Income Tax 03 Feb,2020
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Is Taxpayer’s Charter proposed to be introduced retrospective or prospective?
S. KrishnanCA

Introduction

Finance Bill 2020 introduced by the Government yesterday i.e. on 1st February,2020 proposes to insert a new section 119A vide clause 64 of the Finance Bill whereby the Central Board of Direct Taxes(CBDT) is empowered to adopt and declare a Taxpayer's Charter and issue such orders, instructions, directions or guidelines to other income-tax authorities as it may deem fit for the administration of such Charter and it has been stated that this amendment will take effect from 1st April, 2020.

One question that immediately arises is "Whether the proposed introduction of a new section (and not an amendment to an existing section) is retrospective in operation or prospective in operation?"

This interesting question which will have far reaching consequences is analysed in the ensuing paragraphs.

What is Standard Operating Procedure?

Standard Operating Procedure or SOP as it is popularly known, is a procedure written with step-by-step instructions that describe how to perform a routine activity. In fact, this procedure is already in vogue in the Income-tax Department and is being followed by income-tax officials. In fact, some of such instructions are draconian in nature and go against the spirit and intent of the legislature. One such instruction which is prevalent as on date is that proposed investments to be made by Non-Resident Indians (NRIs) in New Capital asset being a residential property and/or capital gain bonds to take advantage of provisions of sections 54/54F/54EC of the Act out of capital gains arising as a result of sale of a capital asset, are not considered while issuing certificate under section 197 of the Income-tax Act (the Act) to purchaser(s) of properties from NRIs thus subjecting NRIs to lot of stress. The income-tax officials insist that the new capital asset should have been purchased within the time limit stipulated prior to sale of the capital asset as provided in section 54/54F of the Act and/or deposits should have been made in capital gain bonds when application under section 197 of the Act is made. Is this possible? Does not the procedure that is being followed/adopted now amount to rewriting the Act? Some officials suggest that advance can be taken by NRIs from purchasers or the investment can be made out of existing funds of NRIs to fulfil these obligations nay conditions. If an NRI were to take this suggestion seriously then the money to be received from the purchaser for the purpose of this investment would have to be grossed up and this amount would be a staggering amount as tax would be deducted "at the rates in force" as stipulated in section 195(1) of the Act because this receipt would be an uncovered one- not covered by certificate to be issued by the Assessing Officer. With regard to the second part of the suggestion of utilising existing funds for investment in capital asset being a residential property and/or capital gain bonds, it is not advisable as the Income-tax Department during the time of faceless assessment may disallow this investment as "the same had not emanated from the sale proceeds of the property" though there are number of precedents favourable to the assessee that the investment in new property need not come out of sale proceeds of the property. The NRI- assessee then will have to face "faceless appeal" and if he is not successful before the First Appellate Authority then he will have to prefer an appeal before the Income-tax Appellate Tribunal (ITAT). As per the proposed amendment in the proviso to section 254(2A) of the Act " the ITAT may grant stay under the first proviso subject to the condition that the assessee deposits not less than twenty per cent of the amount of tax, interest, fee, penalty, or any other sum payable under the provisions of this Act, or furnish security of equal amount in respect thereof." Moreover, by not permitting the NRI to invest in capital gain bonds because of excess withholding of tax directed by the Assessing Officer on account of not considering the investment in capital gain bonds, our country would be losing inflow of funds into the system of investments.

This cannot be the intention of the legislature.

The proposed amendment is not retrospective in nature

To understand whether the proposed amendment is prospective or retrospective in nature, reference may be made to the observations made at para.39 by the Constitution Bench of the Supreme Court in the case of CIT vs. Vatika Township (P.) Ltd. [2014] 49 taxmann.com 249/227 Taxman 121/367 ITR 466 (SC) which were to the following effect-

"42.1. "Notes on Clauses" appended to the Finance Bill, 2002 while proposing insertion of proviso categorically states that "this amendment will take effect from 1.6.2002". These become epigraphic words, when seen in contradistinction to other amendments specifically stating those to be clarificatory or retrospectively depicting clear intention of the legislature. It can be seen from the same notes that a few other amendments in the Income Tax Act made by the same Finance Act specifically making those amendments retrospective. For example, clause 40 seeks to amend S.92F. Clause (iii-a) of S.92F is amended "so as to clarify that the activities mentioned in the said clause include the carrying out of any work in pursuance of a contract." (emphasis supplied). This amendment takes effect retrospectively from 1-4-2002. Various other amendments also take place retrospectively."

"epigraphic" means intending to suggest the theme or purpose of the amendment.

So, intent of the legislature has to be studied and understood to ascertain whether an amendment falls in any one of the following categories—

  (i)   prospective amendment with effect from a fixed date;

(ii)   retrospective amendment with effect from a fixed anterior date; and

(iii)   clarificatory amendments which are retrospective in nature.

So, in the light of the above it is clear that proposed amendment is prospective in nature.

Suggestion

As the proposed amendment is understood to be prospective in nature whether can it be stated that instructions so far given have no legal sanction and more so when the instructions go against the provisions of the Act?

The Supreme Court in the case of CIT vs. S.V. Gopala Rao [2017] 396 ITR 694 (SC) affirming the decision of the Andhra Pradesh High Court in the case of S.V. Gopala Rao vs. CIT [2004] 270 ITR 433(A.P) held that provisions contained in rule 68B of the Second Schedule to the Income-tax Act, 1961 have statutory force and the CBDT in exercise of its power under section 119 of the Act cannot amend such rule. The circular issued by CBDT in this regard was thus held to be ultra vires.

It is to be noted that as per proviso to section 119 of the Act, no orders, instructions or directions can be issued by CBDT "so as to require any income-tax authority to make a particular assessment or dispose of a particular case in a particular manner"

Is the new provision -proposed section 119A of the Act- brought in to get over this Supreme Court decision?

Be that as it may, it is earnestly expected that the CBDT will come out with Taxpayer's Charter with necessary orders, instructions, directions or guidelines to other income-tax authorities as it may deem fit only for the purpose of (better) administration of such Charter and will not issue instructions so as to interfere with administration of law which ex-facie would be not in tune with the decision of the Supreme Court in the case of S.V. Gopala Rao (supra).

It is also earnestly requested that SOP now introduced in the case of NRIs be withdrawn forthwith in order to enable NRIs to invest in India in new (capital) asset in the form of residential properties and/or capital gain bonds arising out of sale of the original (capital) asset.

(S.KRISHNAN)