Shivakantjha.org - Triplet 7 - The Roguery: Its Rewards and Remedies; Taxability of Proceeds of Crime
Triplet 7
The Roguery: Its Rewards and Remedies; Taxability of Proceeds of Crime
By Shiva Kant Jha
February 06, 2009
THE Madras High Court decision in CIT v. K Thangamani [2009-TIOL-48-HC-MAD-IT] brought to my mind what Dr. T.B. Smith, the great jurist of world fame, had said in course of his Tagore Law Lecture (1978):
“Certainly to me it seems less objectionable that property which has been subject of illegal dealing should be applied to the public good through acquisition by the State than that a rogue should enjoy the fruits of his obliquity.” ( Property Problems in Sale p. 104)
This principle justifies the restitution of the whole amount that the Public Revenue lost on account of the craft of the swindlers. The law and equity demand the recovery to the State of the whole amount lost. It is good to see that the High Court has done right by reversing the decision of the ITAT which would have delighted rogues of all sorts.
The Court dealt with the taxability of the receipts which the assesses had acquired through fraud by obtaining refunds by furnishing bogus TDS certificates. The A.O. treated the amount as his professional income; the CIT(A) held that chargeable under the head ‘Other Sources'; the ITAT held it non-taxable as in its view the fruits of fraud could neither come within the concept of ‘income' nor the Department can be allowed to reap any benefit therefrom through taxation. The High Court reversed the decision by the ITAT holding (i) that the Income Tax Act treats legally earned and tainted income alike; (ii) that even if the assessee is prosecuted for committing an offence, the income of the offender is liable for assessment; (iii) that the Income Tax authorities are not concerned about the manner or means of acquiring income; and (iv) that it “ is not possible for the income tax authorities to act like police to prevent the commission of unlawful acts but it is possible for the tax machinery to tax such income'.
It is easy to see that the problems, which the Assessing Officer faced in this case, fell within the inter-section of criminal-civil-taxation laws. The High Court has ably supported its propositions by analyzing a number of domestic and foreign cases. However, it is distressing that neither the tax authorities nor the High Court perceived the evident diffentia inter se the situations which were the subject-matters in the decided cases noticed, and the subject-matter of the case under their adjudication. The problems herein pertained neither to the chargeability to tax of (a) illegal gains/receipts in a legal business or profession, nor of illegal gains/receipts from illegal business or profession, nor illegal gains/receipts constituting wrongful loss to unknown persons, nor it seems to be case of illegal gains/receipts constituting wrongful loss to determinate persons but not assiduous in exercising their rights to get restitution of the property of which they are wrongfully and fraudulently deprived. The facts amply showed that the receipts were fraudulently obtained through culpable craft thereby causing wrongful loss to the Income-tax Department, and wrongful gains to the fraudster. Hence the SOURCE of the wrongful gains/receipts is fully evident: it is a crime against the Consolidated Fund of India for which the Income-tax Department exists as an agent and keeper under duty to act in terms of the provisions of the Income-tax Act, 1961.The State must get back what it has lost along with full compensation.
The litigation under the Income-tax Law is necessary but quite hazardous and risky. Who knows: the ITAT's view may ultimately prevail! A specious plea can be put forth that as nothing can be charged to tax unless there is a clear source , the receipts of fraud of criminal activities cannot be ever considered a source of income. But it can be countered by assertions that it is “more appropriate to perceive the tax powers as treating unlawful business in the same manner as lawful business”; that the concept of ‘income' is inclusive and of wide semantic province; that we have not imported the ‘the source concept of income' from the U.K. tax law, so a ‘source-less income' can also be chargeable; that the ‘taxation of illegal income is, in species, no different from the taxation of lawful income'. Much has been made by the Court of the doctrine of unjust enrichment'. It must be borne in mind that ‘the doctrine of unjust enrichment cannot be satisfied through tax proceedings only. Incidence tax on income may not be more the one third of the ill gotten receipts/gains. It is not easy to impose penalty which is levied through separate proceedings in which a fresh look on facts may lead to a different perception. The variables to be taken into account in the assessment proceedings and the penalty proceedings are materially not the same. Besides, the tax litigations are prone to face many more hazards in their litigious odyssey. So far the present case is considered we can await the final outcome of the tax litigation keeping our fingers crossed.
To say the obvious, the Department is supposed to take all possible measures so that public interest does not suffer. Even the protective assessments are allowed to be made so that the interest of the Revenue must not ever suffer. In short, the Revenue's approach to salvage its loss has to be multimodal and multifocal so that in no case one goes off the hook on this ground or that. It is always good to consider, apart from the assessment and penalty proceedings, the feasibility of setting afoot civil and criminal actions to recover its revenue lost along with interest and damages (compensatory and/or punitive). Claim would naturally be for the entire quantum of refund wrongfully obtained. On the facts of the case it can be seen that the loser is a determinate legal person (the Income-tax Department) under the legal duty to protect public interest collecting the correct quantum of tax levied as per the law. Hence the possible courses open to the Income-tax Department are: (i) to assess under the I.T. Act; (ii) to set afoot criminal proceedings against the swindlers in terms of Sections 120A, 177, 378, 415, 471, 411, and 420 of the Indian Penal Code; and/or in terms of the provisions of Chap. XXII of the Income-tax Act, 1961; (iii) and/or, thus, initiate appropriate civil and criminal actions demanding the return/restitution of the swindled sums.
In a case of this sort, civil and/or criminal actions are likely to bring to light many unnoticed dimensions of the crime against the Public Revenue. This sort of crime is never done without a set of conspirators at work, of course with a varying measure of culpability. Their profile may be complex as they may include persons from inside the Department too. Such proceedings are likely to shed light to see if the apparent offender is shielding others being the common sharers in the fruits of crime. These hidden creatures may be corporates or non-corporates for whose benefit the crime was engineered. This quest to discover the immediate and remote beneficiaries of the fruits of crime may help the Department to forge remedial actions by saving its time and energy which may get frittered away in targeting some scarecrow collusively set up.
II
Treaty-making power: How to tame the Executive
POWER is always delicious: brute power is most delicious whether exercised from the stage or via green-room. The Executive, whether in the time of the Tudors, or in the days we live have, bereft of all the covering plumage it is accustomed to put on, , share the same character. Its most conspicuous trait is the lust for uncontrolled power exercised under an opaque system to evade and escape public accountability and transparency. . In modern times the government's treaty-making power has been most abused. Its ‘democratic deficit' has been perceived. This has become a most worrisome problem in the common law countries where the Executive is clinging steadfastly to the anachronistic and fossilized British view that this power is a political decision at the international plane immune from the control of parliament and the judiciary. The framers of the US Constitution were the first to subject this exercise of power to the control of the Senate, and in some matters, like NAFTA, the WTO Treaty, to a more rigorous Congressional supervision. The Constitutional amendment (the Bricker Amendment moved in the 1950s) ceased to have a relevance because the US Supreme Court made the treaty-making power of the Executive subject to constitutional limitations. As the U.S. Supreme Court had shown in the Brown v. Board of Education of Topeka , [347 U.S. 483 (1954)] a path to the nation away from racial segregation, so did the Supreme Court do in Reid v. Covert (1957). In Britain , right from the days of the World War I, public agitation remained afoot for parliamentary sanction of treaties. Much headway was made in the matter with the framing of the Ponsonby Rule (1924) for placing treaties before Parliament for 21 sitting days. A Private Member Bill to ‘subject treaty-making power' to the British Parliament's control led, since 1997, to set up a practice to provide detailed explanatory memorandum with the text of treaties placed before Parliament. The government is conceding the popular demand inch by inch. Now a Public Bill is before the U.K. Parliament: the U.K. draft Constitutional Renewal Bill [for text see http://www.publications.parliament.uk/pa/jt200708/jtselect/jtconren/166/166.pdf]. Its effect on the Executive's treaty-making power was stated by the Right Honourable Jack Straw MP, Lord Chancellor and Secretary of State for Justice on 25 March 2008 in the House of Commons: to quote--
“Part 4 makes it a statutory requirement that treaties must be laid before both Houses of Parliament before ratification. If this House were then to vote against the ratification of a treaty, the government could not proceed to ratify it.”
In Australia the decision in Teoh's Case [(1995) 183 C.L.R273] led to the formation of the Joint Standing Committee on Treaties, a Parliamentary Committee. The Senate Legal and Constitutional Committee came out with its report entitled; Trick or Treaty? Commonwealth Power to Make and Implement Treatie s. In Australia the proposed treaty actions are placed before Parliament with ‘National Interest Analysis.' Many other procedural innovations have been made to make the executive accountable to Parliament in the matter of treaty-making. In Canada similar trends are seen though they are less efficacious. Constitutional amendment was moved to prescribe consultation with the provinces on treaties affecting their domain. There is a growing realization that the federal-democratic deficit be removed. .
The purpose of the above fleeting summary of events is just to stress the global concern how to remove the democratic deficit in treaty-making. With the exception of the British government, the executives in other Commonwealth countries seem very resistant to the idea of an effective Parliamentary control. The record of the Government of India in this matter is surely the worst. The outcry against the WTO Treaty or the Indo-U.S Nuclear Deal meant nothing for it. When in February, 1992, Shri M.A. Baby, Member of Parliament, Rajya Sabha gave a notice of his intention to introduce the Constitution (Amendment) Bill, 1992 providing that “every agreement, treaty, memorandum of understanding contract or deal….shall be laid before each House of Parliament prior to the implementation of such agreement, treaty, …… and shall operate only after it has been approved by resolutions of both Houses of Parliament” failed because of most unworthy pleadings by the leading lights of the government of the day.
Now we have some fresh breeze, some good news for our countrymen. I understand two Private Members' Bills are in the process of being moved. The Bill by Dr. Murli Manohar Joshi M.P. is for a Parliamentary enactment, the other by Mrs. Brinda Karat is for Constitutional amendment. They want Parliamentary approval of treaties before they are ratified by our government. I pray to god that whilst considering them for the legislative or the constituent act, we shall have wisdom to be fair to our democratic polity. We cannot afford not to see beyond the nose, Our people's indifference and our Parliament's inertia trapped in trivialities would make our polity languish for long. One thing more. There is a Writ Petition ( Shiva Kant Jha vs Union of India & Ors ) sub judice before the Delhi High Court against the abuse of the treaty-making power. We hope, some institution of this country of the ‘low arousal' people rises to the occasion to do something effective to remove the democratic deficit.
III
The Claim for Costs in PIL Proceedings
THE claim for costs is the sword of Damocles to which a PIL is often exposed. The concept that “costs shall abide the event” means that a party successful in litigation can get costs. There is a rich harvest of cases under the CPC. But there are a host of exceptions to the rule. ‘Intricate constitutional questions decided by the Supreme Court to declare law under Art 141 of the Constitution should be an exception to the conventional rule of costs following the event,” (AIR 1980 SC 452). To grant or not to grant costs is the discretion of the Court.
The courts have made an important distinction between (i) the merits of the claim, and (ii) the merits of bringing the claim.. As Lord Scarman aptly said:
”It enables the court to prevent abuse by busybodies, cranks, and other mischief-makers….." [1982] A.C. 617. The courts adopt pragmatic approach in making its assessment of the cause said to be of great public importance, even where the case brought to the court is lost at the end of the day.
Besides, it is proper, as was observed in Child Poverty Action Group [999] 347 1 W.L.R, that the “court must also have regard to the financial resources of the applicant and respondent, and the amount of costs likely to be in issue.” In R. v. Secretary of State for Foreign and Commonwealth Affairs, ex parte Rees-Mog [ 1994] 1 All ER 457 the Queen's Bench Division granted locus standi to Lord Rees-Mogg on the sole ground that he brought “the proceedings because of his sincere concern for constitutional issues.” It was suggested that these proceedings were no more than a continuation by other means of arguments ventilated in Parliament. But the Court observed appreciating of the petitioner: “Be that as it may, we accept without question that Lord Rees-Mogg brings the proceedings because of his sincere concern for constitutional issues.”
A PIL petitioner works for public good. In the society of our low arousal people and low arousal institutions, a PIL petitioner brings a cause before the Court only to get administrative lawlessness stopped, and to compel the public authorities to discharge their legal duty. He deserves to be appreciated rather than discouraged.
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