The country's law officer is reported to have given the advice on a reference made by the then Finance Minister Pranab Mukherjee whose retrospective tax changes introduced in the 2012-13 budget had drawn sharp criticism from foreign investors.
Vahanvati's view came against the backdrop of Mukherjee's successor P Chidambaram ordering a review of tax provisions that have a retrospective effect, a move which is expected to help regain investor confidence.
Minister of State for Finance S S Palanimanickam last week had informed the Rajya Sabha in a written reply that Income Tax Department would take "appropriate action" with regard to a tax demand of Rs 11,218 crore from Vodafone.
"The Assessing Officer, as a quasi judicial authority, will take appropriate action in the light of the Supreme Court judgement and Section 119 of the Finance Act, 2012," the Minister had said.
The Income Tax Department on October 22, 2010 passed an order determining a tax liability (including interest) of Rs 11,218 crore on Vodafone on acquisition of Hutchinson's stake in Hutch-Essar through a deal in Cayman Islands in 2007.
The Supreme Court, however, quashed the order in January this year. After the apex court's ruling, the Income Tax Act was amended with retrospective effect to bring into tax net such deals.
Section 119 of the Finance Act, 2012 seeks to validate the October 2010 order of the Income Tax Department. The Department had also passed an order to impose a penalty of Rs 7,900 crore in April, 2011. However, the penalty demand was not enforced in view of a Supreme Court's direction dated April 15, 2011.