Proceedings for rectification and reassessment are not mutually exclusive- both can be undertaken in view of retrospective amendment says Delhi High court. Whether retrospective amendment are valid? Some thoughts by author.

[CA DEV KUMAR KOTHARI]

References and links:

ESTER INDUSTRIES LTD VERSUS UNION OF INDIA AND ORS 2013 (4) TMI 489 - DELHI HIGH COURT

Learning from case of Aryaman Spinners (P.) Ltd. Versus Commissioner of Income tax 2012 (11) TMI 720 - GUJARAT HIGH COURT - Appeal before CIT(A) is better forum to seek relief than revision petition under section 264 before CIT

Various proceedings:

Under any law, various proceedings may be provided for seeking relief by affected parties and also for taking of action by government departments or court in some circumstances. In tax laws we find the following proceedings:

Assessment – original assessment, re assessment, assessment in pursuance of directions of higher authorities or court in course of appeal or revision proceedings.

Rectification proceeding- these can be by authorities or court as well as on request of concerned parties (assessee as well as the AO in case of tax matters).

Appeal proceedings- appeal before CIT(A)/ ITAT/ High Court and the Supreme Court.

Appeals can be filed as provided under law against an order passed by an authority before appropriate appellate authority, Tribunal or Court.

Proceedings before Court by way of Writ Petitions:

In case of challenge of virse of any law and also in some cases on issue of jurisdiction, limitations and lack of alternate remedy etc. various type of writ Petitions can be preferred before any High Court having jurisdiction and   the Supreme court.

The scope and limitations for different proceedings:

The purpose of different proceedings are different therefore, it is desirable that most appropriate proceedings should be initiated or availed. However, some proceeding provide greater scope and flexibility than other, which may include scope of some other proceedings also.

The scope and limitations for different proceedings are different. The scope is defined by the relevant provisions and interpretation of the same. The limitations are provided for commencement and / or completion of proceedings, subject matters which can be considered in particular proceeding.

Selection of proper proceedings:

The decision making for selection of a proper proceeding to be initiated or availed is important. The proceedings selected must be such which provide maximum flexibility and scope and also limitations as to period within which proceeding can be initiated and completed as well as scope of condonation of delay in filing of documents relevant to the proceeding.

The decision for selection of proper proceedings is equally important for tax authorities. In some situations tax department might have available scope for rectification, revision, or reassessment or appeal. As each such proceeding has its own limitation the same need to be examined. In such situation there can be different views as to whether one available proceeding oust scope for any other proceedings. For example, when a rectification is possible, whether a revision or reassessment is permissible? Limitation for revision has lapsed, whether rectification can be made? Limitation for reassessment has lapsed, whether rectification can be made? There can be various situations for such consideration.

Case of ESTER INDUSTRIES LTD VERSUS UNION OF INDIA AND ORS 2013 (4) TMI 489 - DELHI HIGH COURT In this case in order on original Writ Petition it was held that the reassessment proceeding was valid in view of retrospective amendment.

In review petition assessee contended that, so far as the issue regarding the constitutionality of the retrospective amendment was concerned, though the plea was rejected by the Court, but in doing so, the Court had wrongly placed reliance on Section 154 and under Section 147 and to this extent, the order was erroneous. Thus, it was contended that the scope of Section 154 and Section 147 was different and distinct.

The Court considered the related issues and observed and held on the following lines:

The retrospective amendment constitutes tangible material (per author it constitute even new tangible material) which permits the reopening of the assessment.

The retrospective amendment constitutes also can be considered to constitute a mistake apparent from record because law as amended has not been applied therefore rectification of the assessment on the ground of mistake apparent from record is permitted.

Only because an action for rectification is permissible, it does not mean that no action can be taken for re-opening the assessment.

The powers under section 147 and section 154 are not mutually exclusive and there can be some overlapping.

When preconditions for the applicability of either of these sections are satisfied, the action taken there under is valid, and cannot be invalidated by the court.

The assessee did not appear to have properly understood and appreciated the purport of observation. It was of the impression that the decision was rendered on the premise that if action under section 154 was permissible, action under section 147 to reopen the assessment was automatically impermissible;

Court held that there was no merit in the review petition filed by assessee, therefore the same was dismissed.

Whether retrospective amendments can be unconstitutional on ground of creating discrimination, inequality and unreasonableness:

In view of the above observations and the ruling of the Court we find that an amendment which has retrospective effect can be a ground for reassessment, rectification, revision and review etc. Generally retrospective amendment are passed giving effect to such amendment including for prior years, which are specified. For example:

Section 43(3) was amended vide FA 1995 to exclude ‘tea bushes and live stock’ from definition of ‘plant’ w.r.e.f.01.04.1962. This was a retrospective amendment giving effect from 01.04.1962. One may ask, why effect was given w.r.e.f. 01.04.1962 only and not from 01.04.1922?

Section 43(3) was again amended vide FA 2003 to exclude ‘ buildings or furniture and fittings ’ from definition of ‘plant’ w..e.f. 01.04.2004. This was a prospective amendment. One may ask, when tea bushes and live stock were excluded w.r.e.f 01.04.1962 why buildings, furniture and fittings were excluded w.e.f. 01.04.2004? What is the basis of ascertaining legislative amendments from a particular date?

Section 14A was inserted vide FA 2001 , w.r.e.f. 01.04.1962.

In section 14A we find that vide FA 2002 a proviso has been inserted w.r.e.f. 11.05.2001 imposing restrictions on powers of the AO on reassessment, re computation and rectification of any order to give effect to S.14A.

In some other provisions also we find such restrictions on AO to give effect to retrospective amendments if the proceedings have attained finality. However, there is no such bar on other authorities who have jurisdiction of appeal or revision.

For example, CIT can pass order u/s 263, CIT(A) can pass order to enhance assessment or decide ground taken by assessee in his appeal by considering new law as amended with retrospective effect. Even Tribunal, High Court and the Supreme Court will have to apply amended law, if appeal is heard and / or decided after coming into force of retrospective amendment. In fact we find several judgments of Tribunal and Courts in which section 14A has been applied for period prior to 11.0.2011 (the cutoff date for the AO.

In equality before law:

Retrospective amendment create inequality amongst tax payer. A tax payer whose assessment has been made and any proceedings is not pending, may not at all been effected, if another proceedings cannot be initiated due to limitation or due to inaction by authorities.

A tax payer whose assessment has been made and some proceedings are initiated will be effected because in such proceedings amended law can be applied.

A taxpayer whose assessment is pending will be effected because in such pending proceedings amended law can be applied.

A taxpayer whose appeal is pending at any stage ( from CIT(A) to the Supreme Court) will be effected because in such pending proceedings amended law can be applied by appellate authority, Tribunal and Court.

A taxpayer who computed income as per law prior to amendment, and finding no taxable income did not file return of income, will not be effected, unless authorities take steps against him to assess or reassess his income in view of amended law.

Suppose in a case relief was allowed by an appellate authority, Tribunal or Court based on law as then existed. The revenue has not challenged the order allowing such relief. The tax payer will not be affected by amendment. However, in case revenue has challenged the order allowing relief, the assessee will be adversely affected because at higher forum of appeal court, the amended law will be considered.

The above examples clearly shows that an amendment in tax law which has retrospective effect can impact different assessee in different manner. The liability to tax, interest and penalty will be different. The proceedings which different assessee will have to face will be different.

The difference is not due to any intelligible differentia between various classes of tax payers who have some application of law which has been amended with retrospective effect.

Unreasonableness:

Many of retrospective amendments are made to overcome judicial pronouncements. This is an unreasonable action against tax payer. Earlier the tax payer has won the case, and later finds that due to amendment he is adversely affected by the amendment and has to pay more tax, interest etc. This causes uncertainty, which also leads of unreasonableness of law.

Scope of retrospective amendments also causes unreasonable restriction on trade and freedom:

Scope of retrospective amendments also causes unreasonable restriction on freedom to trade and profession. A possibility of retrospective amendment make future uncertain. This can be considered as a restraint on trade, commerce and professional activity.

Should we provide opinion with a rider that the opinion is based on law as it stands today, this is however subject to amendments which may be brought in with retrospective effect?  

Therefore, it is desirable to reconsider the aspects relating to constitutional validity of amendments in tax laws which are made with retrospective effect.