The Finance Bill, 2006

The Hon’ble Finance Minister Shri P. Chidambaram has presented in the Parliament the third budget of the UPA Government ‘The Budget 2006-07’, on 28th February, 2006. Considering the complex combination of the UPA consequents and in particular the pressure from the left, the Finance Minister has presented a balanced and progressive budget to please all the factions of the UPA Government. Prudently, not many changes have been brought in the Finance Bill. Unlike in the earlier years, the Finance Bill of this year contains only 76 clauses and in the field of direct taxes there are only 57 clauses. This is a positive sign and a welcome change. Unlike the last year, there are no new harsh inequitable and illegal levies like Fringe Benefit Tax (FBT) and Banking Cash Transactions Tax (BCTT) introduced in the last year. In fact, it was expected that FBT and BCTT would be withdrawn this year. However, this has not happened. On the contrary, these provisions have been retained on the ground of equity.

Fortunately, there is no increase in the rate of tax at both personal and corporate level. However, tax rate has been increased from 7.5% to 10% in MAT provisions. Securities transaction tax has been increased by 25%. Service tax rates have been increased from 10% to 12%. There is no justification for such increase.

It has been the recent trend to overrule the decisions of the courts by retrospective amendments. This year's Finance Bill is not an exception. Sections 43B, 142 and 143(2) have been retrospectively amended overruling the judicial pronouncements, resulting in retrospective liability. Such overruling by retrospective amendment undermines the importance of the judiciary. Therefore, it has been repeatedly canvassed that such retrospective amendments should be avoided, they being really unwarranted. In case of such retrospective amendments the question that arises is as to the date with respect to which the interest liability would commence? The tax liability gets attracted with respect to the date the retrospective amendment is made applicable. One probable view is that the interest liability would also operate with reference to the same date. However, such retrospective interest liability has no justification. Recently, in Star India P. Ltd. vs. CCE. 280 ITR 321 (SC) the Hon’ble Supreme Court has held that such retrospective amendment cannot entail punishment of payment of interest with retrospective effect. In view of this judgment it can be contended that the consequential interest liability will be operative only prospectively.

Further, retrospective amendment to validate the earlier actions, which were invalid as per the legal provisions at the relevant time, is an unhealthy practice which should be avoided. Such retrospective amendments will only promote indiscipline and indifference towards the mandatory provisions of law. There is no justification for such retrospective amendments.

Section 14A provides that the expenditure incurred in relation to income which does not form part of the total income will not be allowed as deduction. Naturally, the provision has led to a lot of litigation as to the quantum of disallowable amount. Even where the actual amount of expenditure incurred in relation to exempt income is nominal a substantial amount is disallowed on proportionate basis by relying on this provision. The Finance Bill has proposed to provide a method for calculating the quantum of expenditure disallowable u/s. 14A. We have to wait and see as to whether such methods would solve the problem and reduce litigation or add to the litigation.

The Finance Bill has also proposed to curtail the time limit for completing the assessment by three months. Accordingly the time limit will end on 31st December instead of 31st March next. The object of the change is stated to be to collect the demand raised in the financial year in the same year itself. Reducing the time permissible for assessment with this object may not be justified. In the past there are a number of examples wherein high pitched assessments were made at the end, in March, and coercive methods adopted to recover the demand in the month of March itself without even giving the minimum period of 30 days prescribed by law for payment of the demand. If this is what is as the back of mind in making the above amendment then possibly the intentions cannot be justified.

SPECIAL STORY: Chapter VIA – Deductions (Part I – General Provisions and Expenditure based Deductions)

The Special Story on ‘Chapter VIA – Deductions’ has been divided into two parts. In the first part the general provisions and expenditure – based deductions are covered. This part is published in this Issue. In the second part for next month the income – based deductions will be covered. I thank Shri Niraj Sheth for designing the Special Story on ‘Chapter VIA – Deductions’. I also thank all the authors for sparing their valuable time and giving their articles in time.

In the past, our Special Story for March used to be on Finance Bill. Now it has been decided by the Journal Committee that it would be advisable to have the Special Story on Finance Act in June. The Finance Bill has otherwise been briefly covered in this Issue in the article by
Shri V. H. Patil, and the regular features.