Advance RulingsCase Briefs

Rajasthan Appellate Authority for Advance Ruling: The Bench of Pramod Kumar Singh, Member (Central Tax) and Ravi Jain, Member (State Tax) while addressing a matter held that hostel seat should be considered as a unit of accommodation.

Factual Background

Appellant had filed an appeal against the ruling issued by Authority for Advance Ruling Rajasthan.

Appellant was registered as a Public Charitable Trust under Section 12AA of the Income Tax Act, 1961. It was stated that the appellant was also the sponsoring body of Mody University of Science and Technology (MUST).

Further, it was added that the appellant was considering a proposal to allow the students of MUST to use the ‘Hostel Accommodation’ in its surplus infrastructure which includes Hostel Seat for the students along with serving meals including breakfast, lunch and dinner.

The ‘Boarding and Lodging Charges’ will directly be charged from the students and shall be based on the type of the ‘HOSTEL SEAT’ opted by the students.

The application was filed before the Rajasthan Authority for Advance Ruling to seek an Advance Ruling on the following:

Whether Hostel facility which includes Lodging and Boarding service provided by appellant to the students of MUST having value service upto Rs 1000 per day would be eligible for exemption under entry 14 of the notification 12/2017 CTR Dt. 28-06-2017?

Rajasthan Authority for Advance Ruling held that the applicant would not be eligible for exemption under entry no 14 of the Notification No. 12/2017 Central Tax (Rate), dated 28-6-2017.

Aggrieved with the above, the present appeal was filed.

Analysis and Decision

Rajasthan Appellate Authority for Advance Ruling expressed that, the Hostel Accommodation Service is at par with the “Service by a hotel, Inn, guest house, club or campsite, by whatever name called, for residential or lodging purpose” which falls under Service Accounting Code – 9963.

The Bench noted that as per Section 2(74) of the CGST Act the term “mixed supply” means two or more individual supplies of goods or services, or any combination made in conjunction with each other day by a taxable person for a single price where such supply does not constitute a composite supply.

In the present matter, the Authority observed that the appellant was supplying services of food along with Hostel Accommodation service.

“The supply of food with Hostel Accommodation service is not naturally bundled in normal course of business.”

Authority added that, a person can live in the hostel without availing other services like food but to make ones stay more comfortable, the said ancillary services are availed him.

Bench found that other services being provided by the appellant were not naturally bundled or ancillary to Hostel service as the inhabitants of Hostel seats can avail the said services from any other source. In fact, the inhabitants have been restricted from sourcing these other services from any other person and have to avail the same from the appellant.

“…supply of hostel accommodation along with food is not a composite supply but it is a mixed supply.”

As per Section 8 (b) of the CGST Act, 2017 in case of the mixed supply of accommodation and food, the highest rate of both will be applicable.

In view of the above, the appeal was disposed of. [Mody Education Foundation, In Re., RAJ/AAAR/01/2021-22, decided on 27-10-2021]

Case BriefsSupreme Court

Supreme Court: The bench of UU Lalit and S. Ravindra Bhat*, JJ has held that whether corporate death of an entity upon amalgamation per se invalidates a tax assessment order ordinarily cannot be determined on a bare application of Section 481 of the Companies Act, 1956 (and its equivalent in the 2013 Act), but would depend on the terms of the amalgamation and the facts of each case.

Facts Background

The Court was deciding an appeal against the order of the Delhi High Court rejecting the appeal, by the revenue and affirming the order of the Income Tax Appellate Tribunal (ITAT) which quashed the assessment order against the assessee Mahagun Realtors Private Limited (MRPL).

MRPL, a real estate company, amalgamated with Mahagun India Private Limited (MIPL) on 01.04.2006. The Assessing Officer (AO), issued an assessment order on 11.08.2011, assessing the income of ₹ 8,62,85,332/- after making several additions of ₹ 6,47,00,972/- under various heads. The assessment order showed the assessee as “Mahagun Relators Private Ltd, represented by Mahagun India Private Ltd”.

It was argued before the Court that the assessment framed in the name of amalgamating company which was ceased to exist in law, was invalid and untenable in terms of Section 170(2) of the Income Tax Act, 1961.

Analysis

Section 170 of Income Tax Act, inter alia, provides that where a person carries on any business or profession and is succeeded (to such business) by some other person (i.e., the successor), the predecessor shall be assessed to the extent of income accruing in the previous year in which the succession took place, and the successor shall be assessed in respect of income of the previous year in respect of the income of the previous year after the date of succession.

Further, there are not less than 100 instances under the Income Tax Act, wherein the event of amalgamation, the method of treatment of a particular subject matter is expressly indicated in the provisions of the Act. In some instances, amalgamation results in withdrawal of a special benefit (such as an area exemption under Section 80IA) – because it is entity or unit specific. In the case of carry forward of losses and profits, a nuanced approach has been indicated. All these provisions support the idea that the enterprise or the undertaking, and the business of the amalgamated company continues. The beneficial treatment, in the form of set-off, deductions (in proportion to the period the transferee was in existence, vis-à-vis the transfer to the transferee company); carry forward of loss, depreciation, all bear out that under the Act, (a) the business-including the rights, assets and liabilities of the transferor company do not cease, but continue as that of the transferor company; (b) by deeming fiction through several provisions of the Act, the treatment of various issues, is such that the transferee is deemed to carry on the enterprise as that of the transferor.

The amalgamation of two or more entities with an existing company or with a company created anew was provided for, statutorily, under the old Companies Act, 1956, under Section 394 (1) (a). Section 394 empowered the court to approve schemes proposing amalgamation, and oversee the various steps and procedures that had to be undertaken for that purpose, including the apportionment of and devolution of assets and liabilities, etc.

Reading Section 394 (2) of the Companies Act, 1956, Section 2 (1A) and various other provisions of the Income Tax Act together, the Court reached to the conclusion that despite amalgamation, the business, enterprise and undertaking of the transferee or amalgamated company- which ceases to exist, after amalgamation, is treated as a continuing one, and any benefits, by way of carry forward of losses (of the transferor company), depreciation, etc., are allowed to the transferee. Therefore, unlike a winding up, there is no end to the enterprise, with the entity. The enterprise in the case of amalgamation, continues.

The Court observed,

“Amalgamation, thus, is unlike the winding up of a corporate entity. In the case of amalgamation, the outer shell of the corporate entity is undoubtedly destroyed; it ceases to exist. Yet, in every other sense of the term, the corporate venture continues – enfolded within the new or the existing transferee entity. In other words, the business and the adventure lives on but within a new corporate residence, i.e., the transferee company. It is, therefore, essential to look beyond the mere concept of destruction of corporate entity which brings to an end or terminates any assessment proceedings. There are analogies in civil law and procedure where upon amalgamation, the cause of action or the complaint does not per se cease – depending of course, upon the structure and objective of enactment. Broadly, the quest of legal systems and courts has been to locate if a successor or representative exists in relation to the particular cause or action, upon whom the assets might have devolved or upon whom the liability in the event it is adjudicated, would fall.”

Ruling on facts

The Court specifically noticed that, in the present case,

  • The amalgamation was known to the assessee, even at the stage when the search and seizure operations took place, as well as statements were recorded by the revenue of the directors and managing director of the group.
  • A return was filed, pursuant to notice, which suppressed the fact of amalgamation; on the contrary, the return was of MRPL. Though that entity ceased to be in existence, in law, yet, appeals were filed on its behalf before the CIT, and a cross appeal was filed before ITAT.
  • Even the affidavit before the Supreme Court was on behalf of the director of MRPL.
  • The assessment order painstakingly attributed specific amounts surrendered by MRPL, and after considering the special auditor’s report, brought specific amounts to tax, in the search assessment order.

The Court was, hence, of the opinion that all the aforementioned points clearly indicated that the order adopted a particular method of expressing the tax liability. The AO, on the other hand, had the option of making a common order, with MIPL as the assessee, but containing separate parts, relating to the different transferor companies (Mahagun Developers Ltd., Mahagun Realtors Pvt. Ltd., Universal Advertising Pvt. Ltd., ADR Home Décor Pvt. Ltd.).

“The mere choice of the AO in issuing a separate order in respect of MRPL, in these circumstances, cannot nullify it.”

Right from the time it was issued, and at all stages of various proceedings, the parties concerned (i.e., MIPL) treated it to be in respect of the transferee company (MIPL) by virtue of the amalgamation order – and Section 394 (2). Furthermore, it would be anybody’s guess, if any refund were due, as to whether MIPL would then say that it is not entitled to it, because the refund order would be issued in favour of a non-existing company (MRPL).

Having regard to all these reasons, the Court held that the conduct of the assessee, commencing from the date the search took place, and before all forums, reflects that it consistently held itself out as the assessee.

[Principal Commissioner of Income Tax v. Mahagun Realtors (P) Ltd, 2022 SCC OnLine SC 407, decided on 05.04.2022]


*Judgment by: Justice S. Ravindra Bhat


Counsels

For Petitioner: Advocate Raj Bahadur Yadav

For respondents: Advocate Kavita Jha

Case BriefsSupreme Court

Supreme Court: The bench of UU Lalit and S. Ravindra Bhat*, JJ has held that the declaration under the Income Declaration Scheme (IDS) cannot lead to immunity from taxation in the hands of a non-declarant.

The Court explained that the objective of Income Declaration Scheme (IDS), introduced by Chapter IX of the Finance Act, 2016, was to enable an assessee to declare her (or his) suppressed undisclosed income or properties acquired through such income. It is based on voluntary disclosure of untaxed income and the assessee’s acknowledging income tax liability. This disclosure is through a declaration (Section 183 of the Income Tax Act) to the Principal Commissioner of Income Tax within a time period, and deposit the prescribed amount towards income tax and other stipulated amounts, including penalty.

Facially, Section 192 of the Income Tax Act affords immunity to the declarant: “…nothing contained in any declaration made under section 183 shall be admissible in evidence against the declarant for the purpose of any proceeding relating to imposition of penalty…” Therefore, the protection given, is to the declarant, and for a limited purpose.

The assessee, in the case at hand, is a private limited company and had filed return of income for the AY 2010-11 on 25.9.2010. The return was accepted under section 143(1) of the Act without scrutiny.

The assessment was re-opened after search proceedings conducted in the case of one Shirish Chandrakant Shah, an accommodation entry provider in Mumbai, it was observed that huge amounts of unaccounted moneys of promoters/directors were introduced in closely held companies of the assessee’s group.

Further, the reasons to believe also stated that the chairman of M.R. Shah Group, during the statement- recorded under Section 132(4), disclosed that Garg Logistics Pvt. Ltd. had declared ₹ 6.36 crores as undisclosed cash utilized for investment in the share capital of the assessee, M.R. Shah Logistics Pvt. Ltd. through various companies. The assessee company’s chairman voluntarily  disclosed the statements made by Garg Logistics under Section 132 of the Act, about the declaration by Garg Logistics P Ltd, under the Income Declaration Scheme (IDS).

It can be seen that in the present case, the declarant was Garg Logistic Pvt Ltd and not the assessee. The Court, hence, held that the assessee could not claim immunity in the present case.

[Deputy Commissioner of Income Tax v. M. R. Shah Logistics Pvt. Ltd., 2022 SCC OnLine SC 365, decided on 28.03.2022]


*Judgment by: Justice S. Ravindra Bhat


For Assessee: Advocate Guru Krishnakumar

Case BriefsHigh Courts

Delhi High Court: The Division Bench of Manmohan and Dinesh Kumar Sharma, JJ., addressed a matter wherein the decision of Income Tax Appellate Tribunal for the Assessment Year 2011-12 was challenged.

Appellant’s Counsel stated that the respondent-assessee had appeared and cooperated in the assessment proceedings and had not raised any objection about non-service of notice under Section 143(2) of the Income Tax Act, 1961 during the entire assessment proceedings and therefore, the assessee was precluded from taking any objection that the notice was not issued in time in accordance with Section 292BB of the Act.

Further, the appellant stated that the Tribunal had erred in ignoring Section 124(3) of the Act which mandated that issue regarding jurisdiction of Assessing Officer cannot be challenged after one month from the issuance of notice under Section 143(2) of the Act or after completion of assessment proceedings, whichever is earlier.

Supreme Court’s decision in Commr. Of Income Tax v. Laxman Das Khandelwal, [2019] 417 ITR 325 (SC) interpreted Section 292BB of the Income Tax Act.

High Court stated that it was in agreement with the Tribunal that Section 292BB does not give the power to condone the failure or delay in issuing the statutory notice required to be issued under Section 143(2) of the Act. Section 292BB deals with the failure of service of notice and not with regard to the failure to issue notice.

In the above-cited Supreme Court decision, it was clearly stated that the scope of Section 292BB is to make service of notice having certain infirmities to be proper and valid. However, the Section does not save the complete absence of notice. For Section 292BB to apply, the notice must have emanated from the Department. It is only the infirmities in the manner of service of notice that the Section seeks to cure.

Therefore, since the notice under Section 143(2) of the Act was not issued within the period of six months prescribed for the purpose, jurisdiction assumed by the Assessing Officer under Section 143(3) of the Act was assumed erroneously.

Settled Law

The issue of jurisdiction goes to the roots of the cause and such an issue can be raised at any belated stage of the proceedings including appeal.

In Court’s opinion, no substantial question of law arose for consideration in the present appeal, hence it was dismissed. [PR. Commissioner of Income Tax v. Consortium Nussli Comfort Net, 2022 SCC OnLine Del 895, decided on 25-3-2022]


Advocates before the Court:

For the Appellant:

Mr Sanjay Kumar, Advocate with Ms Easha Kadian, Advocate

For the Respondent:

Dr. Rakesh Gupta, Advocate with Mr Somil Agarwal and Mr Anshul Mittal, Advocates.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Consumer Disputes Redressal Commission (NCDRC): The Coram of Dinesh Singh (Presiding Member) and Justice Karuna Nand Bajpayee (Member) expressed that in the ‘service’ of ‘housing construction’, if, in a particular case, “compensation” is computed “by way of interest” on the deposited amount it shall not be differently treated than the other cases in which the term “interest” may not at all be used in computing the compensation.

Background

This Commission had by an earlier order directed that OP shall refund the entire principal amount of Rs 2,74,79, 831,48 to the complainant alongwith compensation in form of simple interest at the rate of 11% and OP shall also pay a sum of Rs 25,000 as the cost of litigation.

Both sides admitted that the entire amount paid by the decree holder to the judgment debtors has been refunded along with the cost of litigation.

Issue for Consideration

Whether or not compensation which was computed by way of interest on the deposited amount, attracts TDS?

Analysis, Law and Decision

Coram stated that the only issue was in respect of deduction of tax at source on the “compensation” awarded, which in the present case was computed “in the form of simple interest” on the deposited amount.

Certainly, tax is not deducted at source if the compensation is awarded in the form of a lumpsum amount, or when the formula or yardstick, if and as any adopted for the purposes of computation, does not involve or refer to the term “interest”. It will therefore be erroneous to deduct tax at source just because in a particular case the formula or yardstick adopted for computation alludes to the term “interest”.

Commission clarified that it is neither adding to nor subtracting from the Income Tax Act. If a person is responsible to pay income tax on any revenue or capital receipt under the aid Act, he will be so liable.

Adding to the above, Coram stated that compensation awarded under the Consumer Protection Act is for the loss or injury suffered and is universally applicable to both goods and services inclusive of the service relating to housing construction.

The context and meaning of the term “interest” if used in the mode of calculation or a formula or yardstick adopted for computing compensation under section 2(1)(d) of the Consumer Protection Act is identifiably different from the context and meaning as used in Section 194A of the Income Tax Act.

Hence, there was no justification for deducting tax at source in the instant case.

Concluding the matter, the Commission observed that the tax deducted at source on compensation appeared to be a mistake with no malafide and even though the tax ought not to have been deducted it is also seen that the same has not been retained by the judgment debtors and deposited in the account of the decree-holder in the Income Tax Department.

In view of the above discussion, the matter was closed. [Rita Bakshi v. M3M India Ltd., 2022 SCC OnLine NCDRC 40, decided on 2-3-2022]


Advocates before the Commission:

For the Appellant: Mr. Deepak Narayana, Advocate

For the Respondent: Mr. A. K. Takkar, Advocate with Ms. Syashee Pesswani, Advocate

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.

Op EdsOP. ED.

Introduction

When determining the constitutional validity of taxation laws, the Court generally analyses whether the challenged provision makes a reasonable classification or not. The general tendency of courts in cases where taxation statutes are challenged on the ground of Article 14[1] of the Indian Constitution (Article 14) can be summed up in the words of the Supreme Court in N. Venugopala Ravi Varma Rajah v. Union of India,[2] which noted as follows– “A taxing statute is not, therefore, exposed to attack on the ground of discrimination merely because different rates of taxation are prescribed for different categories of persons, transactions, occupations or objects.” In this article the recent decision of the Supreme Court in CIT v. Pepsi Foods Ltd.[3] (Pepsi Foods decision), has been analysed in view of the above principle of law.

Relevant jurisprudence

A. Relationship between Article 14 and taxation laws

It is accepted that, “the State is allowed to pick and choose objects for taxation if it does do reasonably.” While the above extract is from the laws of the United States of America, the principle has been reiterated by the Indian courts in many decisions.[4] The Supreme Court in Amalgamated Tea Estates Co. Ltd. v. State of Kerala,[5]  held that, “as revenue is the first necessity of the State and as taxes are raised for various purposes and by an adjustment of diverse elements, the Court grants to the State greater choice of classification in the field of taxation than in other spheres.” They went ahead and in view of the above reasoning declared that, “On a challenge to a statute on the ground of Article 14, the Court would generally raise a presumption in favour of its constitutionality.”

For our analysis, it is pertinent to know that any classification made qua taxation legislature, must be based on “rational” grounds and should not be “arbitrary”. Thereby, what one requires to determine is whether the distinction created by the challenged provision is based on “intelligible differentia”. In such cases, the test of permissible classification dictates that a statute may create a distinction so long as it fulfils the two conditions. These are, first, that the classification must be based upon intelligible differentia and must distinguish persons who are grouped together from the rest and second, that the same must have a rational relationship with the objective sought to be achieved by the statute in question.[6]

The Indian courts have dealt with this proposition of law many times, in some cases even declaring taxation laws as unconstitutional. Some instances as highlighted by the Supreme Court in the Pepsi Foods decision[7] are as follows:

(a) Suraj Mall Mohta v. A.V. Visvanatha Sastri[8]– Section 5(4), the Taxation on Income (Investigation Commission) Act, 1947 was held unconstitutional qua Article 14 on the basis that the procedure was substantially more prejudicial and drastic to the assessee than the one contained under the Income Tax Act. The Court noted that, “Classification means segregation in classes which have a systematic relation, usually found in common properties and characteristics.”

(b) Kunnathat Thatehunni Moopil Nair v. State of Kerala[9]Land revenue/tax called “basic tax” challenged on grounds to have treated unequals equally. Classification made under the Land Tax Act, 1955 held to be creating an improper classification and provision held unconstitutional qua Article 14.  In this case, the Court on the ground that the imposition of the above law was ex facie hard on certain classes of people than the other owing to the productivity of their lands, set aside Section 4 of the Act.

(c) Union of India v. A. Sanyasi Rao[10]Section 44[11], the Income Tax Act held unconstitutional for singling out only certain trade whereby relief under Sections 28[12] and 43-C[13] denied to them. Accordingly, the Court held, that the above was “unfair and arbitrary as denying equal treatment under law”.

B. Law of interpretation of statutes

The “golden” rule of interpretation is relevant to the analysis of the Pepsi Foods decision[14]. The first rule of interpretation is ita scriptum est, which states that the Court must not add/modify the law and should carry out a simple literal or grammatical interpretation. However, Lord Wensleydale, in Grey v. Pearson, noted that in many circumstances grammatical or literal interpretation of statute leads to absurdity, repugnance or inconsistency in regard to the object of the statute.[15] Thus, the Court in such cases where the rule of literal interpretation fails may modify the law only with view to remove the said absurdity.

Background to the case

Section 254(2-A)[16], was introduced via amendment to the Finance Act, 1999[17]. It grants the Income Tax Appellate Tribunal (ITAT) power to pass orders in respect to appeals before it and declares that the same will decide the appeal within 4 years from end of financial year it was filed in. The controversy lies in the third proviso to the same which states, that if the appeal is not disposed within the above, order of stay shall stand vacated even if “delay not attributable to taxpayer.”

The genesis of this proviso may be traced to the decision of the Court in ITO v. M.K. Mohammed Kunhi,[18] where it was held that power granted to the Tribunal under Section 254(2-A), implicates that all incidental and necessary powers as well can be exercised such as the power to grant a stay. Power of stay may be exercised, by the Tribunal, however, not as routine and only when strong reasons support the grant of such a stay. The Tribunal must be convinced that the entire purpose of appeal will be frustrated if stay is not granted and recovery proceedings are allowed to continue.

The facts relevant to the present case are; the respondent (assessee) was initially a US based company which merged with PepsiCo India Holdings Pvt. Ltd. w.e.f. 1-4-2010, in view of a scheme of arrangement duly approved by Punjab & Haryana High Court. In the Assessment Year 2008-2009, a return was filed declaring the total income. A final assessment award was made against the assessee on 19-10-2012. The assessee filed an appeal before the Income Tax Appellate Tribunal on 29-4-2013. On 31-5-2013 a stay of the operation of the order of the assessing officer was granted for six months by the Tribunal. The stay extended for 6 months, and was subsequently extended till 28-5-2014. Since, the statutory period for extension of stay was to expire as under Section 254(2-A) was to end of 30-5-2014, the assessee filed a writ petition in the Delhi High Court. The Delhi HC struck down third proviso to Section 254(2-A) which did not permit extension of stay beyond 365 days even if assessee was not responsible for delay in hearing of appeal. The bunch of appeals before the Supreme Court which yielded in the Pepsi Foods decision[19], which is analysed in this article, aimed to seek whether Section 254(2-A), the Income Tax Act, 1961 was constitutional vis-à-vis Article 14 and challenged the orders of various High Courts[20] which also declared the provision unconstitutional.

Synopsis of arguments

The table below will illustrate the main arguments led by the counsels.

S. No. In regard to Petitioner Respondent
1. Whether there is a right to “stay”? No right to stay the judgment of appellate proceedings and the same dependent upon discretion of the appellate court, which once exercised the same does result in an automatic extension in cases of expiry of reasonable period. Once discretionary relief granted it would be arbitrary and discriminatory that such stay be vacated automatically without reference to whether or not the assessee responsible for such delay in appellate proceedings.
2. Whether remedy of stay available? Discretionary remedy of stay part and parcel with right to appeal, which is statutory and may be taken away. Once vested right to appeal there is a vested right to seek stay.

 

3. Whether Article 14 may be used to challenge constitutionality of tax legislations? Article 14 cannot be applied mechanically to tax laws. Discriminatory taxation may be struck down under Article 14 qua the test of Manifest Arbitrariness (Shayara Bano v. Union of India[21]).

 

Ratio of the decision[22]

The Court held that the third proviso to Section 254(2-A) is both arbitrary and discriminatory and thereby, offends Article 14 of the Constitution. This is for twofold reason, firstly, it treats unequals as equals. This is for reason that the same treats assessee who is responsible for delay in proceedings with those who are not. The astonishing feature pointed by the Court under Proviso 3 which in itself spells out the said distinction. Secondly, the third proviso was inserted with view to stay achieve speedy disposal of cases wherein stay has been granted in favour of the assessee. The Court noted that such an objective cannot be discriminatory or arbitrary. Therefore, the above distinction does not fulfil the twin test[23] laid down in Nagpur Improvement Trust v. Vithal Rao[24]. Accordingly, the third proviso which stated “automatic vacation of stay on completion of 365 days, whether or not assessee responsible for the same or not”, was held to be prima facie discriminatory and thus, violative of Article 14. Further, the provision was termed to be “capricious, irrational and disproportionate” towards the assessee.

The Court lay their reasoning in bedrock of various decisions outlining necessary facets of the present matter. The Court took reference from the decision in Essar Steel (India) Ltd. v. Satish Kumar Gupta[25], where the term “mandatorily” as used under Section 12(3) of the Insolvency and Bankruptcy Code, 2016[26] was struck down. The aforementioned decision noted that time taken in a proceeding should not operate to harm the litigant for no fault of their own. The Court went ahead and instead of categorising the entire provision as arbitrary only struck down the term “mandatorily” for being manifestly arbitrary and unreasonably excessive. Further, the Court also noted that where the “tax was imposed deliberately with the object of differentiating between persons similarly circumstanced” the same should be struck down.

Conclusion

In view of the above, the Court held that in the present matter, unequals have deliberately been treated as equals qua equating assesses who are responsible for the delay in appellate proceedings with those who are not. Such a distinction was categorised by the Court as arbitrary and discriminatory and accordingly liable to be struck down. The Court thus, upheld the decision of the Delhi High Court and held that the Section 254(2-A) third proviso must be read without the word, “even” and “is not” after the words, “delay in disposing of appeal”. Thereby, the Court following the golden rule of interpretation simply modified the part of the challenged law which created the absurdity. The unreasonable and arbitrary distinction so created on the grounds of being contrary to Article 14 of the Indian Constitution has been transformed instead of being struck down in its entirety. This has been done both to fit the scheme and fulfil objective of the Income Tax Act.


 Associate, Jusip, e-mail: ananyasharma.ail@gmail.com.

[1] <http://www.scconline.com/DocumentLink/h7G5KbD4>.

[2] (1969) 1 SCC 681 : (1969) 74 ITR 49.

[3] 2021 SCC Online SC 283.

[4] Jagannath Baksh Singh v. State of U.P., AIR 1962 SC 1563.

[5] (1974) 4 SCC 415  

[6] Grey v. Pearson (1857) 6 HL Cas 61, 106: 26 LJ Ch 473, 481.

[7] 2021 SCC Online SC 283.

[8] AIR 1954 SC 545 : (1955) 1 SCR 448.

[9] AIR 1961 SC 552 : (1961) 3 SCR 77.

[10] (1996) 3 SCC 465.

[11]  Income Tax Act, 1961, S. 44.

[12]  Income Tax Act, 1961, S. 28.

[13]  Income Tax Act, 1961, S. 43-C.

[14]  2021 SCC Online SC 283.

[15] (1857) 6 HL Cas 61, 106: 26 LJ Ch 473, 481.

[16]  Income Tax Act, 1961, S. 254(2-A).

[17]  Finance Act, 1999.

[18] AIR 1969 SC 430 : (1969) 71 ITR 815.

[19]  2021 SCC Online SC 283.

[20] CIT v. Ronuk Industries Ltd., 2010 SCC OnLine Bom 2064 : (2011) 333 ITR 99; Narang Overseas (P) Ltd. v. Income Tax Appellate Tribunal, 2007 SCC OnLine Bom 671 : (2007) 295 ITR 22; Pepsi Foods (P) Ltd. v. CIT, 2015 SCC OnLine Del 9543.

[21] (2017) 9 SCC 1.

[22] Paras 22 & 23, Pepsi Foods decision, 2021 SCC Online SC 283.

[23] Twin Test – (i) must be founded on intelligible deferential; and (ii) the differentia must have rational relation with the objective sought to be achieved by the legislation.

[24] (1973) 1 SCC 500.

[25] (2020) 8 SCC 531.

[26]  Insolvency and Bankruptcy Code, 2016, S. 12(3).

Case BriefsSupreme Court

Supreme Court: Interpreting Section 263(2) of the Income Tax Act, 1961, the bench of MR Shah* and AS Bopanna, JJ has held that receipt of the order passed under Section 263 by the assessee has no relevance for the purpose of counting the period of limitation provided under Section 263 of the Income Tax Act.

Section 263 (2) of the Income Tax Act, reads as under:-

“(2) No order shall be made under sub¬section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.”

On a fair reading of sub-section (2) of Section 263, the Court noticed that as mandated by sub¬section (2) of Section 263 no order under Section 263 of the Act shall be “made” after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.

“Therefore, the word used is “made” and not the order “received” by the assessee. Even the word “dispatch” is not mentioned in Section 263(2).”

Hence, once it is established that the order under Section 263 was made/passed within the period of two years from the end of the financial year in which the order sought to be revised was passed, such an order cannot be said to be beyond the period of limitation prescribed under Section 263 (2) of the Act.

Holding that the word used is “made” and not the “receipt of the order”, the Court noticed that,

“As per the cardinal principle of law the provision of the statue/act is to be read as it is and nothing is to be added or taken away from the provision of the statue.”

[Commissioner of Income Tax v. Mohammed Meeran Shahul Hameed, 2021 SCC OnLine SC 901, decided on 07.10.2021]


Counsels:

For Revenue: ASG Vikramjit Banerjee

For Respondents: Senior Advocate R. Sivaraman


*Judgment by: Justice MR Shah

Know Thy Judge | Justice M. R. Shah

Case BriefsSupreme Court

Supreme Court of India: Noting the donations being made to the Trust to be ‘bogus donations’ Bench of Uday Umesh Lalit and Ajay Rastogi, JJ., cancelled the registration of the Trust under Section 12AA and 80G of the Income Tax Act, 1963.

What transpired the present matter?

Present appeal challenged the decision of Calcutta High Court setting aside the order passed by Commissioner of Income Tax (Exemption) cancelling the registration of respondent Trust under Section 12AA of the Income Tax Act, 1961 and another order passed by the Income Tax Appellate Tribunal dismissing appeals therefrom.

Background

Trust was registered under Section 12AA of the Act and was also accorded approval under Section 80G (vi) of the Act.

It was stated that in a survey conducted on an entity named School of Human Genetics and Population Health, Kolkata under Section 133A of the Act, it was prima facie observed that the Trust was not carrying out its activities in accordance with the objects of the Trust. Hence a show-cause notice was issued by the CIT.

Hence CIT invoked the provisions of Section 12AA(3) of the Income Tax Act and cancelled the registration under Section 12AA of the Act. This resulted in cancellation of the approval granted to the Trust under Section 80G of the Act.

When the matter reached High Court, Trust submitted that it had received donations from various donors and the Trust was under no obligation to verify the source of the funds of the donor or whether those funds were acquired by performance of any unlawful activity.

Further, it was also added that the funds were applied for the purposes of trust and that there was no evidence to suggest that those funds were applied for any illegal or immoral purposes or that the Trust was a namesake.

High Court had allowed the appeal and set aside the order of cancellation of the registration of the Trust while directing for the restoration of its registration.

Analysis, Law and Decision

Bench noted that as per the answers to the questionnaire put forward to the Managing Trustee, it depicted the extent of misuse of the status enjoyed by the Trust by virtue of registration under Section 12AA of the Act.

The answers also showed that the donations were received by way of cheques out of which substantial money was ploughed back or returned to the donors in cash. As per the facts, the said donations were ‘bogus’ donations and that the registration conferred upon the Trust under Section 12AA and 80G of the Act was completely being misused by the Trust.

Hence, the authorities were right in cancelling the registration under Section 12AA and 80G of the Act.

Opinion on High Court’s decision

Supreme Court held that High Court erred in entertaining the appeal and it did not even attempt to deal with the answers to the questions and whether the conclusions drawn by the CIT and the Tribunal were in any way incorrect or invalid.

Conclusion

While setting aside the decision under challenge, Court allowed the present appeal and restored the order passed by the CIT and the Tribunal. [Commissioner of Income Tax (Exemptions) v. Batanagar Education and Research Trust, 2021 SCC OnLine SC 529, decided on 2-08-2021]


Advocates before the Court:

Pet. Advocate(s)   ANIL KATIYAR
Resp. Advocate(s)   ABHIJIT SENGUPTA[caveat]
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

Legislation UpdatesNotifications

The Central Board of Direct Taxes has passed Income Tax (25th Amendment) Rules, 2021 on August 31, 2021. The Income Tax (25th Amendment) Rules, 2021 shall come into force on April 1, 2022. The Amendment inserts Rule 9D prescribing calculation of taxable interest relating to contribution in a provident fund, exceeding specified limit. For the calculation of taxable interest relating to provident fund, following points to be taken into consideration under Rule 9D:

 

  • The Non-taxable contribution account shall be the aggregate of the following:
  • closing balance in the account as on March 31, 2021
  • any contribution made by the person in the account during the previous year 2021-2022 and subsequent previous years, which is not included in the taxable contribution account; and
  • interest accrued as reduced by withdrawal
  • The Taxable contribution account shall be the aggregate of the following:
  • contribution made by the person in a previous year in the account during the previous year 2021-2022 and subsequent previous years, which is in excess of the threshold limit; and
  • interest accrued as reduced by the withdrawal, if any, from such account; and

 

The threshold limit shall mean:

  • five lakh rupees, if the second proviso to clause (11) or clause (12) of section 10 is applicable; and
  • two lakh and fifty thousand rupees in other cases.

 


*Tanvi Singh, Editorial Assistant has reported this brief.

Case BriefsSupreme Court

Supreme Court: The Division Bench of Hemant Gupta and A.S. Bopanna, JJ., addressed whether the 2010 amendment of Payment of Gratuity Act 1972 is retrospective.

In the instant matter, Jharkhand High Court’s decision has been challenged whereby the claim of the appellants to declare the applicability of Payment of Gratuity (Amendment) Act, 2010 from 1-1-2007 was declined.

Appellants were employees of Coal India Limited. Government of India had approved the enhancement of gratuity to the executives and Non-Unionized Supervisors of Central Sector Enterprises such as the Coal India Limited where the appellants were employed and the said gratuity was raised to Rs 10 lakhs.

Later, the Payment of Gratuity Act was amended.

Grievance of the Appellants

Appellants were aggrieved that the tax was deducted at the source when the gratuity was paid to the appellants before the commencement of the Amending Act. Thus, the appellants challenged the date of commencement as 24-05-2010 but asserted that it should be made effective from 1-1-2007 and consequently the appellants would not be liable for deduction of tax on the gratuity amount.

The Judgment of D.S. Nakara v. Union of India, (1983) 1 SCC 305, came up for consideration before this Court in a Judgment of State Government Pensioners’ Assn. v. State of A.P., (1986) 3 SCC 501, wherein the payment of gratuity from a specified date of retirement was held to be not unconstitutional.

A similar view was taken in the Supreme Court decision of Union of India v. All India Service Pensioners’ Assn., (1988) 2 SCC 580, wherein it was held that the pension was payable periodically as long as the pensioner was alive whereas the gratuity was ordinarily paid only once on retirement.

Section 4(5) of the Gratuity Act protects the rights of an employee to receive better terms of gratuity under any award or contract with the employer. The gratuity paid to the appellants on strength of office memorandum would fall in the said sub-section.

 “…what is exempt from the Income Tax Act is the amount of gratuity received under the Gratuity Act to the extent it does not exceed an amount calculated in accordance with the provisions of sub-sections (2) and (3) of Section 4 of the Gratuity Act.”

The Gratuity Act contemplated Rs 10 lakhs as the amount of gratuity only from 24-5-2010. Such gratuity is the amount payable only once. Thus, the cut-off date cannot be said to be illegal, it being one-time payment.

Therefore, such amendment in the Gratuity Act cannot be treated to be retrospective. Hence, the said provisions of the statute cannot be said to be retrospective.

In a recent judgment Himachal Road Transport Corporation v. Himachal Road Transport Corporation Retired Employees Union, (2021) 4 SCC 502, in the case of payment of increased quantum of death-cum-retirement gratuity, it was held that the cut-off date cannot be said to be arbitrary which was fixed keeping in view financial constraints.

Lastly, in view of the above, Bench found that the date of commencement fixed by the Executive in exercise of power delegated by the Amending Act cannot be treated to be retrospective as the benefit of higher gratuity was one-time available to the employees only after the commencement of the Amending Act.

Concluding the matter, it was held that benefit paid to the appellants under the office memorandum is not entitled to exemption in view of specific language of Section 10(10)(ii) of the Income Tax Act.

No error was found in the Jharkhand High Court’s decision. [Krishna Gopal Tiwary v. Union of India, 2021 SCC OnLine SC 581, decided on 13-08-2021]

Case BriefsSupreme Court

Supreme Court: The division bench of RF Nariman* and BR Gavai, JJ has explained the object and scope of Explanation 3C of the Section 43B of the Income Tax Act, 1961 and has held that Explanation 3C is clarificatory as it explains Section 43B(d) as it originally stood and does not purport to add a new condition retrospectively.

Section 43B. Certain deductions to be only on actual payment – Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

xxx xxx xxx

(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or

xxx xxx xxx

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him: Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.

xxx xxx xxx

Explanation 3C.—For the removal of doubts, it is hereby declared that a deduction of any sum, being interest payable under clause (d) of this section, shall be allowed if such interest has been actually paid and any interest referred to in that clause which has been converted into a loan or borrowing shall not be deemed to have been actually paid.

Why was Section 43B inserted?

Section 43B was originally inserted by the Finance Act, 1983 w.e.f. 1st April, 1984 after taking note of the fact that in several cases taxpayers were not discharging their statutory liability such as in respect of excise duty, employer’s contribution to provident fund, Employees State Insurance Scheme, etc., for long periods of time, extending sometimes to several years.

To curb this practice, the Finance Act inserted a new section 43B to provide that deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force or any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees shall irrespective of the previous year in which the liability to pay such sum was incurred, be allowed only in computing the income of that previous year in which such sum is actually paid by the assessee.

Why was Explanation 3C inserted?

The Finance Act, 2006 inserted Explanation 3C w.e.f. 1st April, 1989 after it was brought to the Board’s notice that certain assessees were claiming deduction under section 43B on account of conversion of interest payable on an existing loan into a fresh loan on the ground that such conversion was a constructive discharge of interest liability and, therefore, amounted to actual payment. Claim of deduction against conversion of interest into a fresh loan is a case of misuse of the provisions of section 43B.

A new Explanation 3C was, therefore, inserted to clarify that if any sum payable by the assessee as interest on any loan or borrowing, referred to in clause (d) of section 43B, is converted into a loan or borrowing, the interest so converted, shall not be deemed to be actual payment.

Object of Section 43B and Explanation 3C

The object of Section 43B, as originally enacted, is to allow certain deductions only on actual payment. This is made clear by the nonobstante clause contained in the beginning of the provision, coupled with the deduction being allowed irrespective of the previous years in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by it.

“In short, a mercantile system of accounting cannot be looked at when a deduction is claimed under this Section, making it clear that incurring of liability cannot allow for a deduction, but only “actual payment”, as contrasted with incurring of a liability, can allow for a deduction.”

Explanation 3C, which was introduced for the “removal of doubts”, only made it clear that interest that remained unpaid and has been converted into a loan or borrowing shall not be deemed to have been actually paid.

“… at the heart of the introduction of Explanation 3C is misuse of the provisions of Section 43B by not actually paying interest, but converting such interest into a fresh loan.”

Hence,

  • Since Explanation 3C was added in 2006 with the object of plugging a loophole – i.e. misusing Section 43B by not actually paying interest but converting interest into a fresh loan, bona fide transactions of actual payments are not meant to be affected.
  • A retrospective provision in a tax act which is “for the removal of doubts” cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood.
  • Any ambiguity in the language of Explanation 3C shall be resolved in favour of the assessee as per Cape Brandy Syndicate v. Inland Revenue Commissioner [1921 (1) KB 64] as followed in Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613.

[MM Aqua Technologies Ltd. v. Commissioner of Income Tax, 2021 SCC OnLine SC 575, decided on 11.08.2021]


*Judgment by: Justice RF Nariman

Case BriefsHigh Courts

Delhi High Court: The Division Bench of Manmohan and Navin Chawla, JJ., noted the mandatory condition provided under Section 144B (7) of Income Tax Act, 1961.

Present petition challenged the Assessment order, notice of demand and notice of penalty passed under Section 143(3) read with Section 144B, Section 156 and Section 274 read with Section 271AAC(1) of the Income Tax Act, 1961 pertaining to the Assessment Year 2018-19.

Petitioner’s counsel submitted that there had been a breach of principles of natural justice, inasmuch as the respondent/revenue had failed to issue the mandatory Show Cause Notice-cum-draft assessment order to the petitioner/assessee, prior to the passing of the impugned assessment order.

Counsel for the Respondent-Revenue submitted that the final Assessment order had been passed without the issuance of a formal Show Cause Notice due to program and systematic glitches and he pointed out that the petitioner had been given ample opportunities and time for furnishing the requisite details and making submissions and hence there was no violation of principles of natural justice.

Analysis, Law and Decision

High Court opined that Section 144B (7) of the Income Tax Act, 1961 mandatorily provides for issuance of a prior show cause notice and draft assessment order before issuing the final assessment order.

Since in the present matter no prior Show Cause Notice, as well as assessment order, had been issued before passing the impugned assessment order, there was a blatant violation of principles of natural justice as well as the mandatory procedure prescribed in “Faceless Assessment Scheme” and as stipulated in Section 144 B of the Act.

Therefore, in the aforesaid facts, impugned assessment order, notice of demand and notice of penalty were set aside and the matter was remanded back to the Assessing Officer, who shall issue a draft assessment order and thereafter pass a reasoned order.

In view of the above, petition was disposed of. [Akashganga Infraventures India Ltd. v. National Faceless Assessment Centre, Delhi; WP (C) 5413 of 2021, decided on 4-08-2021]


Advocates before the Court: 

For the Petitioner: Mr Prakash Kumar, Advocate & Ms Rashmi Singh, Advocates

For the Respondent: Mr Zoheb Hossain, Sr. Standing Counsel for the Department

Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal, Delhi: Dealing with the validity of the order passed under section 143(3), which was passed by an officer who did not have the Jurisdiction on the case of the Assessee and whether, the second Statutory notice issued under section 143(2) by the jurisdiction Assessing Officer, is also barred by limitation. The tribunal has reiterated that the notice under section 143(2) can be issued within a period of six months from the end of the financial year in which the return was filed. Further, on the point of jurisdiction relating to the issuance of notice also makes the notice under Section 143(2) void-ab-initio

The return of income for Assessment Year 2015-16 was e-filed by the Assessee on 2/9/2015 declaring a total income of Rs. 8,76,900/-. The case was selected for complete scrutiny under CASS. The Assessing Officer after considering the submissions and the relevant documents passed the final assessment order u/s 143 (3) of the Income Tax Act on 1st May, 2017, and accepted the declared income by the Assessee.

The Principal Commissioner of Income Tax (CIT) issued a notice under Section 263(1) on 16/08/2017. The Principal CIT vide order dated 7/11/2017 set aside the original assessment order and directed the Assessing Officer to pass the assessment order afresh.

Being aggrieved by the order u/s 263 of the Income Tax Act, 1961 passed by the Principal CIT, the Assessee preferred an Appeal before the Income Tax Appellate Tribunal (hereinafter referred as to “Tribunal”).

Whereby, the tribunal was pleased to held that the notice under section 143(2) can be issued within a period of six months from the end of the financial year in which the return was filed. Further, on the point of jurisdiction relating to the issuance of notice also makes the notice under Section 143(2) void-ab-initio.

“The tribunal was pleased to held that the notice under Section 143(2) can be issued after an income tax return has been filed but within a period of six months from the end of the financial year in which the return was filed. Thus, the first notice under Section 143(2) was issued on 01.08.2016 which by the non-jurisdictional Assessing Officer and jurisdictional Assessing Officer issued the notice on 10.03.2017 which is beyond the limitation period as per the statutory provisions of the Act. Thus, the notice is time-barred and hence, the assessment itself becomes void-ab-initio.

the proper jurisdiction of the Assessing Officer in the present case is that of DCIT, Circle 25(2) as the assessment for A.Y. 2014-15 has proceeded before the said Assessing Officer in Assessee’s case. There was no change of jurisdiction sought by the Revenue as per Section 124 read with Section 120 of the Income Tax Act, 1961. Thus, on the point of jurisdiction relating to the issuance of notice also makes the notice under Section 143(2) void-ab-initio.”

[Nirmal Gupta v. Pr. CIT-9,  2021 SCC OnLine ITAT 345, decided on 22.06.2021]


† Advocate, Supreme Court of India and Delhi High Court  

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: 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 BriefsSupreme Court

Supreme Court: In a case where the Madras High Court dismissed a writ petition without deciding the validity of Section 40(a)(iib) of the Income Tax Act on the ground that the matter is still sub judice before the Income Tax Authority, the 3-judge bench of Ashok Bhushan, R. Subhash Reddy and MR Shah*, JJ has held

“When the vires of Section 40(a)(iib) of the Income Tax Act were challenged, which can be decided by the High Court alone in exercise of powers under Article 226 of the Constitution of India, the High Court ought to have decided the issue with regard to vires of Section 40(a)(iib) on merits, irrespective of the fact whether the matter was sub judice before the Income Tax Authority. Vires of a relevant provision goes to the root of the matter.”


Background


In the present case, a show cause notice was issued for the Assessment Year 2017-stating that the VAT expense levied on the appellant is an exclusive levy by the State Government and therefore squarely covered by Section 40(a)(iib) of the Income Tax Act and therefore VAT expenditure is not allowable as deduction in accordance with Section 40(a)(iib) of the Income Tax Act, while computing the income of the appellant.

The appellant had argued that the amount which is deductible in computing the income chargeable in terms of the Income Tax Act is not being allowed under the garb of the aforesaid provision and that

“ (…) the said provision is discriminatory and violative of Article 14 of the Constitution of India, inasmuch as there are many Central Government undertakings which have not been subjected to any such computation of income tax and are enjoying exemption.”

The High Court dismissed the said writ petition without deciding the validity of Section 40(a)(iib) of the Income Tax Act by observing that the issue of raising a challenge to the vires of the provision at this stage need not be entertained as the matter is still sub judice before the Income Tax Authority, even though it is open to the aggrieved party to question the same at the appropriate moment.


What the Supreme Court Said


Once the show cause notice was issued by the assessing officer calling upon the appellant – assessee to show cause why the VAT expenditure is not allowable as deduction in accordance with Section 40(a)(iib) of the Income Tax Act, while computing the income of the appellant, it can be said that the cause of action has arisen for the appellant to challenge the vires of Section 40(a)(iib) of the Income Tax Act and the appellant may not have to wait till the assessment proceedings before the Income Tax Authority are finalised.

“The stage at which the appellant approached the High Court and challenged the vires of Section 40(a)(iib) of the Income Tax Act can be said to be an appropriate moment.”

Therefore, it was held that the High Court ought to have decided the issue with respect to the challenge to the vires of Section 40(a)(iib) of the Income Tax Act on merit and has failed to exercise the powers vested in it under Article 226 of the Constitution of India by not doing so.

The Court, hence, without expressing any opinion on merits with respect to legality and validity of Section 40(a)(iib) of the Income Tax Act, remanded matter to the High Court.

[Tamil Nadu State Marketing Corporation v. Union of India,  2020 SCC OnLine SC 953, decided on 25.11.2020]


*Justice MR Shah has penned this judgment 

For appellant: Senior Advocate Rakesh Dwivedi

For Union of India: Additional Solicitor General K.M. Natraj

Op EdsOP. ED.

In 2017, the Supreme Court originated the new fundamental right – right to privacy – by interpreting Article 21 of the Constitution of India.[1] The Supreme Court in its detailed order explains the various facets of privacy, one of which is informational privacy. On the same occasion, the Court laid out a test that can be used to check if any activity of the State violates the right to privacy. In this article, we would delve into one such act of the State.

The Central Government issued a Notification[2] on 31-8-2020 and specified “Scheduled Commercial Banks” as a ‘body’ under Section 138(1)(a)(ii) of the Income Tax Act, 1961[3] that has been empowered to seek any information with regards to an assessee from the data repository of the tax authorities.

It is pertinent to mention that prior to the aforesaid notification, only statutory and governmental authorities like SEBI, MCA and the likes were notified and, in consequence, legally permitted to obtain relevant information in connection with an assessee from taxation authorities. Also, the Government had specified in the notifications the types of information and procedures for request of information and its furnishing by the tax authorities (under certain circumstances). The notifications dictated the broad contours of limitations and mechanism for the exchange of taxation data by the tax authorities.

The term “Scheduled Commercial Banks” is defined under Section 2(e) of the Reserve Bank of India Act, 1934[4] which includes all types of the bank i.e. public, private and international banks. The current number of banks listed under the said Schedule is 225.

Prior to the Notification dated 31st August, the Scheduled Commercial Banks had to take recourse to Section 138(1)(b) of the Income Tax Act which essentially provides for making an application to the income tax authorities for obtaining the particular piece of information from any income tax authorities. Such application was given due consideration on a case-to-case basis.

Now the big question arises as to “Whether the furnishing of tax information of any individual to banks without the consent of individuals concerned, or assessees (in the parlance of the Income Tax Act), violates the right to privacy under Article 21?”

Before analysing the above question, we need to first examine whether the information obtained by the tax authorities is personal enough and ought to receive the protection of the right to privacy that has been recognised as a fundamental right by the Supreme Court in  K.S. Puttaswamy  v. Union of India [5](Privacy judgment).

There are various examples in both regulations and judicial pronouncements conferring tax information as an intrinsic part of one’s privacy. For the purposes of our inquiry, regulations and judicial pronouncements ought to be looked at and there is sufficient jurisprudence to conclude that tax information forms a part and parcel of one’s privacy.  For example, the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011[6] which includes ‘financial information’ as part of “sensitive personal data or information” in Rule  3.

As for the judicial pronouncement, R.F Nariman, J. in the Privacy judgment[7] penned “Taxation laws which require the furnishing of information certainly impinge upon the privacy of every individual which ought to receive protection.”

In Girish Ramchandra Deshpande v. Central Information Commr.[8], the Supreme Court held:

13. The details disclosed by a person in his income tax returns are “personal information” which stand exempted from disclosure under clause (j) of Section 8(1) of the RTI Act

The abovementioned regulation and judgment beg the point that information furnished to tax authorities falls inside the ambit of private information. However, it must be stressed sufficiently that, there is no explicit mention of “tax information” as part of sensitive personal data in any of the legislation. Also, the Data Protection Bill, 2019[9]  introduced in Parliament in the monsoon session does not include tax information as part of financial data or ‘sensitive personal data’. This is a clear omission by the legislators and speaks volumes of the legislative intent. Now prima facie any prudent person can deduce that this is a clear invasion of privacy of the taxpayer.

In the Privacy judgment[10], the Supreme Court of India introduced the three-fold requirement for any law/regulation to invade the right of life and privacy. The three-fold requirement is:

  1. Legality, which postulates the existence of law – it is clear that no specific legislation has been passed by Parliament on sharing the data with the scheduled commercial banks rather a gazette notification has been published to this effect. The gazette notification is a method of publication and giving effect to the particular Act/ Rule/Order and it cannot, in itself held to be the existence of law. The Supreme Court in T.C. Bhadrachalam Paperboards v. Mandal Revenue Officer[11] held:

The object of publication in the Gazette is not merely to give information to the public. Official Gazette, as the very name indicates, is an official document. It is published under the authority of the Government. Publication of an order or rule in the Gazette is the official confirmation of the making of such an order or rule. The version as printed in the Gazette is final.”

The two takeaways from the above judgment are that gazette notification is to provide information to the public about the Act/Rule and secondly, it acts as an official document, nothing more nothing less.

Thus, the requirement of the existence of law is not met.

  1. Need, defined in terms of the legitimate State aim or larger public interest. Section 138(1)(a) provides the sharing of information to enable officers, authorities, and bodies to perform his/her duties under that law. The officers, authorities, and bodies are notified by the Central Government which in its opinion is necessary for “public interest”.

The notification in question does not specify any “public interest” that it aims to achieve, nor does it point out how to achieve that public interest.

As for any duties to be performed under law, the commercial banks are governed by the Reserve Bank of India Act, 1934, and the Banking Regulation Act, 1949[12]. Both these statutes do not cast any correspondent duty or requirement on the bank to collect or gather data from the tax authorities.

Generally, the objects and aim of any Act are mentioned before the starting of any Act/statute. The object and aims show the intention of the legislature in passing that Act. Since no specific legislation has been passed in this case, it cannot be found out what the actual aim is.

We can draw a logical analogy provided by Union of India in Aadhar case[13] where the Attorney General contended that the Aadhar Act aims to provide subsidies to the real beneficiary directly into their bank accounts – the public interest – which is  provided under Section 7 of the Act.

Thus, it is quite clear that both Section 138 and the Notification dated 31st August do not provide any legitimate State aim to provide the information to scheduled commercial banks. The section and notification are vague and ambiguous as to what to achieve.

  • Proportionality, which ensures a rational nexus between the objects and the means adopted to achieve them – since in the present case the ‘object’ (legitimate State aim) is absent, it will be pretty tedious to observe any rational nexus between the object and means adopted to achieve them.

In my opinion, the first two requirements are not met, therefore the question as to proportionality does not arise in this case.

From the above discussion, the Notification dated 31st August does not meet the three-fold requirement that is laid down in Privacy judgment[14].

The Supreme Court in Aadhar judgment[15] had specifically struck down Section 57 of the Aadhaar Act, 2016 which provides any ‘body corporate’ to use Aadhaar for establishing identity. The Court held:

(c) Apart from authorising the State, even ‘anybody corporate or person’ is authorised to avail authentication services which can be based on the purported agreement between an individual and such body corporate or person. Even if we presume that the legislature did not intend so, the impact of the aforesaid features would be to enable commercial exploitation of an individual biometric and demographic information by the private entities.”

Similarly, the notification in question will provide tax information to banks which then can be used for commercial exploitation and data mining. The information revealed in one’s tax return is at the heart of informational privacy; the sharing of such information will amount in all certainty to the violation of the right to privacy. The other important thing that betrays fairness is that all the data sharing is done behind the curtains. Therefore, from all the reasons stated above, Section 138 of the IT Act and the notification allowing sharing of information with commercial banks is in violation of Article 21 of the Constitution of India.


*Author is an advocate practising in Punjab and Haryana High Court and is an alumnus of Jindal Global Law School.

[1] K.S. Puttaswamy v. Union of India, (2017) 10 SCC 1

[2] F. No. 22S/136/2020-IT A.II Notification No. 71 /2020 dated 31.08.2020

[3] Income Tax Act, 1961

[4] Reserve Bank of India Act, 1934

[5] (2017) 10 SCC 1

[6] Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011.

[7]  K.S. Puttaswamy v.  Union of India,  (2017) 10 SCC 1

[8]Girish Ramchandra Deshpande v. Central Information Commr., (2013) 1 SCC 212 on p. 217

[9] Personal Data Protection Bill, 2019. The Bill has been referred to a Joint Parliamentary Committee of both the Houses.

[10] K.S. Puttaswamy v.  Union of India,  (2017) 10 SCC 1

[11] I.T.C. Bhadrachalam Paperboards v. Mandal Revenue Officer, (1996) 6 SCC 634 on p. 645

[12] Banking Regulation Act, 1949

[13] K.S. Puttaswamy  v.  Union of India,  (2019) 1 SCC 1

[14] K.S. Puttaswamy v.  Union of India,  (2017) 10 SCC 1

[15]Ibid.

Legislation UpdatesStatutes/Bills/Ordinances

President gave assent to the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 on 29-09-2020.

The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020

The Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 (Ord. 2 of 2020) was promulgated on the 31-03-2020 which, inter alia, relaxed certain provisions of the specified Acts relating to direct taxes, indirect taxes and prohibition of Benami property transactions. Further, certain notifications were also issued under the said Ordinance.

The said Act will provide for the extension of various time limits for completion or compliance of actions under the specified Acts and reduction in interest, waiver of penalty and prosecution for the delay in payment of certain taxes or levies during the specified period.

Amendments to Income-tax Act, 1961 will also be made:

  • Providing of tax incentive for Category-III Alternative Investment Funds located in the International Financial Services Centre (IFSC) to encourage relocation of foreign funds to the IFSC.
  • deferment of a new procedure of registration and approval of certain entities introduced through the Finance Act, 2020.
  • providing for the deduction for donation made to the Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES FUND) and exemption to its income,
  • Incorporation of Faceless Assessment Scheme, 2019 therein, empowering the Central Government to notify schemes for faceless processes under certain provisions by eliminating physical interface to the extent technologically feasible and to provide deduction or collection at source in respect of certain transactions at a three-fourths rate for the period from 14th May, 2020 to 31st March, 2021.
  • Amendment to the Direct Tax Vivad se Viswas Act, 2020 to extend the date for payment without additional amount to 31-12-2020 and to empower the Central Government to notify certain dates relating to filing of declaration and making of the payment.
  • Finance Act, 2020 is also proposed to be amended to clarify regarding capping of the surcharge at 15% on dividend income of the Foreign Portfolio Investor.
  • Central Government empowered to remove any difficulty up to a period of 2 years and provide for repeal and savings of the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020.

Read the detailed Act, here: Taxation & Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020


Ministry of Law and Justice