Tax Law in the Shadow of the Higher Judiciary

Context:

In the more recent of the rulings, in ITO vs Vikram Sujitkumar Bhatia, the question before the Court concerned whether an amendment to a provision of the Income Tax Act, 1961, could have retrospective effect in the absence of legislative mandate.

About Income Tax Act 1961:

• It is an act to levy, administrate, collect & recover Income-tax in India which came into force from 1st April 1962.
• The Government of India brought a draft statute called the “Direct Taxes Code” intended to replace the Income Tax Act,1961 and the Wealth Tax Act, 1957, but the bill was later scrapped.

India’s law of taxation: It is built on two central precepts:

• First, as per Article 265 of the Constitution, a tax may be imposed only with the authority of law. 
• Second, on a principle of sureness, that any levy ought to be clear, consistent, and predictable.
  • Both these precepts emanate out of a larger commitment to the rule of law, in particular to values of legality and certainty.

Section 153C of the Act:

• It stipulates the conditions under which a search made on a person’s premises could result in the opening of proceedings against other persons and entities. 
• Before an amendment to the law in 2015, Section 153C allowed the Revenue to proceed against third parties to a search, if material seized (such as money, bullion, jewelry, or books of accounts) “belongs or belong to” a person other than the one who was subject to the search.

Amended to the Law in 2015:

• Section 153C now stipulated that assessments could be made against third parties to a search, even if the material seized — in the case of documents and books of accounts — “pertains to” the person or if information contained in those items “relates” to the person. 
• The amendment was not made expressly retrospective. 

Judicial Observation: 

• The Gujarat High Court: It held that an application would impinge on rights that had vested on persons through the previous stipulation. 
  • This reasoning stems out of the idea that even if a law was merely procedural in nature, it would apply retrospectively only if it did not take away any substantive rights conferred on a person. 
  • Here, the Court found that the amendment was bringing into the fold of Section 153C a new class of assessees, who were previously excluded.

• The Supreme Court: It reversed this verdict for the following two reasons.
  • One, that the old Section 153C had been replaced by amendment, and the words “belongs or belong to” had been substituted by “pertains or pertain to,” and, therefore, one must presume that the unamended provision never existed in law, not even before the date of the amendment.
  • Two, that the new law is declaratory, in that it seeks to explain an earlier provision, and is hence retrospective.

Court as Maker, not Interpreter:

• Section 153C may have been amended through substitution. 
• The phrase “belongs to” continues to remain in the provision. 
• The altered law is to add an additional stipulation: that even material — in the case of books of accounts and documents — that “pertains or pertain to” a person can serve as a ground for fresh proceedings. The amendment by no means asserts what was always the position, but, instead, seeks to expand the law’s domain with an eye to the future. 
• The Court, in holding that it will apply to past searches, has acted not as an interpreter of the law but as a maker of the law.

The Judgment in Union of India vs Ashish Agarwal:

• The Court resuscitated notices of reassessment that had been issued by the Revenue without any sanction of law. 
• It not only reversed the Allahabad High Court’s judgment that had been carried to it on appeal but also verdicts rendered by at least seven different High Courts that were not before it.

Earlier Stands of High Courts:

• Parliament had enacted a new regime to govern reassessments of completed income-tax proceedings. 
  • But, despite the change in law, the Revenue continued to issue notices under a repealed provision.
• Its deriving authority is from executive notifications that extended timelines during the COVID-19-inflicted period.
• The High Courts declared these notices invalid, but also pointed out that the Income-Tax Department, if it so desired, was at liberty to invoke the new law, if the statute of limitation so permitted.
• Quashed notices were revived, and were deemed to have been issued under the amended law.

Way Forward: 

• Legitimacy: The Court was not encroaching on legislative functions but was also striving to give life to what were otherwise entirely illegitimate actions. 
• Fresh Round of Litigation: The notices under the old law were evidently issued keeping in mind the preconditions that law stipulated — as a result, this has only led to a fresh round of litigation.
• Article 142 of the Indian Constitution: The Court also invoked its most infamous power of Article 142 of the Constitution, which allows it to pass orders for “doing complete justice to a cause”. 
• Article 265 of the Indian Constitution: It forbids taxation without legislation. Courts should remain cautious for its legislative zone.

News Source: The Hindu

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