It was under the shadow of a war that India introduced two major fiscal legislations; the Income Tax Act, 1961 and the Customs Act, 1962, paving way for tax policy of independent India. Both legislations have witnessed umpteen amendments to accommodate the shifting priorities of the incumbent Governments and are now well past their sell-by date. In respect of customs, no fundamental alteration is required as the law is mostly aligned to the international framework[1]<\/a> which ensures that it stays abreast with the changing times. However, the framework of the income tax law \u2013 notwithstanding the tide of significant policy changes and amendments to reverse the judicial pronouncements \u2013 continues to wheel the Indian economy like a patchy retreated tyre.<\/p>\n <\/p>\n Earnest attempts to bring about holistic changes have not yielded fruit despite the Direct Taxes Code of 2009,[2]<\/a> the Direct Taxes Code Bill, 2010,[3]<\/a> followed with a 2013 Bill,[4]<\/a> all of which lapsed. Thereafter, another fresh attempt in\u00a0recent past by an Expert Committee in 2019[5]<\/a> seems to have met the same fate.\u00a0This is so despite the fact that substantial changes have been made in the income tax policy and law. To enumerate certain landmark changes, the 2016 black money legislation[6]<\/a>; 15% corporate tax rate for new manufacturing entities announced in 2019;[7]<\/a> India\u2019s digital services tax\u00a0i.e.\u00a0the 2020 Equalisation Levy;[8]<\/a> Taxpayers\u2019 Charter;[9]<\/a> scheme for faceless assessments, appeals, penalties;[10]<\/a> the new scheme for reopening of assessments unveiled in 2021;[11]<\/a> etc. are some of the path-defining measures. However, their fullest potential cannot be realised given the limitations inherited under the old framework.\u00a0It is not a surprise, therefore, that the Supreme Court recently implored the Parliament, particularly the draftsmen, to frame\u00a0simpler tax laws which do not scuttle the taxpayers\u2019 ability to carry out their affairs.<\/p>\n <\/p>\n September 9\u00a0decision of the Supreme Court in South Indian Bank<\/em>[12]<\/a> is a quintessential illustration on why the founding premise of the tax law needs to be revisited.\u00a0The decision has been rendered in the context of Section 14-A of the Income Tax Act which disallows claim for expenses which are incurred for earning tax free income.[13]<\/a> This single\u00a0provision, which was inserted in 2001, has seen more than its\u00a0fair share of litigation.\u00a0Notwithstanding the correctness of the underlying premise,[14]<\/a> stretched interpretation of the law and an indiscriminate and patchy implementation has resulted into multiple and tiresome controversies.\u00a0In its two decades of existence, it has engaged the Supreme Court more than 25 times and cluttered the dockets of the tax tribunals and High Courts.<\/p>\n <\/p>\n This part of law illustrates that an over-empowered tax administration results into\u00a0ad hoc\u00a0stances. It is routinely invoked by tax officers who insist\u00a0that a proportional disallowance to the ratio of average investments to average assets is\u00a0mandatory.[15]<\/a> The application of this provision and the accompanying subordinate legislation[16]<\/a> warrants a closer look at the minutest of facts of a business enterprise during the assessment stage, which have to be subsequently revaluated at multiple appellate levels in the tax litigation system.\u00a0In most cases, the disallowance\u00a0is pressed upon to\u00a0require\u00a0businesses\u00a0to\u00a0justify whether\u00a0the expenditure\u00a0is not just directly related to exempt income\u00a0but also to rule out its indirect linkage.[17]<\/a><\/p>\n The practice of ad hoc\u00a0disallowance\u00a0may appear to be trivial but it indicates a discomforting scenario. It not only obliges business to incur more compliance costs, but also disproportionately influences business choices, making them\u00a0perennially\u00a0sceptical\u00a0of Tax Department\u2019s outlook, and perpetuates a penny wise pound foolish quandary.<\/p>\n<\/blockquote>\n <\/p>\n The\u00a0Supreme Court\u00a0decision, echoing Adam Smith\u2019s canon of certainty in tax law, seeks to impress upon the Government that \u201cit is the responsibility of the regime to design a tax system for which a subject can budget and plan\u201d. The Supreme Court has unhesitatingly implored upon the Government to ensure a fair balance of taxpayers\u2019 entitlements such that \u201cunnecessary litigation can be avoided without compromising on generation of revenue\u201d. The observations of the Court, therefore, could not have come at a more appropriate instance.\u00a0The Government must, however, go beyond. It must reinstitute the tax system such that it scuttles the tax officials\u2019 urge to\u00a0assume the role of the\u00a0corporate managers and review their decisions from a tax expediency perspective.\u00a0In other words, the Department\u00a0should not be permitted to\u00a0put itself in the shoes of the taxpayer to assess how a\u00a0prudent\u00a0businessman should operate.[18]<\/a><\/p>\n <\/p>\n The ambitious outlines of the Government, to make India a 5 trillion dollar economy[19]<\/a> and an economic powerhouse, cannot be achieved with an outdated tax system. The recent withdrawal of 2012 retrospective amendment[20]<\/a> reveals that the Government is not shy of undertaking bold course correction measures. Having undone all legacy issues, it is time for reforming the administration and functioning of officials. All bets now rest on the faceless assessment scheme, which has had a rough start, given the clutch of writs issued by some High Courts on denial of natural justice and quashing of notices for fallacious reopening of past cases by application of old archaic provisions despite simplification brought into the statute.[21]<\/a> One cannot over-emphasise the urgency for a new tax system which synergises (and not digests) the aspirations and energies of this reinventing nation, a tax system which facilitates business activity and does not scare away business or drive out investments with humongous compliances and energy sapping inspector-like approach of tax officers.<\/p>\n <\/p>\n The Government of India must attempt a GST-like[22]<\/a> rewriting of entire direct tax landscape which should be based on deep\u00a0stakeholder consultations such that the progressive advancement of tax system is not replete with thorny issues. The basis premise of the law must be simple; business should focus on doing business without managing tax consequences and Tax Department should collect tax without sitting in judgment over how business should do business. The correct tax lawmaking process, which is usually centred around budget day, is too secretive and gives overwhelming powers to the tax bureaucracy and requires businesses to immediate react to the changes because, many of which are overnight. India can do well to take inspiration from advanced countries wherein lawmaking is a continuous process of stakeholder discussion and duly factors economic metrices and impact analysis before deploying the tax measure. Such system avoids a trial and error approach and obviates the need for frequent course correction measures which become inevitable when the measure has not been thought through. In short, the tax law must reduce avenues for friction.<\/p>\n \u2020 Tarun Jain, Advocate, Supreme Court of India; LLM (Taxation), London School of Economics.<\/strong><\/span><\/p>\n [1]<\/a>The Indian Customs policy and law is aligned to India\u2019s participation and multilateral agreements inter alia under the aegis of (a<\/em>) World Trade Organisation; (b<\/em>) World Customs Organisation; and (c<\/em>) Harmonised Commodity Description and Coding System (or Harmonised System).<\/p>\n [2]<\/a> This was draft for public consultation. Available\u00a0 HERE<\/a>.<\/p>\n [3]<\/a> Introduced in the Lok Sabha on 28-8-2010. Available HERE<\/a>.<\/p>\n [4]<\/a> Available at HERE<\/a>.<\/p>\n [5]<\/a> The Task Force on Direct Tax Code submitted its Report to FM Nirmala Sitharaman on 19-8-2019. For details, see HERE<\/a>.<\/p>\n [6]<\/a>The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.<\/p>\n [7]<\/a> For details, see, corporate tax rates slashed to 22% for domestic companies and 15% for new domestic manufacturing companies and other fiscal reliefs, (PIB 20-9-2019), available\u00a0 HERE<\/a>.<\/p>\n [8]<\/a>Vide Chapter VI (Part VI) of the Finance Act, 2020 (amending provisions of Finance Act, 2016).<\/p>\n [9]<\/a>Unveiled in year 2020. For details, see HERE<\/a>.<\/p>\n [10]<\/a>For details, see <HERE<\/a>>.<\/p>\n [11]<\/a>In terms of Ss. 40-45 of Finance Act, 2021 (amending Ss. 147-151 of Income Tax Act, 1961).<\/p>\n [12]<\/a>South Indian Bank Ltd. <\/em>v. CIT<\/em>, 2021 SCC OnLine SC 692<\/a>.<\/p>\n [13]<\/a>\u201c14-A. Expenditure incurred in relation to income not includible in total income<\/em>.\u2014\u00a0(1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.\u201d<\/p>\n [14]<\/a>In a detailed decision in Maxopp Investment Ltd. <\/em>v. CIT<\/em>, (2018) 15 SCC 523, the Supreme Court upheld the underlying premise of S. 14-A.<\/p>\n [15]<\/a>For illustration, see CIT <\/em>v. Jagson International Ltd<\/em>., 2018 SCC OnLine Del 12874<\/a> opining that the mandatory conditionalities under the Income Tax Rules need to be satisfied before S. 14-A disallowance can be triggered and rejecting the stand of the tax authorities of automatically applying the provision.<\/p>\n [16]<\/a>I.e. R. 8-D, Income Tax Rules, 1962.<\/p>\n [17]<\/a>For illustration, see CIT <\/em>v. Sociedade De Fomento Industrial (P) Ltd.<\/em>, 2020 SCC OnLine Bom 1896<\/a> : (2020) 429 ITR 207.<\/p>\n [18]<\/a>For illustration, see recent decision of the Supreme Court in Shiv Raj Gupta <\/em>v. <\/em>CIT<\/em>, 2020 SCC OnLine SC 589<\/a> where the \u201cdoctrine of commercial expediency\u201d has been affirmed. In this case the Supreme Court inter alia observed that \u201ca catena of judgments has held that commercial expediency has to be adjudged from the point of view of the assessee and that the Income Tax Department cannot enter into the thicket of reasonableness of amounts paid by the assessee\u201d.<\/p>\n [19]<\/a> For details, see Vision of a USD 5 Trillion Indian Economy, (PIB 11-10-2018), available HERE<\/a>.<\/p>\n [20]<\/a>Vide Taxation Laws (Amendment) Act<\/a>, 2021 (Act 34 of 2021), assented by the President on 13-8-2021.<\/p>\n [21]<\/a>For illustration, see Pooja Singla Builders and Engineers (P) Ltd. <\/em>v. National Faceless Assessment Centre<\/em>, 2021 SCC OnLine Del 4294<\/a>, holding that even if principles of natural justice have been complied with, still the proceedings cannot be sustained if an order was passed without issuing a show-cause notice which is a mandatory statutory condition.<\/p>\n
\nRecent decision of Supreme Court<\/strong><\/span><\/h3>\n
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\nAspirational cravings<\/span> <\/strong><\/h3>\n
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