The Finance Bill 2022 enshrines certain innocuous amending provisions, clandestinely rekindling extinguished embers of law — call it either a coincidence or a sleight of conscious legislation.
Section 37 prohibits business expenditure which is against any law. The Finance Bill goes miles further on this to clarify that this prohibited spend, a disallowable expenditure, “shall include or deemed to have always been included” payments made for any offence including compounding of offence on an alive or dead law be its prohibition in or outside India
As to how to manifest an overseas law being contrarian or a prohibited one at a particular point of time is not known. Even a compensatory interest payment due to simple venial breach of a law might get disallowed going forward. The legislature certainly cannot sit in the armchair of businessman to decide on validity of spend while one is trying to extricate out of legal clutches.
To put to rest varied legislative reading of ethicality of those in medical or other professions receiving/getting benefits from sponsoring entities, the Bill states that such expenditure has always been presumed to be a disallowable expenditure. A provision for TDS enforcement on such payouts/sponsorships is also proposed which would bring such spends/perks in the limelight besides ensuring the taxability in the hands of the recipient. The lobbying that persisted on allowability of such expenditure in payer’s hands comes to a rest.
Exempt income
Section 14A does not permit expenditure incurred to earn exempt incomes, which was a retrospective introduction wef April 1, 1962, through Finance Act, 2001. The section stood naked sans guidelines as to how to compute the disallowance of expenditure, thus disallowances by revenue got watered down by judiciary.
In came Rule 8D wef March 24, 2008, on which the Revenue claimed a retrospective reading while the judiciary adjudicated it to be prospective. Rule 8D underwent amendments in 2016 due to its controversial permutations and combinations on mode of computation some of it remaining status quo on date, unresolved. Despite its chequered history, courts have held that when there is no exempt income then disallowance under Section 14A is unwarranted.
Finance Bill 2022 reopens this to clarify in a “non obstante clause” that bereft exempt income being earned, expenditure incurred to earn exempt incomes will be disallowed. How does the Revenue intend fixing whether an expense was incurred to earn exempt or tax-free income bereft there being a proximity/pointer of the expenditure to the exempt income. The amendment is a desperate attempt to augment revenue.
Section 43B allows interest expenditure only on actual payment. A conversion of outstanding interest into a loan or an advance was held to be as not meeting the intent of payment as per the existing provisions. Loans and advances might not cover debentures or any other deferred payment obligations. Finance Bill 2022 makes a clarificatory amendment that loans and advances will also cover debenture any other security offering a deferred payment.
Treatment of cess
Cess is an addition to income tax. It gets clarified in this Bill that it will no longer be allowable business expenditure as held by certain judgments with a “removal of doubts” with retrospective effect from April 1, 2005. The memorandum explaining the provisions clarifies the same elaborately through certain judgments.
The assurance given is retro tax provisions are certainly a thing of the past and there will be consistency in the tax provisions to reduce litigation. Indirect retro taxation through clarificatory amending provisions is a backdoor approach to supply omissional chinks of the law. This will proliferate litigation besides questioning consistency of the law.
The pervasive arm of the legislature should not be used as an arm-twisting tool to usher in amendments emasculating anti-revenue judgments. They will eventually lead to a forced contrarian reading of the law. Undoubtedly, these clarificatory amendments might also come up for adjudication before the judiciary on their retrospective reading. Courts have held repeatedly “an onerous provision fastening tax through clarification can never be retrospective”.
The writer is a chartered accountant