MARCH 01, 2012

Intention of Statute seen from common angle - A pain reliever, indeed!

By R Raman  

I wish to recall our memories of the past. Earlier we in the manufacturing sector took initiative by highlighting the issues every year in direct taxation and give our suggestions through MCCI for considering the same in their pre-budgeted memorandum addressed to Finance Ministry.

Accordingly, last year also we sent the same to various institutions viz., MCCI, TIOL, Tax Executive Forum, Head of Corporate Finance group etc for their consideration in their representation to Government. But still there are so many issues, which needs amendment or a clarificatory circular since the same were not sorted out till today. We don't need any monetary benefit; we only need certain clarifications from Finance Minister or his office to put an end to the complicated issues raised during corporate assessments which not only waste time of assesses but also the precious time of Officials/Assessing Officers/Appellate authorities. On the other side heavy tax demands, interest charges, penalties are also being levied even for covered issues. In the case of certain assessees many favourable decisions given by higher appellate authorities viz., CIT(A), ITAT, High Court and Supreme Court in the earlier assessment years were not considered. As a result heavy demands are being raised by the Department in turn it will lead to filing of various writs/petitions for stay, withdrawal of penal proceedings etc which is a clear waste of time since assessee is going to get a favourable decision from the higher appellate authorities as in the case of earlier year. I think this methodology is adapted by the Department to improve their cash flow for issue of refund in certain cases.

It is our constitutional practice to interpret the provision by an interpretation clause mainly to clarify the related parties viz., Government officials, Advocates, Auditors, Assesses etc. about the intention of the statute and amendments made. Now it is a day to day affair and that for the same provision there are different interpretations but no one(Dept) is in line with intention of the Government since the same is in favour of the assessee in most of the cases. One side Government is giving number of reliefs, incentives, exemptions etc to assesses but also giving a target to revenue department to increase their collection by year after year like a business concern increasing their profitability year after year by continuous improvement in profitability and gross profit margin. Revenue is mainly based on growth rate and if Government take necessary steps to collect the outstanding undisputed demand from assessee first, which will fetch more revenue then disallowing major amounts by way of wrong interpretation, withdrawal of earlier circulars etc. This will help only for temporary cash flow but will not serve any purpose in the long term. It is only a figure work and will show a huge pending demand. In some companies, they will show more profit but ultimate cash flow will not be there because of unreal actual book profit (not as per 115JB). Here in the case of Government also they will reach the increase in target every year but their cash flow will not be there because of their short term demand (loan). Since interest u/s 244A is denied we can call it as interest free demand scheme.

Coming to Additional Depreciation issue the same was introduced from 1 st April, 2003 and amended by the Finance Act (No.2) 2004 with effect from 1 st April, 2005. Why I am giving the date is to substantiate my view in the case 234 D where the amendment effective date is being wrongly interpreted. In the case of Additional Depreciation for the past so many years it is the practice of Assessing Officer to disallow the carried forward additional depreciation of previous year. Since it involves crores and crores of rupees every assessee went on appeal on this issue. In the recent case of DCIT Vs Cosmos Films Ltd, ITAT, Delhi “B” Bench had dismissed the department appeal and decided the issue in favour of assessee.

In the judgement it is given "This Additional benefit in the form of additional allowance u/s 32 (1) (iia) is a one time benefit to encourage the industrialization and the provisions related to it have to be constructed reasonably, liberally and purposive to make the provision meaningful while granting the additional allowance. This restriction is only on the basis of period of use. There is no restriction that the balance of the one time incentive in the form of additional sum of depreciation shall not be available in the subsequent year. In section 32 (1) (iia), the expression used is “shall be allowed”. Thus, the assessee earns the benefit as soon as he purchases the new plant and machinery in full but it is restricted to 50% in that particular year on account of period of usages, such restrictions cannot divest the statutory right. Law does not prohibit the balance 50% being allowed in the succeeding year.

The assessee made additions to the assets during the second half of the financial year 2002-03 relevant to the assessment year 2003-04, and since the additional depreciation was claimed only on 50%, on all the additions made after September 30, 2002 on account of the second proviso to section 32 (1) (ii), the assessee claimed the balance 50% in the assessment year 2004-05 under section 32(1)(iia), i.e., depreciation equal to 15% of the actual cost of new plant and machinery".

Held: (i) that the assessee was entitled to the benefit as claimed.

(ii) That the penalties been levied only on the disallowances made of additional depreciation were liable to be cancelled.

From the above, intention of the statute and FM (at that time I think it was Mr Yashvant Sinha) was correctly interpreted to the benefit of the assessee. Whether this decision will stand in other Tribunals is a million dollar question. Another comedy here is on the one side additional depreciation not allowed and on the other side penalty also levied. Even Supreme Court decision was misinterpreted in the issue of interest u/s 244A by lower courts as specific to cases like Sankvik Asia and based on this anything can happen but result will always be contradictory to intention of Statute.

On the other side Government also not willing to pay any interest on interest to the assessee. Initially they used to pay interest based on Sandvik Asia case decided by Supreme Court. Now-a-days they are denying that also from their angle that they will not pay any interest on interest. Here in this decision Supreme Court clearly expressed the view that interest is applicable to “ANY SUM DUE” and by this they have to treat interest also as tax and to pay interest as applicable. In this issue High Courts are only seeing from the angle of “INORDINATE DELAY” which is not correct from general philosophy. Then why every government authority is charging interest on delayed payment of any sum even for a single day.

The above philosophy is only applicable to them in the case of interest payable by them. If interest is chargeable u/s 220(2) then Appellate authority (Government) expect assessee to pay the interest u/s 220(2) from the date of assessment on ITAT dismissing the appeal of assessee even though a favourable decision is obtained from CIT(A). Here still the ITAT decision is not final even there is a chance of assessee winning the case in high court or supreme court. In that case if assessee asks for Interest on Interest based on decided cases they will not grant. Another main thing one has to look into it is even if assessee won the case there will be an inordinate delay in passing giving effect orders based on so many reasons viz., lack of time (considering time barring orders), lack of work force, lack of higher up sanction and so on. Now a days in some cases the order giving effect to appellate orders are pending even after a lapse of 5 years from the date of order. It is also suggested strongly felt by asseesses for introduction of a strong provision fixing the time limit for giving effect orders for assessee to get the benefit intended by Government at least after winning the case against the misinterpretation.

Normally the amendment will be effective from current financial year i.e., from next assessment year. In the case of interest chargeable u/s 234 D it is effective 1 st June, 2003 which means it is effective from Assessment Year 2004-05. But interpretation now being made is that any order passed after 1 st June, 2003 whether it is related to earlier year this interest is applicable. From this it is evident Government is now taking a view to interpret the provision to their advantage whereas intention of the statute is to help the assessee. Ultimately the Government view to help the assesses was not materialized.

Since law maker and law interpreter being one and same that is our Government why clarity is not being achieved till date in disputed issues? If this is solved then pending cases and time barring assessments, processing of giving effect orders will be addressed early on the other hand work force shortage on government side also will be taken care of and will be solved once in for all.

With regard to application of Rule 8D for disallowing expenditure relating to exempted income, clarification is required from the Government regarding Interest expenditure, Gross Assets and Investments mentioned in Rule 8D to restrict the disallowance at least below the exempted income as otherwise there is no point in claiming exemption. Since expenditure disallowed is more than income exempted it is advisable not to claim any exemption in spite of the provision but due to Assessing Officer wrong interpretation in favour of revenue. Hence exemption section is redundant.

TAIL PIECE(PEACE):

From the above views it is evident that what everybody needs is that Government and Department (under government administration) must see the real intention of statute from same angle. This will be a pain reliever for both the Government/Corporates. As in the case of health, first we have to take care of the existing disease before taking action for improvement of health. Normally any doctor would first give antibiotics to cure the sickness then only they will prescribe vitamins and minerals for improving the health condition otherwise it will be in vain.

Clear Intention of the statute is better to over come than Misinterpretation of the statute as we say in the medical philosophy that Prevention is better than Cure .

(The author is Senior Manager (Accounts), Wheels India Limited)