Case BriefsHigh Courts

Delhi High Court: The Division Bench of Manmohan and Navin Chawla, JJ., while focusing on the principles of natural justice and right to personal hearing observed that,

Faceless Assessment Scheme does not mean no personal hearing.

An assessee has a vested right to personal hearing and the same has to be given, if an assessee asks for it.

Instant petition challenged respondent 3’s action in passing the impugned final assessment order under Section 143(3) of the Income Tax Act, 1961 and the impugned notice under Section 156 of the Act for Assessment Year 2018-19.

High Court’s Reasoning

This is unable to comprehend as to how despite ‘nil’ or ‘null’ variation proposed in the show cause notice, the impugned final assessment order and notice makes a demand of Rs 1,69,77,44,240.

High Court expressed that this Court is unable to comprehend as to how despite ‘Nil’ or ‘Null’ variation proposed in the show cause notice, additions had been made to the assessed income in the draft assessment order and the final assessment order. It was noted that while the show cause notice assessed a total loss of Rs 1,76,94,91,428, the impugned final assessment order and notice made a demand of Rs 1,69,77,44,240 as if the petitioner made a super profit!

Further, as mandatorily required by Section 144B(1)(xvi) of the Income Tax Act, no show cause notice was served upon the petitioner.

Petitioner’s response was not considered, and the draft assessment order was issued and the reason for not considering the same response was a technical glitch in the online facility.

Faceless Assessment Scheme does not mean no personal hearing. Not understood as to how grant of personal hearing would either frustrate the concept or defeat the very purpose of Faceless Assessment Scheme.

Bench found that no opportunity of personal hearing was given to the petitioner even after a specific request was made.

High Court opined that a faceless assessment scheme does not mean no personal hearing.

Supreme Court’s decision in Piramal Enterprises Ltd. v. Additional/Joint/Deputy Asst. Commr. Of Income Tax, 2021 SCC OnLine Bom 1534 was referred to wherein Section 144B of the Income Tax Act was interpreted.

It is settled law that where exercise of a power results in civil consequences to citizens unless the statute specifically rules out the application of natural justice, the rules of natural justice would apply.

 High Court elaborated that where an action entails civil consequences, observance of natural justice would be warranted and unless the law specifically excludes the application of natural justice, it should be taken as implanted into the scheme.

The opportunity to provide a hearing before making any decision is considered to be a basic requirement in Court proceedings.

In the Supreme Court decision of C.B. Gautam v. Union of India, (1993) 1 SCC 78, Court invoked the same principle and held that even though it was not statutorily required, yet the authority was liable to give notice to the affected parties while purchasing their properties under Section 269-UD of the Act, namely, the compulsory purchase of the property. It was observed that though the time frame within which an order for compulsory purchase has to be made is fairly tight, yet urgency is not such that it would preclude a reasonable opportunity of being heard

Subsequently, in Sahara India (Firm) v. Commissioner of Income-tax, Central-I, [2008] 169 Taxman 328 (SC), the Supreme Court highlighted the necessity and importance of the opportunity of a pre-decisional hearing to an assesee and that too in the absence of any express provision. Infact, the requirement of following principles of natural justice was read into Section 142(2A) of the Income Tax Act following the earlier decisions of the Supreme Court in Swadeshi Cotton Mills v. Union of India, (1981) 1 SCC 664 and C.B. Gautam v. Union of India, (1993) 1 SCC 78.

Use of the expression “may” in Section 144B (7)(VIII) is not decisive where a discretion is conferred upon a quasi-judicial authority whose decision has civil consequences. The word “may” which denotes discretion should be construed to mean a command. Consequently, this Court is of the view that requirement of giving an assessee a reasonable opportunity of personal hearing is mandatory.

Stating that the non-obstante clause and the use of the expression ‘shall be made’ in Section 144B (1) creates a mandatory obligation upon the respondent/Revenue to follow the prescribed procedure, Court expressed that, the use of the expression “may” in Section 144B (7)(viii) is not decisive.

The word “may” is capable of meaning “must” or “shall” in the light of the context.

Court added that, a quasi-judicial body must normally grant a personal hearing as no assessee or litigant should get a feeling that he never got an opportunity or was deprived of an opportunity to clarify the doubts of the assessing officer/decision-maker.

The Bench suggested that, The identity of the assessing officer can be hidden/protected while granting personal hearing by either creating a blank screen or by decreasing the pixel/density/resolution.

Hence, the word “may” in Section 144B(viii) should be read as “must” or “shall” and the requirement of giving an assessee a reasonable opportunity of personal hearing is mandatory.

Conclusion

The impugned final assessment order and impugned notice issued by respondent 3 have been set aside and the matter remanded back to the Assessing Officer [Bharat Aluminium Company Ltd. v. Union of India, 2022 SCC OnLine Del 105, decided on 14-1-2022]


Advocates before the Court:

For the Petitioner: Mr Arvind Datar, Senior Advocate with Mr Gopal Mundhra, Advocate.

For the Respondents: Mr Gigi C. George, Advocate for UOI.

Mr Sanjay Kumar, Advocate for Revenue.

Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal (ITAT): Coram of Anil Chaturvedi (Accountant Member) and Suchitra Kamble (Judicial Member) allowed the appeal filed by the assessee challenging the assessment order made by the Income Tax authorities.

The assessee society was duly registered, and the renewal was granted for the period of 5 years. Society was granted registration under Section 12AA of the Income-tax Act, 1961. The society was granted an exemption under Section 10(23C) (vi) of the Income Tax Act. The return of income filed was filed declaring NIL income.

Assessing Officer made addition of Rs 93,88,000 towards net surplus from hostel activity and also disallowed Rs 3,26,11,455 regarding the claim of depreciation made by the assessee.

Being aggrieved by the assessment order the appeal of the assessee was partly allowed.

Analysis, Law and Decision

Tribunal stated that it was undisputed that the assessee was carrying educational activity.

Income from these activities declared by the assessee was NIL and the assessee earned gross receipt of Rs 16,26,69,407 on account of educational activity whereas the assessee was also running hostels for the students as per the UGC Guidelines which is an ancillary activity.

Tribunal further expressed that, in the absence of any evidence to show that the hostel facilities were provided to anybody other than students and staff of the trust, the hostel facilities provided by the educational institution shall be construed to be the intrinsic part of the ‘educational activities’ of the assessee and they cannot be considered different than activities of the society of ‘education’.

Hence, the addition amounting to Rs 93,00,088 made by the AO and sustained by the CIT(A) was not correct.

CIT(A) and the Assessing Officer failed to consider that the hostel facility is incidental to achieve the object of providing education as per object of the society and hence comes under the charitable purpose which is exempt under Section 11 of the Income Tax Act, 1961. 

In light of the decision of Supreme Court in CIT v. Rajsthani & Gujarati Charitable Foundation Poona, wherein it was held that the depreciation in respect of cost of the assets allowed to the assessee as expenditure is allowable, the issue regarding the depreciation in respect of hostel facilities was squarely covered in favour of the assessee.

In view of the above discussion, the appeal of the assessee was allowed. [Ideal Institute of Technology Society v. JCIT, 2021 SCC OnLine ITAT 662, decided on 3-11-2021]


Advocates before the Tribunal:

Appellant by: Sh. C. S. Aggarwal, Sr. Adv, Sh. Ravi Pratap Mall, Adv

Respondent by: Ms Sunita Singh, CIT DR

Case BriefsTribunals/Commissions/Regulatory Bodies

Customs, Excise and Services Tax Appellate Tribunal (CESTAT): P. Dinesha (Judicial Member) allowed an appeal which was filed with the point of consideration of eligibility of the appellant for refund of 4% of Special Additional Duty (SAD). The appellant made the above claim for refund and after due adjudication, the Assistant Commissioner rejected 4% SAD being time barred in terms of the above Notification. The Commissioner of Customs (Appeals), Cochin upheld the rejection against which, the present appeal had been filed before this forum.

Counsel for the appellant contended that neither the statute nor the original notification prescribed any limitation for claiming the refund of SAD and hence, imposition of time restriction by an Amending notification is clearly bad in law.

The Tribunal after hearing the contentions was of the view that appellant was correct in claiming refund of 4% SAD which was in terms with the settled position.

The Tribunal explained that the doctrine of precedence only mandates that it is the ratio in the decision of higher courts to be followed, and not conclusions. The Tribunal was of the view that it will be wholly inappropriate to choose views of one of the High Courts based on perceptions about reasonableness of the respective viewpoints, as such an exercise will de facto amount to sitting in judgment over the views of the Hon’ble High Courts- something diametrically opposed to the very basic principles of hierarchical judicial system. When there is a reasonable interpretation of a legal and factual situation, which is favourable to the assessee, such an interpretation is to be adopted.

The Tribunal further held that High Court’s judgment in favour of the assessee, in the light of this legal principle laid down by Supreme Court, is to be preferred over the Hon’ble non-jurisdictional High Court not favourable to the assessee finding guidance from the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192.

The appeal was allowed holding the denial of refund is bad in law.[John’s Cashew Co. v. Commr. Of Customs, 2021 SCC OnLine CESTAT 2598, decided on 18-10-2021]


Suchita Shukla, Editorial Assistant has reported this brief.


 

Legislation UpdatesRules & Regulations

The Central Board of Direct Taxes has notified the Income-tax (30th Amendment) Rules, 2021 vide notification dated 24th September, 2021.

  • The amendment has amended Rule 10D of the Income Tax Act and further extended the applicability of provisions under Rule 10D for assessment years 2020-21 and 2021-22. They shall be deemed to have come into force from the April 1, 2021.
  • Rule 10D of Income tax Rules states that where an eligible assessee has entered into an eligible international transaction and the option exercised by the said assessee is valid, the transfer price declared by the assessee in respect of such transaction shall be accepted by the income tax authorities, if it is in accordance with the circumstances provided in the rule.

 


*Tanvi Singh, Editorial Assistant has reported this brief.

Case BriefsTribunals/Commissions/Regulatory Bodies

Customs, Excise and Services Tax Appellate Tribunal (CESTAT): The Coram of Dilip Gupta (President) and C.J. Mathew (Technical Member) allowed an appeal which was filed against the order passed by Principal Commissioner of Central Excise, New Delhi, by which the demand of service tax had been confirmed with interest and penalty.

Appellant had been engaged in rendering air travel agent and other tour related services and during the period of dispute the appellant was rendering air travel agent services to the Embassy of the United States of America. The appellant claimed that it was the sole and exclusive service provider for the US Embassy and operated from a desk set up within the premises of the US Embassy. On such services, the appellant was availing exemption from payment of service tax in terms of Notification dated 23-05-2007 till 30-06-2012 and, thereafter, under Notification dated 20-06-2012. These Notifications exempted services rendered to diplomatic mission or consular posts in India from payment of service tax. In 2014, an investigation was initiated and audit of the records of the appellant was conducted in terms of rule 5A of the Service Tax Rules, 19944. During the audit, it was observed that the appellant was incorrectly availing exemption on services rendered to the US Embassy. The audit resulted into issuance of a show cause notice dated 16.04.2014 proposing to deny the exemption as a result of which a demand of service tax amounting to Rs. 81,11,575 was made. Principal Commissioner had passed the impugned order dated 30-09-2015 denying the exemption to the appellant and confirming the demand of service tax with penalty.

The four issues framed by the Principal Commissioner were:

(a) Whether the exemption contained in the Notification dated 23.05.2007 upto 30.06.2012 and Notification dated 20.06.2012 w.e.f. 01.07.2012 is available to the appellant for the services provided by it to the US Embassy despite the non-fulfillment of the conditions laid down in the said Notifications and whether, the service tax can be recovered and demanded from the appellant in the event it is not entitled to the exemption?

(b) Whether the appellant fulfilled its duty for amending the changed address in the Registration Certificate as per the provisions of Act and if not so, whether penalty is leviable?

(c) Whether the extended time period can be invoked?

(d) If yes, whether the appellant is liable for payment of interest & penalty under the provisions of Act/Rules, as alleged in the show cause notice?”

Bare perusal of the Notification in issue dated 23-05-2007 indicated that the following conditions have to be satisfied:

  1. Services must have been rendered to a diplomatic mission or consular post in India;
  2. The Protocol Division of the Ministry of External Affairs11 must issue a certificate to the specified diplomatic mission or consular post in India stating that it is entitled to claim exemption from payment of service tax;

iii. The diplomatic mission or consular office must provide the taxable service provider an authenticated copy of such certificate along with an original undertaking (signed and serially numbered) stating that the services have been received for official purpose; and

  1. The invoice raised by the service provider must carry the date and serial number of the undertaking.

In the present case the first condition was fulfilled second condition states that the Protocol Division must issue a certificate to the diplomatic/consular post in India. In this regard, the US Embassy was issued certificates from the Protocol Division and this has not been disputed by the Department and third condition relates to providing certificates and original undertakings by the diplomatic mission/ consular post in India to the service provider. Fourth condition to the Exemption Notification mentions that the invoices issued by the service provider must carry the serial number and date of the undertaking. The purpose of this condition is to ensure proper correlation between the services rendered and the exemption claimed by the service provider. The show cause notice has alleged that the invoices did not carry the serial number of the undertakings. The exemption was sought to be denied on this ground and the impugned order has also confirmed such denial.

Counsel for the appellant submitted that from the entire chain of the aforesaid documents there was no room to doubt that the services were rendered by the appellant to the US Embassy and such services were exempted by virtue of the undertaking and certificate provided by the US Embassy to the appellant.

The Tribunal explained that Notifications was issued by the Central Government of India in the public interest to exempt taxable services provided to a foreign diplomatic mission or consular post in India. As is evident from clause (i) of both the Notifications, the underlying purpose is to uphold the principle of reciprocity amongst the nations. It is only to ensure that there is no evasion of tax and that services have been rendered specifically to those diplomatic missions/ consular officers to whom a certificate has been issued by the Protocol Officer that the Notifications require a correlation to be established between the invoices and the undertakings. Once these two documents can be correlated, though not in a manner provided for, the substantive conditions to the Exemption Notifications stand fulfilled and the exemption cannot be denied and considered the judgments in Lakshmiratan Engineering Works Ltd. v. Assistant Commr. (Judicial) l Sales Tax, 1967 (9) TMI 116, J.K. Manufacturers Ltd. v. Sales Tax Officer, 1969 (5) TMI 54 and Chunni Lal Parshadi Lal v. Commr. of Sales Tax, 1986 (3) TMI 297.

The Tribunal further made it clear that even when an assessee has suppressed facts, the extended period of limitation can be invoked only when “suppression‟ or “collusion” is wilful with an intent to evade payment of duty. The invocation of the extended period of limitation, therefore, cannot be sustained.

The appeal was allowed by the Tribunal.[SOTC Travels Services (P) Ltd. v. Principal Commr. Of CE, 2021 SCC OnLine CESTAT 2574, decided on 20-09-2021]


Suchita Shukla, Editorial Assistant has reported this brief.

Case BriefsSupreme Court

Supreme Court: In an important ruling on taxation law, the bench of Sanjay Kishan Kaul and Hrishikesh Roy*, JJ has held that the proportionate disallowance of interest is not warranted, under Section 14A of Income Tax Act for investments made in tax free bonds/ securities which yield tax free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments.

Issue

Whether Section 14A of the Income Tax Act, 1961, enables the Department to make disallowance on expenditure incurred for earning tax free income in cases where assessees like the present appellant, do not maintain separate accounts for the investments and other expenditures incurred for earning the tax-free income?

What does Section 14A state?

In Section 14, the various incomes are classified under Salaries, Income from house property, Profit & Gains of business or profession, Capital Gains & Income from other sources.

The Section 14A relates to expenditure incurred in relation to income which are not includable in Total Income and which are exempted from tax. No taxes are therefore levied on such exempted income. The Section 14A had been incorporated in the Income Tax Act to ensure that expenditure incurred in generating such tax exempted income is not allowed as a deduction while calculating total income for the concerned assessee.

Legislative history

Section 14A was introduced to the Income Tax Act by the Finance Act, 2001 with retrospective effect from 01.04.1962, in aftermath of judgment in the case of Rajasthan State Warehousing Corporation Vs. CIT, (2000) 3 SCC 126. The said Section provided for disallowance of expenditure incurred by the assessee in relation to income, which does not form part of their total income.

“As such if the assessee incurs any expenditure for earning tax free income such as interest paid for funds borrowed, for investment in any business which earns tax free income, the assessee is disentitled to deduction of such interest or other expenditure.”

Although the provision was introduced retrospectively from 01.04.1962, the retrospective effect was neutralized by a proviso later introduced by the Finance Act, 2002 with effect from 11.05.2001 whereunder, re-assessment, rectification of assessment was prohibited for any assessment year, up-to the assessment year 2000-2001, when the proviso was introduced, without making any disallowance under Section 14A. The earlier assessments were therefore permitted to attain finality. As such the disallowance under Section 14A was intended to cover pending assessments and for the assessment years commencing from 2001-2002.

Facts

  • In the case at hand, the Court was concerned with disallowances made under Section 14A for assessment years commencing from 2001-2002 onwards or for pending assessments.
  • The assessees are scheduled banks and in course of their banking business, they also engage in the business of investments in bonds, securities and shares which earn the assessees, interests from such securities and bonds as also dividend income on investments in shares of companies and from units of UTI etc. which are tax free.
  • None of the assessee banks amongst the appellants, maintained separate accounts for the investments made in bonds, securities and shares wherefrom the tax-free income is earned so that disallowances could be limited to the actual expenditure incurred by the assessee.
  • In absence of separate accounts for investment which earned tax free income, the Assessing Officer made proportionate disallowance of interest attributable to the funds invested to earn tax free income by referring to the average cost of deposit for the relevant year.
  • The CIT (A) had concurred with the view taken by the Assessing Officer.
  • The ITAT in Assessee’s appeal against CIT(A) considered the absence of separate identifiable funds utilized by assessee for making investments in tax free bonds and shares but found that assessee bank is having indivisible business and considering their nature of business, the investments made in tax free bonds and in shares would therefore be in nature of stock in trade. The ITAT then noticed that assessee bank is having surplus funds and reserves from which investments can be made. Accordingly, it accepted the assessee’s case that investments were not made out of interest or cost bearing funds alone and held that disallowance under Section 14A is not warranted, in absence of clear identity of funds.
  • The decision of the ITAT was reversed by the High Court.

Analysis

The Supreme Court took note of the fact that the CIT(A) and the High Court had based their decision on the fact that the assessee had not kept their interest free funds in separate account and as such had purchased the bonds/shares from mixed account. This is how a proportionate amount of the interest paid on the borrowings/deposits, was considered to have been incurred to earn the tax-free income on bonds/shares and such proportionate amount was disallowed applying Section 14A of the Act.

It, however, explained that

“In a situation where the assessee has mixed fund (made up partly of interest free funds and partly of interest-bearing funds) and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest free fund. To put it another way, in respect of payment made out of mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it may not be permissible for the Revenue to make an estimation of a proportionate figure.”

The Court, hence, held that if investments in securities is made out of common funds and the assessee has available, non-interest-bearing funds larger than the investments made in tax- free securities then in such cases, disallowance under Section 14A cannot be made.

[South Indian Bank v. CIT,  2021 SCC OnLine SC 692, decided on 09.09.2021]


*Judgment by: Justice Hrishikesh Roy

Know Thy Judge | Justice Hrishikesh Roy

Appearances before the Court by:

For Appellants: Senior Advocates S. Ganesh, S.K. Bagaria, Jehangir Mistri and Joseph Markose,

For Respondent/Revenue: ASG Vikramjit Banerjee and Senior Advocate Arijit Prasad

Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal (ITAT): A two-Member Bench of Pramod Kumar, Vice President and Amarjit Singh, Judicial Member, referred a seminal question to be decided by a larger Bench of three or more Members of the Income Tax Appellate Tribunal (“ITAT”). The two-Member Bench dubbed it as:

“[A] macro issue that touches upon the tax liability of virtually every company which has residents of a tax treaty partner jurisdiction as shareholders, and has substantial revenue implications.”

The present appeal (filed by the Income Tax Department) and cross-objection (filed by the assessee) called into question the correctness of the order passed by the Commissioner of Income Tax (Appeals) in the matter of assessment under Section 143(3) of the Income Tax Act, 1961, for the assessment year 2016-17.  One of the issues raised in the present matter (by way of one of the grounds taken by the assessee in cross-objection) was that:

“The Assessing Officer be directed to compute the tax payable by the assessee under Section 115-O of the Income Tax Act, 1961 at the rate prescribed in the Double Taxation Avoidance Agreement between India and France in respect of dividend paid by the assessee to the non-resident shareholders i.e., Total Marketing Services and Total Holdings Asie, a tax resident of France.”

Material Facts and Assessee’s Contention

The assessee company has some non-resident tax holders fiscally domiciled in France. The assessee has paid dividend distribution tax under Section 115-O of the Income Tax Act. The short case of the assessee is that since the shareholders of the assessee company are entitled to the benefits of the India France Double Taxation Avoidance Agreement (“Indo French Tax Treaty”), the dividend distribution tax paid by the assessee, which is nothing but a tax on dividend income of the shareholders, cannot exceed the rate at which, under the Indo French Tax Treaty, such dividends can be taxed in the hands of the non-resident shareholders in question

Preliminary Objections by Income Tax Department

The appellant−Income Tax Department raised various preliminary objections to the cross-objection filed by the respondent−assessee, which were rejected by the ITAT. The first objection was that the cross-objection filed by the assessee was time-barred. Perusing the material on record, the ITAT was satisfied that the memorandum of cross-objection was filed within the time limit.

Another objection was about the assessee’s claim of treaty protection. It was contended that the claim so far as the rate of dividend distribution tax is concerned, was never raised before any of the authorities below, and no fresh issue can be raised by way of a cross-objection filed under Section 253(4) of the Income Tax Act. Negating this, the ITAT opined that there is a legal parity in the appeal and the cross-objection inasmuch as the issues which can be raised in an appeal can also be raised in a cross-objection. There cannot be any justification in restricting the scope of issues which can be raised in a cross-objection. Whatever issues, therefore, can be raised by way of an appeal are the issues that can be raised by way of a cross-objection.

Reference to Larger Bench

On the main issue (as noted above), the assessee contended that the matter is covered by the decisions of other Coordinate Benches. The assessee submitted that following the principles of consistency, the issue does not require a reference to Special Bench. The ITAT was urged to follow the Coordinate Benches and remit the matter to the file of the Assessing Officer for reconsideration in the light of the same.

For rejecting this submission, the ITAT found force in the Supreme Court decision in Union of India v. Paras Laminates (P) Ltd., (1990) 4 SCC 453. It was observed by ITAT that the assessee’s submission that the ITAT President cannot constitute a Special Bench in the absence of conflict of opinions by the Division Benches is incorrect and untenable in law. Of course, it is for the President to take a considered call on whether or not it is a fit case for constitution of a Special Bench, but, in the event of his holding the view that it is indeed a fit case to constitute a Special Bench, he is not denuded of the powers to do so on account of lack of conflict in the views of the Division Benches.

Thereafter, the ITAT set out its reasons for doubting the correctness of the decisions of the Coordinate Benches, on the dividend distribution tax rate being restricted by the treaty provision dealing with taxation of dividends in the hands of the shareholders (i.e. Article 11 of the Indo French Tax Treaty, as in the present case):

  • The payment of dividend distribution tax under Section 115-O does not discharge the tax liability of the shareholders. It is a liability of the company and discharged by the company. Whatever be the conceptual foundation of such a tax, it is not a tax paid by, or on behalf of, the shareholder. Therefore, dividend distribution tax cannot be treated as a tax on behalf of the recipient of dividends, i.e. the shareholders.
  • Under the scheme of the tax treaties, no tax credits are envisaged in the hands of the shareholders in respect of dividend distribution tax paid by the company in which shares are held. The dividend distribution tax thus cannot be equated with a tax paid by, or on behalf of, a shareholder in receipt of such a dividend. In fact, the payment of dividend distribution tax does not, in any manner, prejudice the foreign shareholder, and any reduction in the dividend distribution tax does not, in any manner, act to the benefit of the foreign shareholder resident in the treaty partner jurisdiction. This taxability is wholly tax-neutral vis-à-vis foreign resident shareholder and the treaty protection, when given in respect of dividend distribution tax, can only benefit the domestic company concerned. The treaty protection thus sought goes well beyond the purpose of the tax treaties.
  • It is to stretch things a bit too far to say that even when tax burden is shifted from a resident of the tax treaty partner jurisdiction to resident of another jurisdiction, the tax burden on another person, who is not eligible for tax treaty benefits anyway, will nevertheless be subjected to the same level of tax treaty protection. . Such a proposition does not even find mention in any tax treaty literature, and therefore the present decision, extending the tax treaty protection to the company paying dividends, in respect of dividend tax distribution tax, appears to be a solitary decision of its kind.
  • Wherever the Contracting States to a tax treaty intended to extend the treaty protection to the dividend distribution tax, it has been so specifically provided in the tax treaty itself. In the absence of such a provision, it cannot be inferred as such.
  • A tax treaty protects taxation of income in the hands of residents of the treaty partner jurisdictions in the other treaty partner jurisdiction. Therefore, in order to seek treaty protection of an income in India under the Indo French Tax Treaty, the person seeking such treaty protection has to be a resident of France. The expression ‘resident’ is defined, under Article 4(1) of the Indo French Tax Treaty, as “any person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature”. Obviously, the company incorporated in India, i.e. the assessee in the present case, cannot seek treaty protection in India ─ except for the purpose of, in deserving cases, where the cases are covered by the nationality non-discrimination under Article 26(1), deductibility non-discrimination under Article 26(4), and ownership non-discrimination under Article 24(5). as, for example, Article 26(5) specifically extends the scope of tax treaty protection to the “enterprises of one of the Contracting States, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State”. The same is the position with respect of the other non-discrimination provisions. No such extension of the scope of treaty protection is envisaged, or demonstrated, in the present case. When the taxes are paid by the resident of India, in respect of its own liability in India, such taxation in India, cannot be protected or influenced by a tax treaty provision, unless a specific provision exists in the related tax treaty enabling extension of the treaty protection.
  • Taxation is a sovereign power of the State ─ collection and imposition of taxes are sovereign functions. Double Taxation Avoidance Agreement is in the nature of self-imposed limitations of a State’s inherent right to tax, and these DTAAs divide tax sources, taxable objects amongst themselves. Inherent in the self-imposed restrictions imposed by the DTAA is the fact that outside of the limitations imposed by the DTAA, the State is free to levy taxes as per its own policy choices. The dividend distribution tax, not being a tax paid by or on behalf of a resident of treaty partner jurisdiction, cannot thus be curtailed by a tax treaty provision.

For all these reasons independently, as also taken together, the ITAT was of the considered view that it is a fit case for the constitution of a Special Bench, consisting of three or more Members, so that all the aspects relating to this issue can be considered in a holistic and comprehensive manner. The question which may be referred for the consideration of Special Bench consisting of three or more Members, subject to the approval of, and modifications by, the ITAT President, is as follows:

“Whether the protection granted by the tax treaties, under Section 90 of the Income Tax Act, 1961, in respect of taxation of dividend in the source jurisdiction, can be extended, even in the absence of a specific treaty provision to that effect, to the dividend distribution tax under Section 115-O in the hands of a domestic company?”

The Registry was directed to place the matter before the ITAT President for appropriate orders. [CIT v. Total Oil (India) (P) Ltd.,  2021 SCC OnLine ITAT 367, dated 23-6-2021]

Case BriefsSupreme Court

Supreme Court: Interpreting the true scope of Section 80-IA(5) of the Income Tax Act, 1961, the bench of L. Nageswara Rao* and Vineet Saran, JJ has held that the scope of sub-section (5) of Section 80- IA of the Act is limited to determination of quantum of deduction under sub-section (1) of Section 80-IA of the Act by treating ‘eligible business’ as the ‘only source of income’.

Provision in question

Sub-section (1) and sub-section (5) of Section 80-IA which are relevant for these Appeals are as under:

“80-IA. Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.— (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent. of the profits and gains derived from such business for ten consecutive assessment years.

* * * *

(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of subsection (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.”

The essential ingredients of Section 80-IA (1) of the Act are:

  1. a) the ‘gross total income’ of an assessee should include profits and gains;
  2. b) those profits and gains are derived by an undertaking or an enterprise from a business referred to in subsection (4);
  3. c) the assessee is entitled for deduction of an amount equal to 100% of the profits and gains derived from such business for 10 consecutive assessment years; and
  4. d) in computing the ‘total income’ of the Assessee, such deduction shall be allowed.

The import of Section 80-IA is that the ‘total income’ of an assessee is computed by taking into account the allowable deduction of the profits and gains derived from the ‘eligible business’.

Background

In the case at hand, the ‘gross total income’ of the Assessee for the assessment year 2002-03 was less than the quantum of deduction determined under Section 80-IA of the Act. The Assessee contended that income from all other heads including ‘income from other sources’, in addition to ‘business income’, have to be taken into account for the purpose of allowing the deductions available to the Assessee, subject to the ceiling of ‘gross total income’. The Appellate Authority was of the view that there is no limitation on deduction admissible under Section 80-IA of the Act to income under the head ‘business’ only.

The Court was hearing a case where the Revenue had argued that sub-section (5) of Section 80-IA refers to computation of quantum of deduction being limited from ‘eligible business’ by taking it as the only source of income.

“… the language of sub-section (5) makes it clear that deduction contemplated in sub-section (1) is only with respect to the income from ‘eligible business’ which indicates that there is a cap in sub-section (1) that the deduction cannot exceed the ‘business income’.”

On the other hand, the Assessee had argued that sub-section (5) pertains only to determination of the quantum of deduction under sub-section (1) by treating the ‘eligible business’ as the only source of income.

The claim of the Assessee was that in computing its ‘total income’, deductions available to it have to be set-off against the ‘gross total income’, while the Revenue contends that it is only the ‘business income’ which has to be taken into account for the purpose of setting-off the deductions under Sections 80-IA and 80-IB of the Act

Analysis and conclusion

In Synco Industries Ltd. v. Assessing Officer, Income Tax, Mumbai, (2008) 4 SCC 22, the Supreme Court was concerned with Section 80-I of the Act. Section 80-I(6), which is in pari materia to Section 80-IA(5), is as follows:

“ 80-I(6) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean-going vessels or other powered craft to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under subsection (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or the business of the hotel or the business of repairs to ocean-going vessels or other powered craft were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.”

It was held in Synco Industries that

  • for the purpose of calculating the deduction under Section 80-I, loss sustained in other divisions or units cannot be taken into account as sub-section (6) contemplates that only profits from the industrial undertaking shall be taken into account as it was the only source of income.
  • Section 80-I(6) of the Act dealt with actual computation of deduction whereas Section 80-I(1) of the Act dealt with the treatment to be given to such deductions in order to arrive at the total income of the assessee.

In CIT (Central), Madras v. Canara Workshops (P) Ltd., Kodialball, Mangalore, (1986) 3 SCC 538, the question that arose for consideration before this Court related to computation of the profits for the purpose of deduction under Section 80-E, as it then existed, after setting off the loss incurred by the assessee in the manufacture of alloy steels. Section 80-E of the Act, as it then existed, permitted deductions in respect of profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule. It was argued on behalf of the Revenue that the profits from the automobile ancillaries industry of the assessee must be reduced by the loss suffered by the assessee in the manufacture of alloy steels.

The Court was, however, not in agreement with the submissions made by the Revenue. It was, hence, held that the profits and gains by an industry entitled to benefit under Section 80-E cannot be reduced by the loss suffered by any other industry or industries owned by the assessee.

Referring to the aforesaid authorities, the Court held that

“… Sub-section (5) cannot be pressed into service for reading a limitation of the deduction under sub-section (1) only to ‘business income’.”

[CIT v. Reliance Energy Ltd., 2021 SCC OnLine SC 349, decided on 28.04.2021]


Judgment by: Justice L. Nageswara Rao 

Know Thy Judge| Justice L. Nageswara Rao

For Revenue: Senior Advocate Arijit Prasad

For Assessee: Senior Advocate Ajay Vohra

Case BriefsSupreme Court

Supreme Court: Dealing with an important question as to the constitutional validity of the third proviso to Section 254(2A) of the Income Tax Act, 1961, the 3-judge bench of RF Nariman*, BR Gavai and Hrishikesh Roy, JJ has held that any order of stay shall stand vacated after the expiry of the period or periods mentioned in the Section only if the delay in disposing of the appeal is attributable to the assessee.

Section 254 (2A) of the Income Tax Act states that “In every appeal, the Appellate Tribunal, where it is possible, may hear and decide such appeal within a period of four years from the end of the financial year in which such appeal is filed under sub-section (1) or sub-section (2) of section 253”

However, the third proviso provides that “if such appeal is not so disposed of within the period allowed under the first proviso or the period or periods extended or allowed under the second proviso, which shall not, in any case, exceed three hundred and sixty-five days, the order of stay shall stand vacated after the expiry of such period or periods, even if the delay in disposing of the appeal is not attributable to the assessee.”

By a judgment dated 19.05.2015, the Delhi High Court struck down that part of the third proviso to Section 254(2A) of the Income Tax Act which did not permit the extension of a stay order beyond 365 days even if the assessee was not responsible for delay in hearing the appeal. The Revenue, hence, challenged the said judgment and several other judgments from various High Courts holding the same.

The Delhi High Court, in it’s judgment, held that

“Unequals have been treated equally so far as assessees who are responsible for delaying appellate proceedings and those who are not so responsible, resulting in a violation of Article 14 of the Constitution of India.”

Agreeing to the said reasoning, the Supreme Court added,

“This is a little peculiar in that the legislature itself has made the aforesaid differentiation in the second proviso to Section 254(2A) of the Income Tax Act, making it clear that a stay order may be extended upto a period of 365 days upon satisfaction that the delay in disposing of the appeal is not attributable to the assessee.”

It was further explained that ordinarily, the Appellate Tribunal, where possible, is to hear and decide appeals within a period of four years from the end of the financial year in which such appeal is filed. It is only when a stay of the impugned order before the Appellate Tribunal is granted, that the appeal is required to be disposed of within 365 days. So far as the disposal of an appeal by the Appellate Tribunal is concerned, this is a directory provision. However, so far as vacation of stay on expiry of the said period is concerned, this condition becomes mandatory so far as the assessee is concerned.

“The object sought to be achieved by the third proviso to Section 254(2A) of the Income Tax Act is without doubt the speedy disposal of appeals before the Appellate Tribunal in cases in which a stay has been granted in favour of the assessee. But such object cannot itself be discriminatory or arbitrary…”

The Court, hence, concluded:

  • Since the object of the third proviso to Section 254(2A) of the Income Tax Act is the automatic vacation of a stay that has been granted on the completion of 365 days, whether or not the assessee is responsible for the delay caused in hearing the appeal, such object being itself discriminatory, was held liable to be struck down as violating Article 14 of the Constitution of India.
  • Also, the said proviso would result in the automatic vacation of a stay upon the expiry of 365 days even if the Appellate Tribunal could not take up the appeal in time for no fault of the assessee.
  • Further, vacation of stay in favour of the revenue would ensue even if the revenue is itself responsible for the delay in hearing the appeal. In this sense, the said proviso is also manifestly arbitrary being a provision which is capricious, irrational and disproportionate so far as the assessee is concerned.

Hence, partially upholding the validity of the third proviso to Section 254(2A) of the Income Tax Act, the Court held that the same will now be read without the word “even” and the words “is not” after the words “delay in disposing of the appeal”. Therefore, any order of stay shall stand vacated after the expiry of the period or periods mentioned in the Section only if the delay in disposing of the appeal is attributable to the assessee.

[Deputy Commissioner of Income Tax v. Pepsi Foods Ltd., 2021 SCC OnLine SC 283, decided on  06.04.2021]


*Judgment by Justice RF Nariman

Know Thy Judge| Justice Rohinton F. Nariman

Appearances before the Court by:

For Revenue: ASG Bikarma Banerjee

For Assessees: Senior Advocate Ajay Vohra and Advocates Himanshu S. Sinha, Deepak Chopra and  Sachit Jolly

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ITAT’s power to grant stay: Is the Supreme Court decision in Pepsi Foods the last word?

Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal, Bangalore: Dealing with the issue of whether the CIT(A) was justified in confirming the addition of amount representing 15% of the sale proceeds deducted by the Monitory committee from e-auction sale of mineral stock belonging to the Assessee and which was contributed to SPV, as per the direction given by the Supreme Court,  the ITAT held that the amount deducted @ 15% from the sale proceeds constitute trading receipts in the hands of the Assessee, but at the same time it is allowable as deduction u/s 37(1) of the Income Tax Act, 1961.

Over rampant mining in the state Karnataka the Supreme Court in the case of Samaj Parivartana Samudaya v. State of Karnataka, (2019) 17 SCC 753 imposed a complete ban on mining in the district of Bellary. Further, after application and request the mining work was resumed after categorizing the mines in three segments ‘A’, ‘B’ and ‘C’, depending on various types of violations by Lessee and financial obligation were created on account of damages and loss caused to the forest and environment by contravention of laws

The Assessee was a partnership firm and is engaged in the business of extraction of iron ore by taking lease of lands from Government. The mines owned by the Assessee herein have been categorised as “B” category mines. Hence 15% of sale, proceeds have been deducted by Monitoring Committee during the years under consideration.

The Assessee had reduced the above-said amounts from the gross sale proceeds and accordingly declared only net sale proceeds as its income in both the years. Assessment proceedings were initiated whereby the AO held that: –

  1. Entire sale proceeds as per E-auction bit sheets/invoices has to be assessed to tax as trading receipts. Hence it constitutes income in the hands of the Assessee.
  2. The amount retained by CEC/MC, as per directions of the Supreme Court on behalf of the Assessee, which is given to the Special Purpose Vehicle (SPV) is on account of damages and loss caused to the forest and environment by contravention of laws. The said amount cannot be allowed as deduction out of sale proceeds even after the accrual of such liability which is being compensation and penal in nature for contravention of laws. The amount so retained for adjusting penalty and other liabilities is nothing but the appropriation of the profit of the Assesse
  3. SPV established for Social-economic development of the mining area is nothing but relating to Corporate Social responsibility only. Hence it is not allowable u/s 37(1), as it was not incurred by the Assessee wholly and exclusively for the purpose of business. It was retained to meet the penal and other liabilities for contravention of law and therefore, the said amount cannot be allowed as deduction in view of the specific Explanation to section 37(1) of the Act.

The CIT(A) confirmed the view taken by the AO. Being aggrieved by the said order, the Assessee preferred an Appeal before the ITAT, whereby ITAT held that:

“It cannot be said that these amounts are penal in nature. The Assessee could not have resumed the mining operations. Therefore, these expenses are incidental to carrying on the business and hence allowable u/s 37(1) of the Act.”

“In view of the foregoing discussions and also following the decision rendered by the co-ordinate benches, we hold that the amount deducted @ 15% from the sale proceeds constitute trading receipts in the hands of the Assessee, but at the same time it is allowable as deduction u/s 37(1) of the Act. Accordingly, we set aside the order passed by Ld. CIT(A) on this issue in both the years under consideration and direct the AO to delete the impugned addition in both the years.”

Thus the Appeal preferred by the Assessee was allowed and the ITAT was pleased to hold the amount deducted @ 15% from the sale proceeds constitute trading receipts in the hands of the Assessee, but at the same time it is allowable as deduction u/s 37(1) of the Act.

 [M/s. M. Hanumantha Rao Vs. A.C.I.T I.T.A. No. 3298 % 3299/Bang/2018. Decided on 25.02.2021].


† Advocate, Supreme Court of India and Delhi High Court 

Case BriefsTribunals/Commissions/Regulatory Bodies

Income-tax Appellate Tribunal, New Delhi: Dealing with the issue of enhancement by CIT(A) which was never therein the reasons recorded for reopening the assessment. The ITAT was pleased to hold that the CIT(A) exceeded his jurisdiction in making the enhancement on an issue which was never there in the reasons recorded for reopening the assessment.

The Assessee is a resident of Meerut and has been filing his return from the same address before the ITO, Ghaziabad. On the basis of an AIR information ITO, Ghaziabad initiated reassessment proceedings. The information suggested that Assessee has purchased property. All the notices and intimations were issued to the address which was mentioned in the transfer deed of the property. Since all the notices were served at this address, where the Assessee was not residing he could not respond to the notices and the assessment was framed ex parte u/s 144/147 of the Act.

Being aggrieved by the order passed by the Assessing Officer, the Assessee preferred an appeal before the CIT(A). CIT(A) was pleased to delete the addition made by the AO as no such property was purchased by the Assessee. However, the CIT (A) was of the opinion that the Assessee has in fact sold some property in the year under consideration and, accordingly, issued a notice of enhancement.

Being Aggrieved by the enhancement the Assessee preferred an Appeal before the ITAT on a limited issue that CIT(A) had no power to enhance the assessment on an altogether different issue which was never there in the reasons recorded for reopening the assessment.

The ITAT was pleased to hold that the CIT(A) exceeded his jurisdiction in making the enhancement on an issue which was never there in the reasons recorded for reopening the assessment.

“However, the CIT(A) exceeded his jurisdiction in making the enhancement on an issue which was never there in the reasons recorded for reopening the assessment.

We are of the considered view that the enhancement done by the CIT(A) is bad in law and the reassessment notice issued by the AO, Ghaziabad is also bad in law. We, accordingly, set aside the assessment and quash the same. Since the foundation has been removed the order of the first appellate authority becomes non est”

Hence, the appeal was allowed. [Harendra Singh v. ITO, I.T.A No.1318/Del/2018, decided on 27-11-2020]


Akshat Malpani, Advocate, Supreme Court of India and Delhi High Court

Case BriefsHigh Courts

Delhi High Court: The Division Bench of Manmohan and Sanjeev Narula, JJ., upheld the validity of Sections 132 and 69 of the Central Goods and Services Tax Act, 2017, and refused any interim relief to the petitioner.

Petitioners submitted that Sections 69 and 132 of the Central Goods and Services Tax Act, 2017 are unconstitutional as being provisions of criminal nature, they could have been enacted under Article 246A of the Constitution of India, 1950.

Further, the petitioners emphasized that the power to arrest and prosecute are not ancillary and/or incidental to the power to levy and collect goods and services tax.

Adding to the above submissions, it was further stated that since the power to levy Goods and Services Tax is provided under Article 246A, power in relation thereto could not be traced to Article 246 or any of entries in 7th Schedule.

In the alternative, they submitted that Entry 93 of List 1 confers jurisdiction upon the Parliament to make criminal laws only with respect to matters in List I and CGST. Therefore, according to them, Sections 69 and 132 are beyond the legislative competence of the Parliament.

In the past, many cases occurred wherein an assessee had been arrested at the initial stage of the investigation but the department had subsequently failed to establish its case in adjudication proceedings and in the process, the assessee suffered an irreparable loss on account of the arrest.

In the present cases, no Show Cause Notice had been issued to the Petitioners either under Section 73 or Section 74 of the CGST Act by the Respondents for any unpaid tax, short paid tax, or erroneous refunds or where input tax credit had been wrongly availed or utilized.

Court’s Reasoning

  • There is always a presumption in favour of the constitutionality of an enactment or any part thereof and the burden to show that there has been a clear transgression of constitutional principles is upon the person who impugns such an enactment. Further, Laws are not to be declared unconstitutional on the fanciful theory that power would be exercised in an unrealistic fashion or in a vacuum or on the ground that there is a remote possibility of abuse of power.

Bench while analyzing several aspects of the matter stated that whenever constitutionality of a provision is challenged on the ground that it infringes a fundamental right, the direct and inevitable effect/consequence of the legislation has to be taken into account.

Court referred to the decision of Supreme Court in Namit Sharma v. Union of India, (2013) 1 SCC 745.

In the decision of the Court in Maganlal Chhanganlal (P) Ltd. v. Municipal Corporation of Great Bombay, (1974) 2 SCC 402, it was held that :

“Administrative officers, no less than the courts, do not function in a vacuum. It would be extremely unreal to hold that an administrative officer would in taking proceedings for eviction of unauthorised occupants of Government property or Municipal property resort to the procedure prescribed by the two Acts in one case and to the ordinary civil court in the other. The provisions of these two Acts cannot be struck down on the fanciful theory that power would be exercised in such an unrealistic fashion. In considering whether the officers would be discriminating between one set of persons and another, one has got to take into account normal human behaviour and not behaviour which is abnormal. It is not every fancied possibility of discrimination but the real risk of discrimination that we must take into account. This is not one of those cases where discrimination is writ large on the face of the statute. Discrimination may be possible but is very improbable.”

  • Goods and Service Tax is a Unique Tax, inasmuch as the power as well as field of legislation are to be found in a Single Article, i.e. Article 246-A. Scope of Article 246-A is significantly wide as it grants the power to make all laws ‘with respect to’ Goods and Service Tax.

Unless the Constitution itself expressly prohibits legislation on the subject either absolutely or conditionally, the power of a Legislature to enact legislation within its legislative competence is plenary.

Further, Court added that there is also no conflict between the operation of Article 246A and Article 246 as a non-obstante clause has been added to Article 246A to clarify that both Parliament and the State Legislatures have simultaneous powers in relation to Goods and Services Tax.

  • This Court is of the Prima facie opinion that the ‘Pith and Substance’ of the CGST Act is on a topic, upon which the parliament has power to legislate as the power to arrest and prosecute are ancillary and/or incidental to the power to levy collect goods and service tax.

When a law is challenged on the ground of being ultra vires to the powers of the legislature, the true character of the legislation as a whole has to be ascertained.

Bench opined that when a law dealing with a subject in one list is also touching on a subject in another list, what has to be ascertained. If on examination of the statute, it is found that the legislation is in substance on a matter assigned to the legislature enacting that statute, then it must be held valid, in its entirety even though it may trench upon matters beyond its competence. Incidental encroachment is not prohibited.

In light of the discussion of the above point, Court prima facie opined that the pith and substance of the CGST Act is on a topic, upon which the Parliament has power to legislate as the power to arrest and prosecute are ancillary and/or incidental to the power to levy and collect GST. 

  • Even if it is assumed that power to make offence in relation to evasion of GST is not to be found under Article 246A, then the same can be traced to Entry I of List III. The term ‘Criminal Law’ used in the aforesaid entry is significantly wide and includes all criminal laws except the exclusions.

Supreme Court’s decision in Kartar Singh v. State of Punjab, (1994) 3 SCC 569, has emphasized that the language used in the aforesaid entry is couched in very wide terms and the scope of the term ‘criminal law’ has been enlarged to include any matter that could be criminal in nature.

In view of the above, High Court prima facie opined that even if Sections 69 and 132 of the Act could not have been enacted in pursuance to power under Article 246A, they could have been enacted under Entry 1 of List III, as laying down of a crime and providing for its punishment is ‘criminal law’.

  • This Court, at the interim stage, cannot ignore the view taken by the Gujarat High Court with regard to application of Chapter XII CrPC to the CGST Act.

In Gujarat High Court’s decision in Vimal Yashwantgiri Goswami v. State of Gujarat, R/Special Civil Application No. 13679 of 2019, it was held as under:

♦ When any person is arrested by the authorised officer, in exercise of his powers under Section 69 of the CGST Act, the authorised officer effecting the arrest is not obliged in law to comply with the provisions of Sections 154 to 157 of the Code of Criminal Procedure, 1973. The authorised officer, after arresting such person, has to inform that person of the grounds for such arrest, and the person arrested will have to be taken to a Magistrate without unnecessary delay, if the offences are cognizable and non-bailable.

However, the provisions of Sections 154 to 157 of the Code will have no application at that point of time. Otherwise, Section 69 (3) provides for granting bail as the provision does not confer upon the GST officers, the powers of the officer in charge of a police station in respect of the investigation and report. Instead of defining the power to grant bail in detail, saying as to what they should do or what they should not do, the short and expedient way of referring to the powers of another officer when placed in somewhat similar circumstances, has been adopted. By its language, the sub-section (3) does not equate the officers of the GST with an officer in charge of a police station, nor does it make him one by implication. It only, therefore, means that he has got the powers as defined in the Code of Criminal Procedure for the purpose of releasing such person on bail or otherwise. This does not necessarily mean that a person alleged to have committed a non-cognizable and bailable offence cannot be arrested without a warrant issued by the Magistrate.

♦ The authorised officer exercising power to arrest under section 69 of the CGST Act, is not a Police Officer and, therefore, is not obliged in law to register FIR against the person arrested in respect of an offence under Sections 132 of the CGST Act.

♦ An authorised Officer is a ‘proper officer’ for the purposes of the CGST Act. As the authorised Officers are not Police Officers, the statements made before them in the course of inquiry are not inadmissible under Section 25 of the Evidence Act.

♦ Power to arrest a person by an authorized officer is statutory in character and should not be interfered with Section 69 of the CGST Act does not contemplate any magisterial intervention.

  • In view of the Supreme Court Judgment in Directorate of Enforcement v. Deepak Mahajan and the aforesaid Gujarat High Court Judgment, the arguments that prejudice is caused to the petitioners as they are not able to avail protection under Article 20(3) of the Constitution and/or the provisions of CrPC do not apply even when CGST Act is silent, are untenable in law.

Judicial Scrutiny

 When any person is arrested under Section 132(5) of the CGST Act, the said person has to be informed of the grounds of arrest and must necessarily be produced before a Magistrate under Section 69 (2) within a period of 24 hours.

 The above-stated would ensure judicial scrutiny over the acts of executive and it cannot be termed as unreasonable and/or excessive.

 Adding to its analysis, the Court stated that just because the CGST Act provides for both adjudications of civil liability and criminal prosecution doesn’t mean that the said Act is unfair or unreasonable.

  • Court prima facie finds force in the submission of the ASG that the Central Tax Officers are empowered to conduct intelligence-based enforcement action against taxpayers assigned to State Tax Administration under Section 6 of the CGST Act.
  • What emerges at the prima facie stage is that it is the case of the respondents that a tax collection mechanism has been converted into a disbursement mechanism as if it were a subsidy scheme.

To conclude the Court held that what emerges at the prima facie stage is that it is the case of the respondents that a tax collection mechanism has been converted into a disbursement mechanism as if it were a subsidy scheme.

Hence, in view of the serious allegations, the Court expressed that it is not inclined to interfere with the investigation at the present stage and that too in writ proceedings. At the same time, innocent persons cannot be arrested or harassed. Consequently, the applications for interim protection are dismissed with liberty to the parties to avail the statutory remedies.

It is settled law that though the powers of constitutional courts are wide and discretionary, yet there exist certain fetters in the exercise of such powers.

 In the Supreme Court decision of Hema Mishra v. State of U.P., (2014) 4 SCC 453, it was held that despite the fact that provision regarding pre-arrest bail, had been specifically omitted in Uttar Pradesh, the power under writ jurisdiction is to be exercised extremely sparingly.

Court’s view in the instant case is that the allegation that a tax collection mechanism has been converted into a disbursement mechanism most certainly requires investigation.

Bench stated that it has no doubt that the trial court, while considering the bail or remand or cancellation of bail application, ‘will separate the wheat from the chaff’ and will ensure that no innocent person against whom baseless allegations have been made is remanded to police/judicial custody.

Hence, the observations made herein are prima facie and shall not prejudice either of the parties at the stage of final arguments of the present writ petitions or in the proceedings for interim protection. [Dhruv Krishan Maggu v. Union of India, 2021 SCC OnLine Del 241, decided on 08-01-2021]

Case BriefsHigh Courts

Karnataka High Court: A Division Bench of Alok Aradhe and H. T. Narendra Prasad JJ., allowed the appeal and quashed the impugned order due to point of law favouring the assessee and not the revenue.

The facts of the case are such that the assessee is a software engineer who was employed with Aerospace Systems Pvt. Ltd., a company registered in India between the period from 1995-1998 and was deputed to SiRF Technology Inc., U.S. in the year 1995 by Aerospace Systems Pvt. Ltd., India as an independent consultant and worked in that capacity 1995-1998 and later as an employee of SiRF USA from 2001-2004. While on deputation to SiRF USA, the assessee was granted stock option by SiRF USA whereunder the assessee was given right to purchase 30,000 shares of SiRF USA at an exercise price of US $0.08 per share and he also had an option of cashless exercise of stock options. The assessee in assessment year 2006- 07 exercised his right under stock option plan by way of cashless exercise and received net consideration of US $ 283,606 and offered the gain as a long term capital gain as the stock options were held nearly for ten years. The assessee also claimed deduction under Section 54 F of the Act. The Assessing Officer vide order dated 26-12-2018 and as per Section 143 (3) of the Income Tax Act, 1961 i.e IT Act artificially split the transaction into two and brought to tax the difference between the market value of shares on the date of exercise and the exercise price as ‘income from salary’ and the difference between the sale price of shares and market value of shares on the date of exercise of ‘income from short term capital gains’. The claim for deduction under Section 54 F of IT Act was disallowed.  The Commissioner of Income Tax (Appeals) was approached who dismissed the appeal on merits which further went in appeal before Income Tax Appellate Tribunal which was thereby dismissed. Aggrieved by the said orders, instant appeal was filed before present High Court.

Counsel for the appellants submitted that the finding recorded by the tribunal that assesee was an employee of SiRF USA is perverse and therefore, the finding of the tribunal that consideration received on transfer of stock options is in the nature of income from salaries cannot be sustained in the eye of law. It was further submitted that stock option was granted to asssessee when he was an independent consultant with SiRF USA and therefore, cannot be treated to be an employee for the purposes of Sections 15 to 17 of the IT Act.

Counsel for the respondents submitted that as per clause 2(f) of the stock plan even a consultant who performs services for the company or a subsidiary shall be treated as an employee. Therefore, the assessee shall be treated as an employee of SiRF USA and amount received as income from salary.

The Court relied on judgment Dhun Dadabhoy Kapadia v. CIT, (1967) 63 ITR 651 (SC) and on perusing clause 2 (f) and 11 of the stock plan as well as the communication dated 03-08-2006 sent by the SiRF USA to the assessee, the Court observed that the assessee was an independent consultant to SiRF USA and was not an employee of SiRF USA at the relevant time.

The Court thus held that, there was no relationship of employer and employee between the SiRF USA and the assessee and therefore, the finding recorded between the SiRF USA and the assessee and therefore, the finding recorded by the tribunal that the income from the exercise of stock option has to be treated as income from salaries is perverse as it is trite law that unless the relationship of employer and employee exists, the income cannot be treated as salary.

In view of the above, impugned order was quashed and appeal was allowed.[Chittharanjan A. Dasannacharya v.  Commissioner of Income Tax, I.T.A. No. 153 of 2014, decided on 23-10-2020]


Arunima Bose, Editorial Assistant has put this story together

Case BriefsTribunals/Commissions/Regulatory Bodies

Customs, Excise and Services Tax Appellate Tribunal (CESTAT): P.K. Choudhary (Judicial Member), dismissed an appeal filed by the Revenue alleging that the amendment of word “from” in the phrase “clearance of final products from the place of removal” to “upto” would not change the position of law as regards outward transportation upto the place of removal.

The respondent-assessee had availed cenvat credit on service tax paid on outward transportation of its finished goods, i.e. biscuits, which were transported up to the customers’ premises during the period from January, 2005 to September, 2007. Show cause notice dated 04-06-2008 was issued alleging suppression of facts etc. The adjudicating authority confirmed the demand along with applicable interest and imposed equal penalty. On appeal, the Commissioner (Appeals) set aside the Order-in-Original and allowed the appeal of the assessee. Thus, the instant appeal was filed.

The Tribunal relied on the judgment of the Supreme Court in CCE v. Vasavadatta Cements Ltd., (2018) 3 SCC 769 where the Court had held that the assessee was legally eligible to avail credit on outward transportation availed from place of removal upto a certain point, whether it is a depot or customer’s premises.

The Tribunal while dismissing the appeal observed that the availment of credit on outward transportation from factory gate to customer’s place pertains to period prior to April 2008 i.e. prior to period when the definition of input service was amended so credit eligibility goes in favour of the assessee.[CCE v. Anmol Biscuits Ltd., 2020 SCC OnLine CESTAT 256, decided on 28-10-2020]


Suchita Shukla, Editorial Assistant has put this story together

Case BriefsHigh Courts

Karnataka High Court: A Division Bench of Alok Aradhe and H.T. Narendra Prasad, JJ. set aside the decision of the Income Tax Appellate Tribunal in favour of the assessee.

The present appeal was filed under Section 260-A of the Income Tax Act, 1961 (IT Act) wherein an order passed by the Income Tax Appellate Tribunal (ITAT) was challenged.

The substantial question under deliberation was:

If the ITAT was correct coming to the decision that deductions which fall under Section 10-B of IT Act the can be computed without setting off of brought forward business losses and unabsorbed depreciation?

The Court relied on the decision in CIT v. Yokogawa (India) Ltd., 2016 SCC OnLine SC 1491 and held that the decision of the Tribunal in the said matter was incorrect. Therefore, the above-mentioned question was answered in favour of the assessee.[Commissioner of Income Tax v.  Mind Tree Consulting Ltd., I.T.A No. 50 of 2013, decided on 17-08-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal (ITAT), Mumbai: Explaining the law on disallowance u/s.40(a)(ia), the Tribunal has said that if the payees have included the subject mentioned transaction in their income tax returns, then the assessee payer should not be treated as assessee in default and disallowance u/s.40(a)(ia) of the Act should be deleted in its hands. It further stated,

“IF the subject mentioned transaction is not reflected in the income tax returns of the payees, then disallowance made in the hands of the assessee u/s 40(a)(ia) of the Act would remain in force.”

The Tribunal was dealing with a case pertaining to Tax Deduction at Sources and held that the advertisement charges paid to an agency which is a franchisee of a newspaper would attract TDS under Section 194 of the Income Tax Act, 1961.

The Tribunal held that any amount paid as a consideration for carrying out any work is liable for deduction of Tax at Source.

Background

The Assessee was in the business of import eye testing equipment mainly from M/s. Topcon Asia Pvt. Ltd., Singapore and selling them to eye doctors, eye hospitals, medical colleges etc., all over India. The Assessee also procured maintenance contracts, brake-down jobs, and other services to the customer through its engineers.

The Assessee made a one-time payment to the franchisee of “The Hindu” newspaper for advertising for hiring staff . It was argued that it was a one-time payment and no contract exist with the newspaper and accordingly, the provisions of Section 194C of the Act would not be applicable.

On Scrutiny, the Assession Officer disallowed the payment made u/s. 40(a)(ia) by the Assessee on account of advertisement expenses incurred without deduction of tax at source. The Order passed by the AO was upheld the CIT(A). Being aggrieved by the decision of the CIT(A) the Assessee preferred an Appeal before the ITAT.

Issue

Whether the CIT(A) was justified in confirming the disallowance made u/s 40(a)(ia) of the Act for an amount of Rs. 56,997/- on account of advertisement expenses without deduction of tax at source?

Finding

The ITAT was pleased to hold that the any Assessee who is responsible for paying any sum to any resident for carrying out any work in pursuance of a contract shall deduct tax at source thereon.

Further, in the present case the Assessee was responsible for paying the sum to the franchise as consideration for publishing the advertisement and therefore It was held that all the ingredients of Section 194C were fulfilled. Hence, it was held that the Assessee is liable for deduction of Tax at Source.

[Mehra Eyetech Pvt. Ltd. v. Add. Commissioner of Income Tax,  ITA No. 1760/Mum/2019,decided On 13.07.2020]

Op EdsOP. ED.

1. Introduction

Section 254(2-A) of the Income Tax Act, 1961 (“the Act”), inter alia, deals with power of the Income Tax Appellate Tribunal (“the ITAT”) in respect of granting stay in any proceedings relating to an appeal filed before the ITAT. Section 99 of the Finance Act, 2020 has amended Section 254(2-A) of the Income Tax Act, 1961 (“the Act”). This amendment has the potential to be interpreted in a manner that can cause immense hardship to the taxpayers thereby increasing litigation. This article is an attempt to argue that even after the amendment the discretionary powers in respect of stay conferred upon the ITAT remains intact. Any other view would be unconstitutional. The unconstitutionality is elaborated in this article.

The relevant part of Section 254(2-A) of the Act, is reproduced hereunder:

“(2-A) *                                               *                                            *

Provided that the Appellate Tribunal may, after considering the merits of the application made by the assessee, pass an order of stay in any proceedings relating to an appeal filed under sub-section (1) of Section 253, for a period not exceeding one hundred and eighty days from the date of such order [1][subject to the condition that the assessee deposits not less than twenty per cent of the amount of tax, interest, fee, penalty, or any other sum payable under the provisions of this Act, or furnishes security of equal amount in respect thereof] and the Appellate Tribunal shall dispose of the appeal within the said period of stay specified in that order:

[2] [Provided further that no extension of stay shall be granted by the Appellate Tribunal, where such appeal is not so disposed of within the said period of stay as specified in the order of stay, unless the assessee makes an application and has complied with the condition referred to in the first proviso and the Appellate Tribunal is satisfied that the delay in disposing of the appeal is not attributable to the assessee, so however, that the aggregate of the period of stay originally allowed and the period of stay so extended shall not exceed three hundred and sixty-five days and the Appellate Tribunal shall dispose of the appeal within the period or periods of stay so extended or allowed.]

Provided also …..

2. Part 1: Literal interpretation

On reading of the amended proviso, it may be interpreted that on an application of stay by the assessee, the ITAT must hear the parties and consider whether a stay ought to be granted or not. In case where the stay application find favour with the ITAT, the same may be granted with a condition that 20% of the tax, interest, fee, penalty, or any other sum payable under the provisions of the Act (hereinafter for sake of better understanding is referred to as “the disputed demand”)[3] or an equivalent amount of security must be provided. The period of stay granted by the ITAT under the first proviso, however, cannot exceed 180 days.

The second proviso has added a condition that the ITAT, on an application made by the assessee may extend the period of stay subject to compliance with the condition referred to in the first proviso.

3. Part 2: Interpretation in favour of assessee

The following aspects are considered necessary to argue in favour of assessee.

3.1 Inherent jurisdiction to grant stay

Under the scheme of the Act, orders appealable before the ITAT have been provided under Section 253 of the Act. Section 254(1) of the Act confers jurisdiction on the ITAT to pass such orders thereon as it thinks fit after giving both the parties to the appeal an opportunity of being heard.

Section 254(1) at the time when introduced under the Act did not have a specific provision for stay. In ITO v. M. K. Mohammad Kunhi [4] (hereinafter for sake of brevity referred to as “Kunhi”) an issue arose that whether the ITAT has the power to stay the recovery of therealization of the penalty imposed during the pendency of an appeal. An application for stay was rejected by the ITAT which was reversed by the High Court holding that ITAT can grant stay under its inherent powers. On appeal before the Supreme Court, the High Court’s decision was affirmed. The reasons which were in favour of assessee are summarised hereunder:

  • Comparing the power of the Assessing Officer under Section 220 of the Act, it was argued by the Department that there is no express power conferred to the ITAT to grant a stay of recovery. This argument was rejected and it has been held that the ITAT has been conferred wide powers under Section 254(1) of the Act to pass such orders as it thinks fit after giving full hearing to both the parties to the appeal. A substantive right to prefer an appeal to ITAT where the orders of the lower authorities can be challenged on questions of law as well as question of fact.
  • If it is held that there is no power to grant stay on recovery, then the entire purpose of appeal can be defeated if the orders of lower authority are ultimately set aside. Such a situation on part of the legislature was considered to be unintended. Where jurisdiction has been conferred, it is implied that it also grants power of doing all such acts or employing such means as are essentially necessary for its execution.
  • The principle laid down by the Court of Appeal in Polini v. Gray[5] [to grant a stay to the authority who has been conferred the jurisdiction to decide the appeal] was considered to be applicable in this case and the same is reproduced hereunder:

“It appears to me on principle that the court ought to possess that jurisdiction, because the principle which underlies all orders for the preservation of property pending litigation is this, that the successful party in the litigation, that is, the ultimately successful party, is to reap the fruits of that litigation, and not obtain merely a barren success. That principle, as it appears to me, applies as much to the court of first instance before the first trial, and to the Court of Appeal before the second trial, as to the court of last instance before the hearing of the final appeal”.                                          

(emphasis supplied)

  • At the same time, it is not open to the ITAT to grant a stay as a matter of course. It is only when facts and circumstances of the case so warrant on terms as it deems fit.

To overcome this aspect, the Department may argue that the decision of Kunhi[6] (supra) was rendered at a time when the Act was not specific. After having introduced Section 254(2-A) and the amendment by Finance Act, 2020, the decision would no longer hold the field and stay shall be governed by such amended provisions.

The above argument would be contrary to (i) the presumption that the Legislature being the representatives of the people enacts laws which the society considers as honest, fair and equitable (ii) the decisions of various High Courts which have held that the Appellate Authority has the inherent right to grant stay and (iii) the decision of the Bombay High Court in Narang Overseas (P) Ltd. v. Income Tax Appellate Tribunal[7], (hereinafter referred to as “Narang Overseas” for sake of brevity) in the context of proviso to Section 254(2-A) of the Act which has applied the ratio of Kunhi (supra) and held that power to grant interim is co-extensive with the power to grant final relief on the principle that absent power to grant interim relief, the power to grant final relief may be defeated. Basis this, it was held that ITAT may grant stay beyond period of 365 days if the delay is not attributable to the assessee.

The amended provision may cause injustice in genuine cases. Further, the argument would also be contrary to the decisions which have interpreted the amendments to Section 254(2-A) of the Act which sought to curtail the powers of the ITAT. The Courts have intervened to hold that assessee cannot be made to suffer for no fault of his. This was the position taken by the Courts despite the provisions under the Act to the contrary. The same is elaborated at para 3.2. in detail.

Applying this principle, it is submitted that an assessee has no control over the manner in which the Department or the CIT(A) would pass an order. It is submitted that where it demonstrates that 20% is excessive and that he would suffer immense hardship, the ITAT, on the basis of the principles laid down by Kunhi and Narang Overseas case, must have the inherent power to grant stay and relax the condition of 20%.

Proposition (i)

It is presumed on the part of the Legislature that the laws are passed which the society considers as honest, fair and equitable. The 20% condition dislodges this presumption. In cases where a prima facie case and that the demand raised is likely to not survive is established, then it shows that the correctness of the orders of the lower authorities are not free from doubts. In such situation, allowing recovery would amount to giving Department premium over their own wrong. Non-granting of stay would be harsh and not according to reason. It is held in K. P. Varghese v. ITO[8] that the Court should, as far as possible, avoid that construction which attributes irrationality to the Legislature. The rigid condition of 20% would be irrational for the condition of stay generally differs from one case to another. In Ravi Gupta v. Commissioner of Sales Tax[9] , it is held that three factors that must be considered while granting or rejecting stay application. These factors are (i) prima facie case (ii) balance of convenience and (iii) irreparable loss. It was further held that if the demand raised appears to be unsustainable, then the benefit may be considered in favour of assessee. In  CIT v. Bansi Dhar & Sons[10], it is held that an appellate authority must have the incidental/inherent power for the disposal of an appeal to grant/reject a stay. Thus, pending disposal of appeals before the ITAT, and in view of above principles, it is submitted that ITAT has the discretion to grant stay below 20%.

It is submitted that the above consequences would cause grave injustice in the course of administration of the appeals under the Act. In  Bhudan Singh  v. Nabi Bux[11], it was held that the Legislature is presumed to be acting in a manner which advances the cause of justice. The relevant part is reproduced hereunder:

“9. Before considering the meaning of the word “held” in Section 9, it is necessary to mention that it is proper to assume that the lawmakers who are the representatives of the people enact laws which the society considers as honest, fair and equitable. The object of every legislation is to advance public welfare. In other words as observed by Crawford in his book on Statutory Constructions the entire legislative process is influenced by considerations of justice and reason. Justice and reason constitute the great general legislative intent in every piece of legislation. Consequently where the suggested construction operates harshly, ridiculously or in any other manner contrary to prevailing conceptions of justice and reason, in most instances, it would seem that the apparent or suggested meaning of the statute, was not the one intended by the law-makers. In the absence of some other indication that the harsh or ridiculous effect was actually intended by the legislature, there is little reason to believe that it represents the legislative intent”                                                                                  

(emphasis supplied)

Law applicable in respect of “stay” has been well settled. One common principle being that a stay may be granted if after having regard to the facts and circumstances of the case, the Court/Tribunal is satisfied that the assessee has demonstrated prima facie case that he is likely to succeed and demand may not survive, balance of convenience and there would be irreparable injury to the assessee. No straitjacket formula can be applied. It is submitted that the Legislature cannot envisage every situation and in appropriate cases, the power to grant stay may become necessary for an effective adjudication of the appeal.

Proposition (ii)

The argument that the amendment to Section 254(2-A) limits the width of Section 254(1) is contrary to the following decisions:

  • ITC Ltd v. Union of India ILR[12]
  • Collector of Customs v. Madras Electro Castings (P) Ltd.[13]
  • Poly Fill Sacks v. Union of India[14]

In ITC Ltd. (supra), the issue arose in respect of difference of opinion between the Excise Authorities and the Assessee to classify the goods. The said difference, contended by the assessee arose on account of directive contained in a letter dated 7th April, 1982 issued by the Central Board of Excise and Customs to all Collectors of Central Excise. A writ petition was filed challenging the decision of the authorities. Considering that independent authorities would adjudicate the appeals, first at the level of Collector (Appeals) and the second before the Customs, Excise & Gold (Control) Appellate Tribunal, the High Court on the issue of alternative remedy relegated the assessee to the appellate authorities under the Act. At the time of arguing that the alternate remedy would not enable the assessee justice on the ground that (i) Collector (Appeals) would be influenced by the directive and (ii) that the condition of appeal is mandated with the pre-deposit. This argument was rejected on the ground that proviso to Section 35-F of the Central Excises and Salt Act, 1944 confers discretion to the Collector (Appeals) and the Customs, Excise & Gold (Control) Appellate Tribunal (hereafter referred to as “ CEGAT”) to waive the condition of pre-deposit.

The Court has further proceeded to hold that the Collector (Appeals) and CEGAT has inherent power of granting interim relief in exercise of its appellate jurisdiction. This was the ratio of the Court on the basis of the decision of the Supreme Court in M. K. Mohammad Kunhi [15](supra). This was held by the Court despite the requirement of pre-deposit. However, insofar as the provisions under Section 35-F is concerned, the same have been regarded to be in the nature of guidelines in respect of granting a stay.

In the decision of Madras Electro Castings (P) Ltd.[16] (supra), the issue arose in assessing the value of products imported. Arriving at a value higher than that declared by the assessee, the assessable value was worked out and demand was raised based on differential duty. Consequently, confiscation of goods was ordered and the goods were permitted to be released on payment of redemption fine. The order of adjudication was challenged in appeal before the CEGAT and writ petition was filed for release of goods because the assessee was of the opinion that CEGAT does not have power to permit release of goods and thus relief is sought before the Court.

This argument was rejected on the basis that wide powers have been conferred to secure the ends of justice insofar the CEGAT has the authority to confirm, modify or annul the decision or order appealed against. It is also open to remit the matter back for fresh adjudication. The power to confirm, modify or annul the decision or order appealed against takes in its fold to pass such interim orders as are necessary in order to aid the main relief sought for in the appeal. The decision in State of Orissa v. Madan Gopal[17] which has held that interim orders are passed in aid of the main relief was followed. Therefore, it is held that it is quite inherent in the appellate power and more so in the case of the CEGAT to pass such interim orders as are necessary for the purpose of ensuring that the main relief sought in the appeal is available to the party at the end of the proceeding. The provisions of Section 129-E of the Customs Act, 1962 which provides relieving the assessee from pre-deposit does not take away the inherent power of the CEGAT to pass such interim orders as are necessary.

The decision in  ITC Ltd.[18] (supra) and Madras Electro Castings (P) Ltd.[19] (supra) was followed in by the Customs, Excise and Service Tax Appellate Tribunal (hereafter referred to as “CESTAT”) in  IPCL v. Commissioner of Central Excise, Vadodara[20]. The decision of IPCL was affirmed by the Supreme in Commissioner of Customs & Central Excise, Ahmedabad v. Kumar Cotton Mills (P) Ltd. The decision in Kumar Cotton Mills (P) Ltd.[21] was followed in  Narang Overseas[22].

In  Poly Fill Sacks[23] (supra) before the Gujarat High Court, the Excise Authorities had encashed the bank guarantee on interpreting that the power of CESTAT is limited to pass stay order beyond period of 180 days and consequently, stay stands vacated. This argument was rejected based on the principles laid down in Kunhi case[24] (supra). Held that Section 35-C(1) of the Central Excise Act, 1944 is of widest amplitude in dealing with the appeals before it and by implication, in a proper case, there exists a power staying the recovery of demand, etc. pending an appeal in a manner which prevents the right of appeal being rendered nugatory.

The decision of Poly Fill Sacks[25] has been followed by Gujarat High Court in  DCIT v. Vodafone Essar Gujarat Ltd.[26] .

Though these decisions have been rendered in the context of Excise and Customs, it is submitted that the provisions are pari materia. A provision for stay and a provision for granting appeal existed even under those statutes. These decision as stated above, have been followed in context of other provisos to Section 254(2-A) as it existed prior to amendment. In view of ratio of above decisions, it is submitted that the wide interpretation of the language of Section 254(1) of the Act has not been curtailed. An appellate authority has the inherent jurisdiction to grant stay in a fit case on terms as it may deem fit with the only limitation that the discretion exercised be a judicious one. Therefore, Section 254(1) is independent of the amended Section 254(2-A) of the Act.

Alternatively, in view of above, it is submitted that the amended first proviso of Section 254(2-A) by Finance Act, 2020 may be regarded as a provision which is directory in nature and ITAT is not bound by the same. In other words, ITAT has the power to grant stay on such terms as it may deem fit.

Apart from the aforesaid proposition that Section 254(1) is independent of Section 254(2-A), it is submitted that the first proviso by itself confers wide discretion upon ITAT.

Attention is invited to the amended proviso. On a reading of the same, it is submitted that the proviso states that ITAT “may” after considering the merits of application pass an order of stay. It would also be correct to state that ITAT may reject the application of stay. Thus, it is submitted that the power to accept an application for stay or reject it is discretionary in entirety. In case where the ITAT rejects the application of stay, there does not arise any difficult.

However, the issue arises when ITAT is of the opinion that a stay ought to be granted. To address such a situation, it must be appreciated that since the power to grant stay is discretionary in its entirety, it would also be a matter of discretion of ITAT to pass an order of stay which “may or may not be” subject to the condition that the assessee must deposit amount which is not less than 20% of disputed demand.

Depending upon facts and circumstances of the case, ITAT may require the assessee to deposit 50% of the disputed demand. In other cases, it may be below 20% (say 5% or even nil) of the disputed demand. Reliance in this regard is placed on the decision of Ravi Gupta[27] (supra), Kunhi[28] (supra) and Bansi Dhar & Sons[29] (supra).

In view of above, it is submitted that the inherent power of ITAT is independent of the amendment brought in by the Finance Act, 2020.

3.2 Amendments to Section 254(2-A) of the Act and judicial pronouncements on the said amendments

The case of M. K. Mohammad Kunhi (supra) decided on September 11, 1968 had merely held that ITAT has the authority to grant stay and that such stay may be subject to conditions as it may deem fit.

The Finance Act, 2007 had substituted the provisos inserted by the Finance Act, 2001. The effect of the amendment was that ITAT may grant stay for a period of 180 days and that such stay can be extended at the highest for a further period of 185 days. The effect of the first two provisos was that the total period of stay which ITAT could grant was restricted to a total period of 365 days. The third proviso as inserted by the Finance Act, 2007 had the effect of vacating the stay originally granted if the appeal was not disposed within the total period of 365 days.

In  Narang Overseas[30] (supra), it was held that ITAT has the power to grant stay even beyond the period of 365 days only if the delay in disposing of the appeal was not attributable to the assessee. This would be a reasonable way to interpret the provisions keeping in mind the object of the Legislature in expediting stay granted matters. It was also held that it would not be reasonable to recover from the assessee in case of non-disposal of appeal for no fault on the part of such assessee. To arrive at this conclusion, the principle in  Kumar Cotton Mills (P) Ltd.[31] (supra) was followed.

The Finance Act, 2008 amended the third proviso having the effect that the order of stay would stand vacated even if the delay in not disposing the appeal was not attributable to the assessee.

The constitutional validity of the amended third proviso to Section 254(2-A) of the Act which added the words “even if the delay in disposing of the appeal is not attributable to the assessee” in  Pepsi Foods (P) Ltd. v. Assistant Commissioner of Income Tax[32]. It was held that the said provision which allows the Revenue to recover the dues on which stay has been granted pending disposal of the appeal beyond 365 days even when the delay is not attributable to the assessee is unconstitutional on the ground that it discriminates between assessees whose stay should stand vacated on account delay attributable to them vis-à-vis those assessees whose conduct cannot be questioned during the period of stay in appeal before ITAT and such being violative of Article 14 of the Constitution.

In Vodafone Essar Gujarat Ltd. (supra), the Revenue had been aggrieved by stay extension beyond a period of 1000 days and the Department had argued that jurisdiction to extend stay must be governed by the provisions of the Act. The arguments put forth by the Revenue were rejected for the reason that there may be many factors that the appeal was not disposed within the time limit and held that there cannot be any intent to punish the assessee for no fault of his.

In view of the above, it is submitted that the amendments made to Section 254(2-A) though were introduced with the laudable objective that after having granted stay from recovery of taxes, the appeals must be disposed within a given time frame. However, at the same time, the Courts did not allow it go overboard to the extent that if the appeal was not disposed, the stay would stand vacated.

Based on the above principle, it is reiterated that when the assessee demonstrates satisfaction (based on the principle in Ravi Gupta) that stay below 20% ought to be granted, it means that correctness of orders of lower authorities is not free from doubt and thus allowing to recover 20% of disputed demand would be allowing them premium of their own wrong.

4. Part 3: Constitutional validity of Section 99 of Finance Act, 2020 amending proviso to Section 254(2-A) of the Act

It is submitted that if a view in favour is taken that the powers under Section 254(1) of the Act is still preserved and that the condition of 20% is directory, then it may not be necessary to consider the constitutional validity of the provision for it is settled law that an interpretation which saves the provision from being rendered unconstitutional must be preferred over the one which makes it constitutionally invalid. If the view in favour of Department is taken and the rule of 20% is held to be mandatory, then the amendment brought in by the Finance Act, 2020 to Section 254(2-A) of the Act would suffer from the vice of arbitrariness, unreasonable and excessive and impinge upon the independence of the judiciary and separation of powers thereby violating Article 14 of the Constitution. These aspects are separate and mutually exclusive and it is submitted that it stands violated.

4.1 Independence of the Judiciary and separation of powers

In order to appreciate this ground of attack on Section 99 of the Finance Act, 2020 amending the first proviso to Section 254(2-A) of the Act, it is first necessary to appreciate the background in which the Tribunals in India have come to stay and have become an inherent part of our judiciary who has the task of discharging judicial functions.

Secondly, the difference between the Courts and the Tribunals (which are substituting the Courts) would have to be considered. Despite the differences, the two authorities are sharing the judicial power of the State. Therefore, just as independence of the Court is safeguarded, it becomes necessary to safeguard the independence of the Tribunals as well.

Origin and need for tribunalisation of justice

Traditionally, the task of adjudicating the disputes was entrusted upon the Courts. This was slowly and gradually shifted to the Tribunals formed under the specific statute. The system of adjudication through the Tribunals started in the year 1941 with the setting up of ITAT. With the passage of time, the number of cases and consequently, the burden to dispose of cases increased. There was a need to set up alternative institutions which would adjudicate disputes in a quick, effective and efficient manner which would reduce the burden of the courts and also aim to achieve justice for the litigants.

The movement towards setting up the Tribunals was hastened by the need for specialisation. An underlying assumption behind the setting up of specialised Tribunals was that the individuals who decide, possess the qualities necessary for adjudication in that specific field.

Apart from specialisation, domain expertise, particularly in a complex area, is considered to be means of allowing adjudicators who understand the subject to decide quickly and effectively. It may also be noted that apart from transferring jurisdiction from Courts to Tribunals, various statutes, for instance, Section 63 of the Insolvency and Bankruptcy Code, 2016, the Tribunals have been conferred the jurisdiction on the National Company Law Tribunal or the National Company Law Appellate Tribunal to the exclusion of the Courts.

In that sense, the Tribunals have not only taken away subjects which have been carved out of the jurisdiction of courts as a matter of legislative policy, but have also fostered a new culture of adjudication over areas in which a traditional court mechanism had little experience and expertise. In that sense, tribunalisation represents an amalgam of the old and the new. A combination of the role which was traditionally performed by the court together with new functional responsibilities, quite unlike the dispute resolution function which was traditionally performed by the Courts[33].

Thus, as can be seen, the Tribunals are being formed and jurisdiction of courts is being excluded in order to achieve the objective of quick resolution of disputes through institutions manned by person with judicious mind and having specialised knowledge of the subject.

Difference between Court and Tribunal

Strictly speaking, a Tribunal is not a court. There are many decisions which have highlighted the difference between a court and Tribunal. However, it would be sufficient if the case of S. P. Sampath Kumar v. Union of India[34] is referred to. The said differences are noted as under:

  • Courts are established by the State and entrusted with the State’s inherent judicial power for administration of justice in general. Tribunals are established under a statute to adjudicate upon disputes arising under the said statute or disputes of a specified nature. Therefore, all courts are Tribunals but all Tribunals are not courts.
  • Courts are exclusively manned by judges. Tribunals can have a Judge as the sole member, or can have a combination of judicial member and a technical member who is an “expert” in the field to which the Tribunal relates.
  • Courts are governed by detailed statutory procedural rules, in particular the Code of Civil Procedure and the Evidence Act, requiring an elaborate procedure in decision-making, Tribunals generally regulate their own procedure applying the procedure of the Code of Civil Procedure where it is required and without being restricted by the strict rules of rhe Evidence Act.

Independence of Judiciary

In order to appreciate this aspect, it is equally necessary to appreciate the theory of separation of powers as per the scheme of our Constitution which is specifically provided under Article 50. Simply put, it is the demarcation of the functions of the State to the three organs as provided under the Constitution. First, it is the Legislature (includes the Centre as well as the State), second, it is the executive authorities (for example: Income Tax Department, the Police Department, etc.) and third is the judiciary (courts and tribunals). It has been emphasised that every organ of the State must perform and exercise the functions entrusted to it without encroaching upon the functions demarcated to the other.

In Indira Nehru Gandhi v. Raj Narain[35], it was held that division of three main functions is recognised in our Constitution. Judicial power of the State is vested in the judiciary. Similarly, the Executive and the Legislature are vested with powers in their spheres. Judicial power has lain in the hands of the judiciary prior to the Constitution and also since the Constitution. It is not intended that powers of judiciary be passed to or be shared by the executive or the Legislature or that the powers of the Legislature or the Executive should pass to or be shared by the judiciary. The Constitution has a basic structure comprising the three organs of the Republic viz. the Legislature, the Executive and the Judiciary. It is through each of these organs that the sovereign will of the people has to operate and manifest itself and not through only one of them. Neither of these organs of the Republic can take over the function assigned to the other. No Constitution can survive without a conscious adherence to its fine checks and balances. Just as Courts ought not to enter into problems entwined in the ‘political thicket’, Parliament must also respect the preserve of the Courts. The principle of separation of powers is a principle of restraint.

In  Chandra Mohan v. State of U.P.[36], it has been held  that the people of our country come in close contact with the subordinate judiciary in comparison to the Higher Judiciary and thus, it is no less important and probably even more important that their independence should be placed beyond question than in the case of Superior Judges. Article 50 of the Directive Principles of State Policy states that the State shall take steps to separate the judiciary from the executive in the public services of the State. Simply stated, it means that there shall be a separate judicial service free from the executive control.

In  S. P. Sampath Kumar (supra), it was held that judicial review is a basic and essential feature of the Constitution and Parliament cannot take it away otherwise, the Constitution would cease to be what it is. Every organ of the State must act within the limits of the authority and power derived from Constitution. A question may arise as to whether the executive has acted within the scope of its power. Firstly, determination of this question is within the domain of judiciary because it requires interpretation of the Constitution and the laws and this would pre-eminently be a matter fit to be decided by the judiciary. Secondly, the protection afforded to the citizen would become illusory, if it were left to the executive to determine the legality of its own action. The same principle applies for determination of acts of Legislature as well. It is only an independent judiciary under the Constitution assigned with the delicate task of determining what is the extent and scope of the power conferred on each branch of Government, what are the limits on the exercise of such power under the Constitution and whether any action of any branch transgresses such limits. It is also a basic principle of the rule of law which permeates every provision of the Constitution and which forms its very core and essence that the exercise of power by the executive or any other authority must not only be conditioned by the Constitution but also be in accordance with law and it is the judiciary which has to ensure that the law is observed and there is compliance with the requirements of law on the part of the executive and other authorities.

In view of the above, it is clear that Article 50 of our Constitution has been interpreted and it has been held that there is a requirement to have an independent judiciary for the purpose of adjudicating the disputes. Judicial review by an independent judiciary has been considered to be a basic and essential feature of the Constitution. On a combined reading of the above decisions, it is submitted that judiciary also includes authorities such as the Tribunals which are below the High Courts and Supreme Court.

Section 99 of the Finance Act, 2020 and impingement upon the independence of the ITAT

The amendment to the first proviso, if interpreted in a manner to say that ITAT does not have any discretion in granting stay below the limit of 20% of  Indira Nehru Gandhi v. Raj Narain (supra), S. P. Sampath Kumar (supra) and the decision of Chandra Mohan v. State of U.P. (supra) which have held that it is not the function of the Legislature to enter the space in which the judiciary operates. This is exactly what the amendment does by taking away the power to grant stay below 20% of disputed demand and therefore, the said Section 99 of the Finance Act, 2020 violates the independence and discretion conferred upon the ITAT to grant stay.

An independent judicial tribunal determining the rights of citizens, and for adjudication of the disputes and complaints of the citizens, is regarded as a necessary concomitant of the rule of law in  Union of India v. R. Gandhi[37]. It was held that rule of law has several facets. One such facet is that disputes of citizens will be decided by Judges who are independent and impartial at the time of deciding the legality of the actions of the Government. Another facet of rule of law is equality before the law. Essence of equality is that the disputes must be capable of being enforced and adjudicated by an independent forum. Judicial independence and separation of judicial powers from the executive are a part of the common law traditions implicit in a Constitution like ours which is based on the Westminster Model. The fundamental right to equality before law and equal protection of laws guaranteed by Article 14 of the Constitution includes a right to have the person’s rights, adjudicated by a forum which exercises judicial power in an impartial and independent manner, consistent with the recognised principles of adjudication.

It must be recalled that Kunhi case (supra) has held that ITAT is performing judicial function sitting in appeal over the decision of the lower authorities. Thus, if the ITAT, in exercise of appellate jurisdiction is of the opinion that stay ought to be granted in an appropriate case in order to ensure that the entire purpose of appeal would not be defeated, then there exists an inherent and implied power to grant a stay. The power to grant stay is based on the recognised principle of adjudication viz. that the successful party must enjoy the fruits of litigation and not obtain merely a barren success.

At the same time, ITAT was also cautioned against granting stay pending appeal as a matter of course for it is indeed necessary to protect the interest of Revenue. Thus, it is submitted that another principle of adjudication that was applied was that pending disposal of appeal, interest of both the parties must be protected for it is necessary that the successful party must enjoy the benefits of the outcome effectively and not a barren success.

In Bansi Dhar & Sons (supra), Kunhi’s principle was reiterated and held that an appellate authority must have the inherent power for the disposal of an appeal to grant a stay or not to grant a stay.

It is my submission that the amendment brought in by Section 99 of the Finance Act, 2020, to the provisions of Section 254(2-A) of the Act has disturbed the well-recognised principle of adjudication that pending disposal of an appeal, in appropriate cases, the appellate authority can exercise its discretion, pass an order of stay in a manner which would ensure that right of appeal and obtain relief is not rendered nugatory. Further, by mandating the rigid condition of 20%, it is the interest of the assessee only which it has failed to protect.

In view of above, the amendment is violative of the principle of independence of judiciary and against the recognised principles of adjudication and thereby, unconstitutional.

4.2 Doctrine of Arbitrariness

The principle that arbitrariness as a facet of Article 14 in itself is a ground to attack the constitutional validity. This proposition of law has been authoritatively laid down in Shayara Bano v. Union of India[38].

It has been held that Article 14 strikes at the arbitrariness in State action and ensures fairness and equality of treatment. The principle of reasonableness, which legally as well as philosophically, is an essential element of equality or non-arbitrariness pervades Article 14 like a brooding omnipresence and the procedure contemplated by Article 21 must answer the test of reasonableness in order to be in conformity with Article 14. Arbitrariness as a doctrine is distinct from discrimination under Article 14 because any action that is arbitrary must necessarily involve the negation of equality. The concept of reasonableness and non-arbitrariness pervades the entire constitutional scheme and is a golden thread which runs through the whole of the fabric of the Constitution. The arbitrariness doctrine contained in Article 14 would apply to negate legislation, subordinate legislation and acts of the executive.

Arbitrariness in Section 99 of the Finance Act, 2020

The concept of arbitrariness as held in Shayara Bano case (supra) means that when something is done by the legislature capriciously, irrationally and/or without an adequate determining principle, when something is excessive and disproportionate, which is not fair, not reasonable, which is discriminatory, not transparent, biased, with favouritism or nepotism and not in pursuit of promotion of healthy competition and equitable treatment. Positively speaking, it should conform to norms which are rational, informed with reason and guided by public interest.

Attention is invited to the amended first proviso to Section 254(2-A). On a reading of the amended proviso, it appears that ITAT, on hearing the application of the assessee may grant a stay. However, this stay may be granted subject to the condition that not less than 20% of the disputed demand or equivalent amount of deposit would have to be placed and that ITAT shall dispose the appeal within a period of 180 days.

Prior to the amendment, ITAT exercised complete discretion in respect of the terms upon which stay could be granted. Kunhi case (supra) decided on September 11, 1968 had applied one of the most well-recognised principles of adjudication that the power to grant interim relief (in an appropriate case) is co-extensive with the power to grant final relief for if there is no power to grant interim relief as such, the right to obtain final relief may be rendered nugatory. This principle was found to be applicable in  Narang Overseas to hold that despite a statutory provision restricting the power to extend stay beyond 365 days, it does possess the power of extension provided the delay was not attributable to the assessee. The principles based on which the issue was decided in favour of the assessee is sound and unimpeachable.

Pursuant to Kunhi case, ITAT has exercised the power to grant stay in the cases which it thought fit and not a case that the same was granted as a matter of course for the mere asking. This is statistically noted in  CIT v. Maruti Suzuki (India) Ltd.[39] In the years 2011, 2012 and 2013, the appeals in which stay has been granted does not even amount to 10% of the total appeals filed by the assessee. Thus, it can be seen that ITAT is cautious in its approach to grant stay. On basis of the above, the Revenue may not be in a position to say that its interest has not been protected.

On the other hand, the amendment fails to protect interest of the assessee. It is also contrary to one of the principles of adjudication i.e. granting of interim relief in fit cases. The purpose behind granting of interim relief is to ensure that the right of obtaining final relief may not be rendered illusory. The intention behind such a mandatory condition does not seem to be clarified either by the Memorandum to the Finance Bill, 2020 nor does it come out clearly from the notes to clauses.

In other words, the reasons as to why the amendment seeks to undo the right of the assessee to obtain relief from a judicial authority is not forthcoming. It is submitted that a taxpayer is entitled to reasons as to why such a right is being taken away which is vested upon him by the authority of the Supreme Court.

Apart from the above, the excessiveness and unreasonableness of the amendment can be better understood with the following consequences that would flow:

  • The first proviso mandates that assessees would have to pay 20% of the disputed demand or the equivalent amount of security deposit would have to be placed notwithstanding the fact that the assessee is in a position to satisfy (i) prima facie case (ii) balance of convenience and (iii) irreparable loss would be caused if the Department is allowed to proceed with the recovery.

This goes contrary to the decision in Ravi Gupta (supra) which held that the above three factors must be considered and that the appellate authority must exercise the discretion judiciously. The Supreme Court had also held that if it appears that the demand raised would be deleted, then the assessee must not be burdened with payment. It also goes against the decision of the Bombay High Court in UTI Mutual Fund v. ITO[40],   wherein it has been held that if an assessee is in a position to demonstrate the strength of his case, then asking him to make a payment by itself would cause hardship.

  • The entire principle behind the concept of granting interim relief is that a successful party must enjoy the fruits of litigation. In a case where the assessee demonstrates that he is likely to succeed, it is submitted that until the outcome of the appeal is not pronounced by ITAT, this condition of mandatory pre-deposit operates in a biased manner in favour of the Department. The condition of paying 20% of the disputed demand fails to protect the interest of the parties in the litigation and especially the party who is in fact likely to succeed in such scenario.
  • Indeed, it is embarrassing and an absurd situation that where CBDT Instruction No. 1914 dated 21.03.1996 as modified from time to time allows the Assessing Officer (executive authority) under Section 220(6) to relax the directory rate of 20% of the outstanding demand in certain scenarios but ITAT (judicial authority), who has the authority to either confirm, modify or annul the order of the very Assessing Officer, would not be in a position to grant the assessee the relief which it deems fit.
  • To add insult to injury, it is submitted that the inherent powers of CIT(A) who happens to be an authority lower in rank than ITAT continues to hold unrestricted inherent power to grant a stay. It is interesting to note that restriction of limitation of 180 days and/or 365 days as provided under Section 254(2-A) is completely absent in such case. It is submitted that the judicial hierarchy prevailing under the scheme of the Act up to the stage of ITAT has been turned on its own head by the amended first proviso to Section 254(2-A) of the Act insofar as the powers to grant stay to the assessee is concerned.
  • Consider a case where the issue under consideration in the appeal can be argued by the assessee on the strength of the decision and/or principles laid down by ITAT, High Court or the Supreme Court and after hearing the stay application, ITAT is of the opinion that a case for 100% stay has been made out. Nevertheless, mandating the assessee to pay in accordance with the amended first proviso to Section 254(2-A) of the Act would make the assessee suffer with harsh and unjust consequences and make ITAT face such an embarrassing situation that it cannot grant the assessee any relief even it has, as an institution decided the case in favour of the assessee.
  • The condition under the amended first proviso mandates the ITAT to commit breach of judicial discipline. For instance, consider a situation where a decision/ principle laid down by the jurisdictional High Court is applicable which makes it likely for the assessee to succeed. However, the ITAT may not be able to grant the assessee any stay merely because of the condition of pre-deposit of 20% of the disputed demand.

Consider another situation where the ITAT has decided the issue in the assessee’s own case in his favour for an earlier assessment year. Yet, he may not be able to obtain complete stay because of the mandatory condition of 20%. It is indeed a dangerous situation where the ITAT itself is not able to enforce its own order. It is submitted that when rights of a person are injured, a judicial forum is the last resort that is available. Unfortunately, it is this right in respect of stay matters that has been sought to be taken away without providing for any reason and in a manner, which is excessive and disproportionate.

Judicial discipline demands that a decision of the Co-ordinate Bench ought to be followed [see Hatkesh Co-Op. Housing Society Ltd. v. ACIT[41]]. Further, it is not unknown that the Department makes the addition to the income of the assessee despite a favorable decision in assessee’s own case merely because an appeal is preferred before a higher forum [see Union of India v. Kamlakshi Finance Corporation[42]  and also see HDFC Bank Ltd. v. ACIT[43]]. In these cases, the Courts have expressed strong displeasure for not following the principle of judicial discipline.

The only remedy available to the assessee would be that of approaching the High Court under Article 226 of the Constitution. The situation brought about is indeed strange especially considering the cautious manner in which ITAT grants stay as judicially noted in Maruti Suzuki case. Due to such situation, more assessees would approach the High Court under Article 226 of our august Constitution. Precious time of the Courts would get applied unnecessarily when the ITAT discharges such function under its appellate jurisdiction. Indeed, the remedy of stay would not remain an effective and efficacious remedy anymore.

One of the policies of the State is to reduce the litigation and enable the citizens to obtain justice as early as possible. The amendment is contrary to this policy for it would increase the burden upon the higher judiciary.

The decision of the Constitution Bench in  Rojer Mathew v. South Indian Bank Ltd.[44]  in the opinion authored by the then  Chief Justice has expressed its strong displeasure and noted a non-exhaustive list of at least a dozen of statutes providing direct appeal from the orders of the Tribunals which has the effect of reducing the focus of the Court in matters which otherwise deserve more attention. For instance, it has noted that the judicial pronouncements by the Constitution Bench of the Supreme Court in the early 1960s had decided hundreds of cases in comparison to cases not more than a dozen at the present time.

The above observation of the Constitution Bench  in  Rojer Mathew (supra) has only been pointed out to highlight the need to decongest our higher judiciary. On the contrary, this amendment has the tendency to increase numerous writ petitions wherein the assessees would have to seek stay which otherwise could have been obtained from ITAT.

In view of the above, it can be seen that firstly, there is no reason forthcoming as to why the powers of ITAT to grant stay which were wholly discretionary in nature and exercised in a judicious manner is being restricted to the rigid condition of 20% especially when it has been performing this function since 1968.

Secondly, the excessiveness and unreasonableness of the amendment and the severe adverse consequences it has on the rights of the assessee and the authority of ITAT is a serious matter of concern.

Thirdly, the rigid limit of 20% operates in a biased manner in favour of the Department. It is submitted that stay is granted in matters only when the assessee has been able to establish that the demand raised may not survive. This is despite going through the assessment proceedings as well the proceedings before first appellate authority. The assessee has no control over them in the matter of passing orders. Where a prima facie case is still established, then the correctness of the order of lower authorities is not free. Thus, it is submitted that the condition of allowing collection of 20% of disputed demand is biased and in favour of Department. In  Mardia Chemicals Ltd. v. Union of India[45], despite the existence of the provisions for waiving the pre-deposit (75%), the condition of pre-deposit was found to be heavily in favour of the respondent. On this principle, the same was struck down.

In view of the above, it is submitted that the amendment to the first proviso to Section 254(2-A) attracts the vice of arbitrariness, excessiveness and unreasonableness, brought in without an adequate determining principle without any fairness and equitable treatment. The amendment operates with a heavy bias in favour of the Department. It is therefore submitted that the amendment mandating payment of 20% ought to be struck down as arbitrary.

5. Conclusion

Whenever the rights of parties are affected, the forum of last resort is a judicial forum. This forum must necessarily be independent and must be in a position to uphold the rights and condemn the wrong. The Supreme Court has expressed its displeasure in at least five[46] of its Constitutional Bench decisions in the manner in which the minimum standards of judicial independence as are required to be maintained have been diluted. It is sincerely submitted that the amendment brought in by Section 99 of the Finance Act, 2020 if not held to be directory in nature would be another dilution to the  independence of the judiciary which is necessarily required to be maintained in order to enable the citizens to obtain justice and relief from the institution of last resort. I would conclude with a passage from the decision of the  Supreme Court in  Union of India v. R. Gandhi[47] (supra) is reproduced hereunder:

“115. The need for vigilance in jealously guarding the independence of Courts and Tribunals against dilution and encroachment, finds an echo in an advice given by Justice William O. Douglas to young lawyers (The Douglas Letters: Selections from the Private Papers of William Douglas, edited by Melvin L. Urofsky – 1987 Ed., p. 162, – Adler and Adler): (SCC pp. 62-63)

“… The Constitution and the Bill of Rights were designed to get Government off the backs of people – all the people. Those great documents did not give us the welfare State. Instead, they guarantee to us all the rights to personal and spiritual self-fulfilment.

But that guarantee is not self-executing. As nightfall does not come all at once, neither does oppression. In both instances, there is a twilight when everything remains seemingly unchanged. And it is in such twilight that we all must be most aware of change in the air – however slight — lest we become unwitting victims of the darkness”.                                                 

(emphasis in original)


* Advocate, Bombay High Court

[1] Inserted with effect from 01.04.2020.

[2] This proviso has been inserted to replace the second proviso as it stood before the amendment brought in by the Finance Act, 2020.

[3] The condition of 20% is in line with the CBDT Instruction No. 1914 dated 21.03.1996 as modified from time to time.

[4] (1969) 71 ITR 815 

[5] [1879] 12 Ch. D. 438 

[6] (1969) 71 ITR 815

[7] [2007] 295 ITR 22 (Bombay)

[8] (1981) 4 SCC 173 : 1981 SCC (Tax) 293 

[9] (2009) 5 SCC 208 

[10] (1986) 1 SCC 523 : 1986 SCC (Tax) 233 

[11] (1969) 2 SCC 481 

[12] 1982 SCC OnLine Del 291

[13] 1993 SCC OnLine Mad 501

[14] 2005 SCC OnLine Guj 507 

[15] (1969) 71 ITR 815

[16] 1993 SCC OnLine Mad 501

[17] 1952 SCR 28 

[18] 1982 SCC OnLine Del 291

[19] 1993 SCC OnLine Mad 501

[20] 2004 SCC OnLine CESTAT 3467

[21] [2005] 180 ELT 434 (SC)

[22] [2007] 295 ITR 22 (Bombay)

[23] 2005 SCC OnLine Guj 507

[24] (1969) 71 ITR 815

[25] 2005 SCC OnLine Guj 507

[26]2015 SCC OnLine Guj 6235 

[27] (2009) 5 SCC 208 

[28](1969) 71 ITR 815

[29] (1986) 1 SCC 523

[30] [2007] 295 ITR 22 (Bombay)

[31] [2005] 180 ELT 434 (SC)

[32] 2015 SCC OnLine Del 9543 

[33] Rojer Mathew v. South Indian Bank Ltd., 2019 SCC OnLine SC 1456

[34] (1987) 1 SCC 124

[35] 1975 Supp SCC 1 

[36] (1967) 1 SCR 77  

[37] (2010) 11 SCC 1 

[38] (2017) 9 SCC 1 

[39] [2014] 362 ITR 215 (Delhi)

[40] 2013 SCC OnLine Bom 396

[41] [2016] 243 Taxman 213 (Bombay)]

[42] 1992 Supp (1) SCC 648

[43] 2013 SCC OnLine Bom 1795 

[44] 2019 SCC OnLine SC 1456 

[45] (2004) 4 SCC 311 

[46] (i) L. Chandrakumar v. Union of India, (1997) 3 SCC 261;(ii) Union of India v. R. Gandhi, (2010) 11 SCC 1; (iii) Madras Bar Association v. Union of India, (2015) 8 SCC 583 ; (iv) Madras Bar Association v. Union of India, (2014) 10 SCC 1 and (v) Rojer Mathew v. South Indian Bank Ltd., 2019 SCC OnLine SC 1456.

[47] (2010) 11 SCC 1

Case BriefsTribunals/Commissions/Regulatory Bodies

Customs, Excise and Services Tax Appellate Tribunal (CESTAT): A Coram of P.K. Choudhary (Judicial Member) and P. Anjani Kumar (Technical Member), rejected an appeal filed in connection of claiming refund of Service Tax.

The assessee had erroneously paid the Service Tax, with the introduction of separate services under the category of ‘Mining Service’ w.e.f. 01-06-2007, the Respondent/assessee were of the view that their service would fall under the new category and the Service Tax paid by them was not statutorily required to be paid. The Adjudicating Authority had rejected the refund claim. On appeal, the Commissioner had allowed the refund of Service Tax paid for the period prior to 01-06-2007. Thus the instant appeal was filed by the department.

The Court while rejecting the appeal by the revenue relied on the Judgment of CCE v. Vijay Leasing Co., 2010 SCC Online CESTAT 1488 and held that the present case was squarely covered by the decision of the Tribunal in the above case. [Commr. Of CES & ST v. Euro Industrial Enterprises (P) Ltd., Service Tax Appeal No. 1034 of 2009, decided on 04-03-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

Customs, Excise and Service Tax Appellate Tribunal (CESTAT): This appeal was filed by Revenue before a Coram of Madhu Mohan Damodhar (Technical Member) and P. Dinesha (Judicial Member) being aggrieved by the impugned order where appeal of assessee was allowed on the ground that unwarranted removal were based on the recorded statements with no corroborative evidence.

Facts leading to the dispute were that assessee was found to have maintained two invoices of same number with different dates and different value but accounting only one of the two. Ms T. Usha Devi, learned Deputy Commissioner on behalf of the Revenue, contended that the assessee had maintained duplicate invoices which on being contested was not rebutted and can be considered as sufficient proof that there was unwarranted activity. Whereas Mr M.A. Mudimannan, learned counsel appearing for the assessee, supported the findings of the Commissioner made in the appeal.

Tribunal was of the view that the duplicate invoices caused difference between physical production quantity in the stock register and that in respect of only the duplicate invoices the unwarranted removal will have to sustain. The adjudicating authority was directed to re-work the demand which was based on duplicate invoice. Therefore, this appeal was partly allowed and partly remanded. [CCE v. A.R. Metallurgicals (P) Ltd., 2019 SCC OnLine CESTAT 81, Order dated 01-05-2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

Customs, Excise and Service Tax Appellate Tribunal, Chennai: Assessee preferred this appeal before P. Dinesha, J., where assessee was only aggrieved by the dismissal of the appeal by the First Appellate Authority, without condoning the delay in filing the first appeal.

Assesse for explaining delay mentioned that one of the partners of the appellant firm had personal problems. Per contra, it was submitted by the respondent that the delay in filing the first appeal was nine months and the power to condone the delay after the end of 90 days lies only with the Court thus, impugned order should sustain. It was contended by the assessee that sufficient cause was shown and that the Courts had held that a liberal approach should be in condoning of delay. Lest a deliberation is shown for delay the explanation for delay needs to be accepted.

Tribunal was of the view that appeal was filed under Section 129-A of the Customs Act and Section 129-A (5) empowered this forum to condone the delay of any number of days. Section 129 does not authorize this forum to enter the domain of the first appellate authority since the scope of appellate jurisdiction was limited and to assume the jurisdiction of the first appellate authority by this forum was not authorized. It was observed that the first appellate authority had exercised its discretion in accordance with limitation law and thus, this forum could not have judged the correctness of the same. Therefore, this appeal was dismissed. [Vikgnesh Enterprises v. Commissioner (GST), 2019 SCC OnLine CESTAT 55, Order dated 16-04-2019]