The Indian Express :Tue Mar 20 2012, 03:31 hrs
Retrospective amendment to nullify adverse judgment goes against rule of law
Here is a scenario: An Indian company is saddled with a huge demand by the Inland Revenue of the United Kingdom. The case is fought all the way to the House of Lords or now the Supreme Court.
The highest court in that country holds that the Indian company is not liable to tax. Promptly, the British parliament nullifies the judgment with retrospective effect and makes the Indian company liable to tax.
Here is another scenario: Proceedings are launched against an Indian company for violation of US patent laws. Here again, the case is fought up to the US Supreme Court and the verdict is in favour of the Indian company.
The US legislature then amends the patent laws that retrospectively nullify the Supreme Court decision and deems that the Indian company has violated the patent laws.
Won’t it be outrageous if the legislature in the UK or the US repeatedly nullified every judgment that was against the state? What respect would the supreme courts of those countries command if their judgments had no sanctity and were repeatedly overruled by their legislatures?
The Finance Bill 2012, as expected, has made several retrospective amendments (with effect from April 1, 1962, 50 years earlier!). Apart from Vodafone, other decisions in favour of assessees have also been effectively overruled.
There would be no complaint if this was done on rare occasions and where major public interest was involved. Unfortunately, nullifying every adverse judgment given each year by the Supreme Court, high courts and even the tribunals in the succeeding budget has become the norm.
Take, for instance, the case of classification lists. Manufacturers had to file classification lists to sort out their goods and pay the applicable excise duty.
These classification lists were then approved by the department. In 1999, a five-judge bench of the Supreme Court held that once a classification list had been approved, the department could not demand duty for past periods on the ground that there was a “short levy” of duty.
This judgment was rendered in 1999 and the Finance Act 2000 amended the law retrospectively from 1980 and nullified this decision.
Another retrospective amendment happened in 1980. Under the erstwhile Central Excise Rules, excise duty was payable when goods were “removed” from the factory.
In 1979, the Delhi high court held that if the goods were not removed from the factory but were used by that factory in the further manufacture of other products, there would be no excise duty liability because there was no “removal”.
In the following budget, the rules were amended retrospectively from 1944 to declare that even captive consumption would be “deemed to be a removal”.
Not just that. When the Service Tax Tribunal held that management institutions run by non-profit organisations were not “commercial or coaching centres” and need not pay service tax, this was overruled in 2008 with retrospective effect from 2003.
There are literally dozens of such examples where every adverse verdict of the courts or the tribunals has been made naught by an amendment in the budget of the following year. Such retrospective amendments are an insult to the judiciary and strike a mortal blow to the principle of separation of powers.
They also destroy the essential principles of clarity, certainty and stability that must exist not only in tax laws but in any civilised democracy where the rule of law prevails.
Under our Constitution, the judiciary has been assigned the function of interpreting laws made by Parliament. In any dispute, the Union or state governments and the tax payers are adversarial parties and the judgment can be in favour of only one of them.
It would be grossly improper to overrule every verdict in favour of the taxpayer. This would be a classic case of the state telling its citizens: heads I win, tails you lose.
This practice destroys the principle of separation of powers. The government will thus never be a losing party because the benefit of a judgment in favour of the assessee or citizen will immediately be taken away.
It would also be a serious insult to the judiciary if the decision in every keenly contested case is set at naught merely because it is against the government. In no civilised democracy are retrospective laws made to nullify judgments year after year after year.
There is no point in having an “independent judiciary” where only decisions in favour of the state are respected and all decisions in favour of citizens are obliterated. We might as well amend the Constitution and declare that no court shall give any judgment adverse to the Central or state government.
It is a basic principle of tax laws that an assessee’s liability is determined by the law as it stands on the first day of the assessment year.
A corporation pays advance tax and also deducts tax at source on the basis of the law applicable in that year. Can one tell such a corporation, after 10 years, that what it did in 2002 will be deemed to be incorrect merely because there is a Supreme Court decision in 2012 against some other assessee?
The Finance Bill 2012 proposes to go a step further and enables assessments in transactions involving non-residents to be reopened after 16 years! Therefore, every corporation which has any dealings with non-residents will not know what its liability will be till 2028.
It is time to seriously re-examine the power of Parliament and state legislatures to retrospectively amend laws and repeatedly nullify judgments.
The fact that the Vodafone case would stand overruled is not important; it will now face the consequence of being embroiled in litigation for several more years as has often happened in the past in the case of other assessees. What is at greater risk is the credibility and image of India as a country where the rule of law prevails.
The possible gain of a few thousand crores of tax will be seriously off-set by the enormous damage that such amendments cause to our judiciary.
By insulting our judiciary, we may save a few hundred or thousand crores but is it worth the greater damage it does to the Republic of India?
Tragically, India is now a nation where not only the future but even the past is uncertain.
The author is a senior advocate, Madras high court
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