2023 (12) TMI 227 - HC - Income Tax

Accrual of income u/s 2(24) - Scope of Amendment to Section 2(24) by the insertion of sub-cause (xviii) - incentives given by the Government - eligible unit under the ultra mega project - scheme being, Package Scheme of Incentives, 2013 effective from 1st April 2013 for a period of five years - constitutional validity of sub-clause (xviii) to Section 2(24) of the Act - whatever purpose of objective are to be treated as income, irrespective of the fact as to whether or not the same is in the nature of capital assistance and or revenue assistance? - Petitioner s argument regarding the violation of Article 14 stems from the assertion that the amendment to Section 2(24)(xviii) of the Act, which brings various subsidies under the ambit of taxable income, is discriminatory and arbitrary HELD THAT - As held by the Apex Court in Union of India V/s. Exide Industries Limited and Anr. 2020 (4) TMI 792 - SUPREME COURT relied upon the approach of the Court in testing the constitutional validity of a provision is well settled and the fundamental concern of the Court is to inspect the existence of enacting power and once such power is found to be present, the next examination is to ascertain whether the enacted provision impinges upon any right enshrined in Part III of the Constitution. In the present case, the legislative power of the Parliament to enact sub-clause in the light of Article 245 of the Constitution is not doubted at all. Now to the next step of examination, i.e., whether the said clause contravenes any right enshrined in Part III of the Constitution, either in its form, substance or effect. It is no more res integra that the examination of the Court begins with a presumption in favour of constitutionality. This presumption is not just borne out of judicial discipline and prudence, but also out of the basic scheme of the Constitution wherein the power to legislate is the exclusive domain of the legislature/Parliament. This power is clothed with power to decide when to legislate, what to legislate and how much to legislate. Thus, to decide the timing, content and extent of legislation is a function primarily entrusted to the legislature and in exercise of judicial review, the Court starts with a basic presumption in favour of the proper exercise of such power. The time-tested principle of checks and balances does not empower the Court to question the motives or wisdom of the legislature, except in circumstances when the same is demonstrated from the enacted law. In the very nature of taxing statutes, the legislature holds the power to frame laws to plug in specific leakages. Such laws are always pin-pointed in nature and are only meant to target a specific avenue of taxability depending upon the experiences of tax evasion and tax avoidance at the ground level . The general principles of exclusion and inclusion does not apply to taxing statutes with the same vigour unless the law reeks of constitutional infirmities. No doubt, fiscal statutes must comply with the tenets of the Constitution. The imposition of tax on these subsidies under the amended provision does not constitute taking away of a benefit but rather represents a recalibration of fiscal advantages in line with broader economic and policy considerations. Profits, by their nature, are subject to fluctuations resulting from various factors, taxation being but one. Section 2(24)(xviii) of the Act is an example of this balancing act, and its imposition is a reflection of a subsidy's life cycle coming to its fiscal fruition. Petitioner's argument, is ostensibly rooted in concerns over profitability. This does not, in substance, however, provide a tenable basis to impugn the constitutional validity of the amended provision. Hence, petitioner s argument of eroded profitability due to taxation lacks constitutional merit. An extension of this logic could open floodgates of untenable demands from loss-incurring entities seeking tax exemptions to improve profitability. This could potentially create a taxing standard that is inconsistent and prone to manipulations. In Nazeria Motor Service etc. 1969 (8) TMI 88 - SUPREME COURT the Apex Court held that even on the assumption that the profits would be diminished or greatly reduced, it cannot be held that there is any infringement of Article 19(1)(g) under Part III of the Constitution of India. The chronology of events is pivotal in assessing the merits of petitioner's arguments against the constitutional validity of Section 2(24) (xviii) of the Act. When petitioner applied for the subsidy, the amendment to the Act specifically the inclusion of sub-clause (xviii) to Section 2(24), had been in effect for more than two years. Therefore, petitioner, at the time of application, was having full knowledge or ought to have had full knowledge of the tax treatment of such subsidies post-amendment. Secondly, the act of applying for a subsidy after the amendment came into force indicates an acceptance of the prevailing tax regime. It is reasonable to infer that by choosing to partake in the subsidy scheme, petitioner implicitly acknowledged and consented to the accompanying tax obligations as legislated by the amendment. Thirdly and furthermore, it is a well-settled principle that ignorance of the law is no excuse. Petitioner cannot claim ignorance of the amendment or its implications. The legislative change was not done surreptitiously but was the result of a transparent legal process, providing ample opportunity for all stakeholders to acquaint themselves with the new provisions. A retrospective annulment of this provision would cause a state of chaotic disarray. Individuals and entities that have availed of subsidies and concessions and complied with the tax obligations thereof stand to face an untenable situation. They have acted in good faith under the existing legislative policy, and to dismantle this retrospectively would be to penalize compliance and create an environment of uncertainty and unpredictability in tax matters. Moreover, such a judicial step would likely instigate a flood of claims and litigations for refund of taxes paid under the provision, straining the administrative machinery and judicial resources. This would not only disrupt the revenue stream but also place an undue burden on the exchequer. Hence we are not inclined to strike down Section 2(24)(xviii). Amendment to Section 2(24) by the insertion of sub-cause (xviii) of the Finance Act, 2015, is a perfect example of a legislative endeavour to align the definition of income with the evolving economic landscapes and judicial precedent of it being an inclusive and elastic term. The submissions of petitioner though appear to be of fiscal concern were, in our view, more an argument of diminished profits and a narrow interpretation of income which the Apex Court has time and again expanded. The submissions of petitioner fall short of appreciating the overarching legislative intent to foster a comprehensive and equitable taxation regime. The amendment to Section 2(24) by insertion of the impugned sub-clause that includes various subsidies and concessions only indicates the well established jurisprudential path ensuring that the income tax laws remain attuned to the economic realities and continue to serve as a vital cog in the nation's fiscal machinery. As submitted by ASG, it is the duty of the legislature to ensure that taxation policy reflects a balance between incentivizing economic activity and ensuring the equitable distribution of fiscal resources. Petition dismissed.

Summary

Issues Involved:
1. Constitutional validity of sub-clause (xviii) to Section 2(24) of the Income Tax Act, 1961.
2. Retrospective application of the sub-clause.
3. Distinction between capital and revenue receipts.

Summary:

1. Constitutional Validity of Sub-Clause (xviii) to Section 2(24):
The petitioner challenged the constitutional validity of sub-clause (xviii) to Section 2(24) of the Income Tax Act, 1961, arguing that it unjustly includes subsidies, grants, cash incentives, duty drawbacks, waivers, concessions, or reimbursements as "income," making them taxable. The petitioner contended that this sub-clause obliterates the distinction between "income" and "capital receipts," which the Supreme Court has historically upheld as non-taxable. The petitioner argued that taxing capital receipts as income is constitutionally impermissible and violates Articles 14, 19, 246, 265, and 289 of the Constitution of India.

The court held that the legislative competence of Parliament to enact such a provision is well established. The court emphasized the presumption of constitutionality in fiscal statutes and the limited scope of judicial review in economic matters. The court found no constitutional infirmity in the provision, stating that the legislature has the authority to define what constitutes income and to include subsidies and grants within that definition. The court dismissed the petition, upholding the validity of the sub-clause.

2. Retrospective Application:
The petitioner argued that the sub-clause has unintended retrospective application, affecting benefits availed before its enactment. The court noted that the petitioner applied for the subsidy after the amendment had been in effect for over two years, indicating acceptance of the prevailing tax regime. The court held that the amendment was public knowledge, and the petitioner, being engaged in business activities, should have been aware of the tax implications. The court found no merit in the argument of unintended retrospective application.

3. Distinction Between Capital and Revenue Receipts:
The petitioner contended that the sub-clause fails to differentiate between capital and revenue receipts, contrary to established judicial precedents. The court referred to landmark cases like Sahney Steel and Press Works Ltd. and Ponni Sugars and Chemicals Ltd., which applied the "purpose test" to determine the nature of subsidies. The court acknowledged that the Finance Act, 2015, sought to end disputes by making all subsidies taxable unless they fell under an exclusion category. The court held that the legislative intent was to align the definition of "income" with evolving economic landscapes and judicial precedent. The court found no irrationality in the legislature's decision to include various subsidies and concessions as income.

Conclusion:
The court dismissed the petition, upholding the constitutional validity of sub-clause (xviii) to Section 2(24) of the Income Tax Act, 1961. The court found no merit in the arguments regarding retrospective application and the distinction between capital and revenue receipts. The court emphasized the legislature's authority to define income and the presumption of constitutionality in fiscal statutes.