With the retirement of Justice MR Shah, the curtain comes down on a difficult period when judgments in tax cases were almost invariably against the assessee and it came to be expected that assessees would be granted relief only in the rarest of rare cases. Several of these judgments have had a serious impact on trade and industry and have set in motion a fresh round of litigation.
A new procedure for re-assessment introduced by the Finance Act, 2021 and this set in motion literally thousands of writ petitions being filed in various High Courts. Barring Chhattisgarh, all High Courts had held in favour of the assessees and set aside the notices that had been issued. In a batch of special leave petitions, from the Allahabad High Court, the Supreme Court invoked Article 142 and remanded all cases back to the Department with a slew of directions.
In the first place, the Supreme Court failed to note that there was a direct decision of another two judge-bench which had categorically held that Article 142 is not applicable in tax matters (Prashanti Medical Services and Research Foundation v Union of India (2020) 14 SCC 785). Secondly, the court did not wait for other appeals from Delhi, Madras or Bombay wherein detailed reasons were given for arriving at conclusions in favour of the assessees.
The remand has now resulted in a second round of writ petitions and several complications have arisen over the directions issued by the Supreme Court.
In CIT v. Vikram Bhatia, (2023 SCC OnLine SC 370), the retrospective application of the amendment to section 153C came up for consideration. When a search is carried out in the place of X, incriminating material belonging to Y may also be found. Such incriminating material will then be passed on to the Assessing Officer who has jurisdiction over Y and the assessment or re-assessment of Y would then be completed by that officer. Now, various High Courts had interpreted the words “belonging” or “belonged to” as different from “relating to” or “pertaining to”.
Thus, the Delhi, Bombay and Gujarat High Courts had held that incriminating materials must belong to Y; incriminating materials that merely “relate to” or “pertain to” Y would not be sufficient. To get over these decisions, section 153C was amended in 2015 by enabling the assessment of Y even if the books of accounts, documents or receipts “pertains or pertain to” Y.
The Gujarat High Court held that this amendment to Section 153C would apply prospectively. The Supreme Court once again reversed this view that was in favour of assessee and held that an amendment by substitution has the effect of wiping out the earlier provision and replacing it with the amended provision as if the unamended provision never existed.
Further, as Section 153C was a machinery provision, it was held that it must be interpreted in accordance with purpose of this amendment. More importantly, the Court held that the presumption of prospective application does not apply to declaratory statutes.
The Supreme Court thus added a new rule of interpretation that can have catastrophic effect. An amendment by substitution will now mean it has retrospective effect and that the old words or provision did not exist. Thus, if the rate of tax is 25% and an amendment substitutes it for 10%, the result would be that the earlier rate of 25% never existed at all!
In support of the proposition that an amendment by substitution has the effect of wiping out the earlier provisions from the statute book and replacing it with the amended provisions as if the unamended provisions never existed. The court relies on Shamrao v Parulekar (AIR 1952 SC 324).
An examination of this judgment shows that there is no such observation. Indeed, in Zile Singh v. State of Haryana [(2009) 8 SCC 1 (para 25)] expressly states that substitution only deletes the old rule and makes the new rule operative.
Similarly, Zile Singh also refers to Koteswar Vittal Kamath vs K. Rangapa Baliga & Co. [(1969) 1 SCC 255] which held that the process of substitution results in the old rule ceasing to exist and the new rule brought into existence in its place. Thus, the proposition laid down by the Supreme Court in Vikram Bhatia is liable to be reconsidered and overruled.
In Sansera Engineering Pvt. Ltd. v. Dy. Commissioner (2022 SCC Online SC 1635), the issue related to the time limit for granting rebate of duty when the goods were exported. Under section 11B of the Central Excise Act, 1944, the time limit for granting refund was six months. Further, there was a controversy as to whether this time limit would apply to the rebate of duty which was granted under the Rules. In a rebate of duty, the exporter first pays the duty and then claims the refund after fulfilling the conditions that may be prescribed in the relevant notification.
In fact, the Ministry of Finance had issued a circular pointing out that the time limit of six months would not automatically apply to rebate of duty. The circular granted relaxation of time limit to exporters as the remittance of foreign exchange and getting the bank clearances would often take more than six months after the export was completed. If the time limit of six months was rigidly adhered to, the exporter would not get the rebate. This was a beneficial circular to facilitate and encourage exports.
The Madras, Allahabad, Punjab & Haryana and Rajasthan High Courts had held in favour of the assessee while the Bombay, Karnataka, Gujarat High Courts and one judgment of the Madras High Court had held to the contrary. But a well-reasoned judgment of the Madras High Court rendered by Justice Ramasubramanian had expressly referred to the above circular and granted relief.
Once again, the Supreme Court held against the assessee and held that even for rebate, the time limit of six months would apply. This decision has created enormous hardship to hundreds of exporters. The court failed to note that the beneficial circulars are binding on the Department and when they are intended for a particular purpose in public interest, they should be followed.
When the CBEC had given a relaxation after noting the commercial needs of the industry and keeping in mind the need for encouraging exports, it was wholly unnecessary to take a view against the assessee. (By way of a disclaimer, I may add that I had appeared for the appellant in this case.)
No one says that an assessee should win in most cases but where High Courts have uniformly taken a view or the Board circulars have granted relief, it is unfortunate if the Supreme Court still does not grant relief.
It is hoped that in future the Supreme Court would follow the practice of reversing the High Court decisions only when they are found to be perverse. If the High Courts have taken a reasoned view, it is not necessary that the decision should be reversed and rendered in favour of the revenue.
And what is worse is that the decision of the Supreme Court invariably refers to cases which have commenced 10-15 years ago. The financial consequences for assessees in these case are likely to be ruinous. Where a uniform view taken by High Court is to be reversed, it is necessary that the Supreme Court at least directs that interest and penalty should not be levied.
Arvind P Datar is a Senior Advocate of the Madras High Court.