The article discusses the Supreme Court’s interpretation and two recent judgments by the Supreme Court in which the Court reversed well-reasoned judgments of High Courts. Also, it virtually enacted into existence taxes that lack legislative support. The Court’s actions in these cases undermine the rule of law. It is because of allowing the government to tax individuals and businesses without following the proper legislative process. The article concludes by warning that if the Supreme Court continues to act in this way, the rule of law in India will be weakened.
What is the Context:
The Supreme Court’s interpretation of tax matters has resulted in the reversal of well-reasoned judgments and the creation of taxes without legislative support. Two notable judgments by Justice M.R. Shah exemplify this issue.
India’s taxation laws are based on two central precepts: the authority of law and the principle of sureness, emphasizing clarity, consistency, and predictability. Recent judgments by the Supreme Court have raised concerns about the commitment to these principles.
Reversal of Judgments:
- The case of ITO vs Vikram Sujitkumar Bhatia dealt with the retrospective effect of an amendment to the Income Tax Act. High Courts had interpreted the law narrowly, requiring evidence of ownership for material seized during a search. The Supreme Court, however, reversed these decisions, claiming that the amendment was retrospective and declaratory, despite its expansion of the law.
- The judgment in Union of India vs Ashish Agarwal revived reassessment notices issued without legal sanction. The Supreme Court not only overturned the Allahabad High Court’s judgment but also disregarded verdicts from other High Courts. The Court revived the notices under the pretext of officers’ ignorance of the law, despite their reliance on repealed provisions.
Court as a Maker, Not an Interpreter:
The Supreme Court’s interpretation of Section 153C in the Bhatia case goes beyond its role as an interpreter of the law. By applying the amended law retrospectively, the Court expands the law’s scope instead of clarifying its original intent. This undermines the principle of legality and certainty.
Encroachment on Legislative Functions:
The revival of reassessment notices in the Agarwal case not only encroaches on legislative functions but also legitimizes illegitimate actions. The Court invoked Article 142 of the Constitution, which should not be used in violation of statutory law, to revive notices lacking legislative support. This has led to confusion and further litigation.
The Supreme Court’s interpretation of tax matters raises concerns about the commitment to the principles of legality and certainty. The Court’s role should be limited to interpreting the law rather than making new laws. To ensure clarity and predictability in tax laws, it is essential to strike a balance between the judiciary’s role and legislative intent.
Foster better coordination and consultations between the judiciary, legislature, and executive branches to align interpretations of tax laws.
Review and revision:
Conduct a comprehensive review of existing tax legislation to ensure it reflects the needs of a dynamic economy and promotes clarity.
The judiciary should consider the broader economic impact of its decisions and maintain a balance between justice and stability in the tax regime.
The legislature should address any gaps or ambiguities in tax laws, ensuring that they are clear, consistent, and predictable.
Upholding the rule of law:
Preserve the sanctity of taxation with legislative support and avoid encroachment on legislative functions.
By adopting these measures, India can create a tax system that upholds the principles of legality, certainty, and predictability, fostering a favorable business environment and promoting sustainable economic growth.
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