The Hindu Business Line : Prospective versus retrospective amendments

While tax laws by themselves are complicated, even more so are the provisions of the Income-Tax Act, 1961. Even after five decades there is uncertainty with regard to interpreting both the substantive and procedural provisions of the law. The focus and battle lines have shifted from domestic tax to international tax.

Retrospective amendments to the law completely upset the applecart and make a mockery of business models which take into account certain concessions and incentives. Despite repeated representations not to make retrospective amendments, the usual quota ofamendments are made every year.

Recently, the Special Bench of the Delhi Tribunal, in the ITO New Delhi vs Ekta Promoters Pvt Ltd (ITA Nos 2551, 2552 and 2553/Del/2006 dated July 11, 2008) case, had to consider whether the levy of interest under Section 234D of the Act from June 1, 2003, will have retrospective application case.

Facts and decision

The only set of facts in this important case is that the I-T department sought to levy interest under Section 234D for assessment years (AYs) 1998-99 to 2000-2001 by issuing notices under Section 148 of the Act.

The company contested the levy and the CIT (Appeals) held that interest under Section 234D could not be charged for AYs before June 1, 2003. The department took the matter to the Tribunal. The Special Bench of the Tribunal held that levy of interest under Section 234 can be applied only from AYs 2004-2005 onwards and not for the earlier years.

The Bench reasoned that “there is no dispute to the proposition that a court cannot read anything into a statutory provision which is plain and unambiguous. A statute is the edict of the legislature. The language employed in a statute is determinative of the legislative intent and according to the first and primary rule of construction, the intention of the legislation must be found in the words used by the legislature itself and the function of the court is only to interpret the law and the court cannot legislate. If a provision of law is misused and subjected to the abuse of the process of law, it is for the legislature to amend, modify or repeal it, if deemed necessary.

“Legislative causus omissus cannot be supplied by judicial interpretative course. Thus, on the basis of argument that legislature has brought this provision just to fill the lacuna in the law and therefore these provisions should be construed retrospective cannot be accepted more particularly when these provisions have been inserted on the statute w.e.f. June 1, 2003, and not with retrospective effect. The legislature has specifically mentioned the date of applicability, that is, June 1, 2003, and the legislator was not incompetent to make retrospective provision, if it was so intended. Therefore, merely on the basis of interpretation, retrospective effect cannot be given to the provisions of Section 234D.”

Accordingly, the Special Bench held that the levy on interest under Section 234D of the Act would apply prospectively from AY 2004-05 onwards.

Provisions and analysis

Section 234D of the Act was introduced by the Finance Act, 2003 effective June 1, 2003, wherein an assessee getting a refund under the provisional assessment and liable to pay up the same on the regular assessment is liable to return the same with interest at 18 per cent per annum from the date of the refund to the date of the regular assessment.

The objective of this levy is to prevent assessees from enjoying free money in their hands without interest. There is no major concern on the levy per se. The issue became controversial when the department sought to apply the provision for past assessment years. The general principle is that provisions in a statute would operate prospectively unless retrospective operation is expressly provided for. This principle is laid down in Govind Das vs ITO (103 ITR 123 SC) and Sharma vs (ITO 254 ITR 772 SC).

Courts have on several occasions held that retrospective legislation can be held invalid on the ground that it is unreasonable or beyond the legislative competence. A new levy of interest is clearly a substantive provision. It is introduced to achieve a particular objective and take care of situations where refunds are held by assessees for a period and in the case of a demand returned without interest, for the period in their custody.

The Finance Act of 2003 made it abundantly clear that it comes into effect from June 1, 2003. It is also settled law that penal laws cannot generally have retrospective operation. This is confirmed by CIT vs Hindustan Electro (243 ITR 48 SC) and DCIT vs Ashok Paper (256 ITR 673).

The debate on retrospective and prospective application of amendment is endless and in a taxing statute the demand for the earlier years on account of the retrospective application of law can wipe out the net worth of companies. Assessees typically want the best of both worlds — any new incentive to be retrospective and a fresh levy, prospective.

The solution possibly lies in balancing the two and making it clear that any new levy or change has to be only prospective.

(The author is a Partner, Global Tax and Advisory Services, Ernst & Young.)