On 15th December 2021, the Delhi High Court gave its verdict in a highly controversial matter discerning the scope of the executive’s power of delegated legislation in absence of explicit instructions while interpreting the provisions in the light of the taxation laws. While hearing 1346 petitions in the case of Mon Mohan Kohli Vs ACIT, the honorable court held that in absence of unequivocal provisions, the executive can’t deter implementation of new provisions by inserting explanations in certain notifications especially when the dates for such implementation have been set by the legislature itself. This article while analyzing the court’s decision and ratio would try to understand the impact of the matter that would certainly be influential not only in taxation law but also in administrative law.
In the second quarter of 2021, several taxpayers were greeted with Show Cause Notices (“SCN”) issued under Section 148 of the Income Tax Act, 1961 (“the Act”) by the Assessing Officer (“AO”). On perusal, it was discerned that the notices were sent without following the procedure mentioned in the newly inserted Section 148A of the Act which inter alia forces AO to conduct an enquiry and give an opportunity to the assessee of being heard before issuance of such notices. In support of the notices, it was asserted by the revenue that they were issued relying upon the explanations in notifications issued by the Ministry of Finance dated 31.03.2021 and 27.04.2021 which extended the implementation of older laws (which didn’t require the procedure to be followed) to 30.06.2021 that had been made ineffective by the legislature w.e.f. 01.04.2021 through replacement of Section 147- Section 151 of the Act by the new similar provisions via the Finance Act, 2021 (“the Finance Act”).
It was further asserted that the notifications were issued based on the powers given by legislature itself to the executive via Section 3 of the Taxation and other laws (Relaxation and amendment of certain provisions) Act, 2020 (“the Relaxation Act”) which was passed by in light of the pandemic to extend the time limit of actions and suffered from no disability. Aggrieved by the notices and not finding any conceivability in revenue’s stand, the taxpayers rushed to the different high courts seeking relief against the notices while praying to declare the explanations and notifications to be invalid and beyond the powers of the executive. Some of the high courts granted relief to the taxpayers by issuing intermediate orders while some came out with a verdict. The Chhattisgarh High Court was a pioneer in giving a decision and in the case of Palak Khatuja Vs UOI, while relying on A.K.Roy v. Union of India, held that the notifications were issued within powers of the executive. However, dissenting from the above judgment, the Allahabad High Court, in the case of Ashok Kumar Agarwal vs UOI held the notices and explanations in the notifications to be ultra vires and thus invalid. A similar decision was then given in the case of BPIP Infra Private Limited Vs ITO by the Rajasthan High Court while quashing the notices. The issue then came up before the Delhi High Court in the case of Mon Mohan Kohli Vs ACIT, where, while hearing 1346 similar petitions, the court went upon a length to consider every aspect of the case in detail while giving a decision in favor of taxpayers.
The major issue which came before the court was whether the executive can make or change the law by giving an explanation in issued notifications and whether the executive can impede the implementation of law made by the legislature. Subsequent to this issue, contentions were also raised regarding the scope of power delegated to the executive under the Relaxation Act and the nature of the newly inserted sections which required prior enquiry before issuance of notice (to be procedural or substantive) and their retrospective applicability.
Delhi High Court’s view
The court while quashing in notices and holding the explanations invalid observed that the executive can’t exceed the power bestowed upon it by the legislature and in light of executing the laws, can’t undermine the intent of the legislation or supersede the laws made by the legislature. The court relied upon the interpretation of Section 1(2)(a) of the Finance Act and observed that there was no power with the Executive to defer/postpone the implementation of the substituted Sections 147 to 151 of the Act. It was also observed that the law prevailing on the date of issuance of the notice under Section 148 has to be applied considering it to be procedural and thus eligible for retrospective application.
Court’s Ratio and its analysis
Aligning with the view of the petitioners, the court observed that once a law has been replaced by a newer one, it is rendered obsolete and can’t be brought back by the executive. Addressing the issue of the power of executive under Section 3 of the Relaxation Act, the court dissented with the Chhattisgarh court and interpreted the provision narrowly while discerning that it merely provides the central government with the power of extension of time limits and doesn’t offer carte blanche to the executive to amend even the procedure.
On the issue of nature, the court while going through the definitions and intent of the laws, relied on Imperial Tobacco Ltd v. Attorney-General and observed that the laws were indeed procedural as they offered ease to the citizens. On pursing the previous similar acts, their enforceability, and date of implementation, the court while following the precedent established in C.B. Richards Ellis Mauritius Ltd. vs. Assistant Director of Income-Tax observed that the procedural relaxation given by the Finance Act must be implemented retrospectively to align with the intent of the legislation which was to ease compliance and was also evident from the speech of the honorable Finance Minister and the Memorandum to the Finance Act.
It must be noted that an interesting argument was put forward by the revenue asserting that the extension creates a legal fiction wherein the time limits are extended for procedures that could not be completed on time and in continuance of this fiction, the procedure to issue notices must be allowed to be completed based on laws which were in force when the process was supposed to be completed. The court while rejecting the argument due to lack of basis, observed that extension of time limit should be strictly considered.
Chiding the revenue on its excuse of pandemic and diverting from the observation of Chhattisgarh High court, the court while citing a circular issued by revenue itself and observing revenue’s stand on similar procedures, observed that during the enactment of the Finance Act, the legislature was aware of such unfortunate event and it would have been taken into consideration. Additionally, the court emphasized the inequality and mire that would be created if the notices are allowed, giving rise to parallel provisions and inconsistent procedures while undermining the intent of the legislature to ease the concerns of the taxpayers which was enacted in pursuance of guidelines and the judgment given by the Supreme Court in case of GKN Driveshafts (India) Ltd. Vs. Income-tax Officer.
The conservative interpretation of delegated powers of the executive would certainly put constraints on the shoulders of the Central government who would have to be wary to the extent to which they can exercise powers. Additionally, the verdict puts shackles on the revenue authorities who may no longer escape the procedure while issuing notices which would expectedly reduce the number of unsubstantiated notices received by bona fide taxpayers. The verdict also clarifies the position of assessment provisions of the act to be procedural which would be helpful in the seamless retrospective application of future amendments and would aid the taxpayers. Even though the court has rightly restricted executive, the matter is soon expected to knock the doors of the Supreme Court in the light of contradicting opinions given by various high courts to establish a binding precedent.
The central government is primarily liable for the execution of laws and by delegated legislation has the power to even make some laws for easier administration but the extent to which these powers can extent has been debated historically in many cases like Rai Sahib Ram Jawaya Kapurvs the State of Punjab. In the present case, by narrowing interpreting the delegated power, the court has rightly limited the executive from practicing powers which contradicts the principal legislation itself and is beyond what has been explicitly stated. However, like in this case, the courts while discerning the scope of delegated powers must also consider the problems of the executive and create a balance between power and the executive’s ability to fulfill its obligations.