Chandra Prakash Bhatia, IRS (IT: 2006)
Addl. CIT (ReAC) (Tech. Unit), Kolkata
chandra.p.bhatia@incometax.gov.in

Mr. Chandra Prakash Bhatia

Shri Chandra Prakash Bhatia, Additional Commissioner, is an IRS Officer of 2006 Batch. He has served in various units of Income Tax Department. He has been posted mostly in Bihar and Jharkhand and West Bengal. Though a science graduate, he has special interest in studying the ‘Medieval Financial History’. For last three years, he served in Gujarat and had a close view of the art, culture and history of this area. He is a member of the Editorial Board of Taxalogue. At present, he is posted as Additional Commissioner (Technical Unit), ReAC, Kolkata.

Executive Summary

From the ancient time, retrospective law or ex post facto law has been a part of standard jurisprudence. It is neither an Indian creation, nor it is being used exclusively in India. Instances of its application to the International law as well as to the domestic laws of many countries have been cited in the article. In principle, retrospective criminal laws are highly disapproved and discouraged. Retrospective amendments have been frequently used in Revenue laws, sometimes to annul its interpretation by Courts and sometime to prevent its misuse. In India, it is within the power of Hon’ Supreme Court to examine the validity of laws enacted by the Union Government. Several examples of retrospective amendments and the need for such an amendment to the Income Tax Act have been discussed in the article. The most interesting examples are the amendments, which had to be made in the phased out laws so as to make its current and modified forms of enactments stand the test of legality. Report of the Twelfth Law Commission on Income Tax Reforms, submitted to the Government in 1958 has also been discussed in detail. Our present Income Tax Act 1961 has been based on most of such recommendations.

Keywords for the Article on Restropective Amendments

Advance tax, Australia, Company tax, Constitution, Harbour, Income Tax Act, India, IPC, ITO, Law Commission, Leviathan, Lord Macaulay, Lord Mansfield, Non resident, Nuremberg Trials, Previous year, Relief, Recovery, Retrospective, Supreme Court, Supreme Court, Tax demand, Thomas Hobbs, Validation, William Blackstone

Important Sections

9, 115JB, 234b, 220, 222, 250, Article 19 of Constitution

“That, on great emergencies, the State may justifiably pass a retrospective act against an offender, we have no doubt whatever. . . .”

—Lord Thomas Babington Macaulay

Hallam, Sept. 1828

Thomas Babington Macaulay, later known as Lord Macaulay, is best known for his introduction of English and western concepts to education in India. He was appointed as the first Law Member of the Governor-General’s Council and served between 1834 and 1838. His final years in India were devoted to the creation of a Penal Code as the leading member of the Law Commission. This code, known as IPC, is still in force, despite several changes.

Retrospective law or an ex post facto law is one that retroactively changes the legal consequences of actions that were committed, or relationships that existed, before the enactment of the law. In criminal law, its effect may criminalize action that was legal when committed. Further, it may aggravate a crime by bringing it into a more severe category than it was in at the time it was committed. This may result into change of punishment prescribed for a crime by adding newer penalties or extending sentences; or it may alter the rules of evidence in order to make the probability of conviction for a crime higher. In Jurisprudence, retrospective criminal laws are highly disapproved and discouraged.

In Leviathan, Thomas Hobbes wrote in 1651 that ‘Harm inflicted for a fact done before there was a law that forbade it, is not punishment, but an act of hostility: for before the law, there is no transgression of the law’.

William Blackstone wrote in his Commentaries on the Laws of England (in 1765–69)- “[h]ere it is impossible that the party could foresee that an action, innocent when it was done, should be afterwards converted to guilt by a subsequent law; he had therefore no cause to abstain from it; and all punishment for not abstaining must of consequence be cruel and unjust.

All laws should be therefore made to commence in future, and be notified before their commencement. On the global perspective, use of retrospective in law-making is not new. Some important cases, outside India, are being discussed below:

THE NUREMBERG TRIALS

After conclusion of the World War II, thirteen separate trials of war criminals were held in Nuremberg between 1945 and 1947. These trials were presided over by judges from all four major victorious allied powers: America, Britain, France and the Soviet Union. A total of 177 Germans and Austrians were indicted. All but 35 were found guilty: 25 were executed, 20 were sentenced to life imprisonment and 97 were sentenced to shorter prison terms. These trials represented a large-scale prosecution of Nazis, who pleaded the defence of superior orders. In previous war trials, after previous wars, this defence was generally held to be available to subordinate soldiers. Before World War II, prosecutions for war crimes were limited to heads of State, and to high-ranking military commanders only. The defence of being duty bound to follow orders from above was an accepted norm recognized by the international community. In convicting lower-ranking soldiers the Nuremberg trials were, in a sense, was applying international law retrospectively.

At the trials they were told that their actions were crimes against humanity. Such actions were criminal even though they were not in breach of settled international law. Despite their objections, most jurists justified the behaviour of the Nuremberg court by holding that the actions of the Nazis were immoral.

SHAW VS. DIRECTOR OF PUBLIC PROSECUTIONS

In 1961, the House of Lords handed down a decision in Shaw vs. Director of Public Prosecutions which caused heated discussion amongst lawyers and lawmakers. Shaw had published a booklet called the Ladies’ Directory, which advertised the names and addresses of prostitutes. Shaw was successfully prosecuted under a number of provisions of the Sexual Offences Act 1956 and the Obscene Publications Act 1959. He was also convicted on a charge of ‘conspiracy to corrupt public morals’ on the basis that by published the booklet, Shaw was conspiring with the prostitutes ‘… to debauch and corrupt the morals of youth and other subjects of the Queen.”

Shaw petitioned to the House of Lords, claiming that the crime of conspiracy to corrupt public morals was hitherto unknown. The majority built their argument upon the notion; put forward by Lord Mansfield almost two hundred years earlier, that the courts are ‘guardians of public morals’ and that they ought to restrain and punish ‘… whatever is contra bonos mores et decorum.

BOTTOM OF THE HARBOUR

In Australia around 1970, a complex method of avoiding company tax was increasingly being adopted. The method involved transferring of assets before tax became payable. Sometimes another company not having sufficient assets was floated purposefully which was legally liable for such tax. These schemes were known ‘bottom of the harbour’. In the late 1970s the legality of these activities was not clear under the existing law. However, such schemes became popular to avoid or minimize tax liabilities. It was perceived illegal by enforcement agencies.

In 1980, the Crimes (Taxation Offences) Act 1980 made it a criminal offence for a natural person to be a party to, or aid and abet, arrangements to make a company or trustee incapable of paying its taxation debts. Penalties for a breach of the Act were originally five years’ imprisonment or a $50,000 fine, and in 1986 both penalties were doubled. This Act drew much criticism. Some argued that tax evasion was not ‘criminal’ in the generally accepted sense; that tax evaders were ‘white-collar’ offenders, and that the harsh penalties under the Act were unjustified. It is true that tax evasion had been, during the eighteenth and nineteenth centuries, seen as something less than criminal. As the obligation to pay tax was seen as a civil obligation, any legislation which recovered unpaid tax could hardly be seen as criminal legislation.

Soon, the Commonwealth Parliament (Australian Federal Parliament) passed a series of related Acts; the most important of it was the Taxation (Unpaid Company Tax) Assessment Act 1982. This Act aimed to recover tax evaded under the Crimes (Taxation Offences) Act 1980. It was significant as it was explicitly retroactive: tax could now be recovered from ‘bottom of the harbour’ schemes which were entered into before the 1980 Act was passed. But, despite the criticism, there is no doubt that the 1980 legislation made certain tax evasion schemes criminal.

In the above cases, it is interesting to note that the principle of ‘equity and fairness’ was employed to justify a retroactive law against the defaulters.

INDIAN CONTEXT

In India, the first important challenge to retrospective changes being made was by way of challenge to amendment in 1951 imposing a duty on a manufactured tobacco which was brought into force retrospectively i.e. from the date of the introduction of the Bill and not from the date in which the law came into force. This legislation was challenged in the Court on two counts. The first was that the State legislature lacked the legislative competence to enact a sales tax law with retrospective effect. The argument was that sales tax was primarily an indirect tax, the essential feature of which was that its burden could be passed on to the consumer. Where it was imposed retrospectively, the burden of the past could not be so passed on to the consumer and therefore it ceased to be an indirect tax and for that reason was unconstitutional. The Supreme Court accepted that tax laws were subject to the discipline of Part III of the Constitution (Fundamental Rights). However the Indian Supreme Court held that mere retrospectiveness would not render a tax law arbitrary and capricious. [Chhotabhai Jethabhai Patel and Co vs The Union of India and Another, decided on 11 December 1961, 1962 SCR Supl. (2) 1]

In the case of CST vs Billion Plastics (P.) Ltd. (S.T. Reference No. 10 of 1991, 22 February 1995), Hon’ble Bombay High Court held that if a dealer makes purchase of taxable goods from a person who is not a dealer in those goods at all (i.e., neither a registered nor an unregistered dealer), then levy of purchase tax in terms of Section 13 of the Bombay Sales Tax Act will not be attracted.

An example for retrospective law in India is the Karnataka Schedule Caste and Scheduled Tribes (Prohibition of Transfer of Certain Lands) Act 1978. It is an Act to provide for the prohibition of transfer of certain lands granted by the government, to persons belonging to the scheduled castes and scheduled tribes in the state, which means any land granted to the landless agricultural labourers belonging to scheduled castes and scheduled tribes, cannot be purchased. Provisions of this Act override any other Act. Anyone who purchases such a property will not get clear and marketable title; such property will be eventually acquired by Government and returned to the original owner without any compensation to the purchaser. This law which was introduced in 1978 is retrospective in nature and is considered an ex-post facto law. Even law of limitation does not apply to it. Hon’ble Supreme Court has recently declared that land allotted to nomadic tribes or members of the Scheduled Castes and Scheduled Tribes in Karnataka cannot be transferred or sold without prior permission from the government.

Such cases in huge numbers are pending across the State of Karnataka. International Real Estate Companies have expressed concern about investing in Bangaluru, as this law does not have a limitation or expiry time period.

APPLICATION OF RETROSPECTIVITY TO INDIAN INCOME-TAX ACT

The first much debated retrospective amendment was in 1983. The Income-tax Act conferred a tax exemption upon new industrial undertakings as percentage of capital employed in such undertakings. Since the inception of the exemption, a rule had been in place for computation of the capital employed (assessee was not entitled to relief under Section 80J in respect of borrowed capital as the same cannot be included in self-employed capital). This rule was struck down by various high courts as being inconsistent with the parent Act insofar as it provided for excluding long-term liabilities from the computation of capital employed. Parliament retrospectively amended the parent statute itself and engrafted the rule in the parent statute. This retrospective amendment was challenged on the ground that business undertakings had altered their position acting on the face and belief that the parent law would prevail and that the rules that were plainly inconsistent would be ignored, and therefore if the law was now retrospectively altered to ratify as it were rules that were illegal, it would seriously upset settled affairs and thus be harsh and burdensome.

The majority judgment held the rules were valid even as they were framed, and therefore the retrospective amendment was really clarificatory in nature. The issue of such a challenge to retrospectively was not decided by the majority. The dissenting judgment which accepted the proposition that the original rules were ultra-vires, struck down the retrospective amendment to the statute is being an unreasonable restriction on of the right to carry on business. [Lohia Machines Ltd and Anr vs. Union of India (1985) 152 ITR 308 (SC)]

A case involving partition of Hindu Undivided Family, Hon’ble Supreme Court in Govinddas vs. Income-tax Officer [1976] 103 ITR 123 (SC) was decided by Justice P.N. Bhagwati, Justice A.C. Gupta and Justice S. Murtaza Fazal Ali in December 1975. The question of law put up was, “Whether Sub-section (6) of Section 171 of the 1961 Act applies only to situation where assessment of HUF is under Section 143 or Section 144 of I-T Act 1961, and not to situation where assessment of HUF is completed under corresponding provisions of the 1922 Act – Held, yes. Whether, therefore, where assessments of HUF for assessment years in question were completed in accordance with provisions 1922 Act which included Section 25A, ITO was not entitled to avail of provision enacted in Sub-section (6), read with Sub-section (7), of Section 171 of 1961 Act for purposes of recovering tax or any part thereof personally from any members of joint family – Held, yes.

The government amended Section 115JB of the Income-tax Act to ensure that MAT provisions are not applicable to a foreign company that does not have a permanent establishment in the country and was a resident of a nation having a double taxation avoidance agreement (DTAA) with India. Explanation under Section 115JB was inserted by the Finance Act 2008, retrospectively w.e.f. 01 April 2001.

Vodafone Case: The proposal was to allow the country to retrospectively tax cross-border transactions in which the underlying assets are located in India. Under the proposed amendment, all persons, whether resident or non-residents, having business connection in India, will be required to deduct tax at source and pay it to the government even if the transaction is executed on a foreign soil. The Finance Act 2012 amended the Income-tax Act, 1961 by adding Explanation 4 under Section 9(1) with retrospective effect from 01April 1962. The amendments had implications for British telecom giant Vodafone, which won the Rs 11,000 crore tax case in the Supreme Court. In view of the implications of the proposed amendments on overseas deals, it attracted very high attention in media.

Also, with a retrospective amendment by the Finance Act 2001, the Government disallowed expenses incurred in earning exempt income (Section 14A) retrospectively from 01 April 1961. However, reopening of past cases was prohibited.

Section 234B (charging of interest on regular assessment was also amended by the Finance Act 1995, retrospectively w.e.f. 01 April 1989.

The retrospective amendments to substantive income-tax provisions, which made the greatest impact was perhaps, brought in by the Finance (No. 2) Act 1980. This Act amended Sections 35, 80J (omitted w.e.f. 01 April 1989) and 80M (omitted w.e.f. 01 April 2004) with retrospective effect from 01 April 1961, 01 April 1972 and 01 April 1968, respectively. Section 80M was amended by inserting Section 80AA into the Act (omitted w.e.f. 01 April 1998). It seems that the amendment to Section 80M was sought to overturn the effect of a Supreme Court decision in ITO vs. Segu Buchiah Setty [(1964)52 ITR 538]. The issue related to Section 222, read with Sections 250 and 220, of the Income-tax Act 1961 [Corresponding to Section 46(2), read with Sections 31 and 45, of the Indian Income-tax Act 1922] on the issue of Recovery and Collection of Tax and Certificate Proceedings.

The question referred to Hon’ble Supreme Court in relation to Assessment Years 1953-54 and 1954-55 was-Whether on ITO’s order being revised in appeal, default based on it and all consequential proceedings must be taken to have been superseded and fresh proceedings have to be started to realize dues as found by revised order-Held, yes.

CONSTITUTIONAL PROVISIONS IN INDIA

As for India, it is within the right of the courts to evaluate the reasonableness of the retrospective amendment of law in light of the above mentioned principle to ascertain whether it violates the provisions of Article 19(1)(g) of the Constitution (to practice any profession, or to carry on any occupation, trade or business) so as to declare it as unconstitutional. If a retrospective amendment of law is a direct interference with the principle laid down by the Hon’ble Supreme Court, then it would be struck down as unconstitutional and invalid. Thus, the might of the State must stand behind court orders for the survival of the rule of the court in the country.

NOVA CONSTITUTIO FUTURIS FORMAM IMPONERE DEBET NON PRAETERITIS

In the words of Lord Blanesburgh, the provisions which touch a right in existence at the passing of the statute are not to be applied retrospectively in the absence of express intendment or necessary intendment.

In order to qualify as a ‘retrospective law’ the words used must expressly provide or necessarily connote retrospective operation, otherwise, it will be deemed prospective.

TWELFTH REPORT OF THE LAW COMMISSION ON THE INCOME-TAX ACT

The Twelfth Report of the Law Commission on the Income-Tax Act was forwarded to the Union Minister of Law and Justice, Ministry of Law and Justice, Government of India by M.C. Setalvad, Chairman, Law Commission of India, on 26 September 1958. Para 5 of the forwarding letter mentioned that, “The Commission wishes to acknowledge the services rendered by Shri S.A.L. Narayana Row, Commissioner of Income-tax, Shri N. Srinivasan, Deputy Secretary in the Ministry of Finance, and Shri K.N. Srivastava, Income-Tax Officer in connection with the preparation of this Report.

Retrospective amendments are not a new feature arising only after the enactment of the Income-tax Act 1961 (‘the 1961 Act’). Even before that Act, retrospective amendments did happen, albeit largely for procedural issues. However, before enactment of the Income-tax Act 1961, two interesting amendments were carried out with effect from 01 April 1922.

TWO VERY INTERESTING RESTROPECTIVE AMENDMENTS

Introduction of Section 60B in the Indian Incometax Act 1922

Section 60B of the Indian Income-tax Act 1922 says, “Tax may be levied for period other than previous year or deducted at source or paid in advance, wherever so provided.” [Inserted by the Act 28 of 1960, Section 10 (with retrospective effect).]

The Commission had conducted a full review of the 1922 Act. Its Report documented included a draft Bill which, in due course, became  the 1961 Act. Such amendment had also become necessary in view of the decision of Hon’ble Madras High Court in CIT vs. V.E.K.R. Savumiamurthy (1946) 14 ITR 185 (Madras). [Ratio of this case was later approved by Hon’ble Supreme Court in (1970) 77 ITR 123 (SC)]. The Commission has discussed its proposal in detail on page 326 of its report.

In short, the Commission proposed the introduction of:

(a) the proviso to Sub-section (1) of Section 4 of the 1961 Act (Section 3 in the draft Bill); and, (b) a new Sub-section (2) in that Section. Important point for consideration was the difficulty noticed in sustaining the legality of the recovery of the tax on the current income under Scetion 18 and 18A [Sections 18 and 18A of the 1922 Act dealt with tax deduction at source, and advance tax].

Further, as regards item (b) above: Sub-clause (2) was intended to make it clear that there is some kind of liability to pay tax in cases where tax is deductible at source or payable in advance. It seems desirable to make a reference to this obligation to pay tax in advance etc. in the charging section itself, so as to bring out more directly a position which is implied in existing Sections 18 and 18A.

In effect, the Commission said that the procedural sections could not apply in a case where there was no substantive levy of tax. The tax could be recovered, in advance or by deduction, only if, and to the extent that, it was levied or leviable. And it was found difficult to sustain the legality of any recovery in excess of the tax leviable.

The doubt about the legality was found to be so serious that not only did Parliament enact the recommended provisions in the 1961 Act in due course, but it also enacted them retrospectively in the 1922 Act.

Section 10 of the Taxation Laws (Amendment) Act 1960, introduced both the proposed provisions as Section 60B in the 1922 Act, stating that the section ‘shall be inserted, and shall be deemed always to have been inserted.’ In effect, the amendment, made in 1960, applied from 01 April 1922.

The doubts expressed by the Law Commission as to the validity of tax recovery provisions were serious and valid, as is shown by the fact that a retrospective amendment was considered necessary by the Parliament.

The clear proposition which emerges from the introduction of this provision is that all the provisions relating to the collection and recovery of tax, whether by way of advance tax, the deduction of tax at the source, or otherwise, need to be tested for their validity with reference to the tax actually chargeable in each case. The wider proposition on which it is based is that procedural provisions cannot go beyond the substantive charging provisions.

Validation of Recovery Proceedings

A similar procedural infirmity came to light in the case of ITO v. Seghu Buchiah Setty decision of the Hon’ble Mysore High Court in case of Seghu Buchiah Setty 1960) 38 ITR 204 (Mys) later confirmed by Hon’ble Supreme Court in[(1964) 52 ITR 538 (SC)], Hon’ble Supreme Court in its order invalidated demand notices in certain circumstances.

The problem faced was so serious that the Parliament had to enact the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act 1964. Section 5 of the Act states, “The provisions of this Act shall apply and shall be deemed always to have applied, in relation to every notice of demand served upon an assessee by any Taxing Authority under any scheduled Act whether such notice was or is served before or after the commencement of this Act.” It means that the provisions would not only be retrospective, as regards the 1961 Act, but also as regards the 1922 Act. In effect, this amendment has application from 01 April 1922, though it has been enacted after the Indian Income-tax Act 1922 was repealed.

CONCLUSION

In fact the problems arising due to frequent amendments of the Income-tax Act has been pointed out on the very first page of the ‘Twelfth Report of the Law Commission on the Income-tax Act’ submitted to the Government on 26 September 1958 (Introduction part) as follows, “The amendments to the Income-tax Act have been so short-sighted and so short-lived as to rob the law of that modicum of stability which is essential to its healthy growth. Before the provisions of the Act can be sufficiently clarified by the judicial process, new provisions are substituted in their place. In legislation as in other fields of human activity, it is well to bear in mind the dictum of Bacon, “Tarry a little, so, that we may make an end the sooner.” Stability is most essential to the proper administration of a taxing statute, and if the tax structure of this country is to be put on a sound footing, it is essential that a halt should be called to the, making of ill-digested amendments in a frenzy of hurry which has characterized the history of income-tax law of the last few years.”

Some retrospective amendments are always required either to prevent the misuse of law or to harmonize various decisions of honourable courts with the statutes. One can now realize as to how far-looking our lawmakers were in the past and how much attention was paid to the legal drafting, as compared to present time.

Source- Taxalogue 3- April to June 2020

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