Whether retrospective amendment can be applied only to cases whose assessment or appellate proceedings are still pending - NO: Delhi HC

THE issues before the Bench are - Whether when the Supreme Court pointed out the inadequacy of the existing clause (c) of Section 115JB to cover a provision for the diminution in the value of any asset, the legislatative action to plug the lacuna by inserting clause (i) which permitted an upward adjustment of the book profit by the provision made for diminution in the value of any asset with retrospective operation, is unconstitutional; Whether the principle that fiscal benefits specifically provided under the Income Tax Act to foster growth in a sector, cannot be revoked retrospectively, be compared with the provisions of Minimum Alternate Tax; Whether retrospective amendment can be applied only to cases whose assessment or appellate proceedings are still pending and Whether a completed assessment, if reopened on genuine
grounds can be treated separately on the basis of retrospective amendment. And the verdict goes against the assessee.

Facts of the case

The assessee is a public limited company and is engaged in the business of manufacture and trading/export of consumer items such as refrigerators, washing machines, etc. It was assessed to income tax on the “book profit” computed in accordance with the provisions of Section 115 JB of the Act. This section was inserted into the Act by the Finance Act, 2000 w.e.f. 01.04.2001. It made special provision for payment of tax by certain companies. The gist of the section, is that certain companies were liable to pay tax on their “book profit” if the total income computed in accordance with the provisions of the Act was less than 18% of its book profit. In that case, book profit was deemed to be the total income of such companies.

A controversy arose as to whether the provision for bad and doubtful debts made in the profit and loss account can be added to the book profit under the aforesaid clause. The Department took the view that such a provision was made for meeting a liability other than an ascertained liability and therefore the book profit had to be increased by the amount of the provision. The case of the companies which were liable to tax under Section 115 JB was that a provision for bad and doubtful debts cannot be regarded as a provision made for meeting a liability, let alone an unascertained liability, because a debt is not a liability but is an asset of the company and what in effect the company does, when making the provision for bad and doubtful debts, is only to provide for a possible non-recovery of the debt. This later view was upheld by a Special Bench of the Tribunal constituted in JCIT Vs. Usha Martin Ltd. and held that in truth and substance, it was a provision for the diminution of the value of the debt and therefore, it fell outside clause (e) of the Explanation and the book profit cannot be increased by the amount of the provision. This view of the Special Bench of the Tribunal was upheld by the Delhi High Court in CIT Vs. Eicher Ltd. and was eventually resolved by the Supreme Court in the judgment in CIT v. HCL Comnet Systems & Services Ltd.

Thereafter, the Parliament vide the Finance Bill, 2009 introduced an amendment in Section 115JB, by incorporating a new clause (i) in Explanation 1 to sub-clause 2, which provided for any provision for diminution in the value of any asset will also be included in the computation of book profit under the said section. The petitioner filed its returns of income for the AY's 2002-03, 2003-04 and 2009-10 respectively, and the assessee was advised to re-compute its book profit for these years by taking into account the provision for diminution in the value of assets, including any provision made for bad and doubtful debts, in view of the retrospective amendment. The petitioner accordingly, recomputed its book profit and deposited the amount towards additional taxes for these years consequent to the re-computation.

Thereafter, the assessee aggrieved with this amendment filed a writ petition before the High Court to challenge not the amendment as such but its retrospective operation. The assessee also sought refund of the tax deposited as a result of the retrospective amendment along with applicable interest. The main contentions of the counsel for the assessee was that the amendment was not clarificatory provision and therefore, cannot be made retrospective. It was also contended that no justification was provided as to why the clause should be inserted retrospective. Further, the assessee contended that the legislature cannot take back with retrospective effect any benefit which it had granted. The assessee relied on several precedents including A.N. Sen, J in Lohia Machines Ltd. & Anr. vs. Union of India & Ors., and Virender Singh Hooda vs. State of Haryana, where the Court held the retrospective amendment to revoke the benefits granted u/s 80J as invalid.

Finally, the counsel for the assessee argued that the amended provision could not even be applied in the ordinary course in respect of the AY's 2001-02 and 2002-03 for the reason that the time limit for reopening these assessments had ended. It was further pointed out that the amendment was introduced after these dates and only affects assessee in whose case some reassessment or appellate proceedings were pending at the time of introduction of the Bill. On this basis, it was argued that the sole reason for the amendment was to arm some AO's with a tool to support a prima face erroneous action of adding the provision for bad and doubtful debts to the book profit without any statutory support for the same.

Having heard the parties, the High Court held that,

Widening of tax base need not be a new levy

+ there is no merit in the contention of the that the amendment has brought into effect a new tax or a new levy which is outside the scope of Section 115JB. As pointed out earlier, Explanation 1 below section 115JB contains several clauses. If the profit and loss account prepared by the company contains any debit which answers to the description of any of those clauses, the amount of the debit can be added to the book profit and the book profit shall stand increased by the said amount. The purpose of the Explanation is to broaden the base amount on which tax is payable by the company. No new levy is imposed. The tax-base stands widened by the amendment in as much as the amount or amounts set aside as provision for diminution in the value of any asset and debited to the profit and loss account shall be added to the book profit. It is well settled that income tax is only one tax on the total income of the assessee. The book profit of a company as shown in the profit and loss accounts prepared in accordance with the Companies Act, 1956 and as adjusted by the various clauses of Explanation 1 is deemed to be the total income of the company on which tax is payable. It is, therefore, a misnomer to refer to the amendment as imposing a new tax or levy. Since the amendment does not provide for any new levy of income tax, there is no question of it being struck down on the ground of retrospectivity;

Limited reliance on the "Statement of Objet and Reasons" for validating amendment

+ the argument of the petitioner that no justification has been shown for introducing the amendment is also unacceptable. It was pointed out that the “statement of objects and reasons” to the Finance (No.2) Bill, 2009 did not contain anything to show why clause (i) was introduced into the Explanation. The memorandum explaining the provisions of the Finance Bill, 2012 contained a detailed justification as to why certain amendments were being proposed in section 9 of the Act in order to rationalise the international taxation provisions. There is, it was pointed out, reference, to judicial pronouncements which had created doubts about the scope and purpose of sections 9 and 195. It was further stated in the memorandum that there were certain other issues in respect of the income deemed to accrue or arise in India on which there were conflicting decisions of various judicial authorities and, therefore, there was a need to make a clarificatory retrospective amendment to restate the legislative intent and to provide for certainty in law. It is submitted that in contrast, the statement of objects and reasons to the Finance (No.2) Bill, 2009 did not contain any reason nor did it justify the introduction of clause (i) to Explanation 1. The contention, therefore, was that the amendment was arbitrary and whimsical;

+ the petitioner is right to the extent that the statement of objects and reasons did not contain any justification or reason for making the amendment. Not only the statement of objects and reasons, but the memorandum explaining the provisions of the Bill and the notes on clauses appended to the Bill too did not show any justification or reasons for the amendment. The question, however, is whether this invalidates the amendment. That takes us to the question as to what is the importance and relevance accorded to the statement of objects and reasons in the process of examination of the constitutional validity of an amendment. There can be no doubt that the statement of objects and reasons may be employed as an external aid to construe the statute; it can also be referred to for the purpose of comprehending the factual background, the prior state of legal affairs, the surrounding circumstances in respect of the statute and the evil which it seeks to remedy. The usefulness of the statement of objects and reasons is limited to these aspects and no authority has been cited before us to show that the absence of any reason or justification given in the statement of objects and reasons for an amendment would invalidate the legislative action and would render the amendment unconstitutional on that ground alone. It would be relevant to refer to the judgment of the Supreme Court in Bakhtawar Trust & Ors. Vs. M.D. Narayan & Ors. That was not a case where the statement of objects and reasons did not say anything with regard to the reason for the amendment. In that case it was urged that the statement of objects and reasons for the validation Act under challenge showed that the intention of the legislature was rather to render the decision of the High Court infructuous than to correct any infirmity in the legal position. Rejecting the argument, the court observed that [....It is manifest that the Statement of Objects and Reasons cannot, therefore, be the exclusive footing upon which a statute is made a nullity through the decision of a Court of law....];

+ the legal position that emerges appears to be that the constitutionality of a law has to be examined and judged on its own terms having regard to the judicially well-recognised limitations on the legislative powers. If the law offends any provision of the Constitution, it is liable to be struck down. Several other limitations on the legislative powers have been judicially recognised and the law has to fall within those limitations. The statement of objects and reasons may be looked into merely to ascertain the intention of the legislature, the mischief sought to be remedied, and the state of affairs prevailing prior to the amendment. It is thus only an external aid to construction and by no means a touchstone to judge the validity or constitutionality of the statute. That should be decided on the terms of the statute and the statement of objects and reasons can have no decisive influence on the question. Reading more into the statement of objects and reasons would lead to this absurd result, namely, that if sufficient justification for the law is shown in the statement of objects and reasons, then the law must be held to be valid and constitutional irrespective of the question whether it offends the relevant provisions of the Constitution or exceeds the judicially recognised limitations on the legislative powers. It would result in an absurd situation which cannot be countenanced, as pointed out in the judgment of the Federal Court;

+ even otherwise, the argument of the petitioner that no justification has been shown for the retrospectivity is not correct. The sequence of events leading to the retrospective amendment cannot be ignored. There was no provision in Explanation 1 to section 115JB permitting an upward adjustment of the book profit by the amount debited to the provision for bad and doubtful debts. However, the revenue authorities had sought to include the said provision in the book profit. Their attempt failed right up to the Supreme Court which pointed out that a provision for bad and doubtful debts is in fact a provision for diminution in the value of an asset which does not fall under clause (c) of Explanation 1. Having had the benefit of the view expressed by the highest court of the land and realising that the existing clause (c) in the Explanation was inadequate to cover a provision made for the diminution in the value of an asset, Parliament in its wisdom thought that its intention to impose a Minimum Alternate Tax (MAT) on companies which earned profits and declared dividends but did not pay any tax (after availing of all the allowances and reliefs permitted under the Income Tax Act) would be better effectuated by introducing a provision to the effect that even a provision made for diminution in the value of any asset would be added to the book profit. The statutory basis of the judgment of the Supreme Court in HCL Comnet was changed; whereas the Supreme Court pointed out the inadequacy of the existing clause (c) to cover a provision for the diminution in the value of any asset, the legislature sought to plug the lacuna by inserting clause (i) which permitted an upward adjustment of the book profit by the provision made for diminution in the value of any asset, which obviously included a debt. It is not unusual for the legislature to make amendments with retrospective effect to cure the lacuna pointed out by judicial decisions;

Retrospectivity must alter the character of the tax

+ in order to successfully challenge the retrospectivity of the amendment it is necessary for the petitioner to show that the retrospective operation so completely alters the character of the tax as to take it outside the limits of the entry which gives the legislature competence to enact the law. We do not think that the present amendment is open to such criticism. As already pointed out, all it does is to widen the base upon which the levy operates by adding one more category of a debit to the profit and loss account by which the book profit of the company can be increased. The nature of the tax has not undergone any change and it still remains a tax on the book profit of the company. It is in our opinion perfectly open to the legislature to prescribe how the book profit of a company can be computed and this it has done by first enacting that the book profit should be the figure of the profit as per the profit and loss account prepared in accordance with parts II and III of the Companies Act and then by prescribing, in Explanation 1, the items by which the said book profit may either be increased or reduced'

+ explanation 1 to the Section prescribes the manner in which the book profit of a company shall be computed and it is upon the book profit so computed, after giving effect to the said Explanation, that the tax is payable by the company. In other words it is the book profit adjusted in the manner prescribed by the Explanation 1 that is deemed to be the total income of the company. If this is the true position, it is difficult to accept the argument that the insertion of clause (i) with retrospective effect into Explanation 1 so completely alters the nature and character of the tax that it falls beyond the entry 82 in the Union List of the Constitution (“Taxes on income other than agricultural income”) and consequently is beyond the competence of the legislature;

+ a case of some relevance to the present writ petition is that of the Constitution bench of the Supreme Court in Chhotabhai Jethabhai Patel v. Union of India. It was held that the nature and character of the levy of tax/duty with retrospective effect was the same as the nature and levy of the duty with prospective effect and observed that “it would seem to be rather a strange result to achieve, that the tax imposed satisfies every requirement of a duty of an excise in so far as the tax operates from and after April 28, 1951, but is not a duty of excise for the duration of two months before that date". The ratio of this judgment appears to us to apply to the case before us. The tax which was essentially a tax on the book profit and consequently a tax on the total income of the petitioner does not cease to be such a tax or become a new or different tax in nature and character merely because one more item of debit to the profit and loss account is prescribed to be added to the book profit shown in the profit and loss account from a retrospective date. The tax was always on the book profit and on the total income of the company; it continues to remain so even after the retrospective amendment, the change being not in the nature and character of the tax, but on the quantum of the book profit/total income of the company on which it is charged;

Section 115JB vis-a-vis Section 80J

+ there is a marked difference in the nature and character of a Section such as Section 80J which was considered by A.N. Sen, J in Lohia Machines and those of Section 115J/115JB of the Act. Whereas Section 80J was a Section intended to give a fiscal incentive or relief for assessees who set up industrial undertakings in notified backward areas, Section 115J/115JB targeted corporate entities for imposing a Minimum Alternate Tax on their book profit. It was noticed by the legislature that as a result of various tax concessions and incentives certain companies making huge profits and also declaring substantial dividends have been managing their affairs in such a way as to avoid payment of income tax;

+ it would be incorrect to treat the provisions of Section 80J and the provisions of Section 115JB on par and require the same standards to be fulfilled to enact a valid legislative amendment with retrospective effect in both of them. It is apparent from Section 115JB that the object was to tax the so-called zero-tax companies who did not pay any income tax though they earned huge profits and even distributed dividends. By imposing such a tax on the book profit of such companies, Parliament was widening its revenue collection and it can hardly be suggested that it was granting any benefit to those companies. On the contrary, whatever benefits such companies were earlier enjoying were sought to be withdrawn or severely curtailed by the introduction of Chapter XII B and the Minimum Alternate Tax provisions. It would be erroneous and inaccurate to consider any deduction allowed while computing the book profit of the company as a benefit or relief granted to it in the same manner in which Section 80J conferred a benefit upon an assessee who set up an industrial undertaking in a notified backward area. The scheme and purpose are so different that a comparison of both the provisions would be totally off the mark. Explanation 1 provided for computation of the book profit and initially there was admittedly no provision to add back the provision made in the profit and loss account for diminution in the value of an asset. It was wrongly assumed by the tax authorities that a provision for bad and doubtful debts was a provision for meeting an unascertained liability. The true position in law was pointed out by the Supreme Court in its judgment in HCL Comnet; thereafter the legislature stepped in by introducing Clause (i). The reason was to take a lesson out of the judgment of the Supreme Court and to deny the deduction of a provision made not only for bad and doubtful debts but also for the diminution in the value of any asset. It must be recalled that the argument of the companies, accepted by the Supreme Court, was that a provision for doubtful debts is not a provision for meeting an unascertained liability but was a provision for diminution in the value of the debt due to non-recovery or the debt becoming bad. It is of some significance that the retrospective amendment did not confine itself to adding back the provision for bad and doubtful debts; it authorized the Assessing Officer to add back the provisions made for the diminution in the value of 'any asset'. This reflects the anxiety of the legislature to curb the tendency of companies to make downward revisions in the value of their assets – both movable and immovable – so as to neutralise or reduce the book profit. The amendment is thus an attempt to prevent companies from making use of the absence of any provision in Section 115JB permitting the adding back of a provision made for diminution in the value of any asset in order to offset or reduce the book profit. The amendment must be visualized in the larger perspective i.e. that the legislature thought it inequitable that companies earning huge profits and even declaring dividends were not paying any income tax. The basis of computing the total income of such companies was changed. They were no longer entitled to compute their total income in accordance with the other provisions of the Income Tax Act, which are normally applicable. They were to pay tax on their book profit which was deemed to be the total income. If regard is had to the broader canvass of Chapter XII B, as we must, it would be difficult to hold that the absence of any provision in Explanation 1 to add back the provision for doubtful debts (on the footing that it was a provision for meeting an ascertained liability) was not an incentive or relief consciously allowed to the zero-tax companies in the same manner in which the relief under Section 80J was allowed. The sequitur of this conclusion is that the very weighty observations of A.N. Sen, J, made in the context of Section 80J and the retrospective amendment made by the Finance (No.2) Act, 1980 with effect from 1.4.1972, would be out of place in the context of Chapter XII B of the Income Tax Act. If it is not a benefit, deduction or relief allowed by the legislature, there is no question of applying those observations by saying that the benefit etc. cannot be taken away retrospectively;

+ it is emphasised here that there is considerable difference between provisions conceived as incentive or relief provisions, (enacted with a view to foster industrial growth and scientific research activities in the country) and those which essentially seek to bring within the purview of the fiscal legislation companies which did not pay any tax, though earning substantial profits and also dividends. If this essential difference between the two types of provisions is kept in mind, it will be apparent that there can be no question of the retrospective amendment under challenge before us not serving the larger public interest. The provisions of Chapter XII B of the Income Tax Act seek to achieve a larger public interest by removing the inequalities in the tax regime by making companies with the ability to pay tax on account of earning substantial profits, to pay tax and thereby contribute to the fiscal health of the economy. If this is not in the larger public interest, we do not see what can be;

No amendment until finality of disputes

+ we do agree that the view expressed by the Income Tax Appellate Tribunal on the interpretation of statutory provisions may not be final and may not enjoy the same authority as that of a High Court or Supreme Court, and this we say with due respect to the Tribunal, but we are not able to take the proposition forward by saying that the revenue is bound to wait till the last word is said by the High Court or Supreme Court before changing the law with retrospective effect. It need not be so uniformly in all cases. Section 80HHC was a very important relief provision and with booming exports the tax implications of the Section were very high. Parliament may have very well thought that considering the revenue implications the earlier the law is changed the better it would be for all, and for the sake of certainity and clarity it may be desirable that a retrospective amendment to the law is made as expeditiously as possible. If the suggestion is that the legislature has to necessarily wait till the Supreme Court pronounced its view and assuming the Supreme Court endorsed the view of the Tribunal, only then can the legislature make a retrospective amendment, then there would be a long lapse of time covering several years causing delay in the collection of tax and consequential burden of interest. There is nothing which prevents the legislature from giving effect to its intention at the earliest point of time so that there is certainty and clarity in the law. The Court cannot impose its moral standards in such matters as there is no equity about a tax;

No encroachment by legislative upon judiciary

+ in Government of AP vs. Hindustan Machine Tools Ltd., the question arose as to the validity of a retrospective amendment in the definition of the word “house” appearing in Section 2(15) of the Andhra Pradesh Gram Panchayat Act, 1964. The definition of the word “house” as it originally stood for the purpose of levy of house tax did not include certain buildings. An amendment was made in the year 1974 to amend the definition so as to include buildings not originally included in the definition. A building which did not have a main entrance on the common way was included in the definition by the amendment. The amending Act was made retrospective to validate – notwithstanding any judgment, decree or order to the contrary – as if the definition as amended was always enforced. It was held that the amendment was not an encroachment on the judicial power by the legislature. The Supreme Court held that the amendment removed the basis of the decision rendered by the High Court so that the decision could not have been given in the altered circumstances. The present case is also not one of encroachment of the legislature upon the judicial power. Parliament did not attempt to validate the add-back of the provision for bad and doubtful debts by validating the action of the income tax authorities without changing the statutory basis. The provision for bad and doubtful debts, which was described by the Supreme Court in HCL Ltd. as one for diminution in the value of an asset, i.e., debt, was provided for as a separate item to be added to the book profit of the company by insertion of clause (i) with retrospective effect. If clause (i) had always been there in Explanation 1, the Supreme Court would not have held that the provision for bad and doubtful debts cannot be added back. The amending Act cured the statutory provision of the vice from which it suffered and it was given retrospective effect which was quite within the competence of the legislature;

+ in view of the forgoing discussion, we hold that the amendment made to Explanation 1 to Section 115JB of the Income Tax Act, 1961 by the Finance (No.2) Act, 2009 by insertion of clause (i) with retrospective effect from 1.4.2001 is not ultra vires or unconstitutional.

Different treatment given to different assessment years

+ this aspect of the matter has been dealt with in the judgment of Supreme Court in National Agricultural Co-operative Marketing Federation of India Ltd;

+ these observations are a recognition of the consequence that is inevitable in the case of all retrospective amendments, which by their very nature, can be lawfully applied only to assessments that are open and pending either before the Assessing Officer or in appeal proceedings. In the case of completed assessments the amendment can be invoked only if reopening of the assessments under Section 147 of the Act or modification of the assessments under any other provision of the Act is permissible. The provisions relating to limitation and finality of assessments cannot be disturbed, as they are also the result of legislation by Parliament as the Supreme Court itself has recognised. Different considerations would, therefore, arise if by the amendment even final assessments are sought to be reopened. The petitioner can have a grievance and it can be successfully ventilated, only if the revenue authorities seek to disturb the finality of a completed assessment, overlooking the provisions of the Act relating to reopening of assessments. We, therefore, do not think that there is any substance in the contention of the petitioner.