[By Vedant Sharma]
The author is a student of National Law University Odisha.
INTRODUCTION
The Indian Courts have consistently aimed to protect the substantial rights of the citizens. A presumption has been adopted in the Indian Jurisprudence by courts against the retrospective legislation unless the parliament manifest a clear intention for the law to have a retrospective effect. The issue of retrospective law could be traced back to the judgement of Golak Nath vs State of Punjab where the Supreme Court ruled that parliament could not amend fundamental rights retrospectively. The significance of retrospective law was brought to light in the case of the State Bank (Madras Circle) vs Union of India where it was highlighted that retrospective could relate to a variety of things such as changing a right or changing a procedure. The Income Tax Act, of 1961 has itself had more than 60 amendments in less than 30 years of existence. Prospective amendments being those which apply in the future dates are more likely to be easily applied than retrospective law which takes effect from the past.
Recently on 6 June 2024, the Dharwad bench of the Hon’ble Karnataka High Court in the case of SMT. Dhanashree Ravindra Pandit vs The Income Tax Department gave the landmark judgement addressing the complexities around the retrospective application of section 50 of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 which gives authority to revenue to initiate a criminal prosecution for wilful failure to furnish information under return of income as per sub-section (1), (4) or (5) of section 139 of the Income Tax Act, 1961. The respondent/petitioner took recourse to section 72(C) of the Black Money Act, 2015 (‘BMA’) to register a complaint invoking section 200 of the Criminal Procedure Code, 1973 that proceedings can be initiated under the act would still take place even if the assets were in existence before commencement of the act.
The court held in the instant case that section 72(C) of the BMA, 2015 being a deeming section which creates criminal liability should not be extended beyond the purpose of the act for which it is created or beyond the language of the act as per the judgement by the Hon’ble Supreme Court in the case of Kumaran vs the State of Kerala.
One of the major observations that were made by the court was the retrospective application of criminal prosecution under section 50 of the BMA, 2015 that violates the fundamental rights of the taxpayers under Article 20 of the Constitution of India who are convicted for an offence except for violation of law in force at the time of the commission of the act charged as an offence. The court referred to the Hon’ble Supreme Court judgment in the case of Rao Shiv Bahadur Singh v. State of Vindhya Pradesh which held that the retrospective application could not be in case of criminal offences being it violative of Article 20.
The Hon’ble Karnataka High Court also held that the judgement of Hon’ble Supreme Court in Union of India v. Gautam Khaitan would not be applicable in the present scenario as the judgement does not pertain to the issue of retrospective application of Sections 50 and 51 qua Article 20 of the Constitution. Thereby the court held that the prosecution cannot be made retrospectively as it does not pass the muster of Article 20 of the Constitution of India.
UNDERSTANDING THE ISSUES WITH THE PRESENT JUDGEMENT
The Hon’ble High Court of Karnataka has taken a notable step in the realm of the BMA by declaring the retrospective application of Section 50 of the BMA, 2015 as not being applicable but there are still a lot of important issues that are left by the court to be decided.
AMBIGUITY IN LEGISLATIVE INTENT TO MAKE RETROSPECTIVE LAWS
Legislative intent through provisions of Black Money Act
It is clearly stated in the BMA that the law shall come into force on 1st April 2016 as per Section 1(3) of the act and the charge of tax starting from Annual Year 2016-17 onwards as per Section 3. The language of the act in itself implies that the language of the act is intended for prospective application of the law.
Section 2(11) of the BMA defines “undisclosed asset located outside India”. The phrases “held by the assessee” and “he is the beneficial owner” used in Section 2(11) give an implication that the assessee should continue to hold assets. Thereby a liberal interpretation of the provisions suggests that the assets should be held by the taxpayer even after the act has come into commencement which shows that the legislature did not intend to apply the act retrospectively (Srinidhi Karti Chidambaram v Pr CIT).
The legislation can be deemed to be retrospective if it is clarificatory or declaratory in nature as laid down by the Hon’ble Supreme Court in CIT v Vatika Township(P) Ltd. A declaratory act is one that removes doubt about common law or the meaning of a statute and an explanatory act is one that addresses obvious omissions or clarifies doubts regarding a previous act.1 The act can be deemed to be declaratory if the previous legislation, which it is trying to clarify was unclear or unambiguous.
In case of the BMA, it is nowhere mentioned that it is declaratory/clarificatory in nature it is deemed to be clarificatory/declaratory. It was not enacted to remove ambiguity or provide clarification or remove doubts of any previous legislation which shows that the legislature did not intend for retrospective application of present law.
Amendment in section 2(2) after Finance act 2019
The definition of “assessee” was expanded by the Finance (No. 2) Act, 2019 with retrospective effect from the date of commencement of the act which is 1 July, 2015. The definition of assessee, under Section 2(2) of the BMA, 2015, which was restricted to a person as a resident within the meaning of Section 6 of the Income-tax Act. This was further expanded to include a person who is a non-resident or not ordinarily resident in India within the meaning of Section 6(6) of the Income tax act, in the previous year to which the income in Section 4 relates or undisclosed assets was acquired.
The present amendment by the legislature cannot be set aside on the mere grounds that it is applicable retrospectively. The Hon’ble Supreme Court in the judgement of Misrilal Jain vs State of Orissa laid down that the legislature can not only provide for prospective but also retrospective application of the material provisions of the law. The introduction of the Finance Act (No.2) 2019 further led to the retrospective effect of amendment in Section 6 by applying it from 1 July 2015.This further reinforces the fact that any person can be prosecuted under Section 50 of the BMA, 2015 for failure to furnish information in return of income under section 139 of the Income Tax Act, 1961.
As per section 2 of the BMA, the previous year of acquisition of the undisclosed asset located outside India shall be determined under this amendment without giving effect to the provisions of section 72(C) of the BMA, 2015. Therefore, the Hon’ble High Court’s decision to invalidate the retrospective effect of Section 72(C) would not have any effect on the retrospective effect of the amendment.
Thereby it remains undecided by the court whether the amendment, introduced in 2019 which applies retrospectively from 1 July 2015 in the definition of ‘assessee’ to include certain non-residents and residents but not ordinarily residents within the ambit of BMA law will withstand judicial scrutiny.
The Hon’ble Supreme Court in the judgement of CIT vs Vatika Township and Misrilal Jain vs the State of Orissa ruled that legislations which impose obligations or attaches new liabilities have to be treated as prospective unless the legislative intent is for the purpose of applying it retrospectively.
The dilemma in the present act is regarding the ambiguity in legislative intent to make retrospective laws because the provisions of retrospective application imply the prospective application of law whereas the amendment in 2019 implies retrospective application. It was pertinent for the court to decide in the present judgement whether the legislative intent of the BMA is prospective or retrospective.
SECTION 72(C) SHOULD BE DECLARED UNCONSTITUTIONAL –
The BMA, of 2015, consists of three modes for encouraging tax which include Charge of Interest, imposition of penalty or launching of penalty against tax defaulters.
Apart from prosecution under section 50 of the BMA, 2015 the income tax department also has the alternative to pass a penalty order under section 43 for failure to furnish information in return of income under section 139 of the Income Tax Act, 1961.
The Hon’ble Karnataka High Court in the present judgement has dealt with the applicability of section 72(C) only with respect to the criminal liability instead of dealing with the constitutionality of the section which has led it to be open in sections with civil liability e.g.: section 43. Article 20 of the constitution has restricted the application of section 72 (C) in criminal matters but what about in civil matters? Although the present case pertains to an issue regarding section 50 of the BMA but the court pronouncing judgement regarding only criminal liability is something that has left the section to be used by the department to apply the act retrospectively. In the author’s opinion section 72(C) should have been declared unconstitutional by the court due to the following reasons:
Firstly, the Hon’ble Supreme Court in the case of Chiranjit Lal vs Union of India has ruled that treating different classes of people similarly or treating unequal as equals violates Article 14 of the Constitution. A retrospective effect under section 72(C) imposing an unreasonable burden on taxpayers would fail the Article 14 test, if it doesn’t distinguish between two classes that is those subjected to the law retrospectively and those subjected to it for the first time by failing to account for their different situations.
Secondly, the retrospective effect under section 72(C) of the act does not pass the test of Article 19 of the constitution. The Hon’ble Supreme Court in the case of Ujagar Prints (II) v. Union of India, outlined factors to assess if a retrospective tax violates fundamental rights under Article 19(1)(g). These include the context, like validating a previously struck-down tax law; the duration of retroactivity; and the extent of the unforeseen financial burden imposed. In the present scenario the retrospective effect under section 72(C) does not fulfil any of the conditions as it does not validate any of the previous provisions nor the duration of any retroactivity.
As seen in the facts of the present case the penalty under section 50 was initiated with the aid of section 72(C) even when the assets ceased to be in existence in 2010 that is five years before commencement of the act.
ANALYSIS AND CONCLUDING REMARKS
The Hon’ble Karnataka High Court by removing the ambit of retrospectivity in criminal prosecution for failure to furnish a return of income under section 50 of the BMA has taken a notable step and has protected the fundamental right of the taxpayers under Article 20 of the Constitution.
Although it was pertinent for the court to resolve the ambiguity and determine whether the legislative intent is to retrospectively apply the black money or not along with deciding the judicial validity of the 2019 amendment in section 2(2). The court, by restricting the retrospective application of section 50 despite the legislative intent being to apply the act retrospectively would be in violation of the precedents as laid down by the apex court.
The Hon’ble High Court or the Hon’ble Apex Court need to decide upon the constitutionality of Section 72(C) of the BMA and should declare the section to be unconstitutional on the grounds of violation of fundamental rights under Articles 14 and 19. Removal of the section would ensure that there is no injustice with the taxpayers to pay penalty for an action that was committed even before the act came into existence and levying undue burden on them in civil cases.