Showing posts with label Taxation. Show all posts
Showing posts with label Taxation. Show all posts
Wednesday, February 18, 2015
Saturday, April 21, 2012
Recovery of Black Money
There is a legal framework regulated by the Reserve Bank
of India for the opening of bank accounts overseas by Indian residents and for
outward or inward remission of funds through authorized channels. The existing
legal framework for dealing with illicitly generated funds transferred overseas
and measures for the attachment and repatriation of such illegal assets to
India and provision for penalties for offenders are:
A. Under the Prevention of Money Laundering Act, 2002
(PMLA), money laundered out of predicate scheduled offences can be attached and
seized and individuals and other legal entities found to have indulged in money
laundering can be prosecuted. PMLA provides for imprisonment of minimum of 3
years (which can be extended up to 7 years) and a fine of up to Rs.5 lakh and
the tainted proceeds parked overseas can be recovered through Mutual Legal
Assistance Treaties. India has such treaties with 26 countries.
B. Under the Foreign Exchange Management Act, 1999
(FEMA), cases relating to contravention in foreign exchange transactions by
Indian residents can be adjudicated with penalty up to a maximum of 3 times the
amount involved. Further, FEMA empowers the confiscation of the amounts lying
abroad and directing their repatriation.
C. Under both statutes (FEMA and PMLA), investigation is
taken up against specific persons, both natural and legal, and on the basis of
specific information.
D. Section 105A of the Cr. PC provides for reciprocal
arrangement and procedure for attachment and forfeiture of properties generated
from the commission of an offence. Where such properties are situated overseas
and treaty arrangements exist between Government of India and the other
country, Letter Rogatories can be issued to a court / authority of the other
country for execution of such an order.
E. Under the Income Tax Act also, income earned and not
disclosed is taxable and also subject to penalty and interest, as well as
prosecution. The amount recovered may even exceed the entire undisclosed
income. This is in effect confiscation of such income / property.
Actions at hand I. India has negotiated / renegotiated
Double Tax Avoidance Agreements and finalized Tax Information Exchange
Agreements with 44 countries so as to strengthen the exchange of information
relating to tax evasion, money laundering and other criminal / illicit
activities.
II. Agencies enforcing these laws have been strengthened and
action is being taken in all cases where credible information is available. In
the last two years, over Rs 33,000 crore of mispricing has been detected in
international trade and over Rs 30,000 crore of tax evasion detected
domestically.
III. Government has commissioned a study, to be completed
within 18 months, by three national-level institutes to assess the extent of
black money inside and outside the country and its impact on national security.
The study will also indicate the sectors and mode of generation of black money
and recommend measures for its prevention and control.
IV. The Direct Taxes Code Bill, as introduced in
Parliament, contains provisions for mandatory declaration of assets held abroad
by taxpayers in India. It also contains provisions such as General Anti
Avoidance and Thin Capitalization Rules to combat illicit transfer of money and
assets abroad through complex financial arrangements and instruments.
V. A Directorate of Criminal Investigation has been
created in the Central Board of Direct Taxes as a dedicated unit to track
financial transactions relating to illegal / criminal activities and bring such
activities to justice.
VI. A High Level Committee has been constituted under the
Revenue Secretary for effective sharing of information among Law Enforcement
Agencies for coordinated investigation / prosecution of economic offences.
A Joint Working Group (JWG) was constituted in 2006 for
the purpose of renegotiating the Direct Taxation Avoidance Convention with
Mauritius and its last meeting was held in 2008. Thereafter, India has
successfully used the mechanism of the Peer Review Group (PRG) of the Global
Forum for Transparency and Exchange of Information for Tax Purposes – of which
India is Vice Chair – to leverage arguments with the Mauritian side to be more
open in furnishing tax related information to India.
Recently, during the visit of President of Mauritius in
end-April, an indication was received that Mauritius would resume the Joint
Working Group dialogue on the DTAC. Further, Foreign Minister of Mauritius has
conveyed that his government will give a fresh mandate for the resumed
negotiations to their experts. This position has been further confirmed by the
Prime Minister of Mauritius to the Indian Minister of State for External
Affairs on 16th May 2011 during her visit to Mauritius.
Hon’ble Supreme Court in the case of Azadi Bachao Andolan
Vs Union of India (2003) endorsed the Mauritius route for investments into
India for availing of the capital gains tax exemption. Hence, any change in the
law relating to Mauritius can only have prospective application and can be in
respect of future holdings/accounts/entities in Mauritius. Proposed Action In
order to strengthen existing laws relating to black money, the government has
constituted a Committee to consult all stakeholders and submit its report within
a period of six months. The Committee will examine the measures to strengthen
the existing legal and administrative framework to deal with the menace of
generation of black money through illegal means including, inter alia, a)
Declaring wealth generated illegally as national asset; b) Enacting / amending
laws to confiscate and recover such assets; and c) Providing for exemplary
punishment against its perpetrators.
Any further suggestions in this regard will be duly
considered. Collection of details regarding people who go frequently to ‘tax
havens’. Government proposes to expand its Immigration/Emigration databases and
build a database of Indians going frequently to foreign countries considered to
be tax havens and returning to India. Lok Pal Bill A Joint Drafting Committee,
consisting of Government and civil society representatives is already looking
into the provisions of the Bill. Government is committed to the widest possible
consultation on the Lok Pal Bill before its introduction in Parliament and
subsequently until the passage of the Bill. As a first step, State Governments
and political parties are being consulted. Further consultations with the
public will follow. Stronger punishment for the corrupt This is also under
consideration of the Joint Drafting Committee. The maximum punishment for cases
of corruption would be increased substantially. It may be noted that money
secured through corrupt modes can now be confiscated under the Prevention of
Money Laundering Act and some cases have already been taken up under these
provisions. Besides, the Department of Personnel is also considering the
inclusion of a chapter in the Prevention of Corruption Act to provide for
confiscation of ill-gotten wealth. Special Courts for dealing with corruption
cases Government has already decided to set up 71 new special courts for trial
of CBI cases. The number of public prosecutors, inspectors, head constables and
stenographers for additional special courts has been increased. Government is
open to the idea of more special courts to speed up trial of corruption cases.
Public Services Delivery Act Various initiatives have
already been taken by Government, including Citizens’ Charters, Sevottam and
the recently introduced performance management & evaluation system. The
Central Government is prepared to introduce a Public Services Delivery Bill in
Parliament at the earliest and to prepare a Model Bill for adoption by State
Governments. The Central Government will encourage State Governments to adopt
the Model Bill to improve the quality and timeliness of public service
delivery. Technical Education in Indian Languages The Commission for Scientific
and Technical Terminology has been set up with a mandate of providing more
regional language material in technical subjects. The Commission’s work will be
strengthened and speeded up. The National Translation Mission under the Central
Institute of Indian Languages, Mysore will also be strengthened. It may be
noted that the Civil Services Examination is now held in Hindi as well as in
regional languages. Similarly, Hindi is a medium for writing the IIT-JEE
examination. The All India Engineering Entrance Examination, in which more than
11 lakh students appear each year, also offers Hindi as a medium. NCERT
provides text books in Hindi and Urdu. In Tamil Nadu, Tamil is a medium of
instructional examination for degree courses for technical education.
Similarly, in the States of Rajasthan, Uttar Pradesh, Haryana, Bihar and Madhya
Pradesh, the regional language is a medium of instruction and for examination
in diploma level courses in technical education. In addition to all these
initiatives, the Ministry of Human Resource Development has asked AICTE, which
is charged with the duty of determining and maintaining standards of technical education
in the country to constitute a Committee of Experts to draw up a concrete plan
for measures to be taken to increase the use of Indian languages in technical
education. This Committee will submit its report in 3 months. 6 Land
Acquisition Act The Act is in the process of amendment and any suggestions
regarding its provisions can be considered for inclusion. Government is
committed to wide public consultation on the amendments to the Land Acquisition
Act. Agriculture Government has already initiated several projects for
promotion of organic farming and the use of bio-pesticides and bio-fertilizers.
This includes the National Project on Organic Farming, National Horticulture
Mission and the Rashtriya Krishi Vikas Yojana. As a result, organic farming which
only covered 42000 hectares in 2004-05, now covers 10.8 lakh hectares. Nine
States have drafted organic farming policies. There has been substantial
increase in production of compost, bio-fertilizers and development of
vermiculture. To sustain agricultural productivity in the long run and to
address soil health issues, Government is giving special thrust to organic
farming under the National Mission on Sustainable Agriculture and is promoting
farming practices like green manuring, biological pest control and so on. These
measures will be further strengthened and outlays increased. Minimum support
prices are even now based on cost calculations. Elaborate studies are conducted
by the Commission on Agricultural Costs & Prices each year before Government
finalizes the minimum support prices. These cost studies form the basis of the
minimum support prices that are announced. The labour put in by the farmers is
also part of the costs. Government will facilitate explanation of the
methodology followed by the Commission at the technical level.
India presses for automatic exchange of tax information at G-20
Worried over the spurt in cross border transactions and tax evasion,
India has pressed for automatic exchange of information among the countries to
deal with the menace.
“India believes that
Automatic Exchange of Information is one of the most effective ways to improve
voluntary tax compliance and decrease tax evasion and there is a need to make
it obligatory,” Finance Minister Pranab Mukherjee said at the meeting of G-20
Ministers.
The G-20 nations, a
grouping of rich and developing countries, he said, should impress upon tax
havens and those believing in banking secrecy not to give such exemptions that
neutralise the efficacy of global Convention on tax matters.
The Multilateral Convention
on Mutual Administrative Assistance provides member countries mutual
administrative assistance in tax matters.
“To make the
Convention really effective, the G-20 should give a call that the Convention is
signed by Offshore Financial Centres and countries traditionally believing in
secrecy of bank laws and that country should not give exemptions which will
eclipse the efficacy of the Convention,” Mr. Mukherjee said.
With the relaxation
of foreign investment policies, he said, “there has been a great increase in
cross border transactions which bring into focus issues of tax evasion and
illicit flows that pose serious challenges to the world economy”.
Speaking at the
Financial Action Task Force (FATF) Ministerial meeting here, Mukherjee called
for a transparent financial system and said that no country can alone meet the
threats of money laundering and terrorist financing.
“There is an ever
growing need for international cooperation to deal with these threats... We
hope the new standards will improve the domestic and international cooperation
amongst the agencies to combat these crimes,” he said.
Mr. Mukherjee also
called for a system that would prevent and detect the misuse of formal and
informal channels and also to determine the beneficial owners.
The FATF is an
inter-governmental body set up by the G-7 nations for creating global policies
and framework to combat money laundering and terror financing.
India became the 34th
member country of FATF in 2010 and Mukherjee is the first Indian minister to
participate in the conference.
Besides, at the
meeting of the G-20 Ministers, Mr. Mukherjee said the global financial system
continues to face a complex set of challenges.
“While some countries
and regions are recovering from the crisis of 2008, others are confronting
renewed turbulence. The uncertain and uneven recovery has led to calls in some
quarters to weaken financial reform initiatives,” he said.
Mr. Mukherjee further
said a coordinated regulatory response is essential to tackle the volatile
financial markets and anemic growth prospects worldwide.
INTERPRETATION OF TAXING STATUTES
Taxing
Power
Article
265 of the constitution mandates that no tax shall be levied or collected
except by the authority of law. It provides that not only levy but also the
collection of a tax must be under the authority of some law. The tax proposed
to be levied must be within the legislative competence of the Legislature
imposing the tax. The validity of the tax is to be determined with reference to
the competence of the Legislature at the time when the taxing law was enacted.
The law must be validly enacted; i.e., by the proper body which has the
legislative authority and in the manner required to give its Acts, the force of
law. The law must not be a colourable use of or a fraud upon the legislative
power to tax. The tax must not violate the conditions laid down in the
constitution and must not also contravene the specific provisions of the
Constitution. The tax in question must be authorised by such valid law.
Taxation, in order to be valid, must not only be authorised by a statute but,
must also be levied or collected in strict conformity with the statute, which
authorises it. No tax can be imposed by any bye-law rule or regulation unless
the ‘statute’ under which the subordinate legislation is made specifically
authorises the imposition and the authorisation must be express not implied.
The procedure prescribed by the statute must be followed. Tax is a compulsory
exaction made under an enactment. The word tax, in its wider sense includes all
money raised by taxation including taxes levied by the Union and State
Legislatures; rates and other charges levied by local authorities under
statutory powers. Tax includes any ‘impost’ general, special or local. It would
thus include duties, cesses or fees, surcharge, administrative charges etc. A
broad meaning has to be given to the word “tax”.
The
‘tax’, ‘duty’, ‘cess’ or ‘fee’ constituting a class denotes to various kinds of
imposts by State in its sovereign power of taxation to raise revenue for the
State. Within the expression of each specie each expression denotes different
kind of impost depending on the purpose for which they are levied. This power
can be exercised in any of its manifestation only under any law authorising
levy and collection of tax as envisaged under Article 265 which uses only
expression that no ‘tax’ shall be levied and collect except authorised by law.
It in its elementary meaning conveys that to support a tax legislative action
is essential, it cannot be levied and collected in the absence of any
legislative sanction by exercise of executive power of State under Article 73
by the Union or Article 162 by the State Under Article 266(28) “taxation” has
been defined to include the imposition of any tax or impost whether general or
local or special and tax shall be construed accordingly. “Impost” means
compulsory levy.
The
well known and well settled characteristic of ‘tax’ in its wider sense includes
all imposts. Imposts in the context have following characteristics: (I) The
power to tax is an incident of sovereignty; (ii) ‘Law’ in the context of Art,
265 means an Act of legislature and cannot comprise an executive order or rule
without express statutory authority; (iii) The term ‘tax’ under Article 265
read with Article 266(28) includes imposts of every kind viz., tax, cess or
fees; (iv) As an incident of sovereignty and in the nature of compulsory
exaction, a liability founded on principle of contract cannot be a ‘tax’ in its
technical sense as an impost, general, local or special.
Article
246 deals with the distribution of legislative powers as between the Union and
the State legislatures, with reference to the different lists in the Seventh
Schedule. The gist of the article, in short is, that the Union Parliament has
fully and exclusive power to legislate with respect to matters in List I and
has also power to legislate in respect to matters in list III. The State
legislatures, on the other hand, has exclusive power to legislate with respect
to matters in List II, minus matters falling in Lists I and III and has a
concurrent power with respect to matters included in List III. The Parliament
and the State legislature can legislate only in respect to the matters
contained relating to tax in such List. One cannot travel beyond the power
conferred under the said Article.
Taxes
are levied and collected to meet the cost of governance, safety, security and
for welfare of the economically weaker sections of the Society. It is well
established that the Legislature enjoys a wide latitude in the matter of
selection of persons, subject-matter, events, etc., for taxation. The tests of
the vice of discrimination in a taxing law are less rigorous. It is well
established that the Legislature is promulgated to exercise an extremely wide
discretion in classifying for tax purposes, so long as it refrains from clear
and hostile discrimination against particular persons or classes.
Rules
of Interpretation
In
every treatise upon interpretation of statutes, different attitudes are
attributed to the subject matter or nature of the statute so as to consider as to
the effect of the object of the particular statute which is sought to be
achieved. For such purpose the expressions “shall” or “may” or laying down an
affirmative procedure etc. used in the statute frequently came for judicial
consideration. Having regard to the subject matter of statute such in as
beneficial or welfare legislature the word “may” which generally confer a
discretion upon the authority exercising the power is very often construed as a
discretion coupled with duty so as to construe the expression “may” as a
mandatory provision in that what was not explicitly stated in the statute is
construed as mandatory, as if this is implicit in the statute.
Mandatory
and Directory
The
question as to whether a statute is mandatory or directory depends upon the
intent of the Legislature and not upon the language in which the intent is
clothed. The meaning and intention of the Legislature must govern, and these
are to be ascertained not only from the phraseology of the provision but also
by considering its nature, its design, and the consequences which would follow
from construing it one way or the other. The use of the word shall in a
statutory provision, though generally taken in a mandatory sense, does not
necessarily mean that in every case it shall have that effect, that is to say,
unless the words of the statute are punctiliously followed, the proceeding or
the outcome of the proceeding would be invalid. On the other hand, it is not
always correct to say that where the word “may” has been used, the statute is
only permissive or directory in the sense that non-compliance with those
provisions will not render the proceedings invalid. The user of the word “may”
by the legislature may be out of reverence. In the setting in which the word
“may” has been used need consideration and given due weightage.
Sec
154 of IT Act 1961, is to ensure that injustice to the assessee or to the
revenue may be avoided. It is implicit in the nature of the power and its
entrustment to the authority invested ,with quasi-judicial functions under the
Act, that to do justice it shall be exercised when a mistake apparent from the
record is brought to his notice by a person concerned with or interested in the
proceeding. That power is not discretionary and the Income-tax Officer cannot,
if the conditions for its exercise were shown to exist, decline to exercise it
as held by the Supreme Court in L. Hirday Narain vs. I.T.O[1].
The
use of the word “shall” in a statute ordinarily speaking means that the
statutory provision is mandatory. It is construed as such unless there is
something in the context in which the word is used which would justify a
departure from this meaning. Where the assessee seek to claim the benefit under
the statutory scheme, they are bound to comply strictly with the condition
under which the benefit is granted. There is no scope for the application of
any equitable consideration when the statutory provisions are stated in plain
language. The courts have no power to act beyond the terms of the statutory
provision under which benefits have been granted to the assessee.
It
is beyond any cavil that the question as to whether the provision is directory
or mandatory would depend upon the language employed therein. (See Union
of India and Others vs. Filip Tiago De Gama of Vedem Vasco De Gama[2]. In a case
where the statutory provision is plain and unambiguous, the Court shall not
interpret the same in a different manner, only because of harsh consequences
arising there from. The ‘Court’s jurisdiction to interpret a statute can be
invoked when the same is ambiguous. It is well known that in a given case the
Court can iron out the fabric but it cannot change the texture of the fabric.
It cannot enlarge the scope of legislation or intention when the language of
provision is plain and unambiguous. It cannot add or subtract words to a
statute or read something into it which is not there. It cannot re-write or
recast legislation.
It
is also necessary to determine that there exists a presumption that the
Legislature has not used any superfluous words. It is well settled that the
real intention of the legislation must be gathered from the language used. It
may be true that use of the expression ‘shall or may’ is not decisive for
arriving at a finding as to whether statute is directory or mandatory. But the
intention of the Legislature must be found out from the scheme of the Act. It
is also equally well settled that when negative words are used the courts will
presume that the intention of the Legislature was that the provisions are
mandatory in character.
In
India, however, the Courts of law in construing a taxing statute lean on the
ratio of the case of Cape Brandy Syndicate and goes by the words used
in the statute without searching for any intendment of use of such expressions
as they often do in construing different nature of statute such as beneficial
statute, welfare statute more particularly the legislation relating to
protection of the rights of industrial workers. However, an exception to this
rule has been made by the Supreme Court in the case ofState of Orissa vs. M. A.
Tullock & Co[3]. In that
case while the statute namely sec. 5 (2)(a)(ii) of the Orissa Sales Tax Act,
1947 did not make it mandatory for a dealer that he must produce a true
declaration in writing by the purchasing dealer or by such responsible person
as may be authorised in writing in this behalf by dealer that the goods in
question are specified in that purchasing dealer’s certificate of registration
being required for resale by him or in the execution of a contract the rule
made by the rule making authority made it mandatory. The Supreme Court held in
the case of Kedarnath Jute Manufacturing Co. vs. CTO[4] that
the said mandatory provision in the Orissa Sales Tax Rule was inconsistent with
sec. 5(2)(a)(ii) of the Orissa Sales Tax Act and to avoid that conflict that
notwithstanding the use of the expression “shall produce a true declaration”
that the rule was only directory and therefore it would be enough if it was
substantially complied.
Revenue
Statute
In
a revenue statute where by the legislature by an enactment imposes a tax or
charge the rule of construction or interpretation of such statute has been more
or less unanimously construed by Courts in England as also in India in a
simpler manner.
In
the words of Lord Thankerton in the case of I R C vs. Ross and Coulter[5] observed
“counsel are apt to use the adjective ‘Penal’ in describing the harsh
consequences the taxing provisions, but if the meaning of the provisions, is
reasonably clear, the Courts have no jurisdiction to mitigate such harshness.
On the other hand, if the provision is capable of two alternative meanings, the
Courts will prefer that meaning more favourable to the subject. If the
provision is so wanting in clarity that no meaning is reasonably clear, the
courts will be unable to regard it as of any effect.”
These
fundamental principles have been accepted by Supreme Court in a number of
cases. To illustrate Bhagawati J. stated the principle as follows:
“In
construing fiscal statutes and in determining the liability of a subject to tax
one must have regard to the strict letter of law. If the revenue satisfies the
court that the case falls strictly with the provisions of the law, the subject
can be taxed, If, on the other hand, the case is not covered within the four
corners of the provisions of the statute, no tax can be imposed by inference or
by analogy or by trying to prove into the intentions of the legislature and by
considering what was the substance of the matter”.
Long
days back the House of Lord expressly affirmed the cardinal principles of Duke
of Westminster vs. I.R[6]. in
applying the principle of construction implicit in a revenue statute that
the citizen has the legal right to dispose of his capital and income so as to
attract upon himself the least amount of tax. Avoidance of tax is not a tax
evasion and it carries no ignominy with it anybody can so arrange his affairs
so as to reduce the burden of tax to minimum. In the case of Duke of
Westminster the House of Lords so observed that “given that a document of
transaction is genuine the Court cannot go behind it to some supposed
underlying substance”.
However,
the Supreme Court in a Sales Tax case in McDowell vs. CTO[7]took the view
that the legal position in case of tax avoidance should be taken as altered in
the light of three judgments of the House of Lords (i)Ramsay vs I R[8] (ii) I
R vs. Burmah Oil[9] (iii) Furniss
vs Dawon[10].
The
eminent jurist Mr. N. A. Palkhivala in one of his books “We The Nation, The
Lost Decades” in an illuminating article have analysed the judgment of Supreme
Court in McDowell vs. CTO and considered the validity of ruling of
the Supreme Court blurring the distinction between tax avoidance which is
legitimate and tax evasion. By an in depth analysing the said judgment in
McDowell’s case, Mr. Palkhivala observed that the Courts’ pronouncement
obliterating such distinction is patently incorrect and proceeds on a total
misreading of three decisions of the House of Lords. In the said article he
also observed “the whole object is that in a taxing statute the courts
have little scope to find out the underlying intention of the legislature
beyond what is stated in the plain language of the statute” is relevant in
this context.
Conclusion
I
conclude this Article by quoting a classic passage of words of the Late
Rowlatt J who explained the rule of interpretation of revenue
statute in the case of Cape Brandy Syndicate vs. I R C[11]:
“In
a taxing enactment, one has to look at what is clearly said. There is no room
for any intendment. There is no equity about a tax. There is no presumption as
to a tax. Nothing is to be read in, nothing is to be implied. One can only look
fairly at the language used.”
The
Author of this article is a co-author of the book titled ‘The Principles of
Interpretation of Statutes’.
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[Published in Circuit Magazine (Monthly), ICWAI , November, 2010]
[Published in Circuit Magazine (Monthly), ICWAI , November, 2010]
[2] Union of India and Others vs. Filip Tiago De Gama of Vedem Vasco
De Gama; (AIR 1990 SC 981 : (1989) Suppl. 2 SCR 336)
SPEAKING ORDERS OR REASONED DECISIONS
Justice not only should be done, it should appear to
have been done is an old adage. The concept of natural justice that one must be
heard before he is condemned has its root in ancient law. Though it is
difficult to precisely define what is meant by natural justice, the contents of
principles of natural justice are quite easy to enumerate. As it stands today,
the basic principles of Natural justice are:
1) that
the parties should be heard before deciding an issue;
2) the
hearing must be before an impartial Judge, as no man can be judge of his own
cause. Therefore, the hearing must be before an unbiased Judge;
3) the
Judge should decide in good faith. He should have no bias, personal or
pecuniary; and
4) the
decision given must be reasoned one and therefore, the decision must be
evidenced by a speaking order which enumerates the reasons for coming
to a particular conclusion.
The American Due Process of Law postulates: (a)
notice (b) opportunity to be heard (c) an impartial tribunal and (d) an orderly
course of procedure. The concept of speaking order as a part of principles of
natural justice is a significant and important contribution by Indian
jurisprudence. While the English Jurists and Judges have hesitated in adopting
speaking order as a part of the principles of natural justice, the Indian
courts, particularly the Hon’ble Supreme Court has unequivocally accepted that
speaking order is the third important basic principle of natural justice.
Therefore, as it stands as far as the Indian law is concerned, the three basic
accepted principles of natural justice are
1) that the dispute
should be decided by an impartial judge without any bias or interest against
the parties and in the subject-matter of dispute;
2) ‘Audi alteram
partem’ which means, no man should be condemned unheard. Both parties must
be heard before passing any order;
3) that the decisions
must be reasoned one and the orders containing the decision must be speaking
orders.
Therefore, the third principle of natural justice is
that a party ought to know the result of the inquiry and the reasons for the
decision.
A ‘speaking order’ means an order speaking for
itself by giving reasons. Speaking orders are necessary if the judicial review
is to be effective. The party affected must know why and on what grounds an
order has been passed against him. This is a new principle of natural justice
which has been recognised in India and USA, but, however, yet to be recognised
under English Law. There is no general rule of English law, that reasons must
be given for administrative or even judicial decisions. In India also till very
recently, it was not accepted that the requirement of passing speaking orders
is one of the principles of natural justice. However, now it is well
established principle of natural justice. The Courts have specifically held
that passing of a speaking order is a part and parcel of natural justice. As
the Hon’ble Supreme Court observed in M.P. Industries vs. Union of India[1],“So it is
essential that some restrictions shall be imposed on Tribunals in the matter of
passing orders affecting the rights of parties and the least they should do is
to give reasons for their orders.”
The courts have justified the requirement for a speaking
order on three grounds:
1) the party aggrieved
has the opportunity to demonstrate before the appellate or revisional court
that the reasons which persuaded the authority to reject his case were
erroneous;
2) the obligation to
record reasons operates as a deterrent against possible arbitrary action by
executive authority invested with judicial power; and
3) it gives
satisfaction to the party against whom the order is made. The power to refuse
to disclose reasons in support of the order is of an exceptional nature and it
ought to be exercised fairly, sparingly and only when fully justified by the
exigencies of an uncommon situation.
The Supreme Court observed in Siemens Engg. vs.
Union of India[2], “The
rule requiring reasons to be given in support of an order is like the principle
of ‘audi alteram partem’, a basis principle of natural justice, which must
inform every quasi-judicial process and this rule must be observed in its
proper spirit and mere pretence of compliance with it would not satisfy the
requirement of law.”
In respect of the speaking order, the law may
be summarised as under:
1) Where
a statute requires recording of reasons in support of the order, it imposes an
obligation on the adjudicating authority and the reasons must be recorded by
the authority.
2) Even
when the statute does not lay down expressly the requirement of recording
reasons, the same can be inferred from the facts and circumstances of the case.
3) Mere
fact that the proceedings were treated as confidential, does not dispense with
the requirement of recording reasons.
4) If
the order is subject to appeal or revision, the necessity of recording reasons
is greater as without reasons the appellate or revisional authority cannot
exercise its power effectively inasmuch as it has no material on which it may
determine whether the facts were correctly ascertained, law was properly
applied and the decision was just and based on legal, relevant and existent
grounds. Failure to disclose reason amounts to depriving the party of the right
of appeal or revision.
5) There
is no prescribed form and the reasons recorded by the adjudicating authority
need not be detailed or elaborate and the requirements of recording reasons
will be satisfied if only relevant reasons are recorded.
6) If
the reasons recorded are totally irrelevant, the exercise of power would be bad
and the order is liable to be set aside.
7) It
is not necessary to record reasons by the appellate authority when it affirms
the order passed by the lower authority. (This proposition of law requires
reconsideration).
8) Where
the lower authority does not record reasons for making an order and the
appellate authority merely affirms the order without recording reasons, the
order passed by the appellate authority is bad.
9) Where
the appellate authority reverses the order passed by the lower authority
reasons must be recorded, as there is a vital difference between an order of
reversal and an order of affirmation.
10) The validity
of the order passed by the statutory authority must be judged by the reasons
recorded therein and cannot be construed in the light of subsequent explanation
given by the authority concerned or filing affidavit. Orders are not like old
wine becoming better as they grow older.
11) If the
reasons are not recorded in the order, it does not always vitiate the action.
12) The duty to
record reasons is a responsibility and cannot be discharged by the use of vague
general words.
13) The reasons
recorded by the statutory authority are always subject to judicial scrutiny.
In taxation matters
Taxation laws are no exception to application of
principles of natural justice. As the courts have held; the principles of
natural justice are applicable in tax matters, particularly in the case of
assessment proceedings. Coming to the tax field in CIT vs. Walchand,
Justice Shah observed. “The practice of recording a decision without
reasons in support cannot, but be deprecated.”
In Surajmal’s case, the Hon’ble Supreme Court
observed: “The assessment has to be made on relevant materials as evidenced and
the assessee ordinarily has the fullest rights to inspect all records and
materials that are to be used against him. Under the provisions of section 37
of the Indian Income-tax Act, 1922, the proceedings before the Income Tax
Officer are judicial proceedings and all the incidence of such judicial
proceedings are to be observed before the result is arrived at. In other words,
the assessee would have a right to inspect the records and all relevant
documents before he is called upon to lead evidence in rebuttal. The broad
principles emerged in view of application of principles of natural justice are
the assessing officers exercising quasi-judicial function would be governed in
procedure by judicial consideration and must conform to the rules of natural
justice.That is to say, he must proceed without bias and give sufficient
opportunity to the assessee to place his case before the Department. He must
conduct himself in accordance with the principles of justice, equity and good
conscious. The assessing officer cannot rely on any evidence or any fact
in arriving in his conclusion without first pointing out the same to the
assessee and giving him a reasonable opportunity of meeting the case which is
ultimately made out in the assessment order.
In the case of Dhakeswari Cotton Mills, where
the principle of natural justice were violated, the Supreme Court set aside the
assessment.”
Useful reference may be made to the following cases,
wherein the issue of operation of Principles of Natural Justice was considered.
The Supreme Court in CIT vs. Electro House[3] set
aside the order of the Commissioner u/s. 263 as the Commissioner has not given
a reasonable opportunity of being heard to the assessee. However, the Hon’ble
Supreme Court held that the violation of Rule affected only the order and not
the jurisdiction of the Commissioner and as such, it held that, the
Commissioner could pass a fresh order after hearing the assessee.
Similarly, the Hon’ble Andhra Pradesh High Court in Moh.
Begum vs. CIT[4] held
that the order passed in violation of principles of natural justice, does not
make the whole proceedings invalid ab initio, but it only affects the order
passed in violation of these principles.
In Raja vs. CIT[5], the
Hon’ble Madras High Court held that any order passed in violation of principles
of natural justice is null and void. However, as long as the order so passed is
not set aside by the competent Court or Authority, it will continue to operate.
The Hon’ble Supreme Court again in Supt. Excise
vs. Pratap Rai[6] andCIT
vs. National Taj Theatres[7] held
that the order passed in violation of natural justice, though void, it does not
affect the jurisdiction otherwise vested in such authority and in exercise of
such authority, it can pass fresh orders. The Hon’ble Court also held that the
limitation to pass the order within two years under section 263 would be
applicable only for passing the original order and not for passing a fresh
order in pursuance of the Appellate or other order setting aside the original order.
The Courts have held that the Assessing Officer need
not hear the assessee before recording the reasons for re-opening the completed
assessment and before initiating reassessment proceedings. Similarly, it has
been held that the Wealth Tax Officer need not hear the assessee before
referring the matter for valuation to the Valuation officer u/s.16A of the
Wealth-tax Act, 1957. However, the Courts have held that the Valuation Officer
must hear the assessee before he makes his valuation report.
In Kapurchand vs. CIT[8] the
facts were that the Commissioner had passed an order in violation of principles
of natural justice. In such cases, the Hon’ble Supreme Court held that the
Tribunal, while cancelling the order ought to have directed the Commissioner to
pass a fresh order.
In Ajanta Industries vs. CBDT[9], The
Hon’ble Supreme Court set aside an order u/s.127 of the Income-tax Act, 1961
for transferring the case of the assessee, because the reasons recorded for his
satisfaction were not conveyed to the assessee, and as such, such order was
passed in violation of the principles of natural justice.
In Briharilal vs. CIT[10], the
Hon’ble Supreme Court held that a garnishee order passed without hearing the
person against whom it is passed in the course of recovery proceedings, is void
because the same had violated principles of natural justice.
The rules of natural justice were fully applied in
case of exercise of jurisdiction of the Commissioner u/s. 273A for waiver or
reduction of penalty, interest etc. The Commissioner must pass a speaking
order while exercising his jurisdiction u/s. 273A, giving reasons for his
answer and non speaking order is liable to be set aside. Similarly, while
passing the order, he should take into account all material facts and should
not take into account facts which are not material.
In case of the authorities exercising jurisdiction
to grant approval or exemption and the tax-payer has a right to claim it on
fulfillment of the statutory condition, the tax-payer should be given a
reasonable opportunity of being heard, and the authority is bound to pass a
speaking order and give reasons in support of his finding that the tax-payer is
not entitled to the approval or exemption (Bharat Nidhi vs. Union of India[11]). Similarly,
the assessing, appellate and revisional authorities must pass speaking orders.
------------------------------------------------------------------------------------------------------------
[Published in Corporate Secretary of ICSI, November, 2010]
[Published in Corporate Secretary of ICSI, November, 2010]
Thursday, April 19, 2012
POWER OF TAXATION AND CONSTITUTIONAL LIMITATIONS
Concept
Power is a measure of a person's ability to control
the environment around, including the behavior of other persons. The term
authority is often used for power perceived as legitimate by the social
structure. Power manifests itself in a rational manner: one cannot
meaningfully say that a particular social actor "has power" without
also specifying the role of other parties in the social relationship.
Political power is a type of power held
by a person or group in a society. There are many ways to hold such power.
Officially, political power is held by the holders of sovereignty. Political
powers are not limited to heads of states, however, and the extent to which a
person or group holds such power is related to the amount of societal influence
they can wield, formally or informally. In many cases this influence is not
contained within a single State and it refers to international power. Political
scientists have frequently defined power as "the ability to influence the
behaviour of others" with or without resistance.
Sovereignty is the most important constituent
element of the State and there can be no State without a Sovereign power. The
sovereignty of the State is unlimited internally as well as externally. It is
original and absolute power and it cannot be divided. Division of sovereignty
means destruction of sovereignty. Sovereignty represents the unity of the
State, and the sovereign State is one which is externally free and internally
supreme.
All governmental organs and institutions owe their
origin to the constitution and derive their powers from its provisions. These
organs and institutions enjoy only such powers as are conferred on them and
function within limits demarcated by the constitution. Parliament is no
exception and unlike British Parliament, cannot claim unlimited powers. It must
function within its limits and its actions are subjected to judicial scrutiny.
It is given the power to amend the constitution, but the power to amend must be
exercised within the bounds of the constitution. Besides conforming to the
procedure laid down for this purpose, the power to amend should not be
exercised so as to destroy or abrogate the basic structure or framework of the
constitution.
In a sense the constitution may appear to be
sovereign as it is the supreme law of the land. However a document cannot be
the sovereign. The people of India, according to the Preamble, have given to
themselves this constitution. The source of the constitution is the people of
India will continue to be governed under the constitution so long as it is
acceptable to them and its provisions promote their aims and aspirations. It is
true that the constitution was adopted by the constituent assembly which was
not directly elected by the people. But that does not necessarily mean that the
constituent assembly as it came to be constituted, did not project the feelings
of the people. The fact that the constitution has been in operation for about
sixty years with a number of general elections from time to time is an evidence
of the people having accepted the constitution in its present form. Following
the course of Indian history and the pattern of Indian politics, it may be said
that, unlike the Western society, it is the elite of the Indian society rather
than the people themselves who have set the tone for the reformation of the
society. Besides the fact that the Preamble provided that the people of India
have enacted and given to themselves the constitution and its continued acceptance
by the people over the years leads to no other conclusion that the binding
force of the constitution is the sovereign will of the people of India. If at
any stage of history, the people find the constitution is not serving the needs
of the Indian Society, the people of India may, if necessary, set in motion
machinery which provides for a system suited to the aims and aspirations of the
people. It may therefore, be rightly observed that the sovereignty lies with
the people of India.
Taxing
Power
Taxation is the legal capacity of the sovereignty or
one of its governmental agents to exact or impose a charge upon persons or
their property for the support of government and for the payment for any other
public purposes which it may constitutionally carry out. The power of taxation
differs from the power of eminent domain, and where as the government under
taxation, is required to make and enforce contribution of money or property by
the citizen as his share of the burden of support of the government.
A government cannot exist without raising and
spending money. Parliament controls public finance which includes granting of
money to the administration for expenses on public services, imposition of
taxes and authorization of loans. This is a very important function of
Parliament. Through this means Parliament exercise control over the executive
because whenever Parliament discusses financial matters, government’s broad
policies are invariably brought into focus. The Indian Constitution devises an
elaborate machinery for securing parliamentary control over finances which is
based on the following four principles.
1) The first principle
regulates the constitutional relation between the Government and Parliament in
matters of finance. The executive cannot raise money by taxation, borrowing or
otherwise, or spend money, without the authority of Parliament.
2) The second principle
regulates the relation between the two Houses of Parliament in financial
matters. The powers of raising money by tax or loan and authorizing expenditure
belongs exclusively to the popular House, viz., Lok Sabha. Rajya Sabha merely
assents to it. It cannot revise, alter or initiate a grant. In financial
matters, Rajya Sabha does not have co-ordinate authority with Lok-Sabha and
Rajya Sabha plays only a subsidiary role in this respect.
3) The third principle
imposes a restriction on the power of Parliament to authorize expenditure.
Parliament cannot vote for raising money by tax for any purpose whatsoever
except on demand by ministers.
4) The fourth principle
imposes a similar restriction on the power of Parliament to impose taxation.
Parliament cannot impose any tax except upon the recommendation of the
Executive.
The legislature having the power to impose a tax has also the power to prescribe the means by which the tax shall be collected and to designate officers by whom it shall be enforced; the obligation and indemnity of those officers; the means to ensure proper realization of the tax. The method and manner of collection of tax is no criterion for judging the vires of the tax law.
The
following powers flow from the power to tax as ancillary powers:
1) To provide for
refund of a tax illegally or improperly collected and to impose restriction
upon the right to claim such refund.
2) To provide for the
prevention of evasion of the tax imposed.
3) To levy a penalty
for the proper enforcement of the taxing statute, or collecting any amount
wrongly under colour of that statute, whether by way of fine or forfeiture.
Article
265 of Constitution of India
Article 265 of the Constitution lays down that no
tax shall be levied or collected except by the authority of law. Schedule VII
divides this subject into three categories:
1) Union list (Article
246(1) of the Constitution specifies that Parliament has exclusive powers to
make laws with respect of any of the matters enumerated in List I in the
Seventh Schedule to Constitution)
2) State list (As per
Article 246(3) State Government has exclusive powers to make laws with respect
to matters enumerated in List II)
3) Concurrent list
(both Parliament and State Government can pass legislation with respect to
items specified in this list).
Constitutional
Limitations
Apart from the limitation by the division of the
taxing power between the Union and State Legislature by the relevant Entries in
the legislative Lists, the taxing power of either Legislature is particularly
subject to the following limitations imposed by particular provisions of our
Constitution:
1) It must not
contravene Art.13.
2) It must not deny
equal protection of the laws, must not be discriminatory or arbitrary. (Art.14)
3) It must not
constitute an unreasonable restriction upon the right to business.(19(1)(g))
4) No tax shall be
levied on the proceeds of which are specially appropriated in payment of
expenses for the promotion or maintenance of any particular religion or
religious denomination (Art.27).
5) A State Legislature
or any authority within the State cannot tax the property of the
Union.(Art.285)
6) The Union cannot tax
the property and income of a State (Art.289).
7) The power of a State
to levy tax on sale or purchase of goods is subject to Art.286.
8) Save in so far as
Parliament may, by law, otherwise provide, a State shall not tax the
consumption or sale of electricity in the cases specified in Art.287.
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