Volume VII Part 5 June 10, 2014 18 Business Advisor

Rules are subservient to the Act – Return

forms cannot be used for interpreting

legislative intent

V. K. Subramani

All legislations in India have the stamp of approval of the

Parliament. The Parliament is the supreme authority to

introduce a legislation, to amend, modify a piece of

legislation and also to repeal a law. Income-tax law is one

of the statutes subjected to so many amendments on

yearly basis by virtue of the Finance Act presented in the

Parliament.

The Act so enacted requires an administrative arm for

implementation. Particularly with regard to fiscal

statutes, the law by itself may not be adequate and to enforce the law, hence

authorities with delegated powers are created. In India, the Central Board of

Direct Taxes (CBDT) administers direct tax laws and Central Board of

Central Excise and Customs (CBEC) administers indirect taxes.

Delegated legislation

Section 295 of the Income-tax Act empowers the CBDT to make rules for the

whole or any part of India for administering and implementing the Income-

tax Act, 1961.

Broadly, the power of the CBDT to make rules as contained in section 295

could be summarised as under. The list is not comprehensive and contains

only important areas where the delegated legislation is prominently used.

(i) For ascertainment and determination of any class of income;

(ii) Manner and procedure by which income shall be arrived at in

respect of partly agricultural income and partly non-agricultural income;

(iii) Manner and procedure by which income shall be arrived at in the

case of persons resident outside India;

(iv) Manner and procedure by which an individual is liable to tax for

mixing his individual property into HUF property (as prescribed in section

64(2));

Volume VII Part 5 June 10, 2014 19 Business Advisor

(v) Valuation of perquisite chargeable to tax (applicable for salary

income);

(vi) Depreciation in respect of buildings, machinery, plant or furniture,

i.e. prescribing rates of depreciation;

(vii) Necessity of maintaining books of account for notified professions

with monetary limit for maintenance (sections 44AA(2) and (3));

(viii) Limitation for claim of rent as deduction under section 80GG;

(ix) Prescribing guidelines and conditions for General Anti-Avoidance

Rule (GAAR);

(x) Procedures for allotment of PAN and quoting of the same in various

transactions;

(xi) Form of audit report in respect of special audit under section

142(2A);

(xii) Procedure for giving effect to DTAA entered into by Central

Government with any other country;

(xiii) Form with regard to application, claim, return or any information

and fees payable;

(xiv) Procedure for application of refund.

3F Industries case

Recently, in 3F Industries Ltd v. Joint CIT (2014) 44 taxmann.com 200 (Vizag-

Trib) discussed some of the finer nuances of the income-tax law vis-à-vis the

legal principles including delegated legislation.

The assessee in this case filed an appeal against the order passed by the

Income-tax authority in pursuance of the order of the Dispute Resolution

Panel (DRP). The issues were multifaceted including application of Arm‟s

Length Price (ALP) for working capital loan given to a subsidiary company

when the lending company itself had borrowed from a financial institution.

The focus of this write-up is on two aspects, viz. (i) meaning of „tax‟ whether

includes surcharge; and (ii) whether section 234B interest is to be charged

after allowing MAT credit under section 115JAA.

Contention of the assessee

The assessee contended that after computing income-tax liability and

allowance of MAT credit under section 115JAA only on the resultant

Volume VII Part 5 June 10, 2014 20 Business Advisor

surcharge and education cess are to be added. The contention of the

Revenue is that the term „tax‟ always includes surcharge and interest. Thus

contending that after adding surcharge and cess on tax, the MAT credit is to

be deducted.

The tribunal made reference to CIT v. K.Srinivasan 83 ITR 346 (SC), wherein

it was held that income tax has to be increased by surcharge and additional

surcharge for the purpose of the Union. The court held that the word

„surcharge‟ has been used to either increase the rates of income-tax and

super tax or to increase these taxes.

The legislative entry 82 in List I empowers the Central Government to levy

tax on income other than agricultural income. Income-tax, super tax and

surcharge fall in this category. The Parliament enacts the provision in the

Finance Act of each year to invoke its legislative power to prescribe the rate

of tax. The apex court held that the meaning of surcharge is to charge in

addition to or subject to additional or extra charge. If that meaning is

applied to section 2 it would lead to the result that income-tax and super

tax were to be charged in four different rates such as (i) basic surcharge or

rate; (ii) surcharge; (iii) special surcharge; and (iv) additional surcharge.

The word „surcharge‟ has been used in Article 271 of the Constitution for

the purpose of separating it from basic charge of tax or duty and the

proceeds are exclusively meant for the Union.

In Merit Enterprises v. Dy. CIT (101 ITD 78 (Hyd)(SB)), reference was made to

CIT v. Maharaja Pratapsingh Bahadur of Gidhaur (1961) 41 ITR 421 (SC)

where the Supreme court held that surcharge is nothing but additional

income-tax.

Levy of interest section 234B

One of the arguments of the assessee in 3F Industries case was that interest

under section 234B must be charged after deducting MAT credit under

section 115JAA and before calculation of surcharge and education cess. The

argument of the assessee was based on the return form prescribed.

The assessee contended that on the tax liability (excluding surcharge and

cess) the MAT credit under section 115JAA is to be given. Only on the

resultant, surcharge and education cess are to be computed.

The tribunal made reference to CIT v. Chemplast Sanmar Ltd (2009) 180

taxman 335 (Mad) wherein the court held that the delegated legislation, i.e.

income-tax rules, can never negate what is given in the main statute, i.e.

the Income-tax Act.

Volume VII Part 5 June 10, 2014 21 Business Advisor

The observation of the court in para (10) is reproduced below:

“It is well accepted principle that the rule cannot affect, control, enlarge or

detract or derogate from the full operative effect of the provisions of the

section. If any rule purports to do so, it would be void and ultra vires and

further, the rule must be consistent with or in conformity with the Act. If

there is conflict between a rule and the substantial provision of the Act, the

rule must pave way to the provision of the Act.‟

“Further, the delegating authority must exercise power strictly within the

limits of the authority. Even though the rule-making power is conferred on

the said authority, if the rules made are in excess of such delegated power

the rule would be void even if the Act provides that they shall have effect as

though they are enacted in the Act”.

Scheme of section 234B

Section 234B provides for interest on the „assessed tax‟ after deducting

amounts by way of TDS/ TCS, relief allowed under section 90 or section 90A

or any tax credit allowed to be set off under section 115JAA / 115 JD.

Decision of the tribunal

The tribunal with regard to these two issues, viz. whether tax includes

surcharge and education cess, and interest under section 234B is on the

amount of tax including surcharge and cess prior to tax credit under section

115JAA, was in favour of the Revenue.

The decision of the tribunal may look simple and straight one. However, it is

worth mentioning that section 2(43) defining the term „tax‟ does not say

whether it is inclusive of surcharge and education cess or without it.

If the tax laws provide clarity at the expense of brevity this needless

litigation could have been avoided.

(V. K. Subramani is Chartered Accountant, Erode)

Section 2(43) defining the term „tax‟ does not say whether it is

inclusive of surcharge and education cess or without it.