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Rules are subservient to the Act – Return forms cannot be used for interpreting legislative intent - Article by V. K. Subramani published in Business Advisor dated June 10, 2013 (http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/54223)
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Volume VII Part 5 June 10, 2014 18 Business Advisor
Rules are subservient to the Act – Return
forms cannot be used for interpreting
legislative intent
V. K. Subramani
All legislations in India have the stamp of approval of the
Parliament. The Parliament is the supreme authority to
introduce a legislation, to amend, modify a piece of
legislation and also to repeal a law. Income-tax law is one
of the statutes subjected to so many amendments on
yearly basis by virtue of the Finance Act presented in the
Parliament.
The Act so enacted requires an administrative arm for
implementation. Particularly with regard to fiscal
statutes, the law by itself may not be adequate and to enforce the law, hence
authorities with delegated powers are created. In India, the Central Board of
Direct Taxes (CBDT) administers direct tax laws and Central Board of
Central Excise and Customs (CBEC) administers indirect taxes.
Delegated legislation
Section 295 of the Income-tax Act empowers the CBDT to make rules for the
whole or any part of India for administering and implementing the Income-
tax Act, 1961.
Broadly, the power of the CBDT to make rules as contained in section 295
could be summarised as under. The list is not comprehensive and contains
only important areas where the delegated legislation is prominently used.
(i) For ascertainment and determination of any class of income;
(ii) Manner and procedure by which income shall be arrived at in
respect of partly agricultural income and partly non-agricultural income;
(iii) Manner and procedure by which income shall be arrived at in the
case of persons resident outside India;
(iv) Manner and procedure by which an individual is liable to tax for
mixing his individual property into HUF property (as prescribed in section
64(2));
Volume VII Part 5 June 10, 2014 19 Business Advisor
(v) Valuation of perquisite chargeable to tax (applicable for salary
income);
(vi) Depreciation in respect of buildings, machinery, plant or furniture,
i.e. prescribing rates of depreciation;
(vii) Necessity of maintaining books of account for notified professions
with monetary limit for maintenance (sections 44AA(2) and (3));
(viii) Limitation for claim of rent as deduction under section 80GG;
(ix) Prescribing guidelines and conditions for General Anti-Avoidance
Rule (GAAR);
(x) Procedures for allotment of PAN and quoting of the same in various
transactions;
(xi) Form of audit report in respect of special audit under section
142(2A);
(xii) Procedure for giving effect to DTAA entered into by Central
Government with any other country;
(xiii) Form with regard to application, claim, return or any information
and fees payable;
(xiv) Procedure for application of refund.
3F Industries case
Recently, in 3F Industries Ltd v. Joint CIT (2014) 44 taxmann.com 200 (Vizag-
Trib) discussed some of the finer nuances of the income-tax law vis-à-vis the
legal principles including delegated legislation.
The assessee in this case filed an appeal against the order passed by the
Income-tax authority in pursuance of the order of the Dispute Resolution
Panel (DRP). The issues were multifaceted including application of Arm‟s
Length Price (ALP) for working capital loan given to a subsidiary company
when the lending company itself had borrowed from a financial institution.
The focus of this write-up is on two aspects, viz. (i) meaning of „tax‟ whether
includes surcharge; and (ii) whether section 234B interest is to be charged
after allowing MAT credit under section 115JAA.
Contention of the assessee
The assessee contended that after computing income-tax liability and
allowance of MAT credit under section 115JAA only on the resultant
Volume VII Part 5 June 10, 2014 20 Business Advisor
surcharge and education cess are to be added. The contention of the
Revenue is that the term „tax‟ always includes surcharge and interest. Thus
contending that after adding surcharge and cess on tax, the MAT credit is to
be deducted.
The tribunal made reference to CIT v. K.Srinivasan 83 ITR 346 (SC), wherein
it was held that income tax has to be increased by surcharge and additional
surcharge for the purpose of the Union. The court held that the word
„surcharge‟ has been used to either increase the rates of income-tax and
super tax or to increase these taxes.
The legislative entry 82 in List I empowers the Central Government to levy
tax on income other than agricultural income. Income-tax, super tax and
surcharge fall in this category. The Parliament enacts the provision in the
Finance Act of each year to invoke its legislative power to prescribe the rate
of tax. The apex court held that the meaning of surcharge is to charge in
addition to or subject to additional or extra charge. If that meaning is
applied to section 2 it would lead to the result that income-tax and super
tax were to be charged in four different rates such as (i) basic surcharge or
rate; (ii) surcharge; (iii) special surcharge; and (iv) additional surcharge.
The word „surcharge‟ has been used in Article 271 of the Constitution for
the purpose of separating it from basic charge of tax or duty and the
proceeds are exclusively meant for the Union.
In Merit Enterprises v. Dy. CIT (101 ITD 78 (Hyd)(SB)), reference was made to
CIT v. Maharaja Pratapsingh Bahadur of Gidhaur (1961) 41 ITR 421 (SC)
where the Supreme court held that surcharge is nothing but additional
income-tax.
Levy of interest section 234B
One of the arguments of the assessee in 3F Industries case was that interest
under section 234B must be charged after deducting MAT credit under
section 115JAA and before calculation of surcharge and education cess. The
argument of the assessee was based on the return form prescribed.
The assessee contended that on the tax liability (excluding surcharge and
cess) the MAT credit under section 115JAA is to be given. Only on the
resultant, surcharge and education cess are to be computed.
The tribunal made reference to CIT v. Chemplast Sanmar Ltd (2009) 180
taxman 335 (Mad) wherein the court held that the delegated legislation, i.e.
income-tax rules, can never negate what is given in the main statute, i.e.
the Income-tax Act.
Volume VII Part 5 June 10, 2014 21 Business Advisor
The observation of the court in para (10) is reproduced below:
“It is well accepted principle that the rule cannot affect, control, enlarge or
detract or derogate from the full operative effect of the provisions of the
section. If any rule purports to do so, it would be void and ultra vires and
further, the rule must be consistent with or in conformity with the Act. If
there is conflict between a rule and the substantial provision of the Act, the
rule must pave way to the provision of the Act.‟
“Further, the delegating authority must exercise power strictly within the
limits of the authority. Even though the rule-making power is conferred on
the said authority, if the rules made are in excess of such delegated power
the rule would be void even if the Act provides that they shall have effect as
though they are enacted in the Act”.
Scheme of section 234B
Section 234B provides for interest on the „assessed tax‟ after deducting
amounts by way of TDS/ TCS, relief allowed under section 90 or section 90A
or any tax credit allowed to be set off under section 115JAA / 115 JD.
Decision of the tribunal
The tribunal with regard to these two issues, viz. whether tax includes
surcharge and education cess, and interest under section 234B is on the
amount of tax including surcharge and cess prior to tax credit under section
115JAA, was in favour of the Revenue.
The decision of the tribunal may look simple and straight one. However, it is
worth mentioning that section 2(43) defining the term „tax‟ does not say
whether it is inclusive of surcharge and education cess or without it.
If the tax laws provide clarity at the expense of brevity this needless
litigation could have been avoided.
(V. K. Subramani is Chartered Accountant, Erode)
Section 2(43) defining the term „tax‟ does not say whether it is
inclusive of surcharge and education cess or without it.