Tax law change within right but may face reasonableness test

The SC judgment can be annulled by the legislature

Legal experts are of the opinion that the legislature has the power to amend retrospectively the Income-Tax Act to recover Rs 11,000 crore from Vodafone,but the reasonableness of the amendment can be challenged in a court of law.

Experts say that if the governments proposed move to amend the Act from 1962 to bring under net all overseas transactions involving domestic assets really materialises,it will lead to two results: One,the governments review petition against the SCs Vodafone judgment will become infructuous in the light of the new law; two,Vodafone will have to launch a new litigation all over,this time against the amendment.

In the Vodafone case,the SC had declared that the I-T Department doesnt have the jurisdiction to levy tax on the US$ 11 billion acquisition deal between the UK telecom major and Hutchison Essar in 2007.

It is a well-settled SC decision that the legislature has the power to amend laws retrospectively,including tax laws, Justice J S Verma,former chief justice of India,said.

Justice K T Thomas,former judge of the SC,said only penal statutes cannot be amended by the legislature retrospectively. Article 20 of the Constitution says no person shall be convicted of any offence except for violation of the law in force at the time of the commission of the act. But this is not the case for fiscal statutes,which can be amended in public interest by raising revenue concerns.

The SC judgment can be annulled by the legislature. Fiscal statutes can be amended retrospectively to recover public revenue, Justice Thomas said.

Senior advocate P P Rao agrees that though Parliament has in theory the power to amend retrospectively tax laws,the common practice is that the amendment should stand the test of reasonableness. By reasonableness,it means the amendment should not have an unsettling effect,should not be abrasive or cause undue burden on the tax payer. It should be just and fair under Article 14 of the Constitution. If not,the retrospective law can be challenged in court, Rao said.

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Justice Verma said the current proposed amendment is hardly a slight on the SCs decision in the Vodafone case,and that the line is clearly demarcated. The court decides legal issues. The Parliament can always remove the basis on which a decision was given by the court,and if the basis goes,the verdict also goes, Justice Verma said.

One of the basic reasoning enumerated by the Bench led by Chief Justice of India S H Kapadia in the Vodafone tax case judgment was that the government cannot take advantage of the prevailing uncertainty in tax laws.

Now it is up to Vodafone to challenge the amendment, Justice Thomas said.

We are examining this proposed decision with our lawyers,but we do not believe this retrospective change in tax law should have any impact on the final judgment handed down by the SC in our tax case, Vodafone said in a statement.