The Finance Bill, 2012, has evoked mixed reactions from various stakeholders, one of the vital issues being retrospective amendments proposed in Income-tax law. A large number of discussions, however, revolved around the amendment to section 9 meant to nullify the apex court decision relating to the Vodafone case. However, yet another retrospective amendment that will affect millions of resident taxpayers could be found in section 44AD. Originally, this provision was applicable only for civil construction contractors by prescribing a presumptive rate of tax to provide relief from maintenance of books of account.
The Finance (No.2) Act, 2009 substituted this provision by enlarging the scope of application to all taxpayers except companies, LLPs and notified professions. The rider, however, continued, viz. the aggregate receipt from business should not exceed the monetary limit prescribed for audit under section 44AB.
Section 44AD was inserted by the Finance (No.2) Act, 2009 and the Budget proposal was presented in Parliament on July 6, 2009. It became applicable only from the assessment year 2011-12 i.e. for the incomes earned during the financial year 2010-11 by small taxpayers. It prescribes for estimating the income at 8 per cent of the gross sales, turnover or total receipt. It does not distinguish the nature of activity of the taxpayer whether manufacture, trade or job work contract.
Budget 2012
The Finance Bill, 2012, proposes to insert an amendment to section 44AD calling it as clarificatory in nature. It seeks to debar the benefit of presumptive income determination in the case of taxpayers earning income in the nature of commission or brokerage or by carrying on any agency business. The amendment, being clarificatory, will apply on retrospective basis and stated as retrospectively applicable from the assessment year 2011-12 onwards.
Practically, the disqualification will apply to small taxpayers such as insurance agents, postal agents and any other agent carrying on such business. The retrospective insertion would cause discomfort to taxpayers who have already filed their return of income for financial year 2010-11 and who would have received either refund from the tax department or intimation accepting the return filed.
The fallout of the amendment leads to an unworkable situation. When the law permitted the taxpayers the benefit of non-maintenance of books of account during the financial year 2010-11 and permitted filing of return by estimating taxable income, the subsequent retrospective amendment seeks impossibility in reality.
Insertion of retrospective amendment would affect millions of taxpayers as the financial year to which the amendment relates had elapsed and the majority of taxpayers of that category might have also complied with the legal provisions by filing their return of income by estimating the income. However, having a legal provision in the statute book might prompt the tax officers to seek compliance from the taxpayers by presenting books of account, which would not be available with them.
Way out
In the light of the fact that the taxpayers have already complied with the legal provision as it was at the time of filing their return, the retrospective amendment proposed in the Finance Bill, 2012, requires reconsideration by the Legislature. It would be proper and rational to insert such disqualifying conditions in section 44AD on prospective basis that too from financial year 2012-13 onwards. Even for the financial year 2011-12 many taxpayers, based on the belief that there is no need to maintain books of account, might not have maintained the same and inserting a retrospective provision at the fag end of the financial year merits reconsideration.
If the Legislature does not make the provision work on prospective basis, then taxpayers have to rely on the apex court judgment in the case of State of Rajasthan v Shamsher Singh (1985) (Supp) SCC 416 to drive home the point that a person should not be deprived of justice for not doing a particular thing which was not capable of doing. A similar ruling could be found in Cochin State Power & Light Corpn Ltd v State of Kerala (1965) 3 SCR 187 where the same principle was reiterated.
(The author is an Erode-based chartered accountant.)