The Maddening Instability of Income-tax Law

Late Nani A. Palkhivala, Senior Advocate

In 1991, Nani Palkhivala called the Income-tax Act “a national disgrace” because of
its “maddening instability“. He expressed anguish at the “pathological change mania”
that had gripped the Finance Ministry which caused it to make repeated and
mindless amendments to the Law. He also expressed disappointment with the
Indian public who endured injustice and unfairness with “feudalistic servility” and
“fatalistic resignation“. 20 years later and in the wake of the storm that the proposed
retrospective amendments in the Finance Bill 2012 have caused, it is finally time for
the Government and the Nation to pay attention to what he was saying.

On 25th January 1991 the Income-tax Appellate Tribunal completed fifty years of its
existence. On its Golden Jubilee it is but fair to record that it has won golden
opinions on all sides throughout the half a century that it has functioned. There is no
doubt that over this long period, the Tribunal has been manned by some very able
individuals. Quite a few of them were fit to adorn any High Court Bench. No other
Tribunal in India his won such well-deserved popularity and confidence of the
public as the Income-tax Appellate Tribunal.

Administrative justice demands compromise. There is no pre-determined solution to

the problem of tempering power with justice. The Tribunal has rightly earned the
reputation of tempering judicial power with justice. It has evolved a cheap, quick
and informal procedure for doing justice as between the State and the citizen, to the
great satisfaction of the litigating public. In other words, it has acted as a Court of
law in everything but name, while avoiding the regular process of civil law which is
too cumbersome, technical and expensive.

The cardinal error of our times is to mistake amendment for improvement and change for progress. The
Finance Ministry has become almost pathological in its “change mania”. A stable fiscal policy is to a
nation what a stable family life is to an individual. But stability is anathema to the North Block. The
obsessive attitude that the exercise of power must take the form of churning out new laws and
regulations is shared by the legislature and the rule-making authority alike

The work and reputation of the Income-tax Appellate Tribunal afford a striking
illustration of what Professor H.W.R. Wade said at the end of his book “Towards
Administrative Justice”! “No class of people stands to benefit more in the long run
from just administration than the administrators themselves, because the State is
permeated from top to bottom with the truth that government depends upon the
approval of the governed. Fair play in administration will enlist the citizen’s
sympathies and will enormously reduce the friction with which the machinery of
government works. All good administrators should take care that the machinery is
properly tended and that the lubricant of justice is supplied in the right quantity at the
right points“.

On this happy occasion I would like to deal with one topic to which I attach the
greatest importance from viewpoint of the nation’s progress and well-being and
which I have been emphasizing and re-emphasizing over the last thirty years.

Today the income-tax Act, 1961, is a national disgrace. There is no other instance in
Indian jurisprudence of an Act mutilated by more than 3300 amendments in less
than thirty years.

Simple provisions like sections 11 to 13 (which deal with exemption of the income of
charitable trusts) have suffered no less than fifty amendments.

The tragedy of India is the tragedy of waste – waste of national time, energy and
manpower. Tens of millions of man-hours, crammed with intelligence mild
knowledge – of tax gatherers. tax-payers and tax advisers – are squandered every
year in grappling with the torrential spate of mindless amendments. The feverish
activity achieves no more good than a fever.

A striking example is the withdrawal of development rebate and the introduction of

initial depreciation in 1974, the withdrawal of initial depreciation and the
introduction of investment allowance in 1976, the withdrawal of investment
allowance and the introduction of investment deposit account in 1986, and the
restoration of Investment allowance in 1989. Simple continuance of development
rebate would have undoubtedly ensured far more beneficial results both to the
exchequer and to the public. But we stubbornly refuse to learn that the acid test to
be applied to every fiscal amendment as to every economic policy, is – how far will it
bend the talent, energy and time of our people to productive ends and how far will it
dissipate them in coping with legal inanities and quarter-baked changes?

The cardinal error of our times is to mistake amendment for improvement and
change for progress. The Finance Ministry has become almost pathological in its
“change mania”. A stable fiscal policy is to a nation what a stable family life is to an
individual. But stability is anathema to the North Block. The obsessive attitude that
the exercise of power must take the form of churning out new laws and regulations
is shared by the legislature and the rule-making authority alike. It has become
normal to have amendments to Income-tax Rules more than half a dozen times in a
single year. Various forms are changed overnight. Can this country, where crores of
school children and adults have to go without writing paper, afford the luxury of
throwing away millions of pages of printed Forms which are consigned to the scrap
heap so nonchalantly?

The rot begins when wild actions are received calmly by society. These are people that have lost the
power of astonishment at their own actions. When they give birth to a fantastic passion or foolish law,
they do not start or stare at the monster they have brought forth… These nations are really in danger of
going off their heads en masse, of becoming one vast vision of imbecility

Year after year, the Finance Bill continues the fatuous tradition of introducing
experimental provisions some of which are truly whimsical and most of which need
amendment in a short time. We legislate first, and think afterwards. Sections are
introduced which never come into force. because they are repealed or substituted
before the date they are scheduled to come into operation. In the event, complexity
is heaped upon complexity and the confusion becomes worse confounded.

Legislative work expands so as to fill the time available for its completion. This is a
branch of Parkinson’s Law and its operation has caused Parkinson’s Disease in the
body of our fiscal code.

At an International Tax Conference held in Singapore a few years ago, the experts
pointed out that a tax administration which disposes of appeals promptly and
reaches a fair and final settlement speedily, is itself be classed as a tax incentive. The
deplorable record of India in this connection was cited as a warning. The avalanche
of ill-conceived changes and complications, which may be compendiously called
“legal litter”, is mainly responsible for the poor quality of our tart administration.

In the United Kingdom there are less than 29 million income-tax payers but the
number of references filed in the High Court is only around thirty in a year. In India
there are only five to seven million income-tax payers but the number of references
filed in our High Courts is around 6,500 a year, in addition to about 1,500 writ
petitions. These figures reflect the tremendous public dissatisfaction with the
quality of the law and of fiscal administration. Our Law Reports bear witness to the
fact that generally a case reaches hearing in the High Court twenty years and in the
Supreme Court thirty years, after the relevant assessment year. The situation is
continuously aggravated by the deluge of new amendments – the indigestible
verbiage; and the flood of litigation is heavier today than ever before.

G. K. Chesterton, in his brilliant essay “The Mad Official“, analyses how a society
goes mad. The rot begins, he says, when wild actions are received calmly by society.
“These are people that have lost the power of astonishment at their own actions. When
they give birth to a fantastic passion or foolish law, they do not start or stare at the
monster they have brought forth… These nations are really in danger of going off their
heads en masse, of becoming one vast vision of imbecility.” India is one such country in
respect of budgeting and fiscal laws. Today the monster of our direct tax structure
has become more monstrous than ever before.

Two things strike the student of Indian income-tax law with trepidation and
amazement – the precipitate and chronic tinkering with the law by bureaucrats who
are the unacknowledged legislators of India, and the anaesthetized patience of the
Indian public. Truly, we Indians are a “low arousal” people. We endure injustice and
unfairness with feudalistic servility and fatalistic resignation. The poor of India
endure inhuman conditions which would have led to a bloody revolution n any other
country. The rich endure foolish laws and unending amendments which benefit
none except the legal and accountancy profession, and instinctively prefer to
circumvent the law rather than to fight for its repeal.

One of the main reasons for India’s backwardness and stunted development is that
we as a nation have no sense of time at all. We are individually intelligent and
collectively foolish. It is characteristic of us that in our national language the word
‘kal‘ is used both to denote yesterday and tomorrow. I attribute this absence of time
sense to two factors. We were the first country in the world to evolve the concepts of
eternity and infinity: against the backdrop of eternity what does the waste of even
several decades matter? Secondly, we were the first to evolve the doctrine of
reincarnation: if you waste this life you will have several ‘ more in which to make
good.
A telling example of the total absence of a sense of time in our tax administration is
afforded by the Supreme Court’s decision rendered last November in the case
of Sutlej Cotton Mills vs. CIT (1990) 2 SCALE 931. It was a case under the Business
Profits Tax Act, 1947. The accounting period was 1946-47. The amount involved was
a paltry sum of a few lakhs of rupees. The High Court’s judgment was rendered in
I965. The Supreme Court sent the matter bark to the Income-tax Appellate Tribunal
to re-hear the appeal 44 years after the close of the accounting period. Is there any
other civilized country where a tax-payer would not know the quantum of his
liability for 44 years?

Taxes are the life-blood of any government, but it cannot be over-emphasized that
the blood is taken from the arteries of the tax-payers and, therefore, the transfusion
has to be accomplished with the principles of justice and fair play.

India is waiting for a Finance Minister who will have the courage, caliber and vision
to put a stop to the maddening instability of out income-tax law.

Let us never forget the wise words of Justice Hughes who observed that no
democracy can survive without respect for laws and institutions, but that in a free
democracy laws and institutions will command that degree of respect which they
deserve.