2017 (11) TMI 465 - HC - Income Tax

ICDS Regulations Struck Down as Ultra Vires

The Chamber of Tax Consultants & Anr. Versus Union of India & Ors.

The Court held that the specific Income Computation and Disclosure Standards (ICDS) were ultra vires the Income Tax Act and the Constitution. ... Validity and applicability of 'income computation and disclosure standards' (“ICDS”) issued by CBDT - scope of validation laws whereby the Parliament seeks to rectify the defects pointed by the judiciary - Excessive delegation of legislative powers - Held that:- it is only a competent legislature that can make a validation law to override judicial precedents and that too by actually removing the defect pointed out by such precedent. Such a power is not available to the executive. In other words, where there is a binding judicial precedent, by virtue of Articles 141 and 144 of the Constitution, it is not open to the executive to override it unless there is an amendment to the Act by way of a validation law. To that extent, Section 145 (2), as amended, has to be read down to restrict power of the Central Government to notify ICDS that do not seek to override binding judicial precedents or provisions of the Act. The power to enact a validation law is an essential legislative power that can be exercised, in the context of the Act, only by the Parliament and not by the executive. If Section 145 (2) of the Act as amended is not so read down it would be ultra vires the Act and Article 141 read with Article 144 and 265 of the Constitution. The ICDS is not meant to overrule the provisions of the Act, the Rules thereunder and the judicial precedents applicable to the provisions of the Act as they stand. As noted hereinbefore, the challenge in the present case is to a few clauses of the various ICDSs notified on 29th September, 2016 by the Central Board of Direct Taxes (“CBDT”), Department of Revenue, Ministry of Finance. ICDS-I, ICDS-II, Paragraph 10(a) & 12 of ICDS-III, para 5, para 6 & para 8(1) of ICDS-IV, ICDS-VI, ICDS-VII and Part-A of the ICDS-VIII failed to pass the test of judicial scrutiny. Specific ICDS as noted have been struck down as ultra vires the Act, the impugned notification Nos. 87 and 88 dated 29th September 2016 and Circular No. 10 of 2017 issued by the CBDT are also held to be ultra vires the Act and struck down as such. Issues Involved:1. Constitutional validity of the notification No. 87/2016 and Circular No. 10 of 2017 issued by the CBDT.2. Excessive delegation of legislative powers.3. Violation of Articles 14, 19(1)(g), 141, 144, and 265 of the Constitution.4. Validity of specific clauses in various ICDS.Issue-Wise Analysis:1. Constitutional Validity of Notification No. 87/2016 and Circular No. 10 of 2017:The petitioners challenged the constitutional validity of the notification and circular issued by the CBDT on the grounds that they violate Articles 14, 19(1)(g), 141, 144, and 265 of the Constitution. The Court examined the amendments to Section 145 of the Income Tax Act, 1961, and the introduction of ICDS. It was observed that the ICDS intended to prevail over judicial precedents, which is impermissible in exercise of delegated legislative power. The Court held that the power under Section 145(2) cannot permit changing the basic principles of accounting recognized in the Act unless corresponding amendments are made to the Act itself.2. Excessive Delegation of Legislative Powers:The petitioners argued that the delegation of powers to the Central Government to issue ICDS was an instance of excessive delegation of legislative powers. The Court found merit in this contention, stating that ICDS notified under Section 145(2) of the Act has the effect of modifying the basis for computation of taxable income as recognized by the Act and as interpreted by the Supreme Court. The Court emphasized that the power to enact a validation law is an essential legislative power that can only be exercised by the Parliament and not by the executive.3. Violation of Articles 14, 19(1)(g), 141, 144, and 265 of the Constitution:The petitioners contended that the impugned notifications and circular violated Articles 14, 19(1)(g), 141, 144, and 265 of the Constitution. The Court held that the ICDS, to the extent it overrides binding judicial precedents or provisions of the Act, is ultra vires the Act and the Constitution. The Court also noted that maintaining separate records for income tax purposes and accounting purposes would create confusion and additional compliance burden, constituting an unreasonable restriction on the freedom to conduct business.4. Validity of Specific Clauses in Various ICDS:ICDS I: The Court held that ICDS I, which does away with the concept of 'prudence,' is contrary to the Act and binding judicial precedents and is therefore unsustainable in law.ICDS II: The Court found that ICDS II, which pertains to the valuation of inventories, eliminates the distinction between a continuing partnership business after dissolution from one which is discontinued upon dissolution. This is contrary to the decision of the Supreme Court in Shakti Trading Co. and is held to be ultra vires the Act.ICDS III: The Court held that the treatment to retention money under Paragraph 10(a) in ICDS-III will have to be determined on a case-to-case basis by applying settled principles of accrual of income. To the extent that it seeks to bring to tax the retention money, the receipt of which is uncertain/conditional, it is ultra vires.ICDS IV: The Court held that para 5 of ICDS-IV, which requires an Assessee to recognize income from export incentive in the year of making the claim if there is 'reasonable certainty' of its ultimate collection, is contrary to the decision of the Supreme Court in Excel Industries and is ultra vires the Act. Similarly, para 6 of ICDS-IV, which permits only the proportionate completion method, is contrary to judicial precedents and is struck down.ICDS VI: The Court held that ICDS-VI, which states that marked-to-market loss/gain in case of foreign currency derivatives held for trading or speculation purposes are not to be allowed, is contrary to the ratio laid down by the Supreme Court in Sutlej Cotton Mills Limited v. CIT and is ultra vires the Act.ICDS VII: The Court found that ICDS VII, which provides that recognition of government grants cannot be postponed beyond the date of accrual receipt, is in conflict with the accrual system of accounting and is ultra vires the Act.ICDS VIII: The Court held that for entities not governed by the RBI to whom Part A of ICDS VIII is applicable, the accounting prescribed by the AS has to be followed, which is different from the ICDS. Therefore, Part A of ICDS VIII is ultra vires the Act.Conclusion:The Court concluded that to the extent the specific ICDS have been struck down as ultra vires the Act, the impugned notification Nos. 87 and 88 dated 29th September 2016 and Circular No. 10 of 2017 issued by the CBDT are also held to be ultra vires the Act and are struck down. The writ petition was disposed of in these terms with no orders as to costs.