Bombay High Court Upholds Validity Of Amendment To Finance Act; Rejects Serum Institute’s plea

Bombay High Court Upholds Validity Of Amendment To Finance Act; Rejects Serum Institute’s plea

The bench advised that matters of economic policy should be left to the wisdom of the legislature

The Bombay High Court has rejected a petition filed by the vaccine manufacturer Serum Institute of India, challenging the amendments introduced in 2015 to the Finance Act. The Act inserted sub-clause (xviii) to Section 2(24), which defines taxable income.

In the Serum Institute of India Private Limited vs. Union of India & Ors case, a Division Bench of Justice KR Shriram and Justice Neela Gokhale upheld the validity of the amendment while advising, "The economic policy matters should be best left to the wisdom of the legislature. In the context of a changed economic scenario, the expertise of the people dealing with the subject should not be interfered with. While dealing with economic legislation, the court would interfere only in those few cases where the view reflected in the legislation is not possible to be taken at all. The case of the petitioner certainly does not fall within this exception."

The amended provision that came into effect in 2016, stated that subsidies, grants, incentives, waivers, concessions, reimbursements etc. provided by the Central or the state governments would be included within the taxable income of an assessee.

Thus, while dismissing the plea of the SII, the bench stated, "We are unable to find or even assume that what the legislature has done for inserting the impugned sub-clause is irrational. There is no room for any doubt. There is nothing to even question the constitutionality. The petitioner has not been able to demonstrate a clear transgression of the constitutional principles.”

Earlier, the Serum Institute had applied to avail incentives under the 'Package Scheme of Incentives of 2013' issued by the State of Maharashtra. It included stamp duty concessions and exemption from electricity duty, Value Added Tax (VAT), Central Sales Tax (CST), and the State and Goods Services Tax (SGST) subsidy.

After the Finance Act was amended to include such incentives within the fold of the taxable income, Serum Institute challenged the amendment on the ground that the sub-clause (xviii) to Section (24) had an unintended retrospective application. It stated that the provision did not exist when the Maharashtra government’s 2013 scheme was introduced.

The vaccine manufacturer argued that by taxing the incentives, the Central government was indirectly taxing the revenue of the state, which was impermissible under the Constitution of India. It added that under the amended Act, all incentives, given in whichever form or for whatever purpose by the government, were to be treated as income irrespective of whether it was a capital or a revenue receipt.

It pointed out that earlier the capital receipts were not taxable. Capital subsidy was non-taxable by various courts, including the Supreme Court. The taxation of capital receipts was also constitutionally impermissible.

On the other hand, the Central Government countered that the Parliament possessed exclusive powers to make laws concerning any matters enumerated in List 1 of the Seventh Schedule of the Indian Constitution, including laws to tax income.

It urged the court to refer to the legislative judgment in matters relating to social and economic policies and it must not interfere unless the exercise of the legislative judgment was arbitrary.

While finding reason in the Central Government's arguments, the judges dismissed the Serum Institute’s challenge.

The bench held, "The judiciary's role is limited to ensuring conformity with the Constitution without delving into the policy merits. Overturning fiscal statutes could lead to economic chaos and undermine the authority of the legislative body. Therefore, the courts must balance the necessity to uphold constitutional mandates with the practical implications of interfering with legislative judgments in fiscal matters. The courts have the power to destroy, not to reconstruct.”

Senior Advocate Arvind Datar with Advocates Chinmoy Khadalkar, Salonee Paranjape, PC Tripathi, and Atul K Jasani appeared for the Serum Institute.

The Central government was represented by Additional Solicitor General Devang Vyas and Advocates Suresh Kumar, Anusha Amin, Sheelang Shah, Vaibhavi Choudhary, and Mohini Choughule.