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| Menace of retrospective amendments |
| Mukesh Butani / New Delhi Aug 10, 2009, 00:07 IST |
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Retrospective amendments are becoming a regular phenomenon in recent budgets. Such proposals for amendments are being resorted to primarily to neutralise the interpretation given by the courts or tide over adverse decisions against the Revenue Department.
Though the debate on merits of such amendment is endless, it is well settled that the legislature has enormous powers to legislate which includes the power to legislate law with retrospective effect.
Perception of Retrospective law
Legislation can be broadly classified as substantive law or procedural law. Substantive law deals with the rights, obligations and duties; while procedural law deals with the manner in which such rights, obligations and liabilities are enforced.
On substantive law, the general proposition is that amendments take effect prospectively or generally are construed to be prospective in nature. In other words, a normal presumption is against retrospective effect of substantive law.
However, amendments made to procedural law, could be either retrospective or prospective. Generally, procedural law amendments takes effect with prospective operation, however, it applies to pending proceedings.
Scope of Retrospective amendments
The power to amend laws retrospectively is always subject to the parent law under which the legislation is formulated. The Constitution being the parent law and tax law being a subordinate legislation, cannot override the scope envisaged under the Constitutional law.
Under Article 20 of the Constitution, the legislature cannot amend criminal law retrospectively. Following the analogy, even in tax legislation, retrospective amendment relating to penal clauses is questionable and can come up for judicial scrutiny.
Retrospective amendments have been consistently subjected to judicial scrutiny. The judiciary on examination may hold that either the entire legislation or parts thereof is unconstitutional. The judiciary enjoys independent power to examine the veracity or the tenability of law; the legislatures too enjoy power to enact or modify or cure the defect in an enactment with retrospective operation. This clearly poses situations of conflict.
Constitutionality of retrospective amendments
The Apex Court in its landmark judgment in the case of Krishnamurthi while upholding the Madras General Sales Tax imposing sales tax (retrospectively) held that though the legislature can pass a law and make retrospective provisions, the Courts could on an appropriate challenge strike it down on the ground of contravening fundamental rights.
On another occasion, in the case of Epari Chinna Krishna Moorthy, while upholding the retrospective operation under Orissa Sales Tax Act, the court held that in considering the question as to whether legislative power to enact retrospectively has been reasonably exercised, it is relevant to enquire how the retrospective law operates. Further, it is difficult for courts to accept the argument that the retrospective operation is harsh and therefore, the legislation itself is invalid.
In the context of Income tax Act, in Lohia Machines case, while striking down the retrospective amendment, the court held that unreasonableness or arbitrariness with retrospective effect has to be judged on merits in the light of the facts and circumstances of each case.
Last week, the Delhi High Court in a Landmark case of Madhushree Gupta upheld the constitutionality of an amendment to a penalty provision enacted with retrospective effect. The Court held that a prima facie satisfaction having been arrived at by the officer should be evident from the order. A mere statement “penalty proceedings are initiated separately” would not serve the purpose even after the amendment. The retrospective amendment sought to overcome lapses of tax administration for levy of penalty.
In general, it is observed that in majority of the cases, the challenge by the taxpayers to retrospective amendments, do not succeed. Harward Law Review while discussing legislature’s power to make amendments retrospectively opines the Court’s tilt towards upholding such amendments.
Even otherwise, courts have consistently held that retrospective amendments are necessary to enable the legislature to cure inadvertent defects in statutes or lapses of tax administration, what has been aptly called 'small repairs'. It is clear that the interest in retroactive curing of defects in the administration outweighs an individual's interest in benefiting from the defect.
Courts have been reluctant to override the legislative intent as to the necessity for retrospective taxation, not only due to paramount governmental interest in seeking revenues, but since taxes unlike contractual obligation are means of apportioning the costs of Government.
Conclusion
The challenge for us is to explain such amendments to foreign investors. Consistent resort to retroactive legislation does result in shake up of investor confidence. In an emerging scenario, emphasis should be more on stability in tax laws and Governments should refrain from resorting to retrospective legislation which has tendency to unsettle the past positions.
From the Government’s standpoint, there is limited principle of estoppel applicable on tax legislation and it can go back on its promises, which was not intended!
The author is a Partner with BMR Advisors and views are entirely personal
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