Law as on 1st day of assessment year not applicable to financial year in respect of amendments coming into force after first day of April of financial year.
ABCAUS Case Law Citation:
ABCAUS 3147 (2019) (09) HC
Important case law relied upon by the parties:
Badri Prasad & ors. vs. Commissioner of Income Tax (1990) Volume 185 ITR 307
Karimtharuvi Tea Estate Ltd. v. State of Kerala [1966] 60 ITR 262 (SC)
Maneklal Vallabhdas Parikh and Sons v. CIT [1969] 72 ITR 637 (Guj).
Kesoram Industries and Cotton Mills Ltd, vs. Wealth Tax Commissioner (Central) in AIR 1966 SC 1370
Applicability of law as on 1st April of assessment year
The instant judgment had arisen from a reference made by the Income Tax Appellate Tribunal (ITAT) under Section 256(i) of the Income Tax Act, 1961 (the Act).
The point for consideration in the said reference was whether the Appellate Tribunal was correct in law in holding that the share income of minor sons of the assessees, including the share in interest on capital credited to the minor sons out of the partnership firm was to be computed in the hands of their father under Section 64(1)(iii) in the relevant Assessment year.
The said provision was introduced in the Income Tax Act by the Taxation Law (Amendment) Act 1975 with effect from 1st day of relevant Assessment Year, whereas the accounting year of the assessee(s) in the instant case(s) came to an end earlier.
The authorities were of the opinion that the question was answered by a Division Bench decision in which it was held that it is a cardinal principle of tax laws that the law to be applied is that which is in force at the commencement of the assessment year.
However, the Hon’ble High Court observed that when the instant case(s) were referred to the Division Bench, the assessee relied upon the judgment of the Hon’ble Supreme Court wherein it was held that the liability to pay income tax hinges on accrual of income and has no concern with the time when computation is made by the taxing authority. It was the submission of the assessee that the decision of the Apex Court was not considered by the Division Bench.
It was under the above circumstances the issue was referred for consideration to a larger Bench.
The Hon’ble High Court noted that admittedly, the accounting year of the firm had closed much prior to coming into force of Section 64(1)(iii). However, the Income Tax Tribunal added the share income of the minor sons from the partnership firm at the hands of the income of the assessee father under Section 64(1)(iii) of the Act.
The Amicus Curiae appointed by the Court submitted that in view of the consideration and opinion expressed by the Division Bench the issue now stands settled. It was canvassed that irrespective of the fact that the Taxation Law Amendment Act had come into force with effect from 1st day of the relevant AY and irrespective of the fact that the accounting year of both the assessees had closed prior thereto, the income of the minor children of the assesses was liable to be added at the hands of their father while computing his total income.
It was his submission that the law applicable on the date of assessment is relevant for ascertaining the tax liability. He submitted that the time of accrual of income is irrelevant for the purpose of applicability of the Amending Act. Irrespective of the fact that income had accrued and accounting year of the assessee had come to an end prior to the amendment came into effect, the Amending Act which came into force with effect from the 1st day of the relevant AY will apply to arrive at the taxable income of the assessee in the accounting year.
According to him, the Constitution Bench judgment of the Apex Court which had been relied upon by the Division Bench supported his contention. The Constitution Bench had held as under:
“Now, it is well settled that the Income Tax Act, as it stands amended on the first day of April of any financial year must apply to the assessment of that year. Any amendments in the Act which come into force after the first day of April of a financial year, would not apply to the assessment for that year, even if the assessment is actually made after the amendments came into force.”
The Full Bench opined that the legal position settled by the Constitution Bench, was neither as appreciated by the Division Bench nor as canvassed by Amicus Curiae.
The Hon’ble High Court drawn attention that in fact what the Constitution Bench had settled is that if an amendment takes place on 1st of April of any financial year, it would apply to the assessment held for that financial year but not if the amendment comes into force after the start of the financial year on 1st of April in which case it would take effect on the next assessment year.
Applying the said law to the facts of the cases the Hon’ble High Court noted that the provisions of the Amending Act came into force on the first day of April of the financial year. As per the legal position settled, the amendment would apply to the assessment to be held for the next financial year.
The Hon’ble High Court opined that the earlier judgment of the Apex Court is also in line with the Constitution Bench judgment of the Supreme Court.
The Hon’ble High Court opined that the earlier judgment of the Apex Court when read harmoniously with the Constitution Bench judgment of the Apex Court, the argument advanced by the Amicus Curriae as well as the Department can be made only in respect of a rate prescribed under a Finance Act or an Act providing a surcharge if the same is brought into force on the 1st of April of the assessment year in which assessment for the previous year is being done as the same would only provide for ascertaining the rate, for existing liability under the Income Tax Act.
But the Hon’ble High Court pointed out that it was not the given case(s). Under the new provision, i.e. Section 64(1)(iii) a new liability had been prescribed and not the rate for ascertaining the liability. Such new liability under the Income Tax Act cannot be given a retrospective effect. Such liability can only be fastened on an individual if the same was existing at the time of accrual and not at the time of assessment.
In view of the judgments of the Apex Court the Hon’ble High Court held that for deciding the liability of a particular provision of the Income Tax Act, the date of accrual of income would be relevant. If the provision comes into force in a particular financial year, it would apply to the assessment for that year but cannot be made applicable in respect of assessment for a previous year.
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