The Judiciary is as important as National security – In the visionary budget presented by the Honourable Finance Minster, there was not a single word or proposal spelt out on how the Government in its second term won with an overwhelming mandate plans to meet the challenges of skyrocketing pendency of litigation in our country – A robust, efficient and efficacious dispute resolution method for speedy disposal of tax and commercial disputes would go hand in hand with the objective of the Government in boosting foreign investor confidence and providing a fillip to growth.

1. Judiciary

   The Government seems to be determined to lead Indian economy towards an increasingly transparent and formal methods of doing business in India. Great strides have already been made by the Government into throttling the shadow underbelly of the informal grey economy that for years haunted the Indian economy as a sentient plague. However, though policy changes and streamlining of administration have captured the imagination of this government, the dispute resolution arena remains woefully under equipped to meet the challenges thrown to it from time to time. The Government has laudably focused its energy on the arenas of economic growth as well a national security as the arenas for sweeping and large scale upgradation. However, the current state of the Judiciary and the quasi-judicial bodies act as a bottleneck for the change that the Government is seeking to introduce. Any policy whether economic, social or even defense related that is to be implemented cannot provide the desired result unless a robust and effective dispute resolution process is set up in order to decisively and fairly resolve the questions that invariably arise. It is therefore important that the Government treats the problems of the Judiciary at the same priority as the National Security of the Country and accordingly takes bold steps to provide proper infrastructure to the Judiciary and priorities the filing up of vacancies.

   The All India Federation of tax Practitioners have, from time to time suggested that there should be separate allocation of funds for the Judiciary in the budget proposal similar to the budget allocation made for the defense of the Country. The High Courts and subordinate courts are maintained by the States. It is noteworthy that the Central and State Governments are the largest litigants in most forums. More than 60 percent litigation in Courts has its genesis in the Central Acts. As per the paper reports, it has been stated that the Center has submitted a proposal to the 15th Finance Commission for allocating ₹ 436 crore for installation of Justice clocks in 3,350 court premises during 2020-25. However, the immediate need of the hour being speedy disposal of the matters, unless the Central Government takes up the issue of difficulties faced by the lower judiciary on war footing, the entire system may look towards an imminent collapse. The total pendency of appeals before the ITAT as on 1-7-2019 is 97,372 (AIFTPJ – July P. 55). Simply by filling up of vacancies, the pendency can be reduced to 75,000 within a period of two years and this could very well usher in a new era where Appeals can be heard and finally disposed of by the Appellate Tribunal which is the final fact finding authority, within one year of filing. It is striking that due to shortage of judges in the Bombay High Court, the tax appeals which have been admitted in the year 2000 are still pending for final adjudication. Recent paper reports stated that nearly 10,000 prosecution matters are pending before the designated special magistrate court in Mumbai. Only one Court has been notified to decide prosecution matters arising from tax cases which also handles other economic and indirect tax related offenses. Some of the prosecution matters are more than 15 years old and are still frozen at the state of framing of charges. With the above background, one can have a fair estimate of the time that is wasted in litigation proceedings. The Economic Survey 2019 highlighted the reasons for the huge pendency and also measures to be taken to resolve the same (chapter 5. www.itatonline.org). In the introduction, it is stated as under, “Arguably the single biggest constraint to ease of doing business in India is now the ability to enforce contracts and resolve disputes. This is not surprising given the 3.5 crore cases pending in the judicial system. Much of the problem is concentrated in the district and subordinate courts. Contrary to conventional belief, however, the problem is not insurmountable. A case clearance rate of 100 per cent (i.e. zero accumulation) can be achieved with the addition of merely 2,279 judges in the lower courts and 93 in High Courts even without efficiency gains. This is already within sanctioned strength and only needs filling vacancies. Scenario analysis of efficiency gains needed to clear the backlog in five years suggest that the required productivity gains are ambitions, but achievable. Given the potential economic and social multipliers of a well-functioning legal system, this may well be the best investment India can make.”

   We hope that the Government will take positive measures to resolve this issue while taking into consideration the suggestions from various Bar Associations across the country and the State Governments.

2. Black Money Act – Removal of lacunae in Black Money Act

   It has taken four years for the Government to awaken to a big void, a lacuna in the Black Money Act 2015 and to plug the same. The questions surrounding Income and assets outside India belonging to Indians was a big issue much publicized in the 2014 elections and in the year 2015 the Black Money Act was enacted. Surprisingly, the issue could have been tackled under the existing provisions of Income Tax Act, 1961 but Indian politicians and bureaucrats believe in enacting new laws to tackle every menace. Be that as it may be, we have The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, ( referred to as BMA hereafter) to tax, penalize and prosecute undisclosed income and assets outside India. What is chargeable to tax under the BMA is undisclosed foreign income and the value of undisclosed foreign assets. Undisclosed foreign income means income from a source located outside India which was chargeable under Income Tax Act 1961 but which had not been disclosed in the return filed u/s. 139 or where the return u/s. 139 has not been filed within the prescribed time. Undisclosed foreign asset means an asset located outside India purchased out of funds or for the existence of which the assessee had no explanation or explanation is not satisfactory. The definition of the undisclosed foreign income and asset is on the lines of Income Tax Act 1961 and the integration of both would have theoretically presented no challenges.

   The BMA being a taxation statute, could not be retrospective and therefore the Act applied for and from Assessment Year 2016-17 onwards. This presented the first challenge in implementation of the Act as to what was to be done with income earned prior to the said date or assets acquired prior to the said date as covered by BMA? The Proviso to section 3 of the BMA charges undisclosed asset to tax under the Act in the year in which it comes to the notice of the Assessing Officer. So unlike Income -tax Act 1961, where an undisclosed asset is chargeable to tax in the year in which it has been acquired or investment made, under the BMA, it is chargeable to tax in the year in which it comes to notice of the Assessing Officer. In determining the value of the undisclosed asset, a reduction is allowed for income forming part of the value of asset only if, and to the extent it has been subjected to tax under the Income-tax Act, 1961.

   To overcome the challenge against the retrospective operation of Law, Chapter VI of BMA provided for one-time settlement window. An assessee could disclose their undisclosed foreign income and asset and pay tax @ 30% and penalty @ 100 of the calculated tax. By paying 60% of undisclosed foreign income or asset as the case may be, the assessee could make good the default of not paying tax under the Income Tax Act on the foreign income and asset.

   In the case of a person resident in India, income from whatever source and wherever earned, is liable to tax in India under the Income-tax Act. In case of persons who are residents but not ordinarily resident or non- residents, scope of income chargeable to tax under the Income-tax Act is restricted and income earned outside India is not liable to tax. Therefore, BMA, as originally enacted, defined assessee to mean a resident and non ordinary resident and non residents were excluded. And therefore, a big loophole was created in the BMA.

   The Government has woken up to the same after four years, but evaders knew about it the moment the law was enacted. The combination of the definition of the year in which undisclosed asset is assessable and the residential status of the assessee meant that an assessee who had all along hidden his income in foreign shores, had to just fly out and be a non-resident in India as per section 6 of the Income-tax Act, 1961 for the year in which the said Income/Asset came to the notice of the Assessing Officer. The moment he became a Non-resident, despite his foreign undisclosed income or undisclosed asset in the past, which was liable to Income Tax Act, 1961, no action could be taken against him under BMA. The value of undisclosed asset is chargeable to tax under BMA in the year in which it comes to notice of the Assessing Officer and if on the said date, person is treated as a non-resident, he cannot be proceeded against under BMA.

   The Finance (No 2) Bill, 2019 (2019) 415 ITR 1 (St)(86) proposes to amend definition of the assessee under S. 2. of the BMA. Now assessee would also include a non-resident or not ordinary resident when notice is issued, if he was resident in the year in which either the foreign income was earned or the foreign asset was acquired.

   If one looks for resident Indians who have become Non-resident Indians from the year 2012-13 onwards, 2012-13 being the year in which foreign assets became a subject of discussion in public domain, though elections were held in the year 2014; it would be possible for the Revenue to deduce the assesses that have sought to exploit this loophole. It is not difficult to obtain the data, as it is available with them in the return of income filed. It will become apparent if this data is mined and utilized sensibly.

   However, even post the amendment, two issues will remain. Firstly the eternal question of whether a tax be levied retrospectively? The BMA already applies to past transactions by taxing the value of asset in a subsequent year but now the definition of persons covered by the Act has been amended with retrospective effect. The challenge may also emerge on the ground that when BMA was enacted, it provided a window to provide a last opportunity to the assessees falling foul of its provisions to escape the rigours imposed by it by paying only 60% of value of the undisclosed asset or undisclosed income as the case may be, which is not available to assessee’s now covered by BMA by the retrospective amendment. The Questions still remains as to the fate of the proceedings initiated under the Income- tax Act, 1961 against such persons in the interim period. It is hoped that the government addresses these issues before the Bill is adopted by the Legislature.

3. Charitable Trusts

   Clause 7 of the Finance Bill 2019 (2019) 415 ITR 53 (St) proposed amendments giving power to the Commissioner to cancel the registration of charitable trusts under certain circumstances. Clause 7(b) states that the Commissioner is given the power to cancel the registration if the Trust or institution has not complied with the requirement of “any other law –“. The issue for consideration is whether the commissioner can look into the provisions of State laws, Central laws, Municipal laws etc. and decide whether a trust or institution has complied with the requirement of each and every existing law on the statute books and even if the trust falls afoul of some obscure or minor law, cancel its registration? One may have to test the validity and limits of such wide powers given to the Commissioner. In the recent years, one may very well find a large amount of litigation only on issues relating to charitable Trust. The proposed provision will lead to a multifold increase in the litigation involving charitable trusts.

   One of the reasons that Income-tax Act 1961 has became increasingly complicated is that the Government seems to desire to use the Income Tax Act, 1961 as the colloquial stick in the ‘carrot and stick’ scenario to ensure compliance with other under various other legislations. The Income Tax Act, 1961 is by its very name a taxing code and the sanctity of taxation itself needs to be preserved within its hallowed pages. If the Income Tax Act, 1961 is to be used to punish non compliance with other legislation, it shall lose its nature as a taxing statute and shall gain characteristics of a penal statute cause wide spread disruption. Should a purely economic law be used as a blunt instrument in the hope that it ushers in social change?

   As is the case every year, we hope the proposed new Act will be very simple and assessee friendly and assists our great nation to achieve its economic objectives.