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Finance Bill: more delegated powers

This is the second and concluding part of the write-up on the Finance Bill. The first part appeared in these columns on March 12.

ONE MAY also review the fresh powers that are now proposed to be vested with the administration in the light of requirements of delegated legislation.

Power as regards approval of charities under Sec. 10(23C): In respect of approval of educational, medical and other charitable institutions covered under Sec. 10(23C), the Board will now be empowered to prescribe the authority for purposes of such approval to satisfy itself, that the fund or the institution is really established for the purposes for which it was formed.

No guidelines, whatsoever, are available as to how it could be satisfied.

Power to prescribe exceptions for 100 per cent disallowance under Sec. 40A(3): Sec. 40A(3) now empowers the Board to prescribe rules, the cases and circumstances under which disallowance may or may not be made. Here again, there is absolute absence of guidelines.

The existing guidelines are extremely limited. This provision in actual practice targets genuine expenditure including purchases, so that some guidelines in statute that genuine expenditure is not hit by the section was necessary, and rules do not make it a mere revenue raising measures.

The objective of the provision is to deal with cash transactions, which get unaccounted, because of the ease with which cash transactions could go unrecorded.

But where such transactions are recorded in the books, there is hardly any point in treating them on par with unrecorded transactions. Rule 6DD(j) earlier provided for exception for genuine cases, after the provision for disallowance itself was upheld by the Supreme Court because of this exception under this Rule in Attar Singh Gurmukh Singh v ITO (1991) 191 ITR 667 (SC).

Once validity was upheld, the Rule was dropped and the section was amended providing for disallowance of 20 per cent. Deletion of a rule considered as saving grace for the draconian provision was another instance of abuse of powers under delegated legislation.

Power is now taken by way of delegated legislation to provide for exceptions without guidelines.

It is necessary that the statute provides for guidelines that genuine payments are not vulnerable.

Power to prescribe conditions for relief under Sec. 80IA: A still another power now proposed to be delegated is the power to provide for additional conditions for new reliefs, which are proposed to be extended under Sec. 80IA by the Finance Bill, 2007.

Power is also taken by the rules as regards forms and particulars of audit report for such reliefs under Sec. 80IA.

The power to prescribe the conditions without any guidelines will result in prescription of such conditions as are likely to make the provision itself ineffective.

The further conditions under Rule 9C diluting the right under Sec. 72A to carry forward past losses and depreciation in case of amalgamation is an instance of abuse of such power.

When such power to impose further conditions are delegated, the experience of the taxpayer in the light of the conditions later imposed after the assessee enters into commitments based upon the existing law, is to find tax cost extremely burdensome for the assessee, who had banked on the existing rules, as it happened in the matter of Sec. 54EC or 72A.

The Income-tax Act is littered with such powers, which have been abused.

Power to provide measure of value for FBT: An amendment to Fringe Benefits Tax, now proposes to be extended to cover Employees Stock Option (ESOP) Scheme, which is now clearly taxable under Sec. 17(2) in the hands of the employees with the manner on which liability is ascertained being spelt out in the Circular No. 710 dated July 24, 1995 (1995) 215 ITR (St.) 1.

The benefits are clearly identified in the hands of employee, so that shift of liability to employers is to advance the collection of tax, possibly at a rate higher than what will be applicable for employees taxable as capital gains in their own assessments.

But now that the tax burden is proposed to be shifted to employer, the Board is empowered to frame rules to prescribe the method of determining the fair market value.

There were existing guidelines as to how a fair market value is determined under the rules of valuation of wealth tax before wealth tax on shares was dropped. There are also SEBI guidelines. The power vested in the Board without any guidelines is again a power, which is unregulated.

Power to prescribe e-returns and to dispense with annexures: Power was already taken by way of rules, notifications and instructions to dispense with statutory requirements enjoined by Sec. 139(9).

Such power is now sought to be regularised by retrospectively vesting such powers with the Board with effect from June 1, 2006 and deeming that such powers are exercised under the proposed Sec. 139D.

The desirability of accepting returns without enclosures even from revenue's point of view is a different matter requiring serious attention.

Power to prescribe guidelines for Chief Commissioner/ Commissioner in prescribing fees for special audit: Power is now taken under Sec. 142(2A) to prescribe the guidelines for fixing fees for special audit, which will now be directed after a show cause notice.

The need for rules for fixing the remuneration would appear to be unnecessary, when it could be a matter of departmental instruction and exercise of discretion in individual cases.

Conclusion

Every Finance Bill contains number of provisions delegating fresh powers. Not all may be considered necessary, if one were to apply one's mind.

A review of past delegations and the manner in which such delegated powers have been used would indicate that they often override the statute and have an administrative bias mainly because of absence of guidelines for exercise of such power in the statute itself.

Some examples of such overriding powers have been noticed in respect of Sec. 54EC, 40A(3) and 72A.

The attention of legislature is required in this regard to ensure that not all proposals from the Board demanding delegated powers need be conceded.

Where it is required to be so conceded, it should be ensured that sufficient guidelines are available, so that excessive use as for example, noticed in a number of instances does not become a regular feature of our tax laws.

S. Rajaratnam

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