Application of promissory estoppel

The revised tax treaty with Switzerland signed recently paving the way for getting information of money stashed in banks has prompted the Government of India and tax administration to mull with the idea of extending the time limit for reopening tax cases for the past 16 years. Presently, tax returns of the preceding six years only could be reopened for taxing any escaped incomes.

The power to reopen tax assessments are vested with various income-tax authorities in the departmental hierarchy and it is with reference to the incomes which had escaped assessment. The procedures and powers are contained in Sections 147 to 153 of the Act.

The time limit for issue of notice for reassessment is six years from the end of the relevant assessment year where the income which had escaped assessment exceeds Rs1 lakh or more. The time limit is four years from the end of the relevant assessment year if the escaped income is below Rs 1 lakh.

Already, the procedural aspects of reopening the assessment vis-a-vis the rights of taxpayers to know the reasons prompting reassessment has been litigated at various forums. The reassessment order, whether on mandatory basis must cover issues for which the reassessment was initiated, is yet another aspect litigated in recent times.

The recent move to increase the time limit to 16 years for reopening the tax cases would be like bringing back the position of law which was in vogue up March 31, 1989 notwithstanding the present idea for such extended time is intended to tax monies stashed in foreign banks.

Promissory estoppel

The time limit for reopening the assessment was reduced to 10 years from the financial year 1989-90 and the Finance Act, 2001 w.e.f. June 1, 2001 reduced the time limit further to six preceding assessment years. Even search assessments (including block assessments) are with the same time limit applicable for reassessment cases.

When the taxpayers have tuned themselves with the legal provisions and have maintained books of account for only six preceding assessment years, the change of law extending the time limit to sixteen years tantamounts to breaching the promissory estoppel. When the law has not mandated maintenance of books beyond six preceding assessment years, sudden change of law would put the taxpayers and tax department in a chaotic situation. If at all such move is pursued in all seriousness, it must be made only on prospective basis.

The apex court in Motilal Padampat Sugar Mills Co Ltd v. State of U.P. (1978) 118 ITR 326 (SC) has held that taxation is a sovereign or governmental function but where the statute confers power on the Government to grant exemption, no distinction can be drawn between the exercise of sovereign or governmental function and a trading or business activity for applying the doctrine of promissory estoppel. This decision was again affirmed in Union of India v. Godfrey Philips India Ltd (1986) 156 ITR 574 (SC). Hence the taxpayers can contest the proposal for reopening of tax cases to 16 years taking in aid the doctrine of promissory estoppel.

Alternatives

The move of the tax administration and the Government for extending the time period for reopening tax cases if intended for taxing monies stashed in foreign banks, many other possible alternatives could thought of instead of blanket extension of time period by resorting to change of law.

A proviso to Section 149 could be inserted specifically by making reference to monies kept outside India as qualifying for reopening the tax assessments up to the earmarked time of 16 preceding assessment years.

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