Legal Alert
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Substantive Amendment with Retrospective Operation
The
Gujarat High Court (the “Court”) vide its order dated July 02, 2012 (“Order”)
in the matter of Avani Exports v. Commissioner of Income Tax[1],
quashed the retrospective operation of the Taxation Laws (Second Amendment)
Act, 2005 (“Amendment”). The Amendment was quashed mainly on the grounds,
(i) of it being arbitrary in nature and thus in violation of Article 14 of the
Constitution of India; and (ii) that substantive amendment cannot be made with
retrospective operation. The Court further held that such restriction with
retrospective effect cannot be made to overcome the effect of the judicial
decision, without taking recourse to the provision of the appeal, as prescribed
by law.
Background
Facts and Allegations
·
Certain
benefits of deduction under Duty Entitlement Pass Book Scheme (“DEPB”) were
available to the assesses in terms of Section 80 HHC of the Income Tax Act,
1961 (“Act”), from the assessment year 1988-99 to the assessment year
2004-05. Section 80 HHC of the Act deals with deductions in respect of profits
retained for export businesses. As per the revenue department, the DEPB were to
be utilized by the importers to import, without paying duty. However, prior to
the Amendment, there were many exporters, who were claiming deductions of the
profits, earned by selling such DEPB credits in the market, which was not an
import-export activity. Such exporters relied on the view rendered by the Income
Tax Appellate Tribunal in the case of P.G. Enterprises Private Limited
v. DCIT[2], which according to respondent
was highly irrational and legally untenable. As per revenue department, the said
order gave rise to a spat of litigation and huge arrears of taxes; hence the
proposal to bring Amendment was moved and passed by the Parliament.
·
As
an effect of the Amendment, the benefit of deduction of the profit earned by
DEPB sale was denied retrospectively to exporters, who had turnover of
more than Rs.10 crore. Amongst those exporters, who had turnover of more
than Rs. 10 crore, only such exporters were allowed to claim benefit, who could
have proved that they had an option to choose either duty drawback or DEPB, and
they indeed chose DEPB. Further, the Amendment was sought to be enforced only
against those exporters whose assessment proceedings were still pending, either
before assessing officer or the appellate authority. Assesses whose assessments
have become final were not required to comply with the above conditions
and were allowed to avail the deduction under Section 80 HHC of the Act.
·
Petitioners
claimed that by the Amendment, respondents have taken away these benefits retrospectively
after the entire period of benefit was over on March 31, 2004. As per
petitioners, they settled their affairs based on availability of the said
benefit up to March 31, 2004. Petitioners had sought quashing of the Amendment inter
alia on the following grounds:
§ The Amendment grants conditional
benefits selectively to certain assesses, discriminating between the assesses
falling in the same class, which is violative of Article 14 of the Constitution
of India.
§ The conditions stipulated by the
Amendment under Section 80 HHC are arbitrary, capricious, unjust and
discriminatory, thereby violating both Articles 14 and Article 19(1)(g) of the
Constitution of India.
§
Substantive
amendment cannot be made with retrospective operation.
Rulings
·
Negating
the contention of the petitioner that the condition which required only such
dealer to pay higher tax, whose export turnover was beyond certain limit should
be held discriminatory, Court held that the classification based on export
turnover is a recognized way of classification throughout the world. The
dealers having higher turnover are in a position of economic superiority by
reason of their volume of business, therefore they form a class by themselves.
They cannot be treated on a par with comparatively small dealers.
·
However,
the Court accepted the contention of the petitioners that the condition which
provides for the deduction under Section 80 HHC to be claimed by only such
assesse, whose assessment has become final, violates Article 14 of the
Constitution of India. Court observed that in the matter of completion of
assessment, the assesses had little role to play. After the assesses had
submitted their returns within the time fixed by law, if for any reason the
revenue department delayed in finalizing the assessment, revenue department, on
account of its own delay cannot deprive one class of assessees of the benefits
of the deduction. Court held that there was no rationale nexus of such
classification with the object of the Amendment, and, therefore, such classification
failed the test of Article 14 of the Constitution of India, being a case of ‘palpable
arbitrariness’.
·
Accepting
the contention of the petitioner that Substantive amendment cannot be made
with retrospective operation, the Court made following observations:
“after
giving a benefit to the assesse, such benefit can definitely be curtailed but
the same must be effective from a future date and not from an earlier point of
time. Court further observed that if after inducing a citizen to arrange
his business in a manner with a clear stipulation that if the existing
statutory conditions are satisfied, he would get the benefit of taxation and
thereafter, the revenue department withdraws such benefit and imposes a new
condition which the citizen at that stage is incapable of complying,
whereas if such promise was not there, the citizen could have arranged his
affairs in a different way to get similar or at least some benefit, such
amendment must be held to be arbitrary.”
·
Making
certain important observations on the act of legislature of passing
retrospective amendment, so as to correct the wrong order of the tribunal,
Court observed that the revenue department had the right to challenge the
decision of the tribunal before the higher forum, but without challenging
the decision of the tribunal before High Court or Supreme Court, the revenue department
cannot curtail such benefits by proposing amendment and incorporating a new
provisions in the statute from an anterior date. Court held that curtailment
with retrospective effect cannot be made for overcoming the effect of a
judicial decision without taking recourse to the provision of appeal prescribed
by law.
·
For
the forgoing reasons, the Court quashed the Amendment, only to the extent that
the operation of the Amendment could be given effect from the date of the
Amendment and not in respect of earlier assessment years.
Analysis
·
The
Order should be welcomed not only because it provided much needed breather to
the exporters but also in the light of the various retrospective amendments
made every year through finance act, just to overcome adverse judicial
interpretations. The Court categorically has held that retrospective amendment
cannot be made to overcome adverse judicial decision. As the government is
certain to appeal against the Order in the Supreme Court, it will be
interesting to wait and watch the Supreme Court’s verdict.
·
Further,
the Order is significant in wake of recent retrospective amendment made by Government
of India to nullify Supreme Court’s verdict in the Vodafone judgment. Through
the retrospective amendment introduced in the Budget 2012-13, Government of
India had sought to tax indirect transfer of Indian assets overseas. This
retrospective amendment alarmed both domestic industry as well as foreign
investors.
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