As per news reports, the union government has filed a Presidential Reference in relation to the 2G judgment. In this judgment the Supreme Court had cancelled 122 2G licences granting access to spectrum and had ordered their re-allocation by means of an auction. It also held that use of first cum first serve policy (FCFS) to allocate natural resources was unconstitutional. It had held that natural resources should be allocated through auctions. As per the news report, the Presidential Reference seeks clarity on whether the Supreme Court could interfere with policy decisions. This issue has been discussed in a number of cases. For instance, the Supreme Court in Directorate of Film Festivals v. Gaurav Ashwin Jain[1] held that Courts cannot act as an appellate authority to examine the correctness, suitability and appropriateness of a policy. It further held that Courts cannot act as advisors to the executive on policy matters which the executive is entitled to formulate. It stated that the Court could review whether the policy violates fundamental rights, or is opposed to a Constitutional or any statutory provision, or is manifestly arbitrary. It further stated that legality of the policy, and not the wisdom or soundness of the policy, is the subject of judicial review. In Suresh Seth vs. Commissioner, Indore Municipal Corporation[2] a three judge bench of the Court observed that, “this Court cannot issue any direction to the Legislature to make any particular kind of enactment. Under our constitutional scheme Parliament and Legislative Assemblies exercise sovereign power or authority to enact laws and no outside power or authority can issue a direction to enact a particular piece of legislation.” In the present case it may be argued that whereas the Court was empowered to declare a policy such as FCFS as unconstitutional, it did not have the jurisdiction to direct auctioning of spectrum and other natural resources. The Presidential Reference may conclusively determine the Court’s jurisdiction in this regard. However, it has been urged by a few experts that this Presidential Reference amounts to an appeal against the decision of the Court. They have argued that this could be done only through a Review Petition (which has already been admitted by the Court). The advisory jurisdiction of the Court invoked through Presidential References, is governed by Article 143 of the Constitution. Under Article 143 of the Constitution of India, the President is empowered to refer to the Supreme Court any matter of law or fact. The opinion of the Court may be sought in relation to issues that have arisen or are likely to arise. A Presidential Reference may be made in matters that are of public importance and where it is expedient to obtain the opinion of the Supreme Court. The Court may refuse to answer all or any of the queries raised in the Reference. A Presidential Reference thus requires that the opinion of the Court on the issue should not have been already obtained or decided by the Court. In the Gujarat Election Case[3] the Supreme Court took note of Presidential References that were appellate in nature. Thus, a Presidential Reference cannot be adopted as a means to review or appeal the judgment of the Supreme Court. Against judgments of the Court the mechanisms of review is the only option. This position was also argued by Senior Advocate Fali S. Nariman in the Cauvery Water Case[4], where the Court refused to give an opinion. Whether the Court had the authority to determine a policy, such as FCFS, as unconstitutional is not disputed. However, there are conflicting judgments on the extent to which a Court can interfere with the executive domain. It would be interesting to see whether the Court would give its opinion on this issue. In the event it does, it may bring higher level of clarity to the relationship between the executive and the judiciary.
[1] AIR 2007 SC 1640
[2] AIR2006SC767
[3] (2002) 8 SCC 237
[4] (1993) Supp 1 SCC 96(II)
The issue of the General Anti Avoidance Rule (GAAR) has dominated the news recently and there are fears that GAAR will discourage foreign investment in India. However, tax avoidance can hinder public finance objectives and it is in this context GAAR was introduced in this year’s Budget. Last week, the Finance Minister pushed back the implementation of GAAR by a year. What is GAAR? GAAR was first introduced in the Direct Taxes Code Bill 2010. The original proposal gave the Commissioner of Income Tax the authority to declare any arrangement or transaction by a taxpayer as ‘impermissible’ if he believed the main purpose of the arrangement was to obtain a tax benefit. The 2012-13 Finance Bill (Bill), that was passed by Parliament yesterday, defines ‘impermissible avoidance arrangements’ as an arrangement that satisfies one of four tests. Under these tests, an agreement would be an ‘impermissible avoidance arrangement’ if it (i) creates rights and obligations not normally created between parties dealing at arm’s length, (ii) results in misuse or abuse of provisions of tax laws, (iii) is carried out in a way not normally employed for bona fide purpose or (iv) lacks commercial substance. As per the Bill, arrangements which lack commercial substance could involve round trip financing, an accommodating party and elements that have the effect of offsetting or cancelling each other. A transaction that disguises the value, location, source, ownership or control of funds would also be deemed to lack commercial substance. The Bill as introduced also presumed that obtaining a tax benefit was the main purpose of an arrangement unless the taxpayer could prove otherwise. Why? GAAR was introduced to address tax avoidance and ensure that those in different tax brackets are taxed the correct amount. In many instances of tax avoidance, arrangements may take place with the sole intention of gaining a tax advantage while complying with the law. This is when the doctrine of ‘substance over form’ may apply. ‘Substance over form’ is where real intention of parties and the purpose of an arrangement is taken into account rather than just the nomenclature of the arrangement. Many countries, like Canada and South Africa, have codified the doctrine of ‘substance over form’ through a GAAR – type ruling. Issues with GAAR A common criticism of GAAR is that it provides discretion and authority to the tax administration which can be misused. The Standing Committee responded to GAAR in their report on the Direct Taxes Code Bill in March, 2012. They suggested that the provisions should ensure that taxpayers entering genuinely valid arrangements are not harassed. They recommended that the onus should be on tax authorities, not the taxpayer, to prove tax avoidance. In addition, the committee suggested an independent body to act as the approving panel to ensure impartiality. They also recommended that the assessing officer be designated in the code to reduce harassment and unwarranted litigation. GAAR Amendments On May 8, 2012 the Finance Minister amended the GAAR provisions following the Standing Committee’s recommendations. The main change was to delay the implementation of GAAR by a year to “provide more time to both taxpayers and the tax administration to address all related issues”. GAAR will now apply on income earned in 2013-14 and thereafter. In addition, the Finance Minister removed the burden upon the taxpayer to prove that the main purpose of an alleged impermissible arrangement was not to obtain tax benefit. These amendments were approved with the passing of the Bill. In his speech, the Finance Minister stated that a Committee had also been formed under the Chairmanship of the Director General of Income Tax. The Committee will suggest rules, guidelines and safeguards for implementation of GAAR. The Committee is expected to submit its recommendations by May 31, 2012 after holding discussions with various stakeholders in the debate.
