Parliament has the power and jurisdiction to clarify, enact law or bring amendments to a law with retrospective effect to remove the basis or defects in a judgment, say legal experts.
Under the proposed amendment to the Income Tax Act announced by Finance Minister Pranab Mukherjee in the budget, to come into effect from April 1, 1962, all persons, resident or non-resident, having business connection in India will have to incur tax deducted at source and pay it to the government even if the transaction is executed on a foreign soil.
At present, indirect transfer of an asset in India is not taxable under the Act.
On January 20, the Supreme Court, in the Vodafone case, held that the Government of India had no jurisdiction to tax the share sale done by Hutchison Essar to Vodafone and quashed the demand for Rs. 11,000-crore tax.
The court held that Section 9(1)(i) of the IT Act could not be extended to cover indirect transfer of capital assets/property situated in India. For a gain on transfer of a capital asset to be taxable in India, applicability of the last limb of Section 9(1)(i)is required i.e. the capital asset must be situated in India. The words ‘directly or indirectly' in the Section 9(1)(i)go with the income and not with the transfer of a capital asset (property).
The court held that doing so would amount to changing the content and ambit of Section 9. It said the Section was not a ‘look through' one and could not be expanded by giving purposive interpretation. The question of providing ‘look through' in the IT Act or in the tax treaty was a matter of policy. It was to be expressly provided for in the IT Act or in the tax treaty.
The amendment, according to the government, is aimed at overcoming the defects pointed out in the judgment.
The former Supreme Court judge, A.R. Lakshmanan, says: “It is always open to Parliament to pass new legislation or to bring in amendments to the existing law to get over the basis of a judgment. The Supreme Court has on several occasions has upheld such amendments with retrospective effect.”
Asked whether an amendment in the guise of clarification would amount to colourable exercise of power, he said: “Parliament has the power, jurisdiction and is within its limits to bring amendments to cure defects in a judgment.” To a query whether it would not result in further litigation, he said if and when such a case was filed, the Supreme Court would deal with it on merits and in accordance with law.
The former Attorney-General, Soli Sorabjee, while sharing the statement of Justice Lakshmanan on the power of Parliament to amend a law to remove the basis of a judgment, said: “In this case it is to be given retrospective effect from 1962. If the length of the retrospective amendment is found to be unreasonable or arbitrary, the court can strike it down.”
The senior advocate said the word ‘clarification' was a misnomer as it was only an amendment. Asked whether the government could recover Rs. 11,000 crore again from Vodafone, he said the government had the competence to recover amount in public interest.
Constitutional expert and senior lawyer P.P. Rao says: “Parliament can't declare a judgment invalid, but it can remove the basis of a judgment with retrospective effect and validate the tax. Such retrospective amendments have been consistently upheld by the Supreme Court in several decisions.”
Asked whether the government could issue fresh tax assessment order to Vodafone, he said, “Whatever methods available to the government can be used to recover the amount not only from Vodafone but also from others, if they were found to pay similar tax.”
Supreme Court lawyer Mohan Katarki says, “The legislature cannot overrule a judgment but the legislature may pass a validating Act changing the law upon which that judgment had been founded. In the Vodafone case, the assessment orders taxing the overseas merger and acquisition transactions were set aside by the Supreme Court as being contrary to the provisions of the Income Tax Act — as interpreted by it. But, Parliament may remove the ambiguity by clarifying or explaining what the law is and give retrospective effect to the clarification or explanation. After the validating Act is passed, the Income Tax Officer would be within his jurisdiction to pass fresh assessment orders as per law. The court may intervene if the retrospectivity is too long or reopening is of age-old transactions.”
Senior counsel Rajeev Dhavan said Parliament had the competence to bring in retrospective amendments to remove the basis of a judgment. “In the guise of amendment, Parliament can't overrule a judgment or usurp judicial powers.”
Keywords: I-T retrospective amendment