Tax law in the shadow of the higher judiciary

Source– The post is based on the article “Tax law in the shadow of the higher judiciary” published in “The Hindu” on 14th June 2023.

Syllabus: GS2- Polity – Functioning of judiciary

Relevance– Issues related to taxation laws

News – Over the course of the last 12 months, there have been instances where the Supreme Court of India has undermined the basic precepts of taxation, by reversing well-reasoned judgments of High Courts.

What are the two central precepts that are the basis of India’s law of taxation?

First, on the idea contained in Article 265 of the Constitution. A tax may be imposed only with the authority of law.

Second, on a principle of sureness. Any levy ought to be clear, consistent, and predictable.

What are the recent instances where the Supreme Court of India has undermined the well-established principles of taxation?

ITO vs Vikram Sujitkumar Bhatia case–

The provision at stake is Section 153C of the Act. It stipulates the conditions under which a search made on a person’s premises could result in the opening of proceedings against other persons and entities.

Before an amendment to the law in 2015, Section 153C allowed the Revenue authorities to proceed against third parties to a search, if material seized belongs to a third party.

The law was amended in 2015. Section 153C now stipulated that assessments could be made against third parties to a search, even if the material seized pertains to the person or if information contained in those items relates to the person.

Gujarat High Court held that the amendment was not expressly retrospective. Such an application would impact the rights that had vested on persons by earlier provisions of the law.

The Supreme Court reversed this verdict by finding the new law declaratory. SC stated that it seeks to explain an earlier provision. Hence, it is retrospective.

Union of India vs Ashish Agarwal case–

The Court revived notices of reassessment that had been issued by the Revenue without any sanction of law. It reversed the Allahabad High Court’s judgement.

The issue at stake in the case was simple. With effect from April 1, 2021, Parliament had enacted a new regime to govern reassessments of completed income-tax proceedings.

But, despite the change in law, the Revenue continued to issue notices under a repealed provision. It derives authority from executive notifications that extended timelines during the COVID-19-inflicted period.

The High Courts declared these notices invalid. SC revived these quashed notices. Through this, the Court was encroached in the legislative domain. Court also invoked its power under Article 142 of the Constitution.

Article 265 of the Constitution forbids taxation without legislation. However, the Supreme Court’s willingness to encroach in Parliament’s domain, goes against this provision.