2019 (8) TMI 458 - HC - Income Tax

Scope and applicability of Section 64(1)(iii) w.e.f. 1.4.1976 - whether cardinal principle of tax laws that the law to be applied is that which is in force at the commencement of the assessment year is correct for new liability - from the date of amendment/insertion OR from date of accrual - from the date mention of that Financial year OR Assessment year - income of individual to include income of spouse, minor child, etc. - HELD THAT - Reading the judgment of the Apex Court in the case of Kesoram Industries and Cotton Mills Ltd. 1965 (11) TMI 41 - SUPREME COURT in case of Karimtharuvi Tea Estate Ltd 1965 (12) TMI 35 - SUPREME COURT this Court would observe that the argument advanced by Counsel for the assessee (Amicus Curriae) as well as the Department can be made only in respect of a rate prescribed under a Finance Act or an Act providing a surcharge if the same is brought into force on the lst of April of the assessment year in which assessment for the previous year is being done as the same would only provide for ascertaining the rate, for existing liability under the Income Tax Act. But that is not the case here. Under the new provision, i.e. Section 64(1)(iii) a new liability has been prescribed and not the rate for ascertaining the liability. Such new liability under the Income Tax Act cannot be given a retrospective effect. Such liability can only be fastened on an individual if the same was existing at the time of accrual and not at the time of assessment. The observations of the Apex Court in paragraph 33 of the judgment in the case of Keshoram Industries and Cotton Mills (supra), clarifies this position. In view of the judgments of the Apex Court in the case of Keshoram Industries (supra) as well as Karimtharuvi Tea Estate Ltd (supra) this Court would have no hesitation in holding that for deciding the liability of a particular provision of the Income Tax Act, the date of accrual of income would be relevant. If the provision comes into force in a particular financial year, it would apply to the assessment for that year but cannot be made applicable in respect of assessment for a previous year. The Amending Act introduced a new Section 64(1) (iii) in the Income Tax Act with effect from 1.4.1976. The tax liability under the said provision could therefore be charged on the assessee, in the assessment which was to be made for that accounting year i.e. 1976-77, which would be done in the assessment year 1977-78. The Amending Act introducing a new tax liability which came into force with effect from 1.4.1976 could not be given a retrospectivity and be made applicable to the previous accounting year i.e. 1975-76 corresponding to the assessment year i.e. 1976-77. In view of the foregoing discussions and conclusions arrived at by us, that the judgment rendered in the case of Badri Prasad 1990 (2) TMI 29 - PATNA HIGH COURT does not lay down the correct law.

Summary

Issues Involved:
1. Applicability of Section 64(1)(iii) of the Income Tax Act, 1961.
2. Retrospective effect of the Taxation Law (Amendment) Act, 1975.
3. Interpretation of the timing of accrual of income versus the timing of assessment.

Detailed Analysis:

1. Applicability of Section 64(1)(iii) of the Income Tax Act, 1961:
The central issue was whether the share income of minor sons of the assessees, including the interest on capital credited to the minor sons from the partnership firm, should be computed in the hands of their father under Section 64(1)(iii) for the Assessment Year 1976-77. This provision was introduced by the Taxation Law (Amendment) Act, 1975, effective from April 1, 1976. The accounting years of the assessees ended on August 10, 1975, and December 31, 1975. The Tribunal had included the minor sons' income in the fathers' income under this provision, which was contested by the assessees.

2. Retrospective Effect of the Taxation Law (Amendment) Act, 1975:
The legal question was whether the amendment could be applied retrospectively to income that accrued before its effective date. The Division Bench had previously ruled in Badri Prasad & Ors. vs. Commissioner of Income Tax that the law in force at the commencement of the assessment year (April 1, 1976) would govern the assessment for that year. However, the assessees argued that the liability to pay income tax hinges on the accrual of income, as per the Supreme Court's decision in Kesoram Industries and Cotton Mills Ltd. vs. Wealth Tax Commissioner (Central), Calcutta.

3. Interpretation of Timing of Accrual of Income vs. Timing of Assessment:
The Court considered whether the time of income accrual or the time of assessment was relevant for applying the amended provision. The assessees' counsel argued that the law applicable on the date of assessment should determine the tax liability, irrespective of when the income accrued. They relied on the Supreme Court's judgment in Karimtharuvi Tea Estate Ltd. vs. State of Kerala, which stated that the Income Tax Act as amended on April 1 of any financial year must apply to the assessment of that year.

Court’s Findings:

On Applicability of Section 64(1)(iii):
The Court held that the law in force on April 1, 1976, would govern the assessment for the financial year 1976-77. The Tribunal was correct in holding that the share income of the minor sons from the firm was assessable in the hands of their fathers under Section 64(1)(iii) as amended from April 1, 1976.

On Retrospective Effect:
The Court observed that the amendment introduced a new liability and could not be applied retrospectively. The amendment would apply to the assessment for the financial year 1976-77, corresponding to the assessment year 1977-78, and not to the previous accounting year 1975-76.

On Timing of Accrual vs. Assessment:
The Court clarified that the date of accrual of income is relevant for determining tax liability. If a provision comes into force in a particular financial year, it applies to the assessment for that year but not for the previous year. The Court harmonized the judgments in Kesoram Industries and Karimtharuvi Tea Estate Ltd., concluding that the new liability under Section 64(1)(iii) could not be retrospectively applied to the previous accounting year.

Conclusion:
The Court concluded that the judgment in Badri Prasad did not lay down the correct law. The reference was answered, and the matter was remanded to the Division Bench for disposal in terms of the law clarified by the Full Bench.