Retrospective Amendment on Finance Act

The paramount object of an amendment is to mould the law for social welfare. Law which fails to fulfill its objective cannot be termed as a good law, in a country like India laws as well as amendments need to have a nexus with the basic structure of the constitution. An amendment to a statute may be retrospective as well as prospective in operation. [1] Here in this essay I would try to show the validity of the retrospective amendment with respect to the Finance Act 2010.

Normally, an enactment is prospective in nature. It does not affect which has gone, or completed and closed up already. Ordinarily, the presumption with respect to an enactment is that, unless there is something in it to show that it means otherwise, it deals with future contingencies, and does not annul or affect existing rights and liabilities or vested rights, or obligations already acquired under some provision of law although its effect is that it does not affect an existing right as well. If an enactment expressly provides that it should be deemed to have come into effect from a past date, it is retrospective in nature. Retrospective laws are those “which decree consequences or create liabilities arising out of facts which existed or transactions which took place before the enactment of the laws, and which consequences or liabilities did not by law exist with respect to such facts or transactions at the time the facts existed or the transactions took place.” [2]

An amendment to a statute may be retrospective as well as prospective in operation. [3] However there is a constitutional prohibition against criminal legislations applied retrospectively under Article 20 (1) of Constitution of India. It is only retrospective criminal legislation that is prohibited and not the imposition of civil liability retrospectively. Retrospective taxation is of two types, validation laws curing certain irregularities in the imposition or collection of an existing tax and retrospective taxation simpliciter. Taxation by validation laws (better known as healing [4] or curative statutes) is attempted by the legislature where an existing tax is found to be inoperative for some formal [5] as well as substantive [6] defects. Retrospective taxation simpliciter has no such nexus to the past in point of time and is one which imposes a tax on past transactions, situations or property in relation to a former period.

In recent years retrospective amendment has been a very common incident. The Article 20(1) [7] of the Constitution of India provides necessary protection against ‘ex-post facto law’ [8] . Article 20(1) has two parts. Under the first part, no person is to be convicted of an offence except for violating ‘a law in force’ at the time of the commission of the of the act charged as an offence. A person is to be convicted for violating a law in force when the act which can be charged is committed. A law enacted later, making an act which is done earlier (not an offence when done) as an offence, will not make the person liable for being convicted under it. [9] Imposing or increasing a penalty with retrospective effect of violation of a taxing statute does not infringe Article 20(1). The reason for this proposition has been explained by the Supreme Court in Shiv Dutt Rai Fateh Chand v.Union of India. [10]

Article 20 contemplates proceedings of criminal in nature and does not apply to proceedings under a sales tax law which have a civil sanction and are of a revenue in nature. The word ‘penalty’ in Article 20(1) does not include a ‘penalty’ under a tax law levied by departmental authorities for violation of statutory provisions. A penalty imposed by such an authority “is only a civil liability, though penal in character.”

Article 20(1) applies when a punishment is imposed for offences through criminal prosecution (even under tax laws). Even the Supreme Court of India has played an important role in exploring as well in interpreting the doctrine of ex-post-facto law. Apart from above mentioned cases there are several cases in which apex court has dealt with the questions regarding operation of such laws. In the case of Sunderaramier & Co. v. State of Andhra Pradesh, [11] it was held that tax can be imposed retrospectively.

In Budget 2010, a retrospective amendment has been introduced in respect of the matter of ‘service of renting out of property for commercial purposes’. [12] Amendment has been made in the definition of “Renting of immovable property service” to provide explicitly that the activity of renting itself is a renting service. The change has given retrospective effect from 1st of June, 2007. Section 75(A)(5)(h)(i) of the Finance Act, 2010, provided that the Section 65(105)(zzzz) to be substituted with “Taxable service provided to any person, to any person, by any other person, by renting of immovable property or any other service in relation to such renting, for use in the course of or, for furtherance of, business or commerce”, from the portion starting with “to any person” and ending with the words “business or commerce”. [13] Thus according to the Budget 2010-11 ‘renting’ itself is a taxable service.

Now the question may arise, why government took this bold step? and enacted this with retrospective effect. The situation is quite tricky in this case, one cannot solely blame the government for its action. On the other hand few people claimed that the intervention of legislature into the judiciary, is not acceptable as far as good governance is concerned.

So why we cannot negate this amendment? Do it have constitutional validity? The answer is given in the beginning, and the answer is in affirmative, yes it has constitutional validity. The Article 20(1) of the Constitution of India provides necessary protection against ex post facto law.

As per the Income Tax 2010, renting of immovable property comes under the purview of ‘Service’. Service tax is a tax on the service given by the property, for the time being when it remains in the possession of the person who has taken it on rent from the owner. Hence service tax can be imposed on ‘immovable property’.

On the other hand Service tax cannot be termed as a Value Added Tax. It is just a tax on the act of providing service by one party to the other. VAT is just a mechanism or design for imposing an indirect tax in a particular manner. Service tax can be a value-added tax and it can as well be a turnover tax. It depends on whether the credit for the input duty is allowed or not. Only if there is the system of input credit of the tax already paid that it becomes a value added tax. Since it is not a value added tax, the question of value addition does not does not determine the issue whether the tax is legally valid or not. There is no need of value addition at all since all that is necessary is that there is a turnover from the service. Now after the amendment, the question of value addition has become irrelevant. In a landmark case it has been decided that Insofar as renting of immovable property for use in the course or furtherance of business or commerce is concerned, the court is unable to discern any value addition. [14] Hence the amendment made by the legislature is not ultra-virus.

Now coming to the main reason why this amendment is made by the legislature in 2010. According to the previous bare wordings in respect of the ‘renting of immovable property service’, the taxable service was defined in section 65(105)(zzzz) of the Finance Act, 1994 (Act) as follows:

‘Taxable service provided to any person, by any person, in relation to renting of immovable property for use in the course or furtherance of business or commerce’.

Due to the above definition, a dispute had arisen as to whether the service tax would be leviable on the rent per se. In this respect the Delhi High Court in the case of Home Solution Retail India Ltd v. U.O.I., [15] held that renting of immovable property is not liable to service tax but services in relation to renting of immovable property is taxable. Service tax being a value added tax, value addition absent in renting of immovable property for use in the course or furtherance of business or commerce. Renting of immovable property by itself cannot be regarded as a service. Any service connected with renting of immovable property is covered and exigible to service tax.

In this case Mr. P.P. Malhotra, the learned Additional Solicitor General of India, appearing for the Union of India contended that the term ‘in relation to renting of immovable property’ has given a wide interpretation and submitted that the giving of a premises for commercial or business activity was itself a service. [16] Even the Maharashtra Rent Control Act 1999 includes use of garage under the purview of ‘service’ within the ambit of ‘premises’ [17] . Now if we use the rule of purposive construction states that interpretation of statute should be done having regard to the purpose of the Statute. An eminent jurist of U.K., Lord Denning (1899-1999) has evolved this rule of construction. [18]

Thus the Central Government appealed against the Delhi high court judgment and the Supreme Court admitted the Special Leave Petition but declined to grant interim stay to the Government (SLP Civil No 13850/2009). [19] During pendency of that SLP, the service tax department official issued instructions to its officers throughout the country that in view of pendency of SLP, officers should safeguard the revenue by either pursuing the taxpayers to pay the service tax on renting of immovable property or resorting to means under law to protect the revenue. On the basis of such instruction, the officials of the department started sending notices to the petitioners with instructions to start complying with the provisions of the aforesaid notification and circular by paying the requisite service tax. Aggrieved with the orders, again writ petition is filed before the Delhi high court. [20] The Delhi High court [21] held as under:

Even when SLP was pending, the judgment of the High Court held the field and in the absence of any stay, the service tax department was bound to follow the same.

From a perusal of the communications entered by the officials of the department, it was clear that message given was that on account of pendency of the SLP, such persons were under obligation to deposit service tax; so much so that even threat was extended to the extent that failure to comply with the same would leave to initiate the further necessary action against the defaulters.

Even though the judgment of the High Court was challenged by filing the SLP, till the date there was no order passed by the Supreme Court staying the operation of that judgment. In these circumstances, the department could not instruct its officers to pursue matter with taxpayers calling upon them to pay service tax or to resort to other means under law to protect the revenue.

The department had assured that corrective steps would be taken by issuing further instructions, in supersession of earlier instructions, to the officers not to write such letters demanding the payment of service tax or threatening coercive steps. On such assurance, no further orders were required to be passed in the instant petition.

The above order of the Delhi High Court was challenged by the Department in the Supreme Court of India where the matter is still pending. In the meantime the Finance Act, 2010, amended the original definition (stated above), in section 65(105)(zzzz), with retrospective effect from 1st June 2007 to read as follows:

‘Taxable service provided to any person, by any person, by renting of immovable property or any other service in relation to such renting, for use in the course of or, for furtherance of, business or commerce’.

Hence the above retrospective amendment nullified the effect of the Delhi High Court decision in the case of Home Solution Retail India Ltd v. U.O.I. [22] It is an admitted legal position that the legislature has the power to retrospectively amend the law to render ineffective an earlier decision of the Court by curing the infirmities or defect in the law on which such decision was founded.

Now if we scrutiny carefully the effect of this retrospective amendment we can see that all the controversies raised in the case of Home Solution Retail India Ltd v. U.O.I. [23] were silenced once for all. This was being done with retrospective effect only. Now, all the landlords, who have not paid the tax, have to pay the taxes along with the interest. They will ask the tenants to pay the same. Even if they are willing to pay the taxes, the interest will have to be paid from the account of landlord only. The levy of service tax on ‘renting of immovable property’ was introduced w.e.f. 1st of June 2007. The levy of service tax has been the subject matter of constitutional challenge at various High Courts across India.

In the case of M/s Shubh Timb Steels Ltd. v. U.O.I. and another, [24] the constitutional challenge to the levy of service tax on renting of immovable property is on the ground that whether levy of service tax on providing of service to any person by any other person by renting of immovable property for business was covered by Entry 49 List II [25] exclusively and not covered by Entry 92C or 97 of List I and thus, was outside the purview of the Central legislature. Also whether the central government is empowered to collect service taxes under article 268 of the Constitution of India. [26] Further the question is as to validity of levy being made retrospectively operative from 1.6.2007.

The view of Punjab and Haryana High Court regarding the first objection laid by the petitioner is very much important. It held that in case of overlapping of Union and State power, as that have been contended by the petitioner, doctrine of pith and substance is to be applied and the court has to look to the substance of the matter. List I has priority over List II though predominance of List I does not prevent State Legislature from dealing matters under List II. The court stated various judgments were constitutional validity was upheld under List I without affecting the scope of Entry in List II. In the case of C. Rajagopalachari v. Corporation of Madras, [27] income tax on pension under Entry 82 List I was upheld without affecting the scope of Entry 62 List II. Similarly in the case of Western India Theatres Limited v. Cantonment Board [28] it was upheld that entertainment tax on exhibition of film fell under the residual entry of List I and not Entry 62 of List II. Likely in the case of Gujarat Ambuja Cements Limited vs. Union of India [29] as well, service tax on transportation services was upheld under the residual entry of List I which was outside the purview of Entry 56 of List II relating to tax on goods and passengers. Considering various judgments it was observed that Entry 49 of List II relates to tax on land and buildings and not any activity relating thereto. It cannot be held that renting of property did not involve any service as service could only be in relation to property and not by renting of property. The aspect of service element in renting transaction is an independent aspect covered under Entry 92C read with Entry 97 of List I. The subject matter of impugned levy being outside the scope of Entry 49 of List II, power of Union Legislature is undoubted. [30] On the question of retrospective operation, the Hon’ble High Court held that the Legislature was competent to validate the law retrospectively and the objective of a validation is to rectify the defect in the phraseology or lacuna and to carry out the effect of the purpose for which the earlier law was enacted. Thus the Hon’ble High Court upheld the Constitutional validity of the levy of service tax on renting of commercial property with retrospective effect from 1 June 2007. [31]

In another case of Andhra Pradesh High Court the situation is quite different, TRENT Ltd. and Future Value Retail Ltd. challenged before the Andhra Pradesh High Court, the ambit of service tax with retrospective effect on renting of immovable property, that has been brought in by the Finance Act, 2010. [32] The petitioner filed writ petition claiming the following issues [33] :

Declare the impugned provisions, viz. section 65(90a) read with Section 65(105 )(zzzz) of the Finance Act, 1994 as amended by the Finance Act, 2008 and Finance Act 2010 as null and void and ultra vires the Constitution of India and/ or section 66 of the Finance Act and /or be strike down the said provisions as illegal, arbitrary and voilative of Articles 14, 246 and 265 of the constitution of India;

Issue a Writ order or direction in the nature of Certiorari or any other Writ, order or direction of like nature, setting aside Section 75(5)(h) and Section 76 of the Finance Act 2010;

Declare the Notification no. 24/2007 dated 22nd of May, 2007 and Circular No. 98/1/2008-ST dated 4th of January, 2008 as revived by Finance Act 2010 issued by the Respondent No.1 as illegal, null and void and ultra-virus the provisions of the Finance Act 1994 as amended by the Finance Act 2007 and Finance Act 2008 and Finance Act 2010;

Issue a Writ of Mandamus or a Writ in the nature of Writ of Mandamus or any other appropriate Writ order or direction restraining the respondents by their servants agents and subordinates from directly or indirectly giving effect to or acting upon the Section 65(90a) & 65(105)(zzzz) read with Section 66 as amended by Finance Act 1994 as amended by Finance Act 2007 and Finance Act 2008 and Finance Act 2010 as stated hereinabove;

The petitioner also filed an injunction petition seeking to restrain the respondents, their servants, officers and agents from in any manner whatsoever giving effect to directly or indirectly or acting upon Notification 24/2007 dated 22nd of May, 2007 and Circular No. 98/1/2008-SAT dated 4th of January, 2008 as revived by Finance Act 2010 or levying or collecting any taxes on the basis that Section 65( 90a ), Section 65(105)(zzzz) read with section 66 Finance Act, 1994 and recovering any service tax on renting of immovable property from the petitioner pending disposal of the above Writ petition.

The decision of the High court in this matter is also of great significance. Justice Goda Raghuram and Justice Noushad Ali directed the respondents, pending further orders in this application or in the writ petition, not to initiate any coercive steps for recovery of the service tax on the renting of immovable property by the petitioners, on the basis of the provisions of Section 65 (105) (zzzz) as amended by the Finance Act, 2010, for the period 01/06/2007 to 01/04/2010. The court directed that the Petitioner shall, however, be liable to pay the applicable service tax as per the provisions of Section 65(105)(zzzz), for the period subsequent to 01/04/2010 but subject to the result of the writ petition, notice. [34] The High Court has granted stay merely on the issue of retrospective amendment. [35]

In this matter of retrospective amendment if we look with respect to the separation of power. We can find that the SLP is filled by the executive body of this country, and the legislative body of the country in order to resolve the dispute that occurred in the case of Home Solution Retail India Ltd v. U.O.I amended the Finance Act 1994. So one cannot raise the question that there is a sort of interference by the legislature in the judicial process. Central Government preferred a Special Leave Petition [36] against the decision of High Court in HSRI v. U.O.I. [37] Though the S.L.P. has been admitted by the Supreme Court, they declined to issue a stay order on the operation of Delhi High Court’s judgment in the aforementioned case. Case is still pending before the Supreme Court for final hearing and yet to be disposed off. So one cannot take this plea to make this amendment void as well.

On the other hand there is some sort of burden if we try to analyze the effect of retrospective amendment from tax-payers point of view. There are some key questions that need to be answered in this regard. One such question is whether such a tax is chargeable and payable prior to the retrospective amendment coming into force. The legal position is that the tax is not chargeable or payable before this date. This would mean that landlords need to enter into a dialogue with their tenants as to how such back taxes are to be charged for the taxable periods in question and how they would be reimbursed by the tenants, as per contractual terms. The other question is that whether the imposition of tax retrospectively is justified for the country’s economy. Because in the year 2008 the whole world have seen the effect of global recession. This amendment mainly focuses on the real-estate sector of the economy and incidentally this sector was effected worstly by the recession. So the government’s initiative to impose retrospective tax on rent of immovable property can be a challenge for the country’s economy.

Here in this essay I have tried to show the cause and effect as well as validity of the retrospective amendment of the Finance Act, 2010. But this kind of retrospective amendment is not as rare incident in India. So the main target of this essay is to show that it is almost impossible to make the retrospective amendment unconstitutional in India. But there should be some guidelines so that government cannot make any such rule which will harass the tax-payers and will pose a serious threat to good governance. Hope that the Finance Bill, 2011 will take this issue in its concern and will try to rethink before enforcing any sort of amendment which has its effect retrospectively .