2021 (1) TMI 481 - HC - Income Tax

Second Amendment Act 2016 and Finance Act surcharge are rate enhancements, not retrospective tax liabilities under s.115BBE and s.4

HC upheld that the Taxation Laws (Second Amendment) Act, 2016 and the Finance Act surcharge operate as enhancements of tax rates, not as retrospective new ... Applicability of an amended tax rate brought into force on 1st April to assessments of that assessment year - distinction between creation of a new substantive liability and mere enhancement of tax rate for prospective/retrospective effect - enhanced rate under Section 115BBE - surcharge as partaking the character of income-tax and chargeable under the charging scheme - advance tax increased by surcharge as a rate enhancementApplicability of an amended tax rate brought into force on 1st April to assessments of that assessment year - enhanced rate under Section 115BBE - distinction between creation of a new substantive liability and mere enhancement of tax rate for prospective/retrospective effect - Whether the enhanced rate of tax under Section 115BBE made effective from 01.04.2017 applies to assessments in the assessment year 2017-18 relating to income of the previous year 2016-17. - HELD THAT: - The Court examined precedent distinguishing amendments that create new substantive liabilities from amendments that merely change the rate or quantum to be applied in assessment. Prior decisions establish that where an amendment coming into force on 1st April of an assessment year only alters the rate by which tax is quantified, that altered rate applies to assessments carried out in that assessment year. By contrast, measures that impose new liabilities or disturb accrued rights cannot be given retrospective effect unless legislative intent so provides. Section 115BBE, originally providing a tax rate of 30%, was amended by the 2nd Amendment Act to enhance the rate to 60% with effect from 01.04.2017; this change does not create a new charge but increases the rate of tax applicable to income assessed under the existing charging provisions. The seizures and admissions occurred in FY 2016-17 and the assessments were carried out in the assessment year commencing 01.04.2017; accordingly the enhanced rate as on 01.04.2017 is applicable to those assessments. [Paras 11, 13, 15]The enhanced rate under Section 115BBE effective from 01.04.2017 applies to the assessments carried out in assessment year 2017-18 (relating to FY 2016-17); the amendment is a change of rate and not the creation of a new substantive liability.Surcharge as partaking the character of income-tax and chargeable under the charging scheme - advance tax increased by surcharge as a rate enhancement - Whether the enhanced surcharge introduced by amendment to the Finance Act (increasing surcharge to 25% for income under Section 115BBE) effective from 01.04.2017 applies to the assessments in assessment year 2017-18. - HELD THAT: - The Court analysed the nature of surcharge in the Finance Act and prior authority which treats surcharge as an addition that effectively enhances income-tax for the purpose of the Union (Article 271). The Finance Act provisions operate to increase the income-tax computed for an assessment year by a surcharge; thus a change in the rate of surcharge effected from the commencement of an assessment year is a rate enhancement that must be applied to assessments in that year. The amendment removing Section 115BBE from an earlier proviso and inserting a proviso to levy surcharge at 25% on advance tax computed under Section 115BBE(1)(i) was held to be an enhancement of surcharge rates rather than creation of a new liability. [Paras 14, 16, 17]The enhanced surcharge (25%) effective from 01.04.2017 applies to assessments in assessment year 2017-18; surcharge is to be treated as partaking the character of income-tax and is applied as a rate enhancement.Final Conclusion: The Single Judge's order is affirmed. The amendments enhancing the rate under Section 115BBE and the surcharge effective from 01.04.2017 are applicable to assessments carried out in assessment year 2017-18 relating to FY 2016-17; the writ appeal is dismissed. Issues Involved:1. The prospective or retrospective application of amendments made by the Taxation Laws (Second Amendment) Act, 2016, to Section 115BBE of the Income Tax Act, 1961.2. The applicability of the enhanced tax rate and surcharge to the assessments of the previous financial year.3. The nature and imposition of surcharge under the Finance Act.Detailed Analysis:1. Prospective or Retrospective Application of Amendments:The appellant sought a declaration that the amendments made by the Taxation Laws (Second Amendment) Act, 2016, to Section 115BBE of the Income Tax Act, 1961, which enhanced the rate of income tax for unexplained incomes to 60% and the surcharge to 25%, should be applied prospectively. The court referenced the decision in Karimtharuvi Tea Estate Ltd. v. State of Kerala (AIR (1966) SC 1385) and other Supreme Court decisions, which established that an amendment effective from the 1st of April of any financial year would apply to the assessments of that year. The court concluded that the enhancement of the tax rate and surcharge was not a new liability but merely an increase in the rate, thus applicable to assessments carried out in the financial year 2017-2018, relating to the previous financial year.2. Applicability to Assessments of the Previous Financial Year:The appellant argued that the amendments should not apply to the financial year 2016-2017, during which the seizures occurred. The court examined various precedents, including Kesoram Industries v. Commissioner of Wealth Tax [AIR 1966 SC 1385], which clarified that while the Finance Act prescribes the rate of tax, the liability arises on the last day of the accounting year. The court determined that the enhanced tax rate and surcharge, effective from 01.04.2017, apply to assessments made in the assessment year 2017-2018 for the previous financial year 2016-2017. The court emphasized that the amendments did not create a new liability but merely enhanced the existing rate, thus applicable to the assessments of the previous year.3. Nature and Imposition of Surcharge:The appellant contended that there was no provision to enable a surcharge to be taxed retrospectively. The court referenced CIT Kerala v. K Srinivas [(1972) 4 SCC 526], which established that the term 'Income tax' includes surcharge, and Article 271 of the Constitution empowers the Parliament to increase taxes by a surcharge for the Union. The court concluded that the surcharge, as part of the income tax, is applicable from the commencement of the assessment year 2017-2018 and applies to the previous financial year. The surcharge imposed by the Finance Act, 2016, and enhanced by the Finance Act, 2017, was thus applicable to the assessments of the financial year 2016-2017.Conclusion:The court affirmed the judgment of the learned Single Judge, dismissing the writ appeal without any order as to costs. The amendments enhancing the tax rate and surcharge were applicable to the assessments made in the financial year 2017-2018, relating to the previous financial year 2016-2017, as they did not create new liabilities but merely increased the existing rates.