The Chamber Of Tax Consultants vs. UOI (Delhi High Court) - 11 Nov 2017
Questions of law discussed:
(i) Whether the amendments to Section 145 are an instance of delegation by the Parliament of essential legislative powers to the Central Government?
(ii) Are the ICDS an instance of excessive delegation of legislative powers? Whether the impugned ICDS are contrary to the settled law as explained in various judicial precedents and are, therefore, liable to be struck down?
(iii) Whether the impugned amendments to Section 145 of the Act and the consequential ICDS and Circular violate Articles 14, 19 (1) (g), 141, 144 and 265 of the Constitution?
SOME IMPORTANT POINTS DISCUSSED IN THE CASE (for easy reference):
1- In the guise of delegating powers to the Central Government to issue accounting standards/ICDS, what has been effectively done is to delegate the essential legislative power to amend the provisions of the Act, especially those affecting the chargeability and computation of taxable income. The Central Government cannot be conferred with such unfettered powers by the Parliament in the guise of delegated legislation to notify ICDS modifying the basis of taxation which otherwise, if at all, can be done only by the Parliament by making amendments to the provisions of the Act.
2- Further, it is well settled that no tax, fee, or compulsory charge can be imposed by any bye-law, rule or regulation or notification unless the statute under which the subordinate legislation is made, specifically authorizes such imposition.
3-The impugned notification notifying ICDS is contrary to the settled law since its implementation would nullify the judgments of the Supreme Court and the High Courts. Reference was made to the various judgments which would now stand virtually inapplicable on account of the ICDS. It was clarified by the CBDT itself that in the case of conflict between the provisions of the ICDS and the Act, the provisions of the Act shall prevail. Consequently, with the ICDS being made mandatory it was no longer open to an Assessee to compute taxable income in terms of the Act as explained by the judgments of the Supreme Court and High Courts. This method of overriding the binding decision of Courts by the executive was contrary to the law explained in Shri Prithvi Cotton Mills Limited v. Broach Borough Municipality (1969).
4- There was no reasonable basis on which such differentiation or classification can be made for the applicability of the ICDS since the Assessee following cash system of accounting would escape from the implications and compliance requirement of the ICDS. This was violative of Article 14 of the Constitution.
5- Maintaining one set of books of accounts for accounting purposes and another for tax purposes would create confusion, interpretation issues, multiplicity of records and additional compliance burden which would outweigh the gains of ICDS and constitute an unreasonable restriction on the freedom to conduct business.
6-Therefore it is only a competent legislature that can make a validation law to override judicial precedents and that too by actually removing the defect pointed out by such precedent. Such a power is not available to the executive
7-ICDS I talks of accounting policies. It is settled law that accounting standards cannot override the basis on which the taxable income is computed
8-the ICDS now stipulates that prudence is not to be followed unless specified, and that this is contrary to the decisions in CIT v. Triveni Engineering & Industries Ltd (2011) and CIT v. Advance Construction Co. Pvt. Ltd. (2005),
9- ICDS IV only provides for the concept of realizing revenue in respect of recognition of income from sale of goods and recognition of income from rendering of services under the percentage completion method. In respect of interest income, royalty income and income from rendering of services other than the one specified above, there is no such concept of "reasonable certainty of realizing revenue",
10- The further averment is that the concept of prudence has been retained in ICDS X by allowing provision for further liability. This is contrary to what has been clarified in Circular No. 10 of 2017. ICDS X allows recognition of provisions in respect of present liability arising out of a past event. It specifically prohibits recognition of costs or liability that needs to be incurred to operate in the future.
11- ICDS III allows expected losses only on proportionate basis as per the percentage completion method. Therefore, it is not in accordance with the concept of prudence. Expected losses have been allowed as deduction in CIT v. Triveni Engg. & Industries Limited and CIT v. Advance Construction Co. Pvt. Ltd,
12- ICDS-II fails to take into account the two different scenarios aforementioned. It is, therefore, apparent that ICDS-II sidesteps the decision in Shakti Trading Co. (supra). The ICDS-II insists that the stock-in-trade of the firm in both scenarios would have to be valued at market price irrespective of whether the business discontinues
13- Many decided court cases states that "the retention money does not accrue to an Assessee until and unless the defect liability period is over and the Engineer-in-Charge certifies that no liability is attached to the Assessee"
14- Para 5 of ICDS-IV requires an Assessee to recognize income from export incentive in the year of making of the claim if there is 'reasonable certainty' of its ultimate collection. In Excel Industries (supra), the Supreme Court held that it is only in the year in which the claim is accepted by the Government that a right to receive the payment accrues in favour of the Assessee and the corresponding obligation to pay arises in the hands of the Government.
15- In Godhra Electric Supply Company Limited v. CIT (1997), the Supreme Court held that hypothetical income cannot be taxed. This was in the context of the same treatment for monetary assets and liabilities of the Indian entity as well as the foreign operations which leads to adjustment of notional income/loss to the total income. In Sutlej Cotton Mills Limited v. CIT (1979) it was explained that exchange gain/loss in relation to a loan utilized for acquiring a capital item would be capital in nature.
16- ICDS VII however requires that amount has to be taxed in the year of receipt. This again is contrary to and in conflict with the accrual system of accounting.
To the extent the specific ICDS as noted hereinbefore have been struck down as ultra vires the Act, the impugned notification Nos. 87 and 88 dated 29th September 2016 and Circular No. 10 of 2017 issued by the CBDT are also held to be ultra vires the Act and struck down as such
For reading the full text of this judgement please refer link - http://itatonline.org/archives/the-chamber-of-tax-consultants-vs-uoi-delhi-high-court-s-1452-icds-s-145-2-has-to-be-read-down-to-restrict-power-of-the-central-government-to-notify-icds-that-do-not-seek-to-override-binding-ju/ctc-icds-145-2-writ-petition-ultra-vires/
(i) Whether the amendments to Section 145 are an instance of delegation by the Parliament of essential legislative powers to the Central Government?
(ii) Are the ICDS an instance of excessive delegation of legislative powers? Whether the impugned ICDS are contrary to the settled law as explained in various judicial precedents and are, therefore, liable to be struck down?
(iii) Whether the impugned amendments to Section 145 of the Act and the consequential ICDS and Circular violate Articles 14, 19 (1) (g), 141, 144 and 265 of the Constitution?
SOME IMPORTANT POINTS DISCUSSED IN THE CASE (for easy reference):
1- In the guise of delegating powers to the Central Government to issue accounting standards/ICDS, what has been effectively done is to delegate the essential legislative power to amend the provisions of the Act, especially those affecting the chargeability and computation of taxable income. The Central Government cannot be conferred with such unfettered powers by the Parliament in the guise of delegated legislation to notify ICDS modifying the basis of taxation which otherwise, if at all, can be done only by the Parliament by making amendments to the provisions of the Act.
2- Further, it is well settled that no tax, fee, or compulsory charge can be imposed by any bye-law, rule or regulation or notification unless the statute under which the subordinate legislation is made, specifically authorizes such imposition.
3-The impugned notification notifying ICDS is contrary to the settled law since its implementation would nullify the judgments of the Supreme Court and the High Courts. Reference was made to the various judgments which would now stand virtually inapplicable on account of the ICDS. It was clarified by the CBDT itself that in the case of conflict between the provisions of the ICDS and the Act, the provisions of the Act shall prevail. Consequently, with the ICDS being made mandatory it was no longer open to an Assessee to compute taxable income in terms of the Act as explained by the judgments of the Supreme Court and High Courts. This method of overriding the binding decision of Courts by the executive was contrary to the law explained in Shri Prithvi Cotton Mills Limited v. Broach Borough Municipality (1969).
4- There was no reasonable basis on which such differentiation or classification can be made for the applicability of the ICDS since the Assessee following cash system of accounting would escape from the implications and compliance requirement of the ICDS. This was violative of Article 14 of the Constitution.
5- Maintaining one set of books of accounts for accounting purposes and another for tax purposes would create confusion, interpretation issues, multiplicity of records and additional compliance burden which would outweigh the gains of ICDS and constitute an unreasonable restriction on the freedom to conduct business.
6-Therefore it is only a competent legislature that can make a validation law to override judicial precedents and that too by actually removing the defect pointed out by such precedent. Such a power is not available to the executive
7-ICDS I talks of accounting policies. It is settled law that accounting standards cannot override the basis on which the taxable income is computed
8-the ICDS now stipulates that prudence is not to be followed unless specified, and that this is contrary to the decisions in CIT v. Triveni Engineering & Industries Ltd (2011) and CIT v. Advance Construction Co. Pvt. Ltd. (2005),
9- ICDS IV only provides for the concept of realizing revenue in respect of recognition of income from sale of goods and recognition of income from rendering of services under the percentage completion method. In respect of interest income, royalty income and income from rendering of services other than the one specified above, there is no such concept of "reasonable certainty of realizing revenue",
10- The further averment is that the concept of prudence has been retained in ICDS X by allowing provision for further liability. This is contrary to what has been clarified in Circular No. 10 of 2017. ICDS X allows recognition of provisions in respect of present liability arising out of a past event. It specifically prohibits recognition of costs or liability that needs to be incurred to operate in the future.
11- ICDS III allows expected losses only on proportionate basis as per the percentage completion method. Therefore, it is not in accordance with the concept of prudence. Expected losses have been allowed as deduction in CIT v. Triveni Engg. & Industries Limited and CIT v. Advance Construction Co. Pvt. Ltd,
12- ICDS-II fails to take into account the two different scenarios aforementioned. It is, therefore, apparent that ICDS-II sidesteps the decision in Shakti Trading Co. (supra). The ICDS-II insists that the stock-in-trade of the firm in both scenarios would have to be valued at market price irrespective of whether the business discontinues
13- Many decided court cases states that "the retention money does not accrue to an Assessee until and unless the defect liability period is over and the Engineer-in-Charge certifies that no liability is attached to the Assessee"
14- Para 5 of ICDS-IV requires an Assessee to recognize income from export incentive in the year of making of the claim if there is 'reasonable certainty' of its ultimate collection. In Excel Industries (supra), the Supreme Court held that it is only in the year in which the claim is accepted by the Government that a right to receive the payment accrues in favour of the Assessee and the corresponding obligation to pay arises in the hands of the Government.
15- In Godhra Electric Supply Company Limited v. CIT (1997), the Supreme Court held that hypothetical income cannot be taxed. This was in the context of the same treatment for monetary assets and liabilities of the Indian entity as well as the foreign operations which leads to adjustment of notional income/loss to the total income. In Sutlej Cotton Mills Limited v. CIT (1979) it was explained that exchange gain/loss in relation to a loan utilized for acquiring a capital item would be capital in nature.
16- ICDS VII however requires that amount has to be taxed in the year of receipt. This again is contrary to and in conflict with the accrual system of accounting.
To the extent the specific ICDS as noted hereinbefore have been struck down as ultra vires the Act, the impugned notification Nos. 87 and 88 dated 29th September 2016 and Circular No. 10 of 2017 issued by the CBDT are also held to be ultra vires the Act and struck down as such
For reading the full text of this judgement please refer link - http://itatonline.org/archives/the-chamber-of-tax-consultants-vs-uoi-delhi-high-court-s-1452-icds-s-145-2-has-to-be-read-down-to-restrict-power-of-the-central-government-to-notify-icds-that-do-not-seek-to-override-binding-ju/ctc-icds-145-2-writ-petition-ultra-vires/
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