It has been an age-old practice of Indian legislators to amend the tax laws which have the effect of overturning the decisions of the courts of the land. The most perplexing one was the amendment brought about by the Finance Act 2012 which overturned the landmark Supreme Court ruling in favour of UK-based Vodafone Plc. The retroactive amendment stunned foreign investors, who have been vociferously complaining about lack of certainty in the way tax laws are applied in India. Such legislative changes essentially tweak language, generally by inserting an “explanation”, that is designed to remove the basis of judicial decisions.
Continuing the tradition, Finance Bill, 2022 has proposed certain amendments in the Income-tax law which, once approved, will overturn various judicial decisions. While the constitutional validity of some of the proposals might be challenged before the courts, the purpose of this article is to analyse the implications of such amendments proposed by Financial Bill 2022.
As per section 40 of the Act certain amounts are not deductible while computing the income chargeable under the head “Profits and gains of business or profession”. This includes any sum paid on account of any rate or tax levied on the profits or gains of any business/ profession under section 40(a)(ii) of the Act.
The legislative history bears out that the Income Tax Bill, 1961, as introduced in the Parliament, had the word “cess” along with the words “rate or tax” in section 40(a)(ii) However, when the matter came up before the Select Committee of the Parliament, it was decided to omit the word “cess” from the aforesaid clause from the Income Tax Bill, 1961. The effect of the omission of the word “cess” is that only any rate or tax levied on the profits or gains of any business or profession are to be disallowed while computing the income chargeable under the head “profits and gains of business or profession”. The Central Board of Direct Taxes (CBDT), by its circular1, had further clarified that the effect of the omission of the word ‘cess’ is that only taxes paid are to be disallowed in the assessments for the year 1962- 63 and onwards.
Hon’ble Rajasthan High Court in the case of Chambal Fertilizers & Chemicals Ltd2 and the Hon’ble Bombay High Court in the case of Sesa Goa Limited3 have decided the matter in favor of the taxpayer by holding that ‘education cess’ can be claimed as an allowable deduction while computing the income chargeable under the head
“profits and gains of business or profession”. Following the decisions of High Courts, various tribunals have allowed deduction on account of payment of “Cess”.
However, the Bill proposes to insert an Explanation retrospectively from assessment year 2005-06, in the Act itself, to clarify that for the purposes of the relevant provisions, the term “tax” includes and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax. Amendment is made retrospectively to make clear the position irrespective of the circular of the CBDT.
Many of the taxpayers, while computing their income under the head “income from business or profession”, have claimed a deduction of education cess based on the interpretation of the existing law. Some of the taxpayers have also opted to claim such deductions based on the rulings of the High Courts. This proposal will negatively impact all those taxpayers who have claimed a deduction of the surcharge and education cess. However, the favourable rulings by the High Courts and tribunals can be used as defense during the penalty proceedings, if initiated by the tax authorities.
Any expenditure incurred in relation to earning exempt income is not allowed as deduction under section 14A of the Act. There has been a long drawn litigation between the tax department and the taxpayer on various issues relating to this section. One of the issues is whether there should be any disallowance under section 14A if there is no exempt income during the year.
It is a settled position in law as laid down by the Hon’ble Supreme Court4 and various High Courts, that if there is no exempt income during a year, no disallowance under section 14A of the Act can be made for that year. Various High Courts have also taken a similar view.
The Bill has proposed to overturn this settled position by clarifying that expenditure pertaining to exempt income shall not be allowed irrespective of whether the exempt income is earned during the year in which the expenditure is incurred. After this amendment, even in absence of any exempt income during the year, the expenditure pertaining to it could be disallowed. However, unlike the previous amendment, this amendment will be applicable prospectively with effect from 1st April, 2022.
Section 43B of the Act provides that certain deductions are allowed only on actual payment which include interest payable on loan or borrowing from specified financial institution/NBFC/scheduled bank or a co-operative bank. As per the provisions of the section, the interest which has been converted into a loan or borrowing or advance shall not be deemed to have been actually paid.
Hon’ble Supreme Court. in case of M.M. Aqua Technologies Ltd5, treated the issue of debentures as actual payment of interest under Section 43B of the IT Act.
However, the bill proposes to overturn the decision of the Supreme Court by amending Explanations to section 43B to provide that conversion of such interest into debenture or any other instrument by which liability to pay is deferred to a future date, shall also not be deemed to have been actually paid.
The proposed amendment may adversely affect those distressed companies which are going for loan restructuring. However, this amendment will take effect from 1st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years.
Bonus stripping is a concept where an investor buys cum-bonus securities and sells them off after bonus date and books notional loss. In case of dividend stripping, an investor buys cum-diviend securities and sells them off after dividend date and books notional loss.
Section 94 of the Act contains anti avoidance provisions to deal with transactions in securities and units of mutual funds, which restricts the allowability of loss arising out of such transactions. While the provisions pertaining to “dividend stripping” are applicable to both units and securities, provisions pertaining to “bonus stripping” are applicable only to units.
Bangalore Income-tax tribunal in the case of Sri. B.G. Mahesh6 ruled in favor of the taxpayers by holding that in the case of bonus stripping, shares have been either consciously or unintentionally not included in the ambit of section 94(8) of the Act and therefore the disallowance of loss is not sustainable.
The bill proposes to amend sub-section (8) of section 94, pertaining to the prevention of tax evasion through bonus stripping, so as to make the said provision applicable to securities as well. The aforementioned rulings would stand overruled by this proposed amendment.
Surprisingly, this amendment will take effect from 1st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years.
Section 263 of the Act empowers the Principal Chief Commissioner/Chief Commissioner/ Principal Commissioner/ Commissioner to revise any order passed by the AO if it is erroneous in so far as it is prejudicial to the interests of revenue.
Hon’ble Mumbai Tribunal7 has held that the Commissioner has no jurisdiction under Section 263 of the IT Act to revise the order issued by the Transfer Pricing Officer.
Section 263 of the IT Act is proposed to be amended to include the order passed by the Transfer Pricing Officer within its ambit. This, amendment is proposed to come into effect from April 1, 2022, and accordingly, would apply in relation to AY 2022-23 and thereafter.
While the legislator may be within its power to bring amendments in the law to overturn the judicial decisions in order to clarify the intention of the legislature, in many of the cases, such amendments should be avoided to bring much needed certainty in the tax laws.
As far as retrospective amendments are concerned, the Apex Court on earlier occasions, declared that the legislature cannot overrule any decisions of the judiciary by retrospective amendments because that would amount to violating the concept of separation of powers between the legislature and judiciary in the country. Therefore, the legislature must ensure that retrospectively amendments in the tax laws are brought in only in rare cases and only when it is extremely necessary.
Manish Agarwal is a chartered accountant and a registered valuer. He can be reached at firstname.lastname@example.org or +91- 75062 71888
1. Circular No. F. No.91/58/66-ITJ(19), dated 18th May, 1967
2 Chambal Fertilizers & Chemicals Ltd Vs. JCIT D.B Income-tax Appeal No. 52/2018 decided on 31-07-20181 Circular No. F. No.91/58/66-ITJ(19), dated 18th May, 1967
3 Sesa Goa Limited Vs. JCIT (2020) 117 taxmann.com
4 in the case of CIT vs. Chettinad Logistics (P.) Ltd  95 taxmann.com 250 (SC), PCIT vs. GVK Projects and Technical Services Ltd ( 106 taxmann com 181 (SC) and PCIT vs. Oil Industry Development Board ( 103 taxmann.com 326 (SC
5 129 taxmann.com 145
6 Sri. B.G. Mahesh, Bangalore vs Department Of Income Tax  (43 taxmann.com 158)
7 In the matter of JCB India Limited, 2022 (1) TMI 1198, Tata Communications Limited, 2014 (5) TMI 114 and Essar Steel Limited, 2014 (4) TMI 809 and