Monday, March 25, 2013

Validity of retro amendment made to sec. 115JB by FA, 2009 can’t be challenged as it was made to widen the tax base

The amendment made to Explanation 1 to Section 115JB of the IT Act, by the Finance Act, 2009 by insertion of clause (i) with retrospective effect from 1.4.2001 is not ultra vires or unconstitutional.

In the instant writ petition, the petitioner-company challenged the constitutional validity of retrospective amendment made to Section 115 JB of the IT Act, by the Finance Act, 2009 by insertion of clause (i) in the Explanation 1(requiring addition to book profit of provisions for diminution of asset).

HC held in favour of revenue as under:

1) No merit in the contention of assessee that amendment imposes  a new tax or new levy outside the scope of section 115JB
a) The purpose of the Explanation is to broaden the base amount on which tax is payable by the company. The tax-base stands widened by the amendment inasmuch as the amount or amounts set aside as provision for diminution in the value of any asset and debited to the profit and loss account shall be added to the book profit;

b) The tax which was essentially a tax on the book profit and, consequently, a tax on the total income of the petitioner does not cease to be such a tax or become a new or different tax in nature and character merely because one more item is prescribed to be added to the book profit shown in the profit and loss account from a retrospective date;

c)  The tax was always on the book profit and on the total income of the company; it continues to remain so even after the retrospective amendment, the change being not in the nature and character of the tax, but on the quantum of the book profit/total income of the company on which it is charged. Since the amendment does not provide for any new levy of income-tax, there is no question of it being struck down on the ground of retrospectivity.

2) Not sufficient to show that amendment travels beyond section 115JB, but it is necessary to show that it goes beyond the relevant entry in the Constitution
a) In order to successfully challenge the retrospectivity of the amendment it is necessary for the petitioner to show that the retrospective operation so completely alters the character of the tax as to take it outside the limits of the entry which gives the legislature competence to enact the law;

b) The nature of the tax has not undergone any change and it still remains a tax on the book profit of the company. All it does is to widen the base upon which the levy operates by adding one more category of a debit to the profit and loss account by which the book profit of the company can be increase;

c) Explanation 1 to the Section prescribes the manner in which the book profit of a company shall be computed. It is upon the book profit so computed, after giving effect to the said Explanation, that the tax is payable by the company;

d) It is difficult to accept the argument that the insertion of clause (i) with retrospective effect into the Explanation 1 so completely alters the nature and character of the tax that it falls beyond the Entry 82 in the Union List of the Constitution (“Taxes on income other than agricultural income”) and ,consequently, is beyond the competence of the legislature.

3) The retro amendment doesn’t take away with retrospective effect any benefit which is granted by the legislature
a) It would be incorrect to treat the provisions of Section 80J and the provisions of Section 115JB on par and require the same standards to be fulfilled to enact a valid legislative amendment with retrospective effect in both of them;

b) It would be erroneous and inaccurate to consider any deduction allowed while computing the book profit of the company as a benefit or relief granted to it in the same manner in which Section 80J conferred a benefit upon an assessee who set-up an industrial undertaking in a notified backward area. The scheme and purpose are so different that a comparison of both the provisions would be totally off the mark;

c) There is considerable difference between provisions conceived as incentive or relief provisions, (enacted with a view to foster industrial growth and scientific research activities in the country) and those which essentially seek to bring within the purview of the fiscal legislation companies which have not paid any tax, though have been earning substantial profits and also dividends;

d) If this essential difference between the two types of provisions is kept in mind, it will be apparent that there can be no question of the retrospective amendment under challenge not serving the larger public interest. Thus, the writ Petition dismissed but with no order as to costs -  Whirlpool of India Ltd. v. Union of India [2013] 31 200 (Delhi)

A retro amendment to a tax incentive provision which is merely clarificatory isn’t unconstitutional

Gujarat HC upholds the validity of retro amendment made by way of insertion of an Explanation below sec. 80-IA(13), which clarifies that no deduction is available under 80-IA for execution of work contracts.

In the instant case, the petitioner challenged the vires of Explanation inserted in Sec. 80IA(4) by Finance Act 2009. The case of the petitioner was that it was engaged in the development of infrastructure facility. Till the introduction of impugned amendment, deductions were available to all undertakings and enterprises executing infrastructure development projects and it was not required that the assessee itself must develop such infrastructure facilities by investing its own funds. Such Explanation, therefore, changes the very complexion of the deductions which were available for years together and, thus, creates a levy with retrospective effect. The petitioner challenged such explanation, in particular, on the ground of retrospective operation of such amendment.

HC upholds the retrospective operation of amendment, and held as under:
  1. The Explanation merely clarifies that deduction under section 80IA(4) would not be available in case of execution of works contract. Even without the aid of this explanation, it is possible to contend that an enterprise executing a works contract isn’t eligible to sec. 80-IA(4) deduction;

  2. In view of the Gujarat HC verdict’s in the case of CIT v. Radhe Developers [2012] 17 156 (Guj.), there would certainly be a demarcation between developing the facility and execution of works contract awarded by an agency engaged in developing such facility. From the inception, deduction is envisaged for development of infrastructure facilities with private participation;

  3. The impugned explanation is purely explanatory in nature and doesn’t amend the existing statutory provisions, thus, the question of levying any tax with retrospective effect would not arise;

  4. The explanation doesn’t restrict or aim to restrict the provisions of deduction. If it does so, certainly a question of reasonableness in the context of retrospective operation would arise. The Explanation only supplies clarity where, at best confusion is possible in the unamended provision. The revenue could, therefore, legitimately contend that no such deduction is available for mere execution of works contract. Thus, the present petition is dismissed – Katira Construction Ltd. v. Union of India[2013] 31 250 (Gujarat)