This article is inspired by a recent decision of the Patna High Court1 which cited administrative law principles2 to decry as “valorous overreach by a tax executive” its action to effectuate recovery “peremptorily and surreptitiously from the bank accounts of the (taxpayer) to recover tax dues” even before the appellate remedies had been exhausted by the taxpayer. The decision gains relevance as it records the pragmatic considerations motivating the recovery initiated by the tax authorities — “that the financial year is coming to an end and there are bank holidays on the immediate days following”. Interjecting such precipitate steps, the High Court not just reaffirmed that “principles of natural justice stand embedded in every coercive action taken by a statutory authority, even within the four corners of the law”3 but also issued directions injuncting coercive recovery,4 besides declaring that the “tax officer had definitely erred, that too egregiously, to the extent of his action being termed high-handed, in surreptitiously making the recovery”. The dictum of the Patna High Court is also noteworthy to the extent it inter alia posits that:
“17. … The State and its revenues would not collapse if the said amounts were not recovered but there is every chance of a business folding up without liquid funds being available to it, especially a running concern with liabilities to its employees, its other creditors and so on and so forth.
18. The actions of the tax authorities, under the taxing statute should be tempered with good conscience and judicious reasoning, which in the instant case was in complete derogation of the established principles of rule of law; reigning supreme even when there is a compulsory extraction of money for the larger good and welfare, which a levy of tax always is. The tax authority should also act as a facilitator of business and economy and not merely as an extortionist, always looking to have the pound of flesh, to satisfy his hierarchical superiors to push his/her personal agendas. We have no doubt that the action complained of, was high-handed and arbitrary.5”
The decision is, yet another, illustration of the ground realities permeating the labyrinth of the fiscal system as it is enforced in the country. In this background, this article attempts to sketch, of course on an illustrative basis, certain leading instances wherein the judiciary has been compelled to issue prescriptions against coercive measures and thereby upholding the fundamental and legal rights of the citizens by protecting them against arbitrary and abrasive exercise of executive powers.
In its observations — no less than a warning against errant conduct — the Supreme Court in its leading decision in Dabur India Ltd. v. State of U.P.6 had made its displeasure known and injuncted the tax authorities from employing any extra-legal steps or manoeuvres, declaring such:
“31. Before we part with this case, two aspects have to be adverted to — one was regarding the allegation of the petitioner that in order to compel the petitioners to pay the duties which the petitioners contended that they were not liable to pay, the licence was not being renewed for a period and the petitioners were constantly kept under threat of closing down their business in order to coerce them to make the payment. This is unfortunate. We would not like to hear from a litigant in this country that the government is coercing citizens of this country to make payment of duties which the litigant is contending not to be leviable. Government, of course, is entitled to enforce payment and for that purpose to take all legal steps but the Government, Central or State, cannot be permitted to play dirty games with the citizens of this country to coerce them in making payments which the citizens were not legally obliged to make. If any money is due to the government, the Government should take steps but not take extra-legal steps or manoeuvre. Therefore, we direct that the right of renewal of the petitioner of licence must be judged and attended to in accordance with law and the occasion not utilised to coerce the petitioners to a course of action not warranted by law and procedure.…” (emphasis added)
These observations were resounded by the Delhi High Court in its famous decision in Makemytrip (India) (P) Ltd. v. Union of India 7 wherein arrest of a taxpayer’s executive by the tax authorities towards compelling tax payments was not just declared by the High Court to be a violation of the “constitutional and fundamental rights” but also went ahead to acknowledge the right of the taxpayer to “institute appropriate proceedings in accordance with law to recover damages and/or compensation” against the errant officers. In this decision the Delhi High Court had quoted with approval the decision of the Bombay High Court in Vodafone Essar South Ltd. v. Union of India8 which had concluded therein that the conduct of the tax officers was “not only high-handed, but it is in gross abuse of the powers vested in them”, besides being an instance wherein the taxpayer was compelled to pay “the amount by threat and coercion which is not permissible in law”. The Bombay High Court had “strongly condemn the high-handed action” and hoped “that such incidents do not occur in the future”.
One can be pardoned to gather the impression that the aforesaid decisions shielding the taxpayers from precipitate recovery action are unequivocal and thus sufficient in their own right. However, ruefully, these decisions are not exception and it appears that such declarations are required on a regular basis by the courts in order to injunct extra-judicial methods of tax recovery. To illustrate this aspect, it is expedient to highlight other instances of judicial remedies being requested by the taxpayers. In fact, the illustrations in the subsequent paragraphs reveal that similar issues arise before different High Courts frequently.
Recently, the Karnataka High Court in Union of India v. BUNDL Technologies (P) Ltd.9 noted that the tax amount was paid inter alia at 1 a.m. and 4 a.m. by the taxpayer to conclude that the clearly the payment was made “involuntarily”, propelling the High Court to observe that:
“31. … no one in a society governed by rule of law can take resort to a course of action not permissible in law. A statutory power has to be exercised reasonably and in good faith, and for the purpose for which it is conferred. The power vested in any authority by law has to be exercised in consonance with the spirit as well as letter of the Act. The broader the sweeper ambit of the power, the more caution and circumspection is required while invoking such power. A statutory power has to be exercised within a system of controls and has to be exercised by relevance and reason. It needs reiteration that a statutory power should not be exercised in a manner, so as to instil fear in the mind of a person.”
The Karnataka High Court, thus, directed the tax authorities to refund the amount collected from the taxpayer. This direction was on the strength of a decision of the Punjab and Haryana High Court in Century Knitters (India) Ltd. v. Union of India 10 wherein a similar direction was issued to the tax authorities for refunding the amount to the taxpayer.11
The Bombay High Court also had occasion to examine a similar issue in its decision in Neelkamal Realtors Power (P) Ltd. v. Union of India12. Observing that the factual matrix presented to it “gives rise to a very serious issue of rule of law” insofar as the taxpayer claimed to make payment in wake of threat of arrest, the High Court accepted that this amounted to coercion to which end there was “no explanation for the unbecoming conduct of the officers of the State who are duty-bound to treat all equally. The officers’ perception about whether the petitioners would act upon the threat or not, cannot give a licence to the respondents to act in such illegal and high-handed manner”. This High Court decision also recalls that “the Supreme Court as well as our High Court has repeatedly held that rule of law has to be followed and no officers of the respondent can take law in his own hands or take extra-legal steps or manoeuvre so as to collect amounts which have not yet been held by judicial and/or quasi-judicial order as payable by the petitioners to the respondent”.
The Gujarat High Court in Abhishek Fashions (P) Ltd. v. Union of India13 had, in the wake of forceful collection even prior to confirmation of the tax liability, had reminded the tax authorities that they:
“7. … must bear in mind that they are creatures of statute and are bound by statutory law; the powers that they exercise are granted to them by the statute and there are no powers dehors the statute. Therefore, the authorities are bound to act as provided by the provisions under which they can exercise such powers. The revenue is not an organisation which is entitled to retain money without sanction of law. Therefore, without entering into the controversy as to whether payment was voluntary or otherwise, in absence of any statutory backing, the funds recovered by the respondent authorities by way of various cheques collected by them, cannot be permitted to be retained and are required to be refunded forthwith.”
Yet again, albeit recently, the Allahabad High Court in Modi Distillery v. State of U.P.14 chastised the tax authorities for pre-empting the limitation period available to the taxpayer to challenge the tax determination by way of appeal, reminding them of their legal and sacred obligations inter alia in the following terms:
“77. Before parting, it may be observed, statutory authorities must act within the confines of the law. In the present case, they ought to have waited for expiry of the period of limitation that was available to the petitioner, to file revision, before recovering the disputed amount. The beauty and predictability of the rule of law may not take seed and it may not bear fruit in a civil society, unless the State authorities discharge their powers and functions with the exactitude advised by the law. That degree of self-restraint alone lays the foundation of trust between the almighty State and its functionaries on one side and the citizen (and his associations, corporations, entities etc.), on the other. The citizen is tiny, yet he is the omnipresent entity for whom the modern-day State exists. It is his labour that generates both, the fuel i.e. the revenue as also the spark i.e. the means generated by the laws, that combusts the fuel and drives the giant engine of the State machinery, with purpose. Therefore, the State and its functionaries may never seek to outwit the citizen, either deliberately or inadvertently, by adopting any doubtful method. The citizen and all associations, corporations, entities that he forms, must be able to trust blindly, the State for compliance of the laws, as enacted and enforced, even if the former be perceived, standing in violation of the law. That, amongst others would be one test to ascertain adherence to the rule of law, under the constitutional scheme of governance.” (emphasis added)
To similar end is the direction of the Supreme Court that even if a person has been arrested for violation of the tax laws, still such person cannot be compelled to pay part of the tax dues as a condition for obtaining bail.15 In other words, rule of law has to be followed even for under trials and offenders.
The aforesaid paragraphs delineate abundance of judicial prescriptions which invalidate extra-judicial and non-legal methods for recovery of tax dues. The fact that these prescriptions flow from the constitutional courts is a helpful reminder that the tax authorities have no choice but to operate under the watchful eyes of the judiciary which would not hesitate to put the authorities to terms and ensure that their actions are in scrupulous compliance of the statutory provisions and the principles of fair play.16 Nonetheless, the very fact that such large number of precedents exist is unsettling as they grimly depict a scenario wherein the judiciary has to be repeatedly called upon to quell unlawful conduct. One would hope that the existing precedents would be sufficient to shape the future without the necessity for any incremental judicial injunction reaffirming the foundational tenets permeating the constitutional precincts regulating the exercise of executive power in fiscal space.
† Advocate, Supreme Court of India; LLM, London School of Economics; BBA, LLB (Hons.) (Double Gold Medalist), National Law University, Jodhpur. The author can be reached at firstname.lastname@example.org
1. Sita Pandey v. State of Bihar, Civil Writ Jurisdiction Case No. 5407 of 2023 dated 23-8-2023.
2. Citing the decision of the Supreme Court in R.S. Joshi v. Ajit Mills Ltd., (1977) 4 SCC 98 to the effect “38. … [t]here is a tendency for valiant tax executives clothed with judicial powers to remember their former capacity at the expense of the latter. In a welfare State and in appreciation of the nature of the judicial process, such an attitude, motivated by various reasons, cannot be commended. The penalty for deviance from these norms is the peril to the order passed. The effect of mala fides on exercise of administrative power is well established.”
5. Sita Pandey v. State of Bihar, Civil Writ Jurisdiction Case No. 5407 of 2023 dated 23-8-2023.
14. (2022) 381 ELT 604.
16. See generally, Kesar Enterprises Ltd. v. State of U.P., (2011) 13 SCC 733; Radha Krishan Industries v. State of H.P., (2021) 6 SCC 771; Nagarjuna Construction Co. Ltd. v. Govt. of A.P., (2008) 16 SCC 276.