60% Tax Rate Under Section 115BBE Cannot Apply To Pre-1 April 2017 Income: Rajasthan High Court

The Rajasthan High Court on 27 May held that the enhanced tax rate of 60% introduced under Section 115BBE of the Income-tax Act through the Taxation Laws (Second Amendment) Act, 2016, cannot be applied retrospectively to income pertaining to Financial Year 2016–17, as the amendment was expressly made effective from 1 April 2017.

The Division Bench of Justices Arun Monga and Sunil Beniwal held that the higher rate could operate only prospectively and could not govern income earned prior to its commencement. The judges held:

“changes in law occurring after the commencement of a financial year cannot govern the tax liability for that year unless the amendment is expressly made retrospective.”

The Court was dealing with a challenge arising from assessment proceedings concerning a Jodhpur-based jewellery and bullion trader who had deposited Rs.66.17 lakh, including demonetised currency notes, in his bank accounts during November–December 2016. He contended that the deposits constituted business receipts.

During scrutiny assessment, the Income Tax Department rejected the books of account and treated the deposits as unexplained income under Section 68 of the Income-tax Act. The Department then applied the amended Section 115BBE and taxed the income at 60%, along with surcharge and consequential penalty proceedings.

The central issue before the Court was whether the enhanced tax rate under Section 115BBE, which received Presidential assent on 15 December 2016 but was expressly brought into force from 1 April 2017, could nevertheless be applied to income arising during Financial Year 2016–17.

Examining the legislative framework, the Bench noted that Parliament had clearly stipulated the effective date of the amendment. It observed that the provision, as it stood on 1 April 2016, prescribed a 30% tax rate, which would continue to govern assessments for Financial Year 2016–17. It held:

“The amendment to Section 115BBE came into force on 01.04.2017 i.e. the first day of financial year 2017-18. For FY 2016-17, the law in force on 01.04.2016, prescribing a rate of 30%, must govern. The enhanced rate of tax @60% came into force on 01.04.2017 and can apply only from that date, i.e. for financial year 2017-18 onwards”

The Court reiterated that tax statutes are presumed to operate prospectively unless expressly stated otherwise. It held that since the legislature consciously fixed 1 April 2017 as the effective date, the enhanced rate could not be imposed on income earned prior to that date merely because the amendment was enacted in December 2016.

Further, the Bench noted that the Taxation Laws (Second Amendment) Act, 2016 does not contain any express language making Section 115BBE retrospective in operation. It observed:

“..the Taxation Laws (Second Amendment) Act, 2016 is prospective in effect as specified therein (from 15.12.2016 except the amendment of Section 115BBE, which is effective from 01.04.2017)”

Accordingly, the High Court held that the enhanced tax rate under the amended Section 115BBE, along with consequential penal consequences, could not be retrospectively applied to income pertaining to the period prior to 1 April 2017.

For Petitioner: Sandeep Bhandawat, Shanker Singh Shekhawat and Narendra Kumar Taparia, Advocates

For Respondent: K.K. Bissa and Askaran Maru, Advocates