Calcutta H.C : Clause (i) of Explanation 1 to section 115JB(2) as inserted by Finance (No. 2) Act, 2009 with retrospective effect from 1-4-2001, is constitutionally valid

High Court Of Calcutta

Peerless General Finance & Investment Company Ltd. vs. DCIT Circle-3, Kolkata

Section 115JB

Debangsu Basak, J.

W.P. No. 1069 Of 2010

May  3, 2017

ORDER

1. The petitioners challenges the vires of clause (i) of explanation 1 to Section 115JB(2) of the Income Tax Act, 1961 in its prospective and retrospective operation.

2. Learner Senior Advocate for the petitioners submits that, such clause was inserted by the Finance (No. 2) Act, 2009 with retrospective effect from April 1, 2001. It provides that, the net profit as shown in the Profit and Loss Account for the relevant previous year must be increased by amount or amounts set aside as provision for diminution in the value of any asset.

3. Learned Senior Advocate for the petitioners refers to CIT v. HCL Comnet Systems and Services Ltd. [2008] 305 ITR 409/174 Taxman 118 (SC) and submits that, the provisions of clause (c) of Explanation to Sub-Section (2) of Section 115JA and clause (i) of Explanation 1 to Sub-Section (2) of Section 115JB of the Income Tax Act, 1961 had received consideration by the Hon’ble Supreme Court and their Lordships were of the view that clause (c) was not attracted in respect of the provisions for bad and doubtful debts which was made to cover up probable diminution in the value of assets, that is, a debt.

4. He contends that, soon after HCL Comnet Systems and Services Ltd. (supra) the Finance (No. 2) Act, 2009 was introduced to the Parliament on July 6, 2009 containing proposals for insertion of clause (g) of Explanation to Section 115JA(2) with retrospective effect from the assessment year 1998-1999 and the impugned clause (i) in Explanation 1 to Section 115JB(2) with retrospective effect from the assessment year 2001-2002. He submits that, no reason was given for the introduction of such provision with retrospective effect. He relies upon Exide Industries Ltd. v. Union of India [2007] 292 ITR 470/164 Taxman 9 (Cal.) and submits that, an amendment can be made after a judgment of the Hon’ble Supreme Court after the legislature discloses the reasons of such amendment and that, such reason must not be inconsistent with the main objects of the enactment.

5. Learned Senior Advocate for the petitioners submits that, the first petitioner is a non-banking financial company. In terms of the directions and prudential norms issued by the Reserve Bank of India under the Reserve Bank of India Act, 1934, the first petitioner is obliged to make a provision for diminution in the value of investment if the decline is not temporary. It is also mandatory for the first petitioner to make a provision in respect of a non-performing asset. The first petitioner is obliged to show such provision separately in its accounts. The amendments introduced impact the first petitioner the most.

6. Learned Senior Advocate for the petitioners submits that, basic reason for introduction of tax on book profit or minimum alternate tax was that, the profit making companies which were paying dividends were not paying tax because of deductions/allowances made under the normal computation provisions of the Act. He refers to Chapter XII-B of the Act and also Section 115JB in this regard. He submits that, Section 115JA was in force up to the assessment year 1998-1999. Tax on book profit was reintroduced as minimum alternate tax by insertion of Section 115JA in Chapter XII-B with effect from assessment year 1997-1998. It was applicable up to 2000-2001. Section 115JB was introduced with effect from assessment year 2001-2002. Explanation 1 to Sub-section (2) of Section 115JB was amended with retrospective effect from April 1, 2001. He refers to the object of adjustments as stated in the Finance Bill, 2008 memorandum. He submits that, a provision for bad and doubtful debts or a provision of diminution in the value of any other assets is not “below the line” item. Such provision has to be necessarily made in order to present a true and fair view of the real income. He contends that, when the net profit as per the audited profit and loss account is the base for taxation of book profit and when according to the Reserve Bank directions and prudential norms such net profit must be arrived at after providing for bad and doubtful debts, it was never the intention of the legislature to subject such provision to tax by adding it back to the net profit. Provisions for bad debts and diminution in value of assets are required to be added back to the net profit as the amendment stands. This requirement is contrary to the directions and prudential norms of the Reserve Bank of India.

7. Learned Senior Advocate for the petitioners contends that, no reason has been given as to why the amendment was necessary and that with retrospective effect. HCL Comnet Systems and Services Ltd. (supra) did not point out any lacuna or defect in the law which the legislature is seeking to cure by retrospective amendment. The amendment is a transgression by the legislature. After HCL Comnet Systems and Services Ltd. (supra) the legislature cannot be permitted to nullify and override the effect of such judgment.

8. Learned Senior Advocate for the petitioners contends that, with the retrospective insertion in 2009, the new and fresh financial burden has arisen retrospectively from 2001. An enforcing fiscal liability is sought to be imposed with retrospective effect which was not envisaged contemporaneously. A tax payer cannot reasonably be expected to absorb the financial burden for the past period when there was no law in place for imposing such burden. The amendment with retrospective effect has to be held to be oppressive and confiscatory. The retrospectivity, therefore, fails the test of Articles 14, 19(1)(g) and 265 of the Constitution. Referring to Avani Exports v. CIT [2012] 348 ITR 391/209 Taxman 59/23 taxmann.com 62 (Guj.) learned Senior Advocate for the petitioners submits that, when there was no defect in the original legislation, the legislature cannot delete a valid piece of legislation with retrospective effect in order to overcome a decision of the Tribunal interpreting the original legislation in a way which benefited the assessee. He submits that, the Hon’ble Supreme Court had approved the same as appearing in CIT v. Avani Exports [2015] 232 Taxman 357/58 taxmann.com 100 (SC). Relying upon Jayam & Co. v. Asstt. Commissioner [2016] 96 VST 1 (SC) he submits that, where a new provision was made for the first time to the detriment of the assessee whereby calculation of input tax credit was made in a manner entirely different from that made before the amendment, such amendment cannot have retrospective effect. He relies upon Whirlpool of India Ltd. v. Union of India [2013] 355 ITR 51/214 Taxman 567/31 taxmann.com 200 (Delhi) and submits that, the statement of objects and reasons did not contain any justification or reason for making an amendment. He refers to the affidavit-in-opposition filed before this Court and submits that, no justification is put forward. In such circumstances, he submits that the impugned clause is illegal, invalid and ultra vires the Constitution offending Articles 14, 19(1)(g) and 265 both in its retrospective and prospective operation.

9. Learned Advocate for the revenue submits that, the contentions raised on behalf of the petitioners are covered by the decision of the Hon’ble division Bench of the Delhi High Court reported at Whirlpool of India Ltd. (supra). He submits that, the other decisions referred to by the petitioner are not directly on the point. He submits that, there are no reasons as to why the view taken in Whirlpool of India Ltd. (supra) should not be followed. He submits that, the writ petition should be dismissed.

10. The constitutional validity of clause (i) of Explanation 1 to Section 115JB(2) of the Income Tax Act, 1961 as inserted by the Finance (No. 2) Act, 2009 with retrospective effect from April 1, 2001 is the subject matter of the present writ petition. The constitutional validity of such a provision with retrospective effect was taken up for consideration by the Division Bench of the Delhi High Court. The contentions as sought to be raised by the petitioner herein were considered in Whirlpool of India Ltd. (supra). The challenges to the vires of such provisions had faild.

11. Learned Senior Advocate for the petitioner submits that, there are few points which the Delhi High Court did not consider in Whirlpool of India Ltd. (supra). He submits that, the necessity to introduce a legislation where there was no mistake in the provision then subsisting, was considered. As rightly pointed out on behalf of the revenue, the contentions of the petitioners were considered in Whirlpool of India Ltd. (supra). I find no reason to take a view contrary to that expressed therein. HCL Comnet Systems and Services Ltd. (supra) was considered in Whirlpool of India Ltd. (supra). Exide Industries Ltd. (supra) is in relation to a different provision of law.

12. Jayam & Co. (supra) concerns challenges to the constitutional validity of the Tamil Nadu Value Added Tax Act, 2006. While upholding the vires of Section 19(20), the Amendment Act, 2010 whereby amendment was given retrospective effect from January 1, 2007, was struck down. It finds that, the amendment fails to meet the tests laid down by the Court in testing the validity of retrospective operation of fiscal laws. It further finds that, the amendment makes a provision for the first time to the detriment of the dealers. Such a provision cannot have retrospective effect, especially when vested rights had accrued in favour of the dealers. Such fact scenario is not obtaining in the present case. The provision impugned in the present writ petition was considered in Whirlpool of India Ltd. (supra) and it has been held that, no new levy has been proposed to be made by the amendment. The nature of the levy has been changed. It merely cures a provision of vice.

13. In such circumstances, W.P. No. 1069 of 2010 is dismissed. No order as to costs.

Later:-

Prayer for stay is made which is considered and rejected.

[Citation : 396 ITR 236]

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