determines a new rate of tax or surcharge, it normally comes into effect with effect from April 1.

B. It governs the previous year of the assessee which is to commence thereafter, i.e., with effect from April 1.

C. Unless the amending Act provides otherwise either expressly or by necessary implication, the normal presumption would be that any amendment brought about, would apply only to the previous year which is yet to come, on or after the date on which such amendment is enforced.

D. The amendment effected by the Taxation Laws (Amendment) Act, 1975 received the assent of the President of India on 07.08.1975. That is to say after the commencement of the previous year 1975-76 on 01.04.1975 relevant to assessment year 1976-77

E. The Tribunal was legally not correct in holding that the amendment to section 64(1) of the Income-tax Act, 1961, enforced with effect from April 1, 1976, was applicable to the assessment year 1976-77 which would be relatable to the previous year 1975-76 inasmuch as that previous year was already over on the date of enforcement of the amendment.

F. Before the amendment, newly added clubbing provisions were not applicable. Income of minor child by way of profit share in a firm in which he was admitted to as a partner was to be taxed in the hands of the minor as income of the minor and was not to be added or clubbed to the income of the assessee (guardian of the minor).

G. Only after the amendment such income (profit share in firm) was to be clubbed with the income of the assessee / parent of minor.

H. As per the High Court the reason is obvious  that if such charge or rate of charge was to govern the previous year which has already gone by, there would be utter chaos, inasmuch as the assessee would have no idea in advance as to what would be the rate of tax or surcharge or exemption on his currently earned income and investments and he would not be able to either plan out his taxation or to discharge the various obligations of the assessee which arise under the Act throughout his "previous year", from time to time.

The court referred to several judgments. Matters relevant with the context of the article are discussed below:

Kalwa Devadattam v. Union of India [1963] 49 ITR 165 (SC)-

Income arises on accrual (or receipt in case of cash basis of accounting) and at a point of time not later than the close of the previous year.

Chief CIT v. Rama Shanker 2004 -TMI - 10545 - (ALLAHABAD High Court) -

The notification dated July 24, 1980 providing for higher depreciation on the truck used on hire was not applicable for the assessment year 1980-81 because it is well settled that in the Income-tax Act the law as stands on the first day of the assessment year is applicable unless and until any amendment made in the Act or the notification issued therein is specifically made applicable from an anterior date.

Kesoram Industries and Cotton Mills Ltd. v. CWT 1965 -TMI - 49296 - (SUPREME Court) -

Dividend recommended by the Board of Directors during the previous year, however, approved by the shareholders after the end of the previous year was not deductible from wealth, because it was not a liability incurred before the end of the previous year. The recommendation of the board can be withdrawn or modified or may not be approved; therefore it was merely recommendation not resulting into a liability before the end of the previous year (valuation date for wealth tax purpose)

The provisions of the annual budget:

In every annual budget which is usually presented on 28^th February there are proposals to amend law which will usually have effect from the assessment year commencing from the 1^st April next following. For example let us consider the proposals in the Finance Bill 2007 (Budget 2007) which were enacted into the Finance Act, 2007 on receiving the assent of the President on 11^th May, 2007. The section (2) reads as follows:

(2) Save as otherwise provided in the Act, sections 2 to 93 shall be deemed to have come into force on the 1st day of April, 2007.

According to this section the provisions shall come into force from 1^st April, 2007 and thus apply from assessment year 2007-08. However, in many provisions we find that they have specifically been made applicable with retrospective effect and many from assessment year 2008-09. All other provisions shall apply to assessment year 2007-08 for which relevant previous year ended on 31.03.07 that is prior to coming into force of the Finance Act, 2007. For example in section 3 of the Finance Act 2007 which amends section 2 of the Income-tax Act, 1961 we find  provisions which have been given effect from  25.08.1976 ( meaning of India) 01.04.1994 and  01.10.1996 in relation to certain authorities and their designation etc, 01.04.2004 in relation to certain employers, 01.06.1976 , 01.04.2008 etc. Generally provisions which affect the liability of tax payer in form of computation of income are given effect from 01.04.2008 that is assessment year 2008-09 for which relevant previous year had already begun on 01.04.2007.

Thus, applying the ruling in the case of Krishna Mohan Agrawal a view can be taken that such provisions should be applied only to a previous year which has not begun before the Finance Act is enacted on 11.05.2007 in other words those provisions should be applied only to the previous year which commences after 11.05.2007 that is previous year 2008-09 relevant to the assessment year 2009-10 and no to the assessment year 2008-09, as generally understood.

A new dimension about effective date:

As discussed above the judgment of Allahabad high Court on the issue of the effective date sets a new dimension about it.

In case of companies we find that first installment of advance tax falls due on the 15^th day of June and in other cases on 15^th September of the previous year. Once has to plan about income and taxes for the period beginning 1^st April, therefore the tax payer should in all fairness be made aware of the provisions about rate of tax, computation of income, rebates etc. before the previous year begun.

Applying the same there should also be a ban on amendments which affects the rights and privileges of tax payer and obligations as to tax rate, interest liability etc. from an earlier date and many times are prompted because the assessee avails certain benefits on interpretation of law by courts.

Unfortunately the courts rulings permitting  clarificatory amendments to have a retrospective effect has been considered as a blanket permit by the Government to amend law with retrospective effect and every year we find several amendment made with retrospective effect.