PRINCIPLES OF TAXATION

CLASS TEST – 1
ASSIGNMENT

SUBMITTED TO: SUBMITTED BY:

DR. MANOJ KUMAR SINGH SARTHAK MISHRA
ASSOCIATE PROFESSOR, LAW LL.M, CORPORATE
HONS.
 TABLE OF CONTENTS
ARGUMENTS..............................................................................................................................1
ARGUMENTS ON BEHALF OF DEPARTMENT OF REVENUE......................................................1
i. The circular is not violative of Article 14 hence is constitutional....................................1
ii. The application is justified on the account of administrative exigency............................2
iii. The Retrospective application is not a violation of powers conferred under the IT Act,
1961...................................................................................................................................2
ARGUMENTS ON BEHALF OF NGO...........................................................................................4
i. The Impugned Circular is violative of Article 14 of the Constitution...............................4
ii. Retrospective Application of the Circular is ultravires and violative of the provisions of
the IT Act, 1961.................................................................................................................5

i
 ARGUMENTS

ISSUE: WHETHER THE RETROSPECTIVE APPLICATION OF THE CIRCULAR DATED 15TH JULY,
2018 IS UNCONSTITUTIONAL AND ULTRAVIRES TO POWER CONFERRED ON THE AUTHORITIES
UNDER THE ACT?

ARGUMENTS ON BEHALF OF DEPARTMENT OF REVENUE

The Department (hereinafter Respondent) contends that the retrospective application of the
alleged circular is constitutional and is not ultravires of the powers accorded under the Act for
the following reasons:
i. The circular is not violative of Article 14 hence is constitutional

The Respondent hereby contends that the impugned circular is not violative of Article 14 of the
Constitution as it does not indulge in the exercise of the discretionary powers without applying
the principles of reasonableness and the classification of cases on basis of quantum involved,
follows has an intelligible differentia to its proper justification. The Courts in various rulings
have held that, “Classification must be found on intelligible differentia and the differentia must
have rational relation to the object sought to be achieved by the statute. 1 There must be a
substantial basis for making classifications and there should be a nexus between the basis of
classification and the object of the statue under consideration”.2
It is hereby contended that, the impugned circular provides for a well-reasoned explanation with
regards to the ground of the ‘tax effect’3, whereby it has clearly made out the point that in cases
where the tax effect i.e. “tax assessed on the total income – tax calculated on the income
inclusive of disputed deductions” is less, then the Dept. of Revenue would not be appealing any
orders/judgement passed against it at various forums. Thereafter, the circular proceeds ahead to
discuss the monetary limits for different forums.
It is further contended that, the intention of the State behind the passing of such a circular is of
paramount importance, while considering the intelligible differentia. If the monetary limits are
concerned, the amounts concerned are generally covered in cases where the tax liability is
significant and the tax-payer is usually a body corporate or a high net individuals (HNIs),
thereby, essentially categorizing the tax-payer based on their financial status. The monetary bar
should be considered as a welcome step as the same enables the government to exclude
individuals with lower tax liabilities from being dragged into long drawn litigations which
invariably leads to financial drain.
The second element with regards to the determination of reasonability is the existence of a
‘reasonable nexus’ between the act of the State and the object being sought to be fulfilled by
such an act.4

1
Harakchand Ratanchand Banthia v Union of India, (1969) 2 SCC 166; Moulin Rouge pvt. Ltd. v Commercial
Tax Officer, (1998) 1 SCC 70
2
M.P. Jain, Indian Constitutional Law, 933 (Lexis Nexis, 7th ed., 2014)
3
Supra note 6; Commissioner of Income Tax, Bangalore v Ranka & Ranka, 2012 (284) ELT 185
4
Sudhir Chandra v Tata Iron & Steel Co. Ltd., (1984) 3 SCC 369; Kishan Lal Lakhmi Chand v State of Haryana,
1993 (3) SCALE 296; Sheo Nandan Paswan v State of Bihar, (1987) 1 SCC 288

1
It is contended that, in the present case there exists a rationale behind the passing of the circular,
the same being reduction in the number of compulsory litigations vide initiating an economic cap
which is in furtherance of the vision envisaged by the Government of India under its National
Litigation Policy. The Hon’ble Court in the S.R.M.B Dairy Farming Case while emphasizing on
the responsibility of the government to transform itself into a responsible litigant had observed
that, “The Government has formulated the National Litigation Policy with a view to ensure
conduct of responsible litigation, hence, the litigation should not be resorted to for the sake of
litigating. The Government must cease to be a compulsive litigant. [sic]”.5
Thereby, pursuant to the above discussion it is humbly submitted that the impugned circular was
in the furtherance of the efforts by the Government to bring about a reduction in the compulsory
litigation and also protect, tax payer with lower tax incidences from getting involved in
unnecessary litigations, thus, is not violative of Article 14 of the Constitution.
ii. The application is justified on the account of administrative exigency

The Respondent hereby contends that the circular has been issued, keeping the consideration the
administrative exigency of furthering the role of the State as a responsible litigant, in accordance
with the National Litigation Policy. The Hon’ble Court in one of its judgments, while ruling
upon the retrospective application of monetary bars on the appeals by the State had observed
that, “The purpose underlying this policy is to reduce the Government litigation in courts so as
to bring about judicial reforms which includes identifying bottlenecks and also removing
unnecessary Government cases, thus, prioritization in litigation has to be achieved with
particular emphasis on welfare legislation, social reform”.6 It was further observed that
considering the phenomenon of the docket explosion and the rising litigation in the country,
there is an urgent need to bring down the pendency of cases and get meaningful issues decided in
an expedited manner. Thus, it is the responsibility of the Government, being a litigant in well
over 50 per cent of the cases, to refrain from compulsory litigation.7
It is hereby contended that, considering the current issue of the huge case pendency and keeping
its actions in consonance with that of the vision and goals established by it under the NLP, the
circular is not to be considered as a bar to the legal right to appeal. It is merely an action
advocating ‘self-restraint’ on the State functionalities, to bring down the compulsory litigation,
which in turn would be helping in the betterment of the picture i.e. reduction in the pendency of
cases in various courts.
iii. The Retrospective application is not a violation of powers conferred under the IT Act,
1961

The Respondent hereby, contends that the retrospective application of the impugned circular is
not in the violation of the powers conferred to the authorities under the IT Act. Firstly, any
amendment of clarificatory nature is to be given retrospective affect and such is to be adjudged
from the intention of the legislature.8 Secondly, any amendment of beneficial nature should be
given retrospective effect.

5
Director of Income Tax v SRMB Dairy Farming, , [2018] 400 ITR 9 (SC) ¶ 22
6
Supra note 3 at ¶ 10
7
Supra note at ¶ 3
8
CIT v Vatika Township ((2015) 1 SCC 1)

2
The basic principle of application of any amendment under the taxing statutes is that, if the
amendment is in the nature of a clarificatory/declaratory amendment, then its application would
be retrospective in nature. However, if the same is in the nature of an amendatory nature, it has
to be applied with a prospective effect. 9 In addition, the said amendment is a bar that the
Parliament intended to create on the Dept. of Revenue, preventing it from indulging in
compulsory litigation and must therefore be given retrospective effect. The only reason why
cannot be given retrospective effect is if Parliament, in its original intent of § 268A never
intended to create any bar on Department of Revenue from going in appeals in tax disputes.
Hence, it is hereby, humbly contended that the legislature’s intent has always in favour of
creation of a bar over the State instrumentality. Hence, in such a scenario any further amendment
to the provisions bringing about any modifications should be considered clarificatory in nature
and thus be given retrospective application.
It is also contended that, the general rule of interpretation of taxing statutes suggest that “any
amendment of clarificatory nature should have retrospective effect, however, if an amendment is
amendatory nature the Courts should give it a prospective effect”.10 But, as an exception to this
general rule the Hon’ble Supreme Court has held that, “a beneficial circular has to be applied
retrospectively while an oppressive circular has to be applied prospectively”.11
It is thus contended that even if the impugned circular is in the nature of an amendatory nature,
yet a retrospective application would not be considered as violative, as it falls under the category
of beneficiary circular.
The Circular essentially creates a legal bar on the Department of Revenue from perusing
unnecessary appeals for matters having ‘low tax effect’ and hence in doing so creates a
favourable situation for the tax payers, from getting involved in long drawn litigations, which
entirely nullifies any possible advantage that the assessee would otherwise got in form of
reduced tax liability.
It is further, contended that, compulsory litigation is one of the major reasons for the draining out
of the public exchequer. Thus, the bar imposed hereby, would act as a deterrent towards such
compulsory litigation, which again turns out to be in favour of the tax payers only.
Therefore, it is submitted that, the impugned circular is beneficial to the tax payers. Therefore,
irrespective of its nature as being clarificatory or amendatory, a retrospective application would
not make the circular ‘ultravires’ of the power conferred under the Act.
On the basis of the foregoing facts and arguments advanced, it is hereby, finally submitted by the
Respondents that, the impugned circular for the aforementioned reasons, is valid and does not
violates any constitutional or statutory legal principles whatsoever.

9
DIT v HCL Infosystems Ltd., 274 ITR 261 (Del)
10
Govt. of India v Indian Tobacco Association, (2005) 7 SCC 396
11
Jai Fibres Ltd. v CCE, Mumbai, 2007 (218) E.L.T. 484 (S.C.)

3
ARGUMENTS ON BEHALF OF NGO

The NGO (hereinafter Petitioner) contends that the retrospective application of the alleged
circular is constitutional and is not ultravires of the powers accorded under the Act for the
following reasons:
i. The Impugned Circular is violative of Article 14 of the Constitution

The reasonability of classification is one of the fundamental principles of arbitrariness, 12 and is

characterized by an intelligible differentia13 and reasonable nexus.14 Any classification lacking
these two elements can be considered as a bad classification and violates the principle of
arbitrariness,15 an arbitrary act is unequal and results in the infringement of Art. 14.16
It is hereby contended that, the circular is an instance of arbitrary exercise of the power which
neither has any intelligible differentia attached to it thereby justifying the classification of the
appealable orders/judgments from the non-appealable one, nor, does it provides for any precise
objective which can attributed as the underlying reason for making such a classification. The
particular circular pursuant to the arbitrary power conferred on the Authorities under § 268A of
the Income Tax Act, 1961. Hence, the exercise of the same should in consonance with the
provisions of Article 14.
The circular merely provides a categorization based on the ‘tax effect’.17 However, in the absence
of proper reasons, it is extremely difficult to determine the intelligible differentia. Further any
classification devoid of intelligible differentia is a bad classification, thus, it is hereby contended
that the classification under the impugned is invalid and violative of Article 14.
Further, the second element of determining the reasonability of an act is to determine, whether
the act is in pursuance to the objective of the law. The differentia which is the basis of the
classification and the object of the Act are two different things and what is necessary is that there
must be a nexus between them to make the connection between the classification made and the
object sought to be achieved.18
It is hereby contended that, even though the impugned circular does not patently violates
principle of reasonable nexus, however, it manner of application fails to justify the nexus
between the circular and intention of the State under § 268A of the IT Act. The specific section
empowers the CBDT to revise monetary limits of the tax effect which act as a further on the
Department from going in appeal. This particular power is justified in relation to the circular,
only when the circular is given a prospective application and is applied to all the instances of tax
disputes arising post the issue of circular. However, in the present matter, the CBDT has
provided for the retrospective application of the circular. Whereby, directs that all the existing

12
Pradeep Kumar Biswas v Indian Institute of Chemical Biology, (2002) 5 SCC 111; A.N. Parasuraman v State of
Tamil Nadu, (1989) 4 SCC 683; E.P. Royappa v State of Tamil Nadu, AIR 1974 SC 555
13
Budhan Choudhary v State of Bihar, AIR 1955 SC 191; Muhammad Bhai v State of Gujarat, AIR 1962 SC 517;
Oriental Weaving Mills v Union of India, AIR 1963 SC 98
14
Jaila Singh v State of Rajasthan, (1976) 1 SCC 602
15
Bannari Amman Sugars Ltd. v CTO, (2005) 1 SCC 625
16
Kesavananda Bharati v State of Kerala, (1973) 4 SCC 225; I.C. Golak Nath v State of Punjab, AIR 1967 SC
1643; Minerva Mills Ltd. and Ors. v Union of India, (1980) 2 SCC 591; K. Nagraj v State of Andhra Pradesh,
(1985) 1 SCC 523; Sardar Inder Singh v State of Rajasthan, [1957] 1 SCR 605
17
CBDT, Circular No. 3/2018, F No. 279/Misc. 142/2007 – ITJ – [Pt.] (11th July, 2018), ¶ 4
18
Naraindas Indurkhya v State of Madhya Pradesh, (1974) 4 SCC 788

4
pending litigations, where the appeal has been made by the State should be withdrawn. This
particular direction is not in consonance with the objective of the statute, which aims at lessening
the burden of litigation by barring compulsory litigation being pursued. However, the Statute
neither expressly nor impliedly empowered the Authorities to, further this objective by
withdrawing the already pending applications. Hence, it is humbly contended here that, by virtue
of this unauthorized retrospective application the existing reasonable nexus fails, thus making
the act violative of Article 14.
ii. Retrospective Application of the Circular is ultravires and violative of the provisions of
the IT Act, 1961

All the cases of delegated legislation, where the rule making is carried out by the executive,
should not exceed the limits of the power accorded on them. 19 In the present matter, if the
construction of the words of § 268A is to be considered it accords the power of revision on the
authority, however, it accords no power on the authority with regards to the determining, the
prospective or retrospective application. Further, the Hon’ble Supreme Court in its ruling has
observed that the fundamental principle of application of any amendment is that it should be
applied prospectively, unless the same is in the nature of a curative or clarificatory amendment.20
It is hereby contended that, the impugned circular should be read and interpreted in accordance
with the intention of the legislature. The primary intention of the legislature was reduce the
pendency of the cases vide creation of a bar on the Department. However, if the same is applied
to the pending case by giving it a retrospective action, there is always a possibility of chaos being
caused, by such sudden withdrawals of case.
It is further contended, the matters in the appeal, there always a possibility of erroneous
application of legal by the concerned forum, which might be curated on appeal. Also, the general
tendency of the Courts of interpreting the legal principles under taxing statutes in favour of the
State, this increases the chances of such appeals being disposed in favour of the Department.
Hence, the possibility of loss of revenue could not be averted.
Although, there might be an argument that, the appeals outside the monetary limits are primarily
cases involving low tax effects, where the litigation cost may outweigh the remedial costs.
However, at the same time the existing possibility of erroneous application of law is a pressing
concern which could not be ignored as it might lead establishing a wrong precedential value.
Therefore, the importance of the pending cases not being withdrawn only on the ground of
quantum of tax effect might prove detrimental to the public in general in the long run. Thus,
instead of the being retrospectively applied, the same should be prospectively, as it is oppressive
for the general public
On the basis of the above discussion, it is hereby humbly submitted that, even if the circular
might be considered as constitutional and has been passed in confirmation with the powers
accorded over the authority. However, the retrospective application of the same is patently illegal
and vitiates the fundamental principle of application of the tax statutes.

19
Ajit Kumar Nag v GM (PJ) Indian Oil Corporation Ltd., (2005) 7 SCC 764
20
Suchitra Components Ltd. v CIT, 2008 (11) STR 430 (SC)