Editorial of the Day: Tax law in the shadow of the higher judiciary (The Hindu)

Context: The article discusses two judgments by the Supreme Court of India that have raised concerns about the erosion of the central precepts on which India’s law of taxation is built. These precepts are rooted in the larger commitment to the rule of law, legality, and certainty. The article points out that the Supreme Court has, in some instances, undermined these principles by reversing well-reasoned judgments of High Courts and effectively enacting taxes without proper legislative support. Overall, the article raises concerns about the Supreme Court’s approach, which it sees as undermining the principles of legality and certainty in taxation laws, and emphasizes the importance of maintaining a commitment to these principles from both the legislature and the courts.

Background

1. Direct Taxes: These taxes are imposed directly on the income of individuals or entities. Examples include:

• Income Tax: It is levied on the income earned by individuals, corporations, and other entities.
• Corporate Tax: It is imposed on the profits earned by companies and corporate entities.
• Wealth Tax (abolished): This tax was previously levied on the wealth or assets owned by individuals.

2. Indirect Taxes: These taxes are imposed on goods, services, or transactions and are indirectly passed on to the consumer. Examples include:

• Goods and Services Tax (GST): It is a unified indirect tax levied on the supply of goods and services. GST replaced multiple indirect taxes like excise duty, service tax, and VAT.
• Customs Duty: It is imposed on the import and export of goods.
• Excise Duty: It is levied on the production and manufacture of goods.

• Article 265 – The article mentions that there should not be any imposition of tax outside of the purview of the taxation laws and should be within the power of the legislature.
• Article 266 – This particular article touches on the subject of consolidated funds and Public accounts of the states and India.
• Article 270 – Here, the article concerns the taxes imposed and divided between the states and the union. This excludes Article 268, Article 269 and Article 269 A.
• Article 273 – As per this article, the CFI or the Consolidated Fund of India will be charged in case of grants being provided under the export duty. This export duty will be levied on the Jute products in Orissa, Assam, Bihar, and West Bengal.
• Article 275 – This article deals with the grants provided to the State by the Union government for various schemes, also concerning the benefit of the Scheduled Caste and Scheduled Tribes, and the development of the administrative sector of Assam district.

• Funding infrastructure development and public sector projects.
• Financing defence and security measures.
• Supporting scientific research and public insurance initiatives.
• Providing salaries to government employees.
• Facilitating development and welfare programs for the public.

Decoding the Editorial

The article discusses two judgments by the Supreme Court that have raised concerns about the erosion of the central precepts on which India’s law of taxation is built.

• Central Percepts:
  • The first precept is the requirement that taxes can only be imposed with the authority of law, as stated in Article 265 of the Indian Constitution.
  • The second precept is the principle of sureness, which calls for taxes to be clear, consistent, and predictable.
• Reversing of Judgement:
  • There is a concern that the Supreme Court of India has been reversing well-reasoned judgments of High Courts and effectively creating taxes without proper legislative support.
  • In this backdrop, two judgments delivered by Justice M.R. Shah, who retired from the Supreme Court on May 15 can be cited.
  • The case of ITO vs Vikram Sujitkumar Bhatia:
    • This case revolves around the interpretation and retrospective effect of Section 153C of the Income Tax Act, 1961 in India.
    • The provision at stake is Section 153C of the Act. It stipulates the conditions under which a search made on a person’s premises could result in the opening of proceedings against other persons and entities.
    • Before an amendment to the law in 2015, Section 153C allowed the Revenue authorities to proceed against third parties to a search, if material seized belongs to a third party.
    • The law was amended in 2015. Section 153C now stipulated that assessments could be made against third parties to a search, even if the material seized pertains to the person or if information contained in those items relates to the person.
    • Gujarat High Court held that the amendment was not expressly retrospective. Such an application would impact the rights that had vested on persons by earlier provisions of the law.
    • The Supreme Court reversed this verdict by finding the new law declaratory. SC stated that it seeks to explain an earlier provision. Hence, it is retrospective.
  • Union of India vs Ashish Agarwal case–
    • The Court revived notices of reassessment that had been issued by the Revenue without any sanction of law. It reversed the Allahabad High Court’s judgement.
    • The issue at stake in the case was simple. With effect from April 1, 2021, Parliament had enacted a new regime to govern reassessments of completed income-tax proceedings.
    • But, despite the change in law, the Revenue continued to issue notices under a repealed provision. It derives authority from executive notifications that extended timelines during the COVID-19-inflicted period.
    • The High Courts declared these notices invalid. SC revived these quashed notices. Through this, the Court was encroached in the legislative domain. Court also invoked its power under Article 142 of the Constitution.
    • Article 265 of the Constitution forbids taxation without legislation. However, the Supreme Court’s willingness to encroach in Parliament’s domain, goes against this provision.
• Supreme Court as Interpreter vs Lawmaker:

The argument presented in the article is that in both the cases mentioned, the Supreme Court has acted as a law maker rather than a mere interpreter of the law.

1. Expanding the law’s domain: In the case of ITO vs Vikram Sujitkumar Bhatia, the Court held that the amended provision, Section 153C of the Income Tax Act, would apply retrospectively to searches conducted prior to its enactment. The argument asserts that the amendment, which added the stipulation that material “pertains or pertains to” a person, expanded the law’s domain with an eye to the future. By applying the amendment to past searches, the Court is seen as making new law rather than interpreting existing law.
2. Reviving notices without legal sanction: In the case of Union of India vs Ashish Agarwal, the Court revived notices of reassessment that had been issued by the Revenue without any sanction of law. The argument suggests that by reversing the judgments of multiple High Courts and reviving these notices, the Court acted as a law maker. It disregarded the invalidity of the notices declared by the High Courts and effectively created new legal validity for them.
3. Deeming ignorance of the law as a valid reason: The Court, in the Ashish Agarwal case, justified its decision by stating that revenue officers may have been under a bona fide belief that the amendments were not yet enforced. The argument highlights that the Court, despite it not being the government’s pleaded case, found that mistakes of this kind should not burden the exchequer. By deeming the quashed notices as valid and issued under the amended law, the Court is seen as creating a legal fiction and making new law.

Therefore, the article suggests that the Supreme Court, through its interpretations and actions in these cases, went beyond the traditional role of interpreting the law and instead acted as a law maker by expanding the law, reviving notices without legal sanction, and deeming ignorance of the law as a valid reason.

Judicial Activism:

• This is seen as SC’s mere encroachment on legislative functions.
• By resuscitating actions without legislative support and reversing judgments that were not on appeal before it, the Court is seen as exceeding its authority.
• The Court’s invocation of Article 142 of the Constitution, which grants it the power to pass orders for “doing complete justice to a cause,” also needs a mention.
• Article 265 of the Constitution prohibits taxation without legislation. It implies that if the Supreme Court continues to assume the role of Parliament by making laws and disregarding legislative procedures, the constitutional guarantee against taxation without legislation will remain illusory.

In other words, the Court’s actions seem to undermine the principle of separation of powers and the constitutional requirement that taxation should be based on duly enacted laws.

Beyond the Editorial

1. Income Tax Act, 1961: This law governs the taxation of income earned by individuals, companies, and other entities. It lays down the provisions for the assessment, computation, and collection of income tax.
2. Goods and Services Tax (GST) Act, 2017: GST is a unified indirect tax levied on the supply of goods and services. It replaced multiple indirect taxes like excise duty, service tax, and VAT. The GST Act governs the registration, administration, and collection of GST.
3. Customs Act, 1962: This law deals with the levy and collection of customs duties on the import and export of goods. It also provides for various procedures, rules, and regulations related to customs duties.
4. Central Excise Act, 1944: The Central Excise Act governs the levy and collection of excise duty on the production and manufacture of goods in India.
5. Wealth Tax Act, 1957 (abolished): The Wealth Tax Act was repealed in 2015, and wealth tax is no longer applicable in India.

Regarding the retrospective application of tax laws in India, the general principle is that taxation laws are prospective in nature. This means that they apply to transactions and events occurring after the enactment of the relevant law. However, there have been instances where tax laws have been amended with retrospective effect, meaning they apply to transactions that occurred before the amendment. Retrospective amendments are usually made to rectify certain anomalies, clarify legal positions, or address specific situations. The retrospective application of tax laws is often a subject of debate and scrutiny, as it can impact taxpayers’ rights and create uncertainty in the tax regime.

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