On the face of it, the Explanation looks innocuous and a routine one. However, if it is considered in the background of legal provision, where it proposes to remove doubts, it becomes clear that there are no doubts, which are proposed to be removed and in effect the Explanation is meant to enable the tax department to detract from a position, which it had consciously taken in the year 1999 and now wants to go back from that position from retrospective effect ie, from the date the relevant law was enacted.
This is nothing less but a breach of faith of taxpayers, who acted on the basis of law as laid down by the Finance Act, 1999 and took benefit but which the tax department now intends to withdraw without any ostensible grounds.
To understand the nature of the amendment, it is necessary to give a background as to what the law is, which is proposed to be changed and why the Explanation has been made operative from April 1, 2000 and see the legal provisions, which were operative before April 1, 2000 and those operative from April 1, 2000.
A new sub-section (4) was brought in section 80-IA by the Finance Act, 1999. Before that, law in relation to the same subject was contained in sub-section (4A). The position in regard to two provisions is mentioned hereinafter.
Sub-section (4A) before April 1, 2000
The requirement for getting tax benefit u/s 80-IA was, besides other conditions, that the enterprise, which claims the benefit of tax holiday, should start developing, operating and maintaining the infrastructure facility on or after April 1, 1995.
Sub-section (4) after the amendment by the Finance Act, 1999
Section 80-IA was substituted by two sections - 80-IA and 80-IB - by the Finance Act, 1999 w.e.f. April 1, 2000. In this substitution, clause (4A) earlier (supra) became clause (4). The new clause provides that for getting the tax holiday benefit, the company (or consortium of companies) must enter into agreement with the prescribed body for carrying on the business of (i) developing or (ii) maintaining and operating or (iii) developing, maintaining and operating a new infrastructure facility.
Sub-sections (4A) & (4)
A comparison of the section 80-IA before its restructuring in 1999 brings out prominently the difference in the scope and applicability of the two provisions. Under the earlier sub-clause (4A), the deduction was available to an assessee, who carried on the integrated process of development, maintenance and operation of infrastructure facility - the words used being developing, maintaining and operating any infrastructure facility. After the substitution of section 80-IA by the new section by the Finance Act, 1999, the deduction became admissible to an enterprise, which carried on the business of infrastructure facility of only (i) developing (or development) or (ii) of only maintaining and operating or (iii) the entire process of developing, maintaining and operating.
In other words, even a person, executing works contracts in respect of specified activities was made entitled and eligible to the benefit of section 80-IA(4) by the amendment made by the Finance Act, 1999 w.e.f. April 1, 2000. There is no ambiguity or doubt in this regard, which the new Explanation proposes to remove from the date the clause (4) came into operation.
Comments on the proposed Explanation
(i) Two aspects become relevant in the context of the Explanation proposed to be added to section 80-IA. Courts have decided that an Explanation normally should be read as to harmonise with and clear up any ambiguity in the main section and cannot be so construed as to widen or curtail the ambit of the main provision. For the purpose of taking any action or for the purpose of interpreting law, the foundation is the main section and the Explanation is merely a subordinate part for the purpose of arriving at a particular conclusion in the matter of interpretation of the relevant provision. An Explanation cannot be treated as an amendment for taking away the existing right(s). The purpose of an Explanation is to explain and to clear any mental cobwebs surrounding the meaning of a statutory provision and to prevent controversial interpretation without giving up the true meaning of the provision. Explanation is intended more as a legislative exposition or clarification of the existing law, than as a change in it. When the Explanation serves the purpose of clarification of the existing law, there is no question of its prospective or retrospective operation.
(ii) Secondly, the Explanation has not become necessary because the intention of the Legislature has been differently put or interpreted. It is a situation, where the government reviews its own decision and withdraws something, which was consciously given some years ago from April 1, 2000. No convincing reasons have been given for retrospective withdrawal of the benefit given by the Finance Act, 1999. The issue is as to why those taxpayers, who set up their businesses or enterprises and made investment on the basis of law clearly laid down (without any ambiguity or doubt) and where assessments have already been completed, should lose the benefit of tax holiday because the government decides to have a rethinking on the provision or desires to correct a mistake committed 7/8 years ago with retrospective effect.
What is moral, legal or fiscal justification for changing the law retrospectively needs to be explained. Prima-facie, such a decision merely indicates fiddling with tax laws at the whims and fancies of the policymakers and breach of faith for the taxpayers making them to lose trust in the tax administration, leading to dampening of desire for voluntary compliance. The amendment is misconceived and is likely to be struck down if challenged by writ petitions.
The author is former chairman, Central Board of Direct Taxes