The Retrospective Notoriety

A recent judgment by Hon’ble Income-tax Appellate Tribunal (hereinafter referred to as ‘ITAT’ or ‘Tribunal’), Mumbai in the case of Maria Fernandes Cheryl [1] has stirred the Indian income-tax universe again with its intriguing take on retroactive operation of amendments in Income-tax Act, 1961 (‘Act’).

Facts of the case

• A non-resident assessee sold her capital asset, being flat for a consideration for INR 75,00,000 during financial year 2010-11 [relevant assessment year (‘AY’) being 2011-12]. The capital gains were computed by treating the sale consideration at INR 75,00,000 and accordingly, offered to tax.
• The stamp duty value (‘SDV’) of the flat was assessed at INR 79,91,500.

Contentions of the Learned Assessing Officer (‘AO’)

• The AO invoked deeming fiction as provided under section 50C of the Act and considered SDV to be the full value consideration for the purpose of computation of capital gains and consequent tax thereon.
• The AO highlighted the fact that relaxation in respect of the deeming fiction as provided in the ‘third proviso to section 50C(1) of the Act’[2] was prospectively inserted by Finance Act 2018 (with effect from 1 April 2019). The proviso was further amended by the Finance Act 2020 (with prospective effect from 2021), in as much as the tolerance band of 5% was increased to 10%. To substantiate, the AO relied upon the text of Finance Acts and respective explanatory notes. Accordingly, such a relaxation should not apply in the instant case.
• Interestingly, the AO also requested the Hon’ble members of ITAT that in an event where such relaxation may be bestowed upon the assessee, to mention in the ruling itself that relief is being provided as a special case and this decision may not be considered as a precedent.

Ruling by the bench[3]

• The Tribunal discussed Circular No. 8 of 2018 as issued by Central Board of Direct Taxes, wherein, reasons for insertion of said proviso vide Finance Act 2018 has been comprehensively discussed.The proviso curbs genuine hardship to assessee on account of variation in SDV and actual consideration (owing to bonafide factors such as shape or location of land/ building). The Tribunal regarded the hardship as ‘unintended consequence’ where there was a little justification for invoking an anti-avoidance provision and which was eventually, being corrected by way of the said proviso.
• However, there is no good reason for holding the curative amendment to be only as prospective in effect.
• ITAT relied upon a ruling[4] wherein, in respect of a different provision, it was pronounced that in view of the well settled legal position to the effect that a curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically, the insertion of such an amendment must be given retrospective effect from the point of time when the related legal provision was introduced.
• In respect of the enhanced tolerance band to 10%, the ITAT went on to applaud the government for their responsiveness to the concerns of taxpayer and ruled that there is no particular reason to justify any particular time frame for implementing this enhancement of tolerance band. In other words, genuine hardship owing to variation in consideration due to bonafide factors (as discussed above) was as much valid in 2003 (i.e. the year in which section 50C of the Act was first enacted) as it is in 2021. There is no variation in the material facts in this respect in 2021 vis-à-vis the material facts in 2003.
• Lastly, the ITAT stated that treating the present case to be special and the request to not treat it as a precedent violates the cherished principle of ‘equality before the law’ to the core. The judicial functioning needs to be transparent, predictable and even-handed and an issue settled upon must hold good for other similarly placed litigants as well.

Author’s note

• Retroactive operation of provisions has its own fair share of controversies in the world of litigation.
• This trend of retrospectivity in statutes first came to light in the case of Chhotabhai v Union[5], wherein through a retrospective amendment, duty was sought to be imposed on manufactured tobacco from the date of the introduction of the Bill.
• The Hon’ble Apex court of India in the case of Commissioner of Income Tax vs. Vatika Township[6] has laid down general principles governing retrospective operation of legislations.

Among other principles, it states that if legislation confers a benefit on some persons but without inflicting a corresponding detriment on some other person or on the public generally and where to confer such benefit appears to have been the legislators object, then the presumption would be that such legislation, giving it a purposive construction, would warrant it to be given a retrospective effect. This exactly is the justification to treat procedural provisions as retrospective.

Having said the above, one may clearly infer that the ITAT ruling is in line with the principle, even where the amendment had been made prospective in nature explicitly via the Finance Act.

• ‘Doctrine of fairness’ is another principle that toils for the benefit of taxpayer as the ruling abundantly makes it clear that a prospective operation of amendment would undeniably be disadvantageous to scenarios falling before the date of amendment, owing to the fact that genuine hardship has been ubiquitous since introduction of the original provision itself.
• The ruling is yet another one in the series of pronouncements going beyond the literal construction, to interpret the law in a much more logical manner.

Notes:-

[1] ITA No. 4850/Mum/2019

[2] “Provided also that where the value adopted or assessed or assessable by the stamp valuation authority does not exceed one hundred and five [Word ‘ten’ shall be substituted for ‘five’ by the Finance Act, 2020] percent of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of section 48, be deemed to be the full value of the consideration.”

[3] Shri Saktijit Dey along with Shri Pramod Kumar (Vice President – Mumbai ITAT) passed the ruling. Shri Pramod Kumar is known for his attention to detail and wise selection of words in his pronouncements.

[4] Rajeev Kumar Agarwal Vs ACIT [(2014) 45 taxmnann.com 555 (Agra)]

Other case laws relied upon by the Tribunal:

(a) CIT Vs Ansal Landmark Township Pvt Ltd [(2015) 61 taxmann.com 45 (Del)]

(b) Dharmashibhai Sonani Vs ACIT [(2016) 161 ITD 627 (Ahd)]

(c) CIT Vs Vummudi Amarendran [(2020) 429 ITR 97 (Mad)]

[5] 1962 Supp 2 SCR 1

[6] 2014-TIOL-78-SC-IT-CB