Direct Tax

The preceding quarter saw some important judicial developments on the tax front. While the Supreme Court decided on the prospective applicability of amendments to the benami transactions law and interpretation of exemption provisions under the income tax law, the ITAT clarified the scope of its inherent powers to grant a stay on tax demand.

Himanshu SinhaPartner

Aditi GoyalCounsel

Bhuwan DhooparSenior Associate

The Indian income tax framework saw some interesting developments in the previous quarter. The Supreme Court confirmed the prospective application of Benami Transactions (Prohibition) Amendment Act, 2016 (a benami transaction is where property is transferred to one person but paid for by another i.e. ownership through proxy). In a separate matter, it also held that exemption provisions under the income tax law must be complied with literally and strictly. These landmark Supreme Court rulings are expected to have a far-reaching impact on income tax litigation. The Income Tax Appellate Tribunal (ITAT) also rendered a noteworthy decision holding that it does not have the inherent power to stay tax demands unconditionally when the statute itself stipulates that certain pre-conditions must be met.

Key Developments

  • Supreme Court holds the Benami Transactions (Prohibition) Amendment Act, 2016 to be prospective in nature

    On 23 August 2022, the Supreme Court, in the case of UOI v Ganpati Dealcom Pvt. Ltd., held that the Benami Transactions (Prohibition) Amendment Act, 2016 (2016 Act) prescribes substantive provisions and would therefore apply prospectively.

    In this case, a show cause notice was issued under the 2016 Act for an alleged benami property purchased in 2011. The notice was challenged before the High Court of Calcutta which quashed it on the basis that the provisions of the 2016 Act do not have retrospective application and would, therefore, not apply to a transaction undertaken in 2011.

    On reference, the Supreme Court, after analysing the history of benami transactions in India, the framework of Prohibition of Benami Property Transactions Act, 1988 (1988 Act) and the 2016 Act held that the provisions of the 2016 Act are not procedural in nature. The amendments made by the 2016 Act are substantive and would thus apply prospectively. The key observations of the Supreme Court were:

    • Section 3(2) of the 1988 Act, which mandated a punishment of three years for those entering into benami transactions, was vague, arbitrary and created an unduly harsh law.
    • Section 5 of the 1988 Act, which provided for civil forfeiture of benami property, was manifestly arbitrary. The Union of India argued that this provision was civil in nature and could consequently be amended with retrospective effect. However, the Court held that there is an implicit recognition of forfeiture being a punitive sanction, as the officer is required to build a case against the accused for confiscation.
    • Further, the 2016 Act created a confiscation procedure distinct from the procedure contemplated under any enactment in force in India at the time. It also altered substantive rights of evidentiary standards from ‘beyond reasonable doubt’ to ‘preponderance of probabilities’. Such a change cannot be termed as merely procedural.
    • Additionally, the 2016 Act covers a new class of fictitious and sham transactions. Under the 2016 Act, the taint of benami transactions extends to proceeds arising from a benami property, apart from attaching to the property in perpetuity, unless the defence of innocent ownership is established. These provisions cannot be held as enforcing civil obligations and consequently cannot have retrospective application.

    Given the above, the Supreme Court clarified that the authorities cannot initiate or continue criminal prosecution or confiscation proceedings for transactions entered into before 25 October 2016 - the enforcement date of the 2016 Act.

    The ruling of the Supreme Court is in accord with settled law on the retrospective applicability of penal statutes and has brought clarity to the scope of the 2016 Act. However, while the Supreme Court has quashed proceedings for transactions entered into before the enforcement date of the 2016 Act, it is possible that such transactions may be scrutinised under the income tax law, which also empowers authorities to tax unexplained cash credits and investments.

  • Supreme Court holds that the option to opt-out of exemption requires strict compliance with the prescribed conditions

    On 11 July 2022, the Supreme Court, in the case of PCIT v Wipro Ltd., held that the assessee cannot be permitted to withdraw its claim of exemption under section 10B of the Income Tax Act, 1961 (IT Act) by filing a revised return of income to substitute the claim made in the original return.

    In this case, the assessee claimed an exemption under section 10B of the IT Act in the original return of income filed on 31 October 2001. Subsequently, during the assessment proceedings, the assessee filed a declaration before the assessing officer that it did not want to avail the benefit of the exemption. Accordingly, the assessee filed a revised return withdrawing the claim of exemption and sought to carry forward unabsorbed losses. The assessing officer passed an order denying the withdrawal of the exemption and the claim of carry forward of losses. The Commissioner of Income Tax (Appeals) upheld the order of the assessing officer.

    Thereafter, the assessee's claim was allowed by the ITAT and the Karnataka High Court. However, when the matter reached the Supreme Court, the Supreme Court set aside the order of the Karnataka High Court and allowed the appeal of the tax department.

    The Supreme Court negated the contentions of the assessee and held that it was not eligible to carry forward losses since the declaration to opt out of the exemption under section 10B was filed after the due date of filing the return. The key observations of the Supreme Court were:

    • To opt out of the exemption under section 10B, two conditions must be satisfied by the taxpayer: (i) filing of a declaration before the assessing officer and (ii) filing of such declaration before the due date of filing of the return of income. The Supreme Court held that the fulfilment of both these conditions is mandatory.
    • The Supreme Court overruled the decision of the Karnataka High Court that the time limit for filing the declaration is directory in nature. The Court held that since both the requirements are phrased similarly, it would be incorrect to conclude that one condition is mandatory, while the other is directory.
    • An assessee can file a revised return in a case where there is an omission or a wrong statement but not to subsequently withdraw a claim of exemption and carry forward losses.
    • In a taxing statute, provisions must be read as they are and be literally construed, particularly in the case of an exemption. Exemption provisions are to be strictly and literally complied with. Therefore, the requirement to file the declaration before the due date of filing the return of income cannot be construed as a procedural requirement.

    This decision of the Supreme Court is expected to have a far-reaching impact on tax litigation as it seemingly departs from the settled principle that a substantive claim must be allowed to be made until the conclusion of assessment proceedings, and that any time limit for filing a form to make such claim is only directory.

  • ITAT holds that it does not have the inherent power to grant unconditional stay of demand when the statute itself stipulates certain pre-conditions to be met

    In its recent ruling in the case of Hindustan Lever Limited v DCIT, the Mumbai Bench of the ITAT held that it does not have the inherent power to grant an unconditional stay of demand by waiving the condition requiring deposit of 20% of the tax demand as stipulated in the proviso to section 254(2A) of the IT Act.

    In this case, the assessee company had sought complete stay of the income tax demand for a particular year on the basis that a majority of the issues under consideration had been decided in its favour in earlier years. The assessee company relied on the landmark judgement of the Supreme Court in MK Mohd Kunhi (1969) which had categorically held that the ITAT has inherent powers of granting stay on collection/recovery of disputed tax in fit and deserving cases, and that these powers are ancillary and incidental to the powers of disposing of an appeal. The assessee company also contended that this is an inherent power of the ITAT that is also enshrined in section 254(1) of the IT Act, which cannot be curtailed, diluted or otherwise narrowed down by the proviso to section 254(2A).

    The ITAT rejected the claim of the assessee company and granted a conditional stay subject to the assessee providing security for at least 20% of the tax demand. The ITAT held that it is bound by the statutory provision requiring deposit of at least 20% of the disputed demand as a pre-condition to grant of stay. The ITAT also observed that the provisions of the law are to be read so as to make them workable, rather than making them redundant. Further, the ITAT itself being a creature of the statute, cannot question the reasonableness of statutory provisions.

To summarise, while some issues have been settled in this quarter, some questions remain. For instance, the ruling of the Supreme Court on the prospective application of the benami transactions law may trigger a similar contention from the perspective of the Black Money (Undisclosed Foreign Income and Assets) and Imposition Act, 2015 (Black Money Act). The Black Money Act also contains certain retrospective provisions aimed at clamping down on unaccounted money stashed in foreign bank accounts. It would also be interesting to see if the constitutional courts take a different view on the power of the ITAT to grant an unconditional stay of demand.

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