The anatomy of the tax regime in India The main acts like the Customs Act The subsidiary

diary acts: the various finance acts, the sales tax act Then the rules, which are delegated legislations Notifications ( these are the ones creating all kinds of confusion with exemptions and levys.. thus this is where the lawyers come in use) Circulars

There are certain technical rules regarding all kinds of tax laws.. this is because they are to be interpreted strictly ( give no more room for extortion than there already is) Acc to him, the general rule of thumb for tax law statutes is, interpret it diametrically opposite as you would a normal statute. There are some questions which need to be asked whenever you see a tax statute Who is being taxed? On what? How? How much?

Once you decide what the levy of the tax is on, then the person paying is not important, excise is on manufacturing, sales tax on sales, service tax on services... The basic canon of interpretation would be to not supply any words more than those given in the statute Interpretation vs. Construction : interpretation would be gleaning the intention of the legislators while giving effect to anything, but when you know that the legislation did not intend something, say new developments, (internet related laws), when you are imputing intention, then there would be construction.. Excise is a tax on manufacturing... as something comes out of the factory, the manufacturer has to pay tax dependant on the tariff rates, subject to certain exemptions.. Taxation and exemption can play an important part in the development process of a state or a region. Eg: after the Kucch earthquake, excise duty was exempted.. so as to encourage investment Same was done to himachal and uttarakhand.. An example provision General order 10% excise Exemption new industrial units set up in areas mentioned in Annexure 1, which have commenced commercial production on or after 7th jan 2003 but not later than 31st day of march 2010 also the exemption would apply for ten years from the date of commencement of production...

FACTS: 1. If a BPO is set up: service industry would not be a part of this, cos the production and the consumption is at the same time.. ( 2. Suppose the production started on 29th march 2010, but then the license for the factory was obtained only on 10th of April, then? The plain meaning would say that the set up would mean with all the requisite licenses and all.... so acc to the plain meaning the client would not get the exemption The beneficial statute interpretation rule is that they should be construed in a liberal manner so as to give most qualifying units the benefit... so merely because of a bureaucratic delay, a huge benefit such as this should not be denied.. So the plain meaning should be provided, however when unfairness is being caused by this, and it is going against the intention of the legislature, then the benefit should not be denied on technical grounds.. There is some decision which quotes this rules are valuable servants but dangerous masters thus the intention needs to be looked at, and justice dont to the statute...

Another important canon legal sense of the word When a plain word in a statute is interpreted in a certain way by the court, and then they are again used in statutes in similar context... the same meaning as defined by the court last time would be used. This would be the legal meaning set up was interpreted by the High Courts and SC in at least ten cases.. It meant the condition or the status just before the commencement of commercial production... the legal sense would be this. This is another canon of interpretation when a word is used in a statute meant for use by commercial men, it should be interpreted as commercial men would (he gave a coal and charcoal example, where the SC said that charcoal would be included in coal, cos industrialists and all ask for coal even when they mean charcoal..) The primary rule regarding punctuation was that it is not to be considered an aid of construction, cos the punctuation was put in by the scribes after the passing of the act, but this rule has diluted to day cos these days you have to rely more and more on punctuation, cos the drafting is just not good enough to interpret without punctuation... 3. Is trial production commercial production or not? Sc hasnt held it to be commercial production in the general sense... but trial produce which is thereafter sold is commercial production. 4. Unit/ new industrial unit

When a term hasnt been provided in a statute, notification or anywhere for that matter, where do you find the meaning? a) Trade usage (understood by the trade as a whole, and not just a class involved in the trade, there is a supreme court decision on this the citation of which will be given tomorrow) Here the industrial unit has been derived from the industrial undertaking as has been used by the income tax jurisprudence for long... its some entity which is manufacturing something at an industrial scale, but need not be a factory( This the SC has said specifically... this can be a part of the factory. An independent integrated setup which can manufacture something identifiable...) unit was first used in litigation cos people started claiming that a production line is a unit.. there is some ambiguity in this matter.. Some circular said that a production like is a new unit. The circular is supposed to be binding on the department, cos it reflects the intention of the department... and that is the highest authority on tax matters in that area. Therefore a production line would also be a new unit.

Sales Tax now I944 case called something, when a transaction is taxable for sales tax, then any aspect of the same can be taxed Then a later SC decision interpreted sale to be in the context of the transfer of property only and not when entering in to the contract for sale, so that there wasnt multiple taxation .. sales w.r.t to madras sales tax act would mean this, and would only tax things when the property is transferred in Madras. The rest of the statute was looked at, saying the rest of the act doesnt give any indication of intention to tax any sale outside of the state. Harmonious interpretation need be given, and this is the only way you can harmoniously construct it with the rest of the statute.

Second class... missed an hour Mahalakshmi Mills case Tobacco means any form of tobacco, whether cured or uncured and whether manufactured or not, and includes the leaf, stalks and stems of the tobacco plant, but does not include any part of the tobacco plant while still attached to the earth.... Now a person manufacturing tobacco seed cake is also being affected although he is not dealing with any form of tobacco. The Supreme Court in this case agreed that tobacco seed cake and oil are definitely not included in this definition. Tobacco seedcakes have no nicotine content, they are used as manure and cattle feed and that has absolutely no relation to the traditional tobacco use... tobacco oil is also used as a perfume, or rather a an ingredient of perfumes. The construction of the definition shows that the cured/uncured tobacco was a category, in which leaf stem and all were specifically included but seeds left out.. this means that the seeds, which do not contain any tobacco anyway, are not covered by the definition. This legislation is meant to capture tobacco used for its specific purpose for smoking, tobacco raw, cigarettes and their derivatives.. seeds are not cured... and are not included in the list of things included. The counter argument that it is attached to the earth was also ignored.. The purpose and the kind of words used would lead to the conclusion that tobacco and the tobacco seed oil are not a part of this definition. TAJ MAHAL HOTEL Plant includes Vehicles, books, scientific apparatus and surgical instrument purchased for the purpose of the business, profession or vocation. These people bought some pipe fittings and sanitary items, there is an IT provision which allows for deduction for plant and machinery out of the income tax. IT fellows said, pipe fitting and sanitary wear would not be included in plant and machinery in any sense. Plant and machinery is meant for depreciation of plant and machinery as understood in the industrial sense... The SC held that books for profession, surgical instruments for hospitals and all.. the definition intends to provide for all the capital which might be needed for a particular industry to grow... sanitary wear and the rest would be necessary for the hoteling industry. Thus everything which might be necessary for the running of a hotel would be deductible from the income of the hotel...

IMPORT: with its grammatical variations and cognate expressions means bringing into India from a place outside India. INDIA includes the territorial waters of India

A ship is coming in to India and has come into the territorial waters, but turns to go to Karachi, offload some fruits there and then come back to Bombay to offload a second load of goods and docks there... has there been any import in this case? And how many times. Assume the import duty in this case is 100% When the implication of law Is an absurdity, as in the application leads to absurd results.. There might be goods not meant for india Sometime the vessels just enter and go out of the territorial waters inadvertently

There might also be a distinction between the charging and the computation provisions. The charging happens as soon as they are brought into India, but the charging happens only when they are ready for consumption in India. Thus merely import is not enough; the computation of duty is the operative step. This has been a source of debate between the various high courts, Bombay didnt hold the distinction while the Madras and the Andhra High court did.

Construction of a proviso , exception and the savings clause When you want to restrict something, then there is an exception.. there is a main clause and the exception restricts its application to a particular type of thing or manner.

A proviso

does not restrict but provides for a special way or manner for a specific class of

people in the main class. Savings clause is merely to preserve old rights and not to create new ones. Example : there was in madras a municipal levy on the annual value of the building or the property.. based on the expected annual rent. Proviso said, it could be six percnt of the capital (for some specific building of course) Madras people began to apply the 6% rule as it was easier to calculate.. the SC said its allowed... why? The annual rent is a fictitious concept, therefore the 6% is already covered by the main clause. Since the proviso does not restrict, you can very well apply it to all, provided that it is also applied to the special case it was meant for. So whenever you see a proviso, be open to the possibility that it may apply to the whole of the main provision too.. it generally provides for a special case. Had the main provision included the specific way in which the annual rent is calculated, then it wouldnt have been a classical proviso, and this would not have been allowed. the proviso doesnt limit the main provision , but at the same time the proviso can't be taken away from the main provision. This in the language of Venn diagrams, main would be a big circle in

which there is a small circle of the proviso. The big circle can contain a ton of other things too.... along with the proviso, so you cannot object if the proviso is actually used as the main thing..

Conflict between the main and the proviso which cannot be resolved, then which should prevail? The proviso would prevail, for what reason it cannot be decided.. Attorney General Vs. Chelsea Waterworks, this was the English case which gave effect to proviso over the main one... cos it is the last thing which the legislature has put in ... the last word

should be given effect to.

There is nothing logical about it, rule of thumb taken for convenience.

Dominion Engineering When two provisos are conflicting, then what will come about? The later proviso will apply

An Explanation applies to a portion of the section, not all of it, even though it may be at the
end of the section Bengal Immunity vs. Sundaram Pillai condenses the law on the positions of explanations..

26th July

Rogue proviso: Justice Bhagwati Just because there is a proviso which is disconnected with the rest of the main proviso, but then you cannot give the main provision some meaning coloured or expanded to suit the proviso... So first, you come to a conclusion about the main provision using various interpretative tools, then you look at the proviso and use it for the restrictive purpose it was meant for.. Only in the position when the main situation is unclear and the proviso is not, then only can the proviso be used to interpret the main provision. Eg: Main provision : state government can levy a fee provided it applies to income tax Here, without the proviso, the fee can be either kind of fee, license fee, education fee, sales tax cess... But then the proviso clarifies the fee is in the nature of a tax and not a cess or a license. This is a classic case of the exception.. this kind or reliance generally does not happen.. this is an actual proviso which applies to all of the main class... here is an example of the proviso which is an exemption, but also assists interpretation Main: State government can levy a fee provided Dealers in Solan region are exempted from the sales tax Here an exception has been carved out.. but then you understand that the fee is in the character of a sales tax This would not be a restriction on the meaning of the word fee, cos if you read the rest of the statute and come to the conclusion that the fee is to be in the nature of the sales tax... ASK : what if there is a power, and the power can be exercised in 3 ways, discretionary.... then can one insist that the authorities use one way and not the other? Cos using on e way thel tax is lesser

A proviso only applies to a section which it is appended to, but what if the proviso is enacted as a section itself? The whole chapter Anything at all, has a life of its own Applies to all of the statute, cos you have to read it all harmoniously Ans: there is no rule of thumb which will decide to what all it would apply... you will have to search for the section to which it applies Explanation : there are no special rules as such for this one,

There are two rules in conflict which each other... The main provision is quite clear and there is a classic proviso (adding something to the main provision) There are two provisos, the latter will apply I dont see how they are in conflict, but if these guiding rules are ever in conflict, you have to see which one applies to that case and choose,

INTERNAL AIDS OF CONSTRUCTION

Assume there is an act without a preamble, which is later inserted retrospectively from the date the act has come into force, for aiding construction. Is this a good aid for construction?

What is the difference between a tax and a fee? Tax is a public welfare fee... it is not headed towards a particular cause A fee is charged for a specific service.. say rubber cess... collected from the tyre manufacturers, and for the welfare of the rubber plantation workers AIR 1994 SC 1648 : Dhankamal (the difference between a fee and cess) Of course there is a difference between a license fee, HE(higher education) cess, SHE cess are taxes, they are not fees as in license fee

Substance over form principle : some English fellow said that to look just at the form is just to see the skin and miss the soul. Tax law is form over substance Every progressive regime recognises that a tax is a burden on the subject, the judges would be more inclined to read a tax law in the favour of the assesses

But what if someone is clearly covered by the words, but then the substance did not mean to cover it.. then what would be the recourse Once you fall under the words, you have to pay the tax, whatever be the hardship to the person In these cases, its best to pay the taxes and get refund, ASK how??

When there are two interpretations, and one leads to double taxation, then that one would be avoided...

Charging section and the computation section In cash based accounting you usually pay the taxes at the time you receive them... all the law firms apparently follow the cash system.. cos there will always be clients who will not pay you. Although cash based is not progressive, accrual based system is more popular these days CASE: there was a successful lawyer who followed the cash based accounting system... then he got put on the bench... but judges are not supposed to practice... some client paid him after he became the judge Do the amount you got later.... would that be taxable? Profits and gain s from income and the other sources of income, which head would it be taxable? Apparently it is not taxable at all.... 1st principle: Each source of income is mutually exclusive, the IT defined the total income to be a combination of all the sources... other sources being residuary.. If one falls in two categories, there is an overlap, which can be a problem... thus there isnt supposed to be an overlap.. United Comemrcial Bank, case on income tax.. 2nd Unless something falls within one of the categories in that accounting year, then you cannot tax it..

For the person, it would not have been an income from the profession... in the year in which the person has received the money, then

3rd: Where enteries are mutually exclusive, and a particular type of income falls within one category, but for some reason it doesnt, then you cannot change it later... or put it into the residuary category 4th Charging and the computation sections should be seen as integrated code Computation section does not provide for the levy... thus you cannot charge it in the charging section...

Case: Amarchand Shroffs case, section24 B of the income tax act... ( he died, his receipts in the hands of his heir, is it to be charged as his income? SC said no..

Assume in this case, the judge got the payment in cash and did not even let it appear in the balance sheet.. would then it be taxable?

4th day Retrospectivity

Once the chargeable activity has occurred, the government is free to collect the taxes in any manner... also the person you is taxed may be different from the person who has triggered the taxation, like the tobacco dealer may be charged excise tax.. when the manufactured product is removed..as the collection points are based on convenience Basically, the charging section and the collection/computation may be different times, but then they have to be read in a coterminous manner...as in both the activities have to take place... so for the collection of excise, the manufacture and the removal from the factory should have taken place. It is said that the computation and the charging section form an integrated code. BC Srinivasan case: computation and the charging section form an integrated code. The implication of this, the intention, whether or not to tax something can be inferred from the charging or the computation section. Say, if some manufacture is chargable, the exemption in either of the sections would be applicable In yesterdays example, the professional tax thing, the charging section allowed charging of tax, but the computation section allowed the collection of the professional tax only in the year in which he received the money, that year he hadnt been acting in his professional capacity.

Commencement of the Act: When does an act come into existence? In some cases the act comes into existence the very day the bill is tabled, i.e. prior to the presidential assent. Provisional Collection of Taxes act 1931 It deemed that certain sections of the finance bill which are declared in the act will come into effect the day the bill was tabled.. There is a decision of Pieco Electronics 1994: on the day the finance bill is tabled certain provisions as declared in the 31 act will come into effect.. For taxation purposes, the finance act provisions which are in effect on the very first day of the financial year will be used for the assessment of the previous year. Thus it is important that some crucial provision come into effect immediately and not wait for the presidential assent, which usually takes about 3 months..

SS Gadgill vs. Lal AIR 1965 SC 171 s. 34 (1)(b) before finance act 1956, came into effect on 1st april 1956

he may in cases falling under clause (a) at any time within 8 years and in cases falling under clause (b) at any time within 4 years, serve on the assessee a notice under subsection (2) of section 22 and may proceed to assess or reassess such income Provided Where assessment made or to be made on a person deemed to be an agent of non-resident, this section shall have effect as if for period of 8 years and 4 years, 1 year was substituting Post finance act 1956 Provided further that Income Tax officer shall not issue notice under this subsection for any year after the expiry of two years after that year... if person deemed to be an agent of non resident under section 43. Facts: Lal and company has business connections with a variety of non residents, and there is income from all of them.. there is a provision for an Indian to be an agent of a non resident and can pay the income tax for that non resident. For 1954-55, assessment year ending March 31 1955, the IT officer wanted to reassess his income deeming him an agent of the non resident. He issued a notice for enhancing income on March 27, 1957 (Before 2 years from the expiry of the assessment year ending 1955). Can he issue a notice after all this time?

If one year the finance act does get tabled, then there will be no tax at all....

The Supreme Court in this case held that the notice was not valid

The first principal for retrospectivity: 1. Where a provision affects substantive rights, the presumption is against retrospectivity. 2. Where the provisions affect procedural issues, the presumption favours retrospectivity. You are presumed to have rights relating to prosecution and defence, but the manner in which they are conducted are not a subject matter of the rights. There are vested rights and existing substantive rights, the law prohibits retrospectively changing the vested right. Vested: which has crystallised in the past as a right, say succession of some inheritance Existing: say, your uncle has his only heir in you, then you have a legitimate existing right... A provision shall apply retrospectively even to a vested right if it says so expressly or as a necessary implication.

A provision is retrospective by necessary implication if under no reasonable interpretation of the same it can apply prospectively In

The statute of limitation is generally procedural limitation It is incorrect to categorise a statute(say the limitation act) as being wholly procedural/substantive in nature.... in some cases, as in this, some of the limitations can be substantive rights.. First Argument The revenue officers first argument was, in this case there has been no break between the two acts, therefore there is a continuity, the new act will apply to the whole time period, as in prospectively too.. Second argument: This is not really a repeal and a new act, this is a substitution of the act, there is a concept in the American law, which says that where an act has been taken away and re-enacted supposedly applying to the same people and substantially the same thing, then the Statutes of limitation are procedural in nature any you have to look at existing rights... thus the new law would apply for the existing actions.. prospectively or retrospectively The SC dismissed all the arguments. There is no of continuity, there is a cardinal principal of interpretation which says that while pending actions and proceeding will apply/be regulated by the new law even if it is arising from the old act... but pending actions which are time barred or have hit the limitation cannot be revived by a procedural statute... when the right from an old statute extinguishes, even for a fraction of a second, it cannot be revived by another statute.. Because then the statute of limitation will not be acting in a procedural way, but will be changing vested rights. The issue of substitution does not have any claim in the Indian context...

AIR 1965 SC 1970

Vested rights New opportunity Or new disability with relation to the part transactions are all covered

General rule is this: Where the act tries to confer benefits, it can apply retrospectively also, cos then the retrospectivity is not against the public policy.. GP Singh : contract law area which is interesting Transfers: generally beneficial provisions can apply retrospectively, w.r.t. transfer of property, some formalities need to be completed under the old law, which have been done away with under the new law, there are some transfers under the old act which are defective; due to the change in the law would they be rendered proper? Where a transfer is defective, no right is vested... you cannot have something go back and vest the right... you cannot go back and clean up the defects in the past... therefore the provisions which do away with formalities will not make good past defective transactions, they will only be prospective. Acts applying for new formalities can't be applied retrospectively either.. but a pending transfer will be affected by the new right. The transfer is a done thing, thus the new act wont change the fact of a past transfer

Last class (sigh...)

Been discussing the vodaphone case Bhuvaneshwar Singh 1994 6 SCC 77

Coking coal mines emergency provision ordinance, provided the mgmt of all the coking coal mines vested with the government. 30/4/1972 brought about the coking coal nationalisation act, all the mines are vested in the central government without any encumbrances... in the intervening period, this owner of the mine was some guy, (only the mgmt was vested in the government). They paid some petty amount for buying out the huge reserves... for the period they were in mgmt, they had the owners bear the expenses, but did not attribute them the value of the stocks lying with them... 1994 4 SCC 429 Bhuvaneshwar singh filed a petition saying the mgmt should pay him the amount due to him by way of stock.. the HC and SC both ruled in favour of the petitioner, you better pay the owners the amount you received from the stock.... 1986, some nationalisation amendment ordinance, saying we deem that whatever the petty amount was paid would include the amount of stock lying with you.. effective from 1/5/1972 Another petition: the retrospectivity is valid; as has been decided by a constitutional bench of the supreme court. but the earlier judgment needs to be enforced. The government has been directed to make payment already by the SC which is absolutely enforceable on anyone.. The earlier decision was held unenforceable It is not enough to retrospectively change the law, you have to validate it too.. in this ordinance, they put in another clause which said, all judgment decrees and all passed in any case are rendered ineffective.. If there is no validating provision then the previous judgments can't be rendered ineffective PC Mills judgment: Separation of powers under the constitution says that the legislature can't invalidate judgments.. This decision said that, where there is a valid retrospective amendment, and there is a valid validating clause, then that is not an encroachment of the judicial powers by the legislature Suppose some power-wielding authority, for his/her own interest, (as in to invalidate a judgment a judgment against them) has bullied the legislature into passing a retrospective law and a validating amendment which invalidates that decision (or maybe all the decisions in the past year). Then what would be the import of this retrospectively enacted law? The earlier decision of the supreme court would be stand... this decision says that merely passing the validating law would not be enough.. the same law would need to be changed to remove the defect, an in the basis in law for the decision would need to be changed for the retrospectivity to be effective.

Some pending Delhi HC matter of his: Cascading of taxes, and tax credit

Credit structure of a commodity is positive, i.e. the duty paid on the output is always more than the input Cenvat credit on tractors and some other vehicles was inverted, i.e. the output having smaller tax liability The credit accumulated, as in the manufacturers There was a retrocpective lapsing of the accumulated cenvat credit with the manufacturers, which was done with a rule This was challenged saying delegated legislation was not empowered by the primary legislation to retrospectively change the law, the SC gave it in their favour But then the government enacted something giving retrospective power to enact such a rule which lapses the credit(?), then gave a validating provision Another writ petition against it: then what?

APPEALS The right to appeal is a vested right, you may or may not make use of it, it may be for a limited time period, but it is still a vested right for that time period... There is a law in which you have one right of appeal, as in you can file an appeal against the decision of the lower court only. someone loses the case after that appeal, but then the legislature confers a second right of appeal... can the person who has lost the appeal make use of this? NO, the case is final, the claim dead.... had the appeal been pending the same would have applied to the woman.. some new right cannot revive a dead claim or change a final order (although had there been a validating provision it would have been revived) Hussain Qasam dada AIR 1953 SC 221 Delhi cloth Mills AIR 1927 Privy council 242 (this was the case which had the right to second appeal conferred)