The Board has clarified that the even sums outstanding on 01.04.2001 or 01.10.2001 are to be considered for the purpose of notional tax levy. We shall now deal with the rule making power of the Board specially considering the intent of the Section. Under the amended section 17 it is intended to widen the meaning of perquisite by including certain fringe benefits with prospective date. But in the context of old interest free or concessional loans drawn by the employees in the past the amended rule take away the prejudice caused to the assessee in the past which in our view is not in the powers of the Board by a mere issue of a Circular.
The Supreme Court in the case of ITO v. M.C. Poonnose [1970] 75 ITR 174 held that an authority, which has the power to make subordinate legislation, cannot make it with retrospective effect unless it is so authorised by the Legislature, which has conferred that power on it. The Income-tax Act itself, while conferring rule-making power on the Board, has empowered the Board by making specific provision in section 295(4) of the Income-tax Act, 1961, to give retrospective effect to any rule. This power is subject to the only restriction that no retrospective effect should be given to any rule so as to prejudicially affect the interest of the assessee.
In matters of substantive law, the amendment cannot have retrospective effect unless it is specifically made retrospective. In respect of procedural law, amendment may have effect on all matters pending as on the date on which the amendment is declared to be effective and would also be applicable to other future cases, though it may relate to assessments or proceedings earlier to the effective date, unless it has the effect of divesting rights, which had vested in the taxpayer.
Also when a fresh levy is imposed retrospectively by any legislation, the courts have tended to strike down such levy as being an unreasonable restriction on the fundamental rights guaranteed under article 19(1)(f) and (g) of the Constitution.
In the case of Shew Bhagwan Goenka v. CTO [1973] 32 STC 368, the Calcutta High Court considered the West Bengal Taxation Laws (Amendment) Act of 1969, in so far as it gave retrospective operation to a new definition of “business” incorporated retrospectively by virtue of the amendment. The retrospective amendment, the court said, imposed an unreasonable restriction upon a person’s fundamental right guaranteed under article 19(1)(f) and (g) of the Constitution and was, therefore, invalid.
The court observed that the object of the amendment was not to remove or rectify any defect in phraseology or lacuna or to validate proceedings, which had taken place on the basis of the earlier enactment. The Court found that the object of the amendment is to widen the definition of business so as to include for the first time transactions, which without the amendment fell outside the concept of business hitherto understood and judicially determined. The amendment for all intents and purposes seeks to impose sales tax for the first time on transactions, which till the amendment fell outside the purview of the Act. Debiprosad Pal J held that the effect of retrospective operation of such an amendment would be to impose an unexpected liability in respect of transactions which when took place were not subject to any charge or liability under the Act. Under the Act, a dealer will be saddled with a liability to pay sales tax with respect to transactions, which will now constitute business as defined by the amendment. He might have entered into such transactions several years back, and at the time when these transactions took place such sales were not taxable. As a result of the retrospective operation of the amendment, he is now to be treated as a dealer liable to pay tax in respect of such transactions of sales. Thus, by introducing the amendment with retrospective effect, the petitioner is subjected to pay tax, which could never be contemplated or foreseen at the time when sales were actually effected.
In the amendment carried out by the Finance Act read with rule 3 under Income tax Rules, 1962 dealing with interest free or concessional loans made available to the employee during the relevant previous year cannot be assumed to include amounts advanced or made available in the years preceding to the year of amendment as in that case it would amount to subjecting such sums to levy of tax which could never be contemplated or foreseen at the time of drawing such advances. In other words it has the effect of divesting rights, which had vested in the taxpayer.
In our view therefore an individual employee may seek relief from such tax levied on the opening outstanding balances in his personal return as this amounts to partial retrospective operation thus impairing an existing right under an enactment. The employer’s are however advised to consider such opening sums in view of the Board Circular so stating that the new rule is also applicable to opening balances. This strategy can avoid any demands for interest and penalties at a later date.
In our view the new notification viz a viz levying of tax on interest free loans shall be deemed to have come into force even in respect of previous sums made available in the preceding years, will make the notification retrospective in effect and therefore would be invalid. In our view a direct writ course is well laid out in this regard.