2023 (10) TMI 280 - HC - Income Tax

Constitutionality of Explanation to Section 10AA(1) - Exemption to SEZ unit / Developer - Contention of the petitioner that the Explanation to Section 10AA(1) is unconstitutional as violative of Articles 14, 19(1)(g) and 265 of the Constitution of India - HELD THAT - The Explanation does not introduce any new method of computation of the tax thereby curtailing the rights of the assessee in any way, it merely clarifies the vagueness around the deduction that crept in due to the deliberate misapplication of the decision in Yokogawa 2016 (12) TMI 881 - SUPREME COURT by the assessee to the facts and circumstances of this case. The assessee does not have a vested right to claim deduction since such deduction is only allowable in terms of the provisions of Section 10AA of the Act, and the Explanation inserted merely clarifies the intention of the legislature and does not alter the position of law as contained in the parent provision. Respondent submit that in any case, the decision in Yokogawa (supra) is not applicable in the instant case since that decision dealt with Section 10A of the Act, and not Section 10AA of the Act. Sections 10A and 10AA of the Act are not in pari materia and thus it cannot be said that the decision in Yokogawa (supra) was in any manner applicable to this instant case, and thus there was no need for the legislature to insert the aforesaid Explanation to circumvent the decision in Yokogawa (supra). Therefore, the contention of the petitioner that the Explanation to Section 10AA(1) of the Act is unconstitutional is without merits. As principle of legitimate expectation is not applicable to the case of the petitioner and Explanation after Sub-section (1) of Section 10AA of the Income Tax Act, 1961, inserted by amendment with prospective from 1st April, 2018, applicable in respect of the assessment year 2018-19 and subsequent years is constitutional and is a valid piece of legislation and is not arbitrary, discriminatory and is not violative of Articles 14, 19 265 of the Constitution of India. WP dismissed.

Issues Involved:
1. Constitutionality of the Explanation to Section 10AA(1) of the Income Tax Act, 1961.
2. Violation of Articles 14, 19(1)(g), and 265 of the Constitution of India.
3. Application of the principle of legitimate expectation.
4. Validity of legislative amendments in fiscal statutes.

Summary:

Constitutionality of the Explanation to Section 10AA(1) of the Income Tax Act, 1961:
The petitioners challenged the Explanation to Section 10AA(1) of the Income Tax Act, 1961, inserted by the Finance Act, 2017, effective from April 1, 2018, as unconstitutional. They argued that this Explanation nullified the Supreme Court's decision in Yokogawa India Ltd., which allowed exemptions under Section 10AA without inter-unit profit/loss adjustments. The Explanation mandated that deductions under Section 10AA should be computed from the total income after such adjustments, thereby depriving the petitioner of the full benefit of the exemption.

Violation of Articles 14, 19(1)(g), and 265 of the Constitution of India:
The petitioners contended that the Explanation was discriminatory and violated Articles 14 (equality before law), 19(1)(g) (right to practice any profession), and 265 (taxation only by authority of law) of the Constitution of India. They argued that the Explanation created an arbitrary distinction between units within Special Economic Zones (SEZs) and other units, thus frustrating the purpose of Section 10AA, which was to provide tax incentives to SEZ units.

Application of the Principle of Legitimate Expectation:
The petitioners claimed that they had a legitimate expectation to continue receiving the benefits under Section 10AA as interpreted by the Supreme Court in Yokogawa. They argued that the Explanation inserted by the Finance Act, 2017, violated this expectation by changing the method of computing deductions.

Validity of Legislative Amendments in Fiscal Statutes:
The respondents argued that the Explanation was a clarificatory amendment intended to remove ambiguities and prevent tax evasion. They cited several judgments to assert that courts should show restraint in interfering with fiscal statutes unless they are manifestly unjust or unconstitutional. They contended that the Explanation did not retrospectively alter any rights but merely clarified the legislative intent.

Judgment:
The court held that the Explanation to Section 10AA(1) of the Income Tax Act, 1961, inserted by the Finance Act, 2017, is constitutional and valid. The court found no arbitrariness or discrimination in the Explanation, stating that it was a clarificatory amendment aimed at preventing tax evasion and ensuring that deductions under Section 10AA are computed correctly. The court also held that the principle of legitimate expectation is not applicable in this case, as the Explanation did not retrospectively alter any rights but clarified the existing law. The writ petition was dismissed with no order as to costs.

Conclusion:
The court upheld the constitutionality of the Explanation to Section 10AA(1) of the Income Tax Act, 1961, and dismissed the writ petition, finding no violation of Articles 14, 19(1)(g), and 265 of the Constitution of India. The court emphasized judicial restraint in interfering with fiscal statutes and rejected the application of the principle of legitimate expectation in this case.

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