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.

Amendments to existing lawsLegislation Updates

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

Case BriefsSupreme Court

Supreme Court: Holding that Bangalore Club is not liable to pay wealth tax under the Wealth Tax Act, 1957, the3-judge bench of RF Nariman, Navin Sinha and Indira Banerjee, JJ has said,

“Bangalore Club is an association of persons and not the creation, by a person who is otherwise assessable, of one among a large number of associations of persons without defining the shares of the members so as to escape tax liability. For all these reasons, it is clear that Section 21AA of the Wealth Tax Act does not get attracted to the facts of the present case.”

The Court noticed that only three types of persons can be assessed to wealth tax under Section 3 i.e. individuals, Hindu undivided families and companies. Hence, if Section 3(1) alone were to be looked at, the Bangalore Club neither being an individual, nor a HUF, nor a company cannot possibly be brought into the wealth tax net under this provision.

Association of Persons vis-à-vis Body of individuals

The Court held that it cannot be held that being taxed as an association of persons under the Income Tax Act, 1961 the Bangalore Club must be regarded to be an ‘association of persons’ for the purpose of a tax evasion provision in the Wealth Tax Act as opposed to a charging provision in the Income Tax Act.

It explained that the definition of “person” in Section 2(31) of the Income Tax Act, 1961 would take in both an association of persons and a body of individuals. For the purposes of income tax, the Bangalore Club could perhaps be treated to be a ‘body of individuals’ which is a wider expression than ‘association of persons’ in which such body of individuals may have no common object at all but would include a combination of individuals who had nothing more than a unity of interest.

Interpretation of Section 21AA of the Wealth Tax Act

Section 21AA was enacted w.e.f. 1 st April, 1981 and for the first time from 1st April, 1981, an association of persons other than a company or cooperative society has been brought into the tax net so far as wealth tax is concerned with the rider that the individual shares of the members of such association in the income or assets or both on the date of its formation or at any time thereafter must be indeterminate or unknown. It is only then that the section gets attracted.

The Court noticed that Section 21AA was introduced in order to prevent tax evasion and that it does not enlarge the field of tax payers but only plugs evasion as the association of persons must be formed with members who have indeterminate shares in its income or assets.

“The reason why it was enacted was not to rope in association of persons per se as “one more taxable person” to whom the Act would apply. The object was to rope in certain assessees who have resorted to the creation of a large number of association of persons without specifically defining the shares of the members of such associations of persons so as to evade tax.”

The Court explained:

  • sub-section (2) begins with the words “any business or profession carried on” by an association of persons. No business or profession is carried on by a social members club.
  • the association of persons mentioned in sub-section (1) must be persons who have banded together for a business objective – to earn profits – and if this itself is not the case, then sub-section (2) cannot possibly apply.
  • Insofar as Rule 35 is concerned, again what is clear is that on liquidation, any surplus assets remaining after all debts and liabilities of the club has been discharged, shall be divided equally amongst all categories of members of the club. This would show that “at any time thereafter” within the meaning of Section 21AA (1), the members’ shares are determinate in that on liquidation each member of whatsoever category gets an equal share.

Noticing the aforementioned aspects of Section 21AA of the Wealth Tax Act, the Court said,

“when Parliament used the expression “association of persons” in Section 21AA of the Wealth Tax Act, it must be presumed to know that this expression had been the subject matter of comment in a cognate allied legislation, namely, the Income Tax Act, as referring to persons banding together for a common purpose, being a business purpose in the context of a taxation statute in order to earn income or profits.”

It said that in order to be an association of persons attracting Section 21AA of the Wealth Tax Act, it is necessary that persons band together with some business or commercial object in view in order to make income or profits.

“The thrust of the provision therefore, is to rope in associations of persons whose common object is a business or professional object, namely, to earn income or profits.”

Object of Bangalore Club founded in 1868 by a group of British officers

  • To provide for its Members, social, cultural, sporting, recreational and other facilities;
  • To promote camaraderie and fellowship among its members.
  • To run the Club for the benefit of its Members from out of the subscriptions and contributions of its member.
  • To receive donations and gifts without conditions for the betterment of the Club. The General Committee may use its discretion to accept sponsorships for sporting Areas
  • To undertake measures for social service consequent on natural calamities or disasters, national or local.
  • To enter into affiliation and reciprocal arrangements with other Clubs of similar standing both in India and abroad.
  • To do all other acts and things as are conducive or incidental to the attainment of the above objects.

Conclusion

Noticing the objects of the Club and applying the aforementioned principles, the Court, hence, concluded that Bangalore Club is a social and the persons who are banded together do not band together for any business purpose or commercial purpose in order to make income or profits and hence, do not attract Section 21 AA of the Wealth Tax Act.

[Bangalore Club v. Commissioner of Wealth Tax, 2020 SCC OnLine SC 721, decided on 08.09.2020]

Legislation UpdatesNotifications

Central Board of Direct Taxes in exercise of powers conferred under Section 138(1)(a) of Income Tax Act, 1961, has issued Order inF.No. 225/136/2020/ITA.II dated 31.08.2020, for furnishing information about IT Return Filing Status to Scheduled Commercial Banks, notified vide notification No. 71/2020 dated 31.08.2020 under sub-clause (ii) of clause (a) of sub-section (1) of Section 138 of the Act.

The data on cash withdrawal indicated that huge amount of cash is being withdrawn by the persons who have never filed income-tax returns. To ensure filing of return by these persons and to keep track of cash withdrawals by the non-filers, and to curb black money, the Finance Act, 2020 w.e.f. 1st July, 2020 further amended the Income-tax Act, 1961 to lower the threshold of cash withdrawal to Rs. 20 lakh for the applicability of TDS for the non-filers and also mandated TDS at the higher rate of 5% on cash withdrawal exceeding Rs. 1 crore by the non-filers.

Income Tax Department has already provided a functionality “Verification of applicability under Section 194N” on www.incometaxindiaefiling.gov.in for Banks and Post offices since 1st July, 2020.  Through this functionality, Bank/Post Office can get the applicable rate of TDS under Section 194N of the Income-tax Act, 1961 by entering the PAN of the person who is withdrawing cash.

The Department has now released a new functionality “ITR Filing Compliance Check” which will be available to Scheduled Commercial Banks (SCBs) to check the IT Return filing status of PANs in bulk mode. The Principal Director General of Income-tax (Systems) has notified the procedure and format for providing notified information to the Scheduled Commercial Banks. The salient features of the using functionality are as under:

  1. Accessing “ITR Filing Compliance Check”: The Principal Officer & Designated Director of SCBs, which are registered with the Reporting Portal of Income-tax Department (https://report.insight.gov.in) shall be able to use the functionality after logging into the Reporting Portal using their credentials. After successfully logging in, link to the functionality “ITR Filing Compliance Check” will appear on the home page of the Reporting Portal.
  2. Preparing request (input) file containing PANs: The CSV Template to enter PAN details can be downloaded by clicking on the “Download CSV template” button on the “ITR Filing Compliance Check” page. PANs, for which IT Return filing status is required, are required to be entered in the downloaded CSV template. The current limit of PANs in one file is 10,000.
  3. Uploading the input CSV file: Input CSV file may be uploaded by clicking on Upload CSV button. While uploading, “Reference Financial Year” is required to be selected. Reference Financial Year is the year for which results are required. If the selected Reference Financial Year is 2020-21 then results will be available for Assessment years 2017-18, 2018-19 and 2019-20. Uploaded file will start reflecting with Uploaded status.
  4. Downloading the output CSV file: After processing, CSV file containing IT Return Filing Status of the entered PANs will be available for download and “Status” will change to Available.  Output CSV file will have PAN, Name of the PAN holder (masked), IT Return Filing Status for last three Assessment Years. After downloading of the file, the status will change to Downloaded and after 24 hours of availability of the file, download link will expire and status will change to Expired.

Scheduled Commercial Banks can also use API based exchange to automate and integrate the process with the Bank’s core banking solution. Scheduled Commercial Banks are required to document and implement appropriate information security policies and procedures with clearly defined roles and responsibilities to ensure security of information.


Ministry of Finance

Press Release dt. 02-09-2020 

Case BriefsHigh Courts

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

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

The substantial question under deliberation was:

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

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

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal, New Delhi: The 3-Member Bench of Justice Bansi Lal Bhat (Acting Chairperson), V.P. Singh, Member (Technical) and Shreesha Merla, Member (Technical), rejected the appeal filed by the Operational Creditor against the order of NCLT, after finding a need for ‘further investigation’ in the case.

The Appellant (Operational Creditor) and the Respondent (Corporate Debtor) entered into a Business Transfer Agreement (BTA) dated 7 April 2018 for the transfer of undertaking on a Slump Sale basis under Section 2(42-C) of the Income Tax Act, 1961 at a lump sum amount of Rs 123 Crores. The appellant contended that the Corporate Debtor had only transferred a sum of Rs 65 Crores and the remaining debt of Rs 58 Crores was unpaid.

The Appellant contended that after the satisfaction of ‘condition precedent’ relating to transfer, a compliance notice was submitted to the Corporate Debtor on 4 June 2018, which was acknowledged by the Corporate Debtor. It was further submitted, the sale was consummated and the possession of Undertaking was handed over by the Operational Creditor to the Corporate Debtor. Demand for payment was regularly communicated to the debtor but no payment was made. He also contended that the NCLT erred in deciding the judgement by not appreciating the facts and correct perspective of law.

The Respondent contended that the impugned appeal was premised on the suppression of facts and information, misrepresentation and gross misconstruction of the provision of the business transfer agreement. They further argued that it had replied to the demand notices and the payment of outstanding debt was made into 3 Tranche Payments as more particularly specified in the BTA. They also argued that post slump sale transaction was under the scope of IBC proceedings and in reply to the demand notice the corporate Debtor raised the issue of pre-existing dispute.

The Tribunal relied on the principle of ‘pre-existence’ of dispute as interpreted in the case of Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., (2018) 1 SCC 353. The Court said that “all that the Adjudicating Authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster”. After examining the documents supplied by both the parties, the Tribunal found that issues had been raised by the corporate debtor before the receipt of demand notices which proved ‘pre-existence’ of dispute and there was a plausible contention in the defence raised by the corporate debtor which required further investigation. Therefore, the appeal was rejected and no substance was found in the appeal. [Allied Silica Limited v. Tata Chemicals Ltd.,  2020 SCC OnLine NCLAT 613, decided on 11-08-2020].

Case BriefsSupreme Court

Supreme Court: Dealing with the question as to whether disallowance under Section 40(a)(ia) of the Income Tax Act, 1961 is confined/limited to the amount “payable” and not to the amount “already paid”, the bench of AM Khanwilkar and Dinesh Maheshwari, JJ held that the expression “payable” is descriptive of the payments which attract the liability for deducting tax at source and it has not been used in the provision in question to specify any particular class of default on the basis as to whether payment has been made or not. Stating that the term “payable” has been used in Section 40(a)(ia) of the Act only to indicate the type or nature of the payments by the assessees to the payees referred therein, the Court said that the argument that the expression “payable” be read in contradistinction to the expression “paid”, sans merit and could only be rejected.

Section 40(a)(ia) provides for the consequences of default in the case where tax is deductible at source on any interest, commission, brokerage or fees but had not been so deducted, or had not been paid after deduction (during the previous year or in the subsequent year before expiry of the prescribed time) in the manner that the amount of such interest, commission, brokerage or fees shall not be deducted in computing the income chargeable under “profits and gains of business or profession”.

The Court, further, said that

“Section 40(a)(ia) is not a stand-alone provision but provides one of those additional consequences as indicated in Section 201 of the Act for default by a person in compliance of the requirements of the provisions contained in Part B of Chapter XVII of the Act.”

Explaining the scheme of the Act, the Court said that Section 194C is placed in Chapter XVII of the Act on the subject “Collection and Recovery of Tax”; and specific provisions are made in the Act to ensure that the requirements of Section 194C are met and complied with, while also providing for the consequences of default. Section 200 specifically provides for the duties of the person deducting tax to deposit and submit the statement to that effect. The consequences of failure to deduct or pay the tax are then provided in Section 201 of the Act which puts such defaulting person in the category of “the assessee in default in respect of the tax” apart from other consequences which he or it may incur. Section 40 of the Act, and particularly the provision contained in sub-clause (ia) of clause (a) thereof, indeed provides for one of such consequences.

Hence, holding that when the obligation of Section 194C of the Act is the foundation of the consequence provided by Section 40(a)(ia) of the Act, reference to the former is inevitable in interpretation of the latter, the Court said that the scheme of these provisions makes it clear that the default in compliance of the requirements of the provisions contained in Part B of Chapter XVII of the Act (that carries Sections 194C, 200 and 201) leads, inter alia, to the consequence of Section 40(a)(ia) of the Act. Hence, the contours of Section 40(a)(ia) of the Act could be aptly defined only with reference to the requirements of the provisions contained in Part B of Chapter XVII of the Act, including Sections 194C, 200 and 201.

On the question whether sub-clause (ia) of Section 40(a) of the Act, as inserted by the Finance (No. 2) Act, 2004 with effect from 01.04.2005, is applicable only from the financial year 2005-2006 and not retrospectively, the Court said that

“It needs hardly any detailed discussion that in income tax matters, the law to be applied is that in force in the assessment year in question, unless stated otherwise by express intendment or by necessary implication.”

As per Section 4 of the Act of 1961, the charge of income tax is with reference to any assessment year, at such rate or rates as provided in any central enactment for the purpose, in respect of the total income of the previous year of any person. The expression “previous year” is defined in Section 3 of the Act to mean ‘the financial year immediately preceding the assessment year’; and the expression “assessment year” is defined in clause (9) of Section 2 of the Act to mean ‘the period of twelve months commencing on the 1st day of April every year’. The legislature consciously made the said sub-clause (ia) of Section 40(a) of the Act effective from 01.04.2005, meaning thereby that the same was to be applicable from and for the assessment year 2005-2006; and neither there had been express intendment nor any implication that it would apply only from the financial year 2005-2006.

The Court, hence, said

“We need not multiply on the case law on the subject as the principles aforesaid remain settled and unquestionable.”

 

[Shree Choudhary Transport Company v. Income Tax Officer, 2020 SCC OnLine SC 610 , decided on 29.07.2020]

Hot Off The PressNews

As reported by media, Ministry of Home Affairs sets up an Inter-Ministerial panel set up to probe violations by Rajiv Gandhi Foundation, Rajiv Gandhi Charitable Trust and Indira Gandhi Memorial Trust.

“MHA sets up inter-ministerial committee to coordinate investigations into violation of various legal provisions of PMLA, Income tax Act, FCRA etc by Rajiv Gandhi Foundation, Rajiv Gandhi Charitable Trust & Indira Gandhi Memorial Trust . Special Director of ED will head the committee.”

         — MHA


Media Reports

Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal (ITAT): A Division Bench of R.K. Panda (Accountant Member) and Kuldip Singh (Judicial Member), while addressing a matter held,

“Bar Council of Delhi being engaged in safeguarding the rights, privileges and interest of the advocates, its dominating purpose is the advancement of general public utility within the meaning of Section 2(15) of the Act, as such, genuineness of its activities and object of charitable purpose is proved, thus entitled for registration under 12AA and consequent exemption under Section 80G.”

Bar Council of Delhi — Appellant sought to set aside the impugned order passed by the Commissioner of Income tax (Exemption) passed on 27th September, 2019.

Application in Form No. 10A and 10G moved by the appellant seeking registration under Section 12 AA of the Income tax Act, 1961 were rejected by CIT (E) on the grounds inter alia that since the appellant failed to furnish balance sheet and income & expenditure account for the FY 2018-19 despite called for, the conditions laid down under Section 12 AA are not satisfied and that the name of the Bar Council of Delhi does not appear in approved association/institution notified by the Government thus not a charitable institution within meaning of Section 2(15) of the Act.

Appellant approached the tribunal by filing the present appeal.

Tribunal noted that, appellant has been established with object to control, supervise, regulate or encouragement of the profession of law for which there is a separate provision in the Act as contained under Section 10(23A) of the Act for exempting its income which shall not be included in its total income.

CIT (E) proceeded to reject the application under Section 12AA and consequent exemption under Section 80G of the Income Tax Act.

Question for determination in this case is:

Whether activities of the appellant – Bar Council/ professional body which is to control, supervise and regulate profession is not a charitable within the meaning of definition contained under Section 2(15) of the Act as has been held by the CIT(E)?

Supreme Court in case of CIT v. Bar Council of Maharashtra, 130 ITR 28, affirming the judgment of Bombay High Court in case of Bar Council of Maharashtra v. CIT , 126 ITR 27, held that primary and dominant purpose of an institution like the appellant is the advancement of the object of general public utility within the meaning of Section 2(15) of the Act and as such, the income from securities held by the appellant would be exempt from any tax liability under Section 11 of the Act.

Whether the CIT (E) is empowered to reject the registration and consequent exemption under Sections 12AA and 80G of the Act due to non-furnishing of financials of FY 2018-19?

When the object of the institution is proved to be charitable within the meaning of Section 2(15) of the Act, further scrutiny of the financials of the appellant are not required because it is otherwise within the purview of AO to examine at the time of assessment if the appellant is entitled to exemption under Section 11 of the Act.

In the present matter, the tribunal is thus of the opinion that the CIT (E) has erred in declining the registration under Section 12 AA of the Act on the ground that financials of FY 2018-19 have not been furnished by the appellant.

Tribunal further observed that, merely on the basis of the fact that income of the appellant exempted under Section 10(23A) is not a bar to claim deduction in assessment under Section 11 of the Act, as such income is to be excluded under Section 11 of the Act.

Hence, appeal filed by the appellant is allowed directing CIT(E) to provide registration under Section 12 AA and consequent exemption under Section 80 G of the Act. [Bar Council of Delhi v. CIT (Exemption), 2020 SCC OnLine ITAT 340 , decided on 02-07-2020]

COVID 19Legislation UpdatesNotifications

In view of the challenges faced by taxpayers in meeting the statutory and regulatory compliance requirements across sectors due to the outbreak of Novel Corona Virus (COVID-19), the Government brought the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 [the Ordinance] on 31st March, 2020 which, inter alia, extended various time limits. 

In order to provide further relief to the taxpayers for making various compliances, the Government has issued a Notification on 24th June, 2020, the salient features of which are as under:

I. The time for filing of original as well as revised income-tax returns for the FY 2018-19 (AY 2019-20) has been extended to 31st July, 2020.

II. Due date for income tax return for the FY 2019-20 (AY 2020-21) has been extended to 30th November, 2020. Hence, the returns of income which are required to be filed by 31st July, 2020 and 31st October, 2020 can be filed upto 30th November, 2020. Consequently, the date for furnishing tax audit report has also been extended to 31st October, 2020.

III. In order to provide relief to small and middle class taxpayers, the date for payment of self-assessment tax in the case of a taxpayer whose self-assessment tax liability is upto Rs. 1 lakh has also been extended to 30th November, 2020. However, it is clarified that there will be no extension of date for the payment of self-assessment tax for the taxpayers having self-assessment tax liability exceeding Rs. 1 lakh. In this case, the whole of the self-assessment tax shall be payable by the due dates specified in the Income-tax Act, 1961 (IT Act) and delayed payment would attract interest under section 234A of the IT Act.

IV. The date for making various investment/ payment for claiming deduction under Chapter-VIA-B of the IT Act which includes section 80C (LIC, PPF, NSC etc.), 80D (Mediclaim), 80G (Donations) etc. has also been further extended to 31st July, 2020. Hence the investment/ payment can be made upto 31st July, 2020 for claiming the deduction under these sections for FY 2019-20.

V. The date for making investment/ construction/ purchase for claiming roll over benefit/ deduction in respect of capital gains under Sections 54 to 54GB of the IT Act has also been further extended to 30th September, 2020. Therefore, the investment/ construction/ purchase made up to 30th September, 2020 shall be eligible for claiming deduction from capital gains.

VI. The date for commencement of operation for the SEZ units for claiming deduction under section 10AA of the IT Act has also been further extended to 30th September, 2020 for the units which received necessary approval by 31st March, 2020.

VII. The furnishing of the TDS/ TCS statements and issuance of TDS/ TCS certificates being the prerequisite for enabling the taxpayers to prepare their return of income for FY 2019-20, the date for furnishing of TDS/ TCS statements and issuance of TDS/ TCS certificates pertaining to the FY 2019-20 has been extended to 31st July, 2020 and 15th August, 2020 respectively.

VIII. The date for passing of order or issuance of notice by the authorities and various compliances under various Direct Taxes & Benami Law which are required to be passed/ issued/ made by 31st December, 2020 has been extended to 31st March, 2021. Consequently, the date for linking of Aadhaar with PAN would also be extended to 31st March, 2021.

IX. The reduced rate of interest of 9% for delayed payments of taxes, levies etc. specified in the Ordinance shall not be applicable for the payments made after 30th June, 2020.

The Finance Minister has already announced extension of date for making payment without additional amount under the “Vivad Se Vishwas” Scheme to 31st December 2020, necessary legislative amendments for which shall be moved in due course of time. The said Notification has extended the date for the completion or compliance of the actions which are required to be completed under the Scheme by 30th December, 2020 to 31st December, 2020. Therefore, the date of furnishing of declaration, passing of order etc under the Scheme stand extended to 31st December, 2020.

Deferment of the implementation of new procedure for approval/ registration/ notification of certain entities u/s 10(23C), 12AA, 35 and 80G of the IT Act has already been announced vide Press Release dated 8th May, 2020 from 1st June, 2020 to 1st October, 2020. It is clarified that the old procedure i.e. pre-amended procedure shall continue to apply during the period from 1st June, 2020 to 30th September, 2020. Necessary legislative amendments in this regard shall be moved in due course of time.

The Finance Minister has already announced reduced rate of TDS for specified non-salaried payments to residents and specified TCS rates by 25% for the period from 14th May, 2020 to 31st March, 2021. The announcement was also followed by the Press Release dated 13th May, 2020. The necessary legislative amendments in this regard shall be moved in due course of time.


Ministry of Finance

[Press Release dt. 25-06-2020]

Op EdsOP. ED.

1. Introduction

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

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

“(2-A) *                                               *                                            *

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

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

Provided also …..

2. Part 1: Literal interpretation

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

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

3. Part 2: Interpretation in favour of assessee

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

3.1 Inherent jurisdiction to grant stay

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

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

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

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

(emphasis supplied)

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

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

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

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

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

Proposition (i)

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

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

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

(emphasis supplied)

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

Proposition (ii)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

4.1 Independence of the Judiciary and separation of powers

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

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

Origin and need for tribunalisation of justice

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

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

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

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

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

Difference between Court and Tribunal

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

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

Independence of Judiciary

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

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

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

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

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

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

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

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

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

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

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

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

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

4.2 Doctrine of Arbitrariness

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

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

Arbitrariness in Section 99 of the Finance Act, 2020

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

5. Conclusion

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

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

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

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

(emphasis in original)


* Advocate, Bombay High Court

[1] Inserted with effect from 01.04.2020.

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

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

[4] (1969) 71 ITR 815 

[5] [1879] 12 Ch. D. 438 

[6] (1969) 71 ITR 815

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

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

[9] (2009) 5 SCC 208 

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

[11] (1969) 2 SCC 481 

[12] 1982 SCC OnLine Del 291

[13] 1993 SCC OnLine Mad 501

[14] 2005 SCC OnLine Guj 507 

[15] (1969) 71 ITR 815

[16] 1993 SCC OnLine Mad 501

[17] 1952 SCR 28 

[18] 1982 SCC OnLine Del 291

[19] 1993 SCC OnLine Mad 501

[20] 2004 SCC OnLine CESTAT 3467

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

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

[23] 2005 SCC OnLine Guj 507

[24] (1969) 71 ITR 815

[25] 2005 SCC OnLine Guj 507

[26]2015 SCC OnLine Guj 6235 

[27] (2009) 5 SCC 208 

[28](1969) 71 ITR 815

[29] (1986) 1 SCC 523

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

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

[32] 2015 SCC OnLine Del 9543 

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

[34] (1987) 1 SCC 124

[35] 1975 Supp SCC 1 

[36] (1967) 1 SCR 77  

[37] (2010) 11 SCC 1 

[38] (2017) 9 SCC 1 

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

[40] 2013 SCC OnLine Bom 396

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

[42] 1992 Supp (1) SCC 648

[43] 2013 SCC OnLine Bom 1795 

[44] 2019 SCC OnLine SC 1456 

[45] (2004) 4 SCC 311 

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

[47] (2010) 11 SCC 1

COVID 19Legislation UpdatesNotifications

In view of the unprecedented humanitarian and economic crisis, the CBDT has decided that the implementation of new procedure for approval/ registration/notification of certain entities shall be deferred to 1st October, 2020.

Accordingly, the entities approved/ registered/ notified under Sections 10(23C), 12AA, 35 and 80G of the Income-tax Act, 1961 (the Act) would be required to file intimation within three months from 1st October, 2020, i.e, by 31st December, 2020. Further, the amended procedure for approval/ registration/ notification of new entities shall also apply from 1st  October, 2020.

The necessary legislative amendments in this regard shall be proposed in due course.

Various representations were received in the finance ministry expressing concerns over the implementation of the new procedure from 1st June, 2020 due to the outbreak of novel corona virus (COVID-19) and consequent lockdown. There have been a number of requests to defer the applicability of the new procedure.

It may be noted that The Finance Act, 2020 rationalized the procedure relating to approval/ registration/ notification of certain entities referred to in sections 10(23C), 12AA, 35 and 80G of the Act, with effect from 1st June, 2020. As per the new procedure, the entities already approved/ registered/ notified under these sections would be required to file intimation within three months, i.e, by 31st August, 2020.

Further, the procedure for approval/ registration/ notification of new entities has also been rationalized with effect from 1st June, 2020.


Ministry of Finance

[Press Release dt. 09-05-2020]

[Source: PIB]

Hot Off The PressNews

As reported by Hindu, The deadline for linking PAN Card with Aadhaar Card has been extended several times by the Income Tax Department and the current deadline for the same will end on 31-03-2020.

The IT Department has stated that, if the PAN Card and Aadhaar Card are not linked by the 31-03-2020, they will become inoperative.

Persons whose PANs become inoperative shall be liable for all the consequences under the I-T Act for not furnishing, intimating or quoting the permanent account number.

The Income-tax (5th Amendment) Rules, 2020


[Source: The Hindu]

Legislation UpdatesNotifications

Section 195 of the Act relates to levy of tax deduction at source (TOS) on any sum chargeable to tax and which is paid to a non-resident, not being a company, or to a foreign company. Prior to the amendment, sub-section (2) of the said section provided that where the person responsible for paying such sum chargeable under the Act to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate of such sum so chargeable and upon such determination, tax shall be deducted only on that proportion of the sum which is so chargeable.

2. However, no format was prescribed for making the application under sub-section (2) of Section 195. Therefore, the deductor has to write an application on plain paper and physically submit it to the Assessing Officer. The AO then issues a certificate determining by general or special order, the appropriate proportion of such sum so chargeable to tax at source under section
(1) of section 195 of the Act, and there are also no standard operating procedures in respect of processing and disposal of the application under the said sub-section. This increases uncertainty and causes inconvenience to deductors.

3 Further, sub-section (7) of Section 195 also provided that the Government may specify a class of persons or cases, where the deductor who is responsible for paying to a non-resident not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall make an application to the Assessing Officer to determine by general or special order, the appropriate proportion of sum chargeable, and upon such determination, the tax shall be deducted under sub-section (I) on that proportion of the sum which is so chargeable. However, no format was prescribed for making such application and neither is any standard operating procedures specified in respect of processing and disposal of the application. There was a demand from various stakeholders to streamline the process of passing such orders under section 195(2) of the Act.

4. In order to streamline the process for making an application by the deductor and to reduce the human interface, section 195 of the Act was amended through Finance (No.2), Act 2019. The new amended section 195 now empowers the Board to prescribe the form and manner of filing of application under sub-section (2) to determine the appropriate proportion of such sum so chargeable and upon determination tax to be deducted as per sub-section (I) of section 195 on that proportion only. Further sub-section (7) of section 195 was amended to provide that the Government may specify a class of persons or cases, where the deductor who is responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall make an application to the Assessing Officer in such form and manner and Assessing officer to determine in such manner as may be prescribed the appropriate proportion of sum chargeable, and upon such determination, tax shall be deducted under sub-section (I).

5. As a result of the amendments carried out in sub-section (2) and sub-section (7) of Section 195 of the Act, vide Finance (No.2) Act, 2019, consequential amendments have to be carried out in Income-tax Rules, 1962 (the Rules) and Forms to give effect to the amendments.

6. In view of the above discussion, a new Form 15E is proposed to be introduced in the Rules to operationalize the provisions of Section 195(2) of the Act.

7. It has been decided to seek the stakeholder’s comments in relation to proposed Form 15E to be introduced in the Rules. In this regard, comments and suggestions are invited from the general public on the proposed form.


Ministry of Finance

[Notification dt. 31-12-2019]

Legislation UpdatesRules & Regulations

G.S.R. 614(E)—In exercise of the powers conferred by Section 139 A read with Section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:—

  1. Short title and commencement- (1) These Rules may be called the Income–tax (Fifth Amendment) Rules, 2019.(2) They shall come into force from the 1st day of September, 2019.
  2. In the Income-Tax Rules, 1962, in Rule 114, —

(i) after sub-rule (1), the following sub-rules shall be inserted, namely: __

“(1A) Any person, who has not been allotted a permanent account number but possesses the Aadhaar number and has furnished or intimated or quoted his Aadhaar number in lieu of the permanent account number in accordance with sub-section (5E) of section 139A, shall be deemed to have applied for allotment of permanent account number and he shall not be required to apply or submit any documents under this rule.

(1B) Any person, who has not been allotted a permanent account number but possesses the Aadhaar number may apply for allotment of the permanent account number under sub-section (1) or sub- section (1A) or sub-section (3) of Section 139A to the authorities mentioned in sub-rule (2) by intimating his Aadhaar number and he shall not be required to apply or submit any documents under this rule.

(1C) The Principal Director General of Income-tax (Systems) or Director General of Income-tax (Systems) shall on receipt of information under sub-rule (1A) or sub-rule (1B), as the case may be, authenticate the Aadhaar number for that purpose.”;

(ii) after sub-rule (6), the following sub-rule shall be inserted, namely: __

“(7) The Principal Director General of Income-tax (Systems) or Director General of Income-tax (Systems) shall lay down the formats and standards along with procedure for, __

  1. (a)  furnishing or intimation or quoting of Aadhaar number under sub-rule (1A); or
  2. (b)  intimation of Aadhaar number under sub-rule (1B); or
  3. (c)  authentication of Aadhaar number under sub-rule (1C); or
  4. (d)  obtaining demographic information of an individual from the Unique Identification Authority of India,

for ensuring secure capture and transmission of data and shall also be responsible for evolving and implementing appropriate security, archival and retrieval policies in relation to furnishing or intimation or quoting or authentication of Aadhaar number or obtaining of demographic information of an individual from the Unique Identification Authority of India, for allotment of permanent account number and issue thereof.”


Ministry of Finance

[Notification dt. 30-08-2019]

[Notification No. 59/2019/F. No. 370142/13/2019-TPL]

Case BriefsHigh Courts

Delhi High Court: A Division Bench of Dr S. Muralidhar and Talwant Singh, JJ. quashed an order of reassessment passed by the Assessing officer for non-compliance of the procedure outlined by the Supreme Court in GKN Driveshafts India (P) Ltd. v. CIT, (2003) 1 SCC 72.

The short point involved in the present case was — whether the Assessing Officer could have proceeded to finalise the reassessment pursuant to notices issued under Section 147/148 of the Income Tax Act, 1961 without compliance of procedure laid down by the Supreme Court in GKN Driveshafts case?

The High Court observed: “This Court has emphasised ins several decisions that the procedure outlined by the Supreme Court in GKN Driveshafts (India) Ltd. is sacrosanct. in other words, where in response to a notice issued under Section 147 by the AO, the Assessee seeks the reasons to believe that prompted the reopening, and files objections thereto, those objections have to be considered on their merits and only a reasoned order has to be passed thereon by the AO. Importantly, this has to happen prior to the AO proceeding with the reassessment.”

In the present case, it was noted, the Assessment Officer had not chosen to dispose of the objections filed by the petitioner against reopening of the assessment, but had proceeded to the stage of passing the impugned reassessment order.

The Court, therefore, set aside the reassessment order. Directions were issued to the Assessing Officer to consider the petitioner’s objections to reopening of assessment and dispose of them by a reasoned order within 4 weeks of the date of the order.[Surendra Kumar Jain v. CIT, 2019 SCC OnLine Del 9393, decided on 29-07-2019]

Case BriefsHigh Courts

Chhattisgarh High Court: Prashant Kumar Mishra, J. quashed criminal proceedings pending against the petitioner-assessee before the Chief Judicial Magistrate for the commission of offences under Section 276-C (willful attempt to evade tax) and Section 277 (false statement in verification) of the Income Tax Act, 1961.

The gravamen of the offence alleged against the petitioner was that it concealed its income for the assessment year 1990-1991. Consequent to that, a penalty was imposed upon him by the Commissioner of Income Tax. He also granted sanction for petitioner’s prosecution, pursuant to which the criminal case which the subject matter of the present petition, was registered. The petitioner filed an appeal before the appellate authority — CIT (Appeals) — which appeal was allowed and the penalty was set aside on the finding that the petitioner did not conceal its income.

S. Rajeshwara Rao and M.K. Sinha, Advocates for the petitioner, contended that in view of the position that the penalty levied on the petitioner was set aside, the criminal proceedings pending on the file of CJM may also be quashed. Per contra, Naushina Ali appearing on behalf of A. Choudhary, Standing Counsel for the Revenue, opposed the present petition.

The High Court relied on K.C. Builders v. CIT, (2004) 2 SCC 731, wherein the Supreme Court held that “once the finding of concealment and subsequent levy of penalties under Section 271 (1)(c) of the Act has been struck down by the Tribunal, the assessing officer has no other alternative except to correct his order under Section 154 of the Act as per the directions of the Tribunal.” It was further held in the said case that “the finding of the Appellate Tribunal was conclusive and the prosecution cannot be sustained since the penalty after having been decided by the complainant following the Appellate Tribunal’s order, no offence survives under the Income Tax Act and thus quashing of prosecution is automatic.”

In the matter at hand, the High Court, following the law laid down in K.C. Builders, held that it will an empty formality to direct the petitioner to approach the trial Magistrate, who had otherwise kept the application preferred by the petitioners pending since 15-01-2014. Resultantly, the Court exercised its inherent powers and quashed the criminal proceedings pending against the petitioner. The petition was allowed. [System (India) Castings v. CIT, 2019 SCC OnLine Chh 63, decided on 26-06-2019]

Legislation UpdatesNotifications

Order under Section 119 of the Income-Tax Act, 1961

Section 44 AB of the Income-Tax Act, 1961 (‘the Act’) read with Rule 6G of the Income-tax Rules, 1962 (‘the Rules’) requires specified persons to furnish the Tax Audit Report along with the prescribed particulars in Form No. 3CD. The existing Form No.
3CD was amended vide notification no. GSR 666(E) dated 20th July, 2018 with effect from 20th August, 2018. However, the reporting under clause 30C and clause 44 of the Tax Audit Report was kept in abeyance till 31st March, 2019 vide Circular No. 6/2018 dated 17.08.2018.

Representations were received by the Soard that the implementation of reporting requirements under clause 30C (pertaining to General Anti-Avoidance Rules (GAAR)) and clause 44 (pertaining to Goods and Services Tax (GST) compliance) of the Form No. 3CD may be deferred further.

The matter has been examined and it has been decided by the Board that the reporting under clause 30C and clause 44 of the Tax Audit Report shall be kept in abeyance till 31st March, 2020.


[Notification dt. 14-05-2019]

Ministry of Finance

Legislation UpdatesNotifications

S.O. 1398(E) —In exercise of the powers conferred by clause (46) of Section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies for the purposes of the said clause, ‘Visakhapatnam Special Economic Zone Authority’, an authority constituted by the Central Government, in respect of the following specified income arising to that authority, namely:—

(a)  Lease Rent (charged as per Government prescribed rate);

(b)  Receipts from I-Card and Permit fees;

(c)  Allotment fee in respect of Standard Design Factories;

(d)  Auction/bid amount in respect of Plots/Building which fall vacant;

(e)  Transfer charges in respect of Plot/Building;

(f)  Fee for Issue of Form-I for exemption of Building Plans;

(g)  Processing fee for approval of Building Plans, conveying NOC’s etc.;

(h)  Site usage charges from Service Providers;

(i) License fee for allotment of Staff Quarters to the Staff; and

(j) Interest earned on (a) to (i) above.

2. This notification shall be effective subject to the conditions that Visakhapatnam Special Economic Zone Authority,-

(a)  shall not engage in any commercial activity;

(b)  activities and the nature of the specified income shall remain unchanged throughout the financial years; and

(c)  shall file return of income in accordance with the provision of clause (g) of sub-section (4C) of Section 139 of the Income-tax Act, 1961.

3. This notification shall be deemed to have been applied for the assessment year 2018-2019, and shall apply with respect to the assessment years 2019-2020, 2020-2021, 2021-2022 and 2022-2023.

[Notification No. 25 /2019/F. No. 300196/62/2018-ITA-I]

[Notification dt: 19-03-2019]

Ministry of Finance