Constitution Bench Lays down law on retrospective taxation, principle of "fairness" the balancing factor [Read the Judgment]

The Constitution Bench of the Supreme Court delivered the judgment in relation to retrospective taxation and held that a statute has to be read prospectively until a contrary intention appears. The Court also applied the doctrine of fairness in the judgment.

The litigation in Commissioner of Income Tax, New Delhi v. Vatika Township Private Ltd. arose when there was a search and seizure operation under Section 132 of the Act on the premises of Vatika in 2001.

A notice was also issued requiring to  file  the return  of  income  for  the  block  period  ending 10.02.2000.In compliance, Vatika filed its return of income for the block period from 01.04.1989 to 10.02.2000.The Block Assessment in this case was completed at a total undisclosed income of Rs.85, 18,819/-.  After  sometime,  the Assessing  Officer,  on verification  of  working of  calculation of  tax, observed  that surcharge had not been levied on the tax imposed upon the assessee. This was treated as a mistake apparent on record by the Assessing Officer and accordingly a rectification order was passed under Section 154 of the Act.

This order was challenged by Vatika and the same said order was cancelled by the CIT (Appeals)-I, New Delhi on the ground that the levy of surcharge is a debatable issue and therefore such an order could not be passed taking umbrage under Section 154 of the Act and the component of surcharge was removed.

The IT Department then issued a notice under section 263 of the Act and sought to revise the order made by assessing officer  by which he had given effect to the order of the  CIT  (Appeals) and  in  the  process  did  not  charge  any surcharge.  In the opinion of CIT, this led to income having escaped the assessment. As in in this particular case the search and seizure operation took place on 14.07.1999 and treating this date as relevant, the Finance Act 1999 was to be applied.

The CIT, accordingly, cancelled the order dated 09.09.2003not levying surcharge upon the assessee, as being erroneous and prejudicial to the interests of the revenue. The Assessing Officer was directed by the CIT to levy surcharge @ 10% and the amount of income tax computed and issue revised notice of demand.

Vatika then filed the appeal before the Income Tax Appellate Tribunal against the said order of the CIT and the Tribunal allowed the appeal. Against the order of the Tribunal, the tax department approached the High Court of Delhi by way of an appeal filed under Section 260 A of the Act for the block period 01.04.1989 to 10.02.2000. This appeal was been dismissed by the High Court.

Thereafter, the tax department appealed to the Supreme Court to adjudicate upon the matter.

The High Court had taken the view that "proviso inserted in Section 113 of the Actby the Finance Act, 2002 was prospective in nature and the surcharge as leviable under the aforesaid proviso could not be made applicable to the block assessment in question of an earlier period i.e. the period from 01.04.1989 to 10.02.2000 in the instant case."

The same issue about the same proviso had reached the Supreme Court as a reference case and was decided in Commissioner of Income Tax, Central II v.  Suresh N.Gupta. The Division Bench in that case had held that the said proviso is clarificatory in nature.

When the same issue came up before another Division Bench, it doubted the correctness of the judgment in Suresh Gupta case and asked the matter to be placed before a larger Bench.

The case was put up before a three judge bench which ordered "After  having  heard  learned  counsel  on  both sides  at  length,  looking  to  the  important questions  of  law  involved  having  wide ramifications and pendency of several matters on the same issue before several High Courts and Tribunals, we deem it appropriate to refer the matters for being placed before Five Judges Bench."

As a result, the matter reached the Constitution Bench consisting of Chief Justice of India Mr. R M Lodha, Justice Khehar, Justice Chelameswar, J. A.K Sikri, and Justice Rohinton Nariman and it is Justice Sikri who authored the judgment, with his brother judges agreeing with his view.

The judgment noted that, "the surcharge on the income tax was introduced for the first time by the Finance Act, 1995. "Regarding block assessment, the Court noted, "In  the  present  case,  since  we  are  concerned  with  the surcharge  on  the  block  assessment, it  also  becomes imperative to take note of the relevant provisions pertaining to the block assessment.   These provisions are contained in Chapter XIV-B. The purpose of this Chapter is to lay down a special procedure for assessment of search cases with a view to combat tax evasion and also to expedite and simplify assessments in search cases."

The Court then discussed the judgment delivered in the Suresh N Gupta case, which had framed two issues

1. Whether on the facts and circumstances ofthis case, the Finance Act, 2001 was applicable to "block assessment" under Chapter XIVB in respect of search carried out on January 17, 2001?

2. Whether the proviso inserted in Section 113 by the Finance Act, 2002, is clarificatory ?"

The Constitution Bench judgment also stated that view expressed in Suresh N Gupta has been followed in CIT v.  Sanjeev Bhatpara. The Court then discussed the Scheme of Chapter XIVB of the Act in detail.

Addressing the question of retrospectivity, the Court opined "Of the various rules guiding how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation.  The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow's backward adjustment of it. Our belief in the nature of the law is founded on the bed rock that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as Lex prospicit non respicit: law looks forward not backward. As was observed in Phillips vs. Eyre, a retrospective  legislation  is  contrary  to  the  general principle  that  legislation  by  which  the  conduct  of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the character of past transactions carried on upon the faith of the then existing law."

The Court then referred to principle of fairness and referred to L'Office Cherifien des Phosphates v. Yamashita-Shinnihon Steamship Co. Ltd and various other cases.

The Court held "We  would  also  like  to  point  out,  for  the  sake  ofcompleteness, that where a benefit is conferred by a legislation, the rule against a retrospective construction is different.  If a legislation confers a benefit on some persons but without inflicting a corresponding detrimenton some other person or on the public generally, and where to confer such benefit appears to have been thelegislators object, then the presumption would be thatsuch a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect. This exactly is the justification to treat procedural provisions as retrospective."

It also relied on Government of India & Ors.  v. Indian Tobacco Association, in which the doctrine of fairness was held to be relevant factor to construe a statute conferring a benefit, in the context of it to be given a retrospective operation.

The court said "In such cases, retrospectively is attached to benefit the persons in contradistinction to the provision imposing some burden or liability where the presumption attaches towards prospectivity.  In the instant case, the proviso added to Section 113 of the Act is not beneficial to the assessee.  On the contrary, it is a provision which isonerous to the assessee. Therefore, in a case like this,we have to proceed with the normal rule of presumption against retrospective operation."

The Court then refined the discussion to declaratory statues and referred to the opinion expressed by Justice G.P. Singh and also to opinion expressed by Constitution Bench    in Keshav lal Jethalal Shah  v.  Mohanlal Bhagwandas & Anr.

The Court held that the intention of the legislature was to make the impugned proviso prospective in nature and the Court over-ruled the law laid down in Suresh N Gupta.