Faceless Income Tax Appellate Tribunal – Opacity In The Name Of Transparency

Advocate Aditya Ajgaonkar has explained the concept of “faceless appeals” proposed to be introduced in the ITAT by the Finance Bill 2021. He has opposed the proposal and argued that it is a serious affront to the independence of the judicial function and a violation of the principles of natural Justice. He has pleaded that the proposal should be reconsidered by the Government

The contribution of the Tribunal set up under the provisions of the Income-tax Act, 1961, is perhaps underappreciated and under emphasised in today’s legal world where rapid tribunalisation has become a norm rather than an exception in the pursuit of dispensing fair, transparent and rapid justice to the litigants. The taxpayers that have found themselves on the wrong side of the tax exchequer, despite having a good case on merits, have managed to get justice for themselves through the tribunal.

As the first Tribunal to be set up this country, the members of the Bar Association of the Tribunal often call it the ‘Mother Tribunal’of the other Tribunals in the country. This role has been discharged by it admirably over the years and the Tribunals that have followed it have by and large stuck to the script laid down by it in as far as they have been conceived as independent bodies with the power to follow the principles of natural justice and also hack through red tape and formulate and follow their own procedure with the single minded pursuit of justice with no interference by the Government. However, with the introduction of the Finance Bill, 2021, the script is about to change. It turns out that the first Tribunal to be set up in the country is going to continue to be a pilot project. This bill under the pretext of noble intentions brings in sweeping reform designed to dismantle a system that has thus far worked admirably. Under the garb of introducing transparency, it seeks to make the system opaque and mechanical. The Bill heralds in the arrival of the so-called Faceless Tribunals.

The ‘facelessness’ of adjudicatory processes is a change that has been recently pursued by the government.The first scheme to be introduced was the ‘E-assessment scheme 2019’. After laying dormant in its cocoon, it burst through in the form of a butterfly in the year 2020 as the faceless assessment scheme. This was followed with the introduction of faceless appeals. The reception to faceless assessment was energetic as it seemed that adjudication based on strict layers of translucency between the adjudicating authority in the form of the assessing officer and the hapless assessee was the need of the hour and in tune with the concept of promoting transparency, accountability and ultimately rendering justice. What was required were provisions for accountability. That what was introduced was considered as a lawyer of insulation. It should have been given a chance at improvement by the passage of time with the promise of a safety net of the existing appellate authorities being able to correct any inadvertent error or issue that may creep in. Perhaps an analysis of the reaction and the quality of the orders passed in the faceless scheme would have been in order?

Let us pause for a moment here and consider a certain Mr.Assessee, in whose hand the assessing officer has deemed fit to add a certain amount of income as undisclosed. In all earnestness, Mr.Assessee / his authorised representative and the assessing officer have exchanged a flurry of digital communication with scans of thousands of pages of documents. Let us also consider that the assessing officer has without the benefit of any guidance from the Assessee’s side scrutinised the documents while keeping ourselves open to the possibility that he perhaps has not. An order has been passed with an addition made. Can the role of the handicap of the elimination of the human element in adjudication of an issue be ruled out? Income-tax proceedings are often a complex cocktail of facts and law.

 Mr.Assessee, now known as Mr Appellant has approached the Commissioner of Income-tax (Appeals) as the first Appellate authority from the order of the assessing officer. Mr.Appellant hopes that he could perhaps convince the Appellate Authority of how the stand taken by him in his return of income is justified. To his surprise he finds himself hamstrung by the same difficulties that he had in convincing the assessing officer. The same written submissions are given to the appellate authority with the same flurry of email communication. More often than not, in the absence of someone to point out the nuances, the result will be the same. The human element is not a vice to be eliminated in adjudication. It is to be cherished and cultivated. When the application of law becomes a mathematical formula to be followed instead of a living organic growth of jurisprudence, law finds itself as an end in itself and the ultimate aim of rendering justice is bypassed.

Mr.Appellant is now thoroughly downcast and fearful of the tax burden, interest, penalty and perhaps prosecution. He finds himself with no way out than to approach the second appellate authority being the Income-taxAppellate Tribunal. He has, during assessment and first appellate proceedings, quoted extensively from various nuanced judgements passed by the Hon’bleMembers of the tribunal. These Members have been aided by the help of excellent lawyers / chartered accountants and outstanding departmental representatives. He finally expects to be able to sit in on the proceedings and understand what is the thought process of the officers adjudicating the dispute is. He finally expects transparency and justice by getting to witness the conduct of the proceedings in open court.

What he finds out is that the tribunal has also been made faceless!He shall no longer be privy to the thoughts, queries, difficulties and nuances were involved in the adjudicatory process. Perhaps, neither shall the authorised representative. He may or may not go ahead and appeal to the High Court. The tribunal is the last fact-finding authority in the scheme of adjudication and appeal under the Income-taxAct, 1961. If the ITAT Appeal is lost, his fate is sealed. The High Court shall only entertain substantial questions of law and will require him to invest significant amounts of time and money to approach. The denial of a face to face hearing at the final level of fact determination may have catastrophic effects for the case of the Appellants. The same process that has been put in place to increase transparency has now lent to opacity to the process of adjudication.

The Income-taxAppellate Tribunal is an independent body that does not function under the control of the Ministry of Finance but under the Ministry of Law and Justice. This is a mark of the age old adage “Justice must not only be done but also be seen to be done”.To this end the Tribunal, as per the provisions of Section 255 of the Act, gets to decide upon its own procedure. When a person attends a hearing of his matter, that is taken up for adjudication before the tribunal, he gets to witness first-hand the representation made by his authorised representative, the objections taken by theIncome-tax department as well as the reactions of the members. The faceless scheme manages to bypass all that and reduces everything to mere letters.The Tribunal carries out a Judicial function. The Supreme Court in the case of Rajesh Kumar v. DCIT [2006] 287 ITR 91 (SC) has re-iterated based on Section 136 of the Income-tax Act, 1961, that proceedings before Income-tax Authorities are judicial proceedings.Section 255(6) states that “The Appellate Tribunal shall, for the purposes of discharging its functions, have all of the powers that are vested in the Income-tax authorities referred to in Section 131”. It continues to state that “any proceeding before the Appellate Tribunal shall be deemed to be a judicial proceeding within the meaning of Section 193 and 228 and for the purpose of Section 196 of the Indian Penal Code and the Tribunal proceedings shall be deemed to be a civil court for all the purposes of Chapter XXXV of the Code of Criminal Procedure, 1898”. The language employed in the latter part of Section 255(6) is virtually identical to that used in Section 136 of the Act.Section 293 of the Act provides for a specific bar of suits in the civil court. An extension of the logic seems to make it clear that the Court exercises at least ‘quasi judicial’ function. It is therefore important that the independence of the Tribunal is zealously protected.

The stalwarts of the tax Bar  have, over the years, moulded Income-tax into something that is more than just a complex formula for computation of income in the most intimidating form it could possibly attain. The value of the orders of the Tribunal is that it is the first forum in the adjudication of Income-tax disputes where proceedings are not conducted in enclosed cabins but are conducted in open courts. These orders are the panacea that sooth the often-outrageousadditions made by the Department. The Assessing officer and the Commissioner of Income-tax (Appeals)are both authorities within the Income Tax Department. The ITAT is the first truly independent body free from pressures of the Income tax Department in the process of adjudication of tax disputes, allowing them to be empowered to administer justice.And now they have been hamstrung.Rule 33 of the Income-tax (Appellate Tribunal) Rules, 1963, specifically states that the proceedings before the Tribunal shall be open to the public and that the Tribunal may decide, in its discretion, direct that the proceedings before it in a particular case will not be open to the public. What was earlier the exception is now sought to be made the rule.

The Constitution bench (nine judges) of the Supreme Court in the case of Naresh Shridhar Mirajkar&Ors. V. State of Maharashtra (1966) 3 SCR 744, Gajendragadkar C.J., observed as follows :- It is well settled that in general, all cases brought before the courts, whether civil, criminal, or others, must be heard in open court. Public trial in open court is undoubtedly essential for the healthy, objective and fair administration of justice. Trial held subject to the public scrutiny and gaze naturally acts as a check against judicial caprice or vagaries, and serves as a powerful instrument for creating confidence of the public in the fairness, objectivity, and impartiality of the administration of justice. Public confidence in the administration of justice is of such great significance that there can be no two opinions on the broad proposition that in discharging their functions as judicial tribunals, courts must generally hear causes in open and must permit the public admission to the court-room. As Bentham has observed: “In the darkness of secrecy sinister interest, and evil in every shape, have full swing. Only in proportion as publicity has place can any of the checks applicable to judicial injustice operate. Where there is no publicity there is no justice. Publicity is the very soul of justice. It is the keenest spur to exertion, and surest of all guards against improbity. It keeps the Judge himself while trying under trial (in the sense that) the security of securities is publicity”. (Scott v. Scott [(1911) All ER 30] ). In fact, Bachawat J., expressely held that “Save in exceptional cases, the proceedings of a court of justice should be open to the public.”

The Hon’ble Supreme Court in the case of Pradyuman Bisht v. UOI &Ors. (2020) 1 SCC 443 was observing the question of closed circuit television cameras may be put up in courts. The Court specifically brought out that the installation of CCTV cameras would be in the interest of justice and specifically asked the learned Additional Solicitor General as to why the Union of India had installed CCTV cameras in Tribunals where open hearing takes place like Court such as ITAT, Cestat, etc. as the Tribunals stand on the same footing as far as object of CCTV camera is concerned. It was further observed that recordings wiould help the constitutional authorities and the High Courts exercising jurisdiction under Articles 226 and 227 of the Constitution over such Tribunals. The bench directed that this aspect be taken up by the learned Additional Solicitor General with the authorities concerned so that an appropriate direction is issued by the authority concerned for installation of CCTV cameras in Tribunals in same manner as in courts and an affidavit filed in this Court. The case of Naresh Shridhar Mirajkar&Ors. V. State of Maharashtra was specifically relied upon in this Judgement. Therefore, the ratio laid down by the constitution bench for proceedings in court may be also made applicable to tribunals. The faceless Tribunal scheme flies right in the face of the aforementioned Supreme Court Judgements.

The Memorandum the Finance Bill, 2021, shows how ill-conceived the scheme is. The scheme purports to provide for the proceedings to be done in a jurisdiction-less manner in the name of efficiency, transparency and accountability to the assessment process. This by itself is perverse. A second appeal should not by any stretch of imagination be considered as an extension of the assessment proceedings. Justice cannot be sacrificed at the alter of so called efficiency. Transparency and accountability which are sought to be arguably introduced into the proceedings by the adoption of the faceless scheme at the assessment and the appellate level are diminished if not eliminated by relegating the second appeal process to the anonymity offered by the faceless scheme.

The wording of the memorandum seem to suggest that the proceedings of the Tribunal are a part of the Assessment process. They are clearly not. As an appellate authority, the Tribunal takes part in the adjudication but not the assessment. The concept of the doctrine of merger cannot bestretchedto such an extent as to consider proceedings before the tribunal to be an extension of the assessment proceedings. This mistreatment and misinterpretation of the process of adjudication by itself is perverse and shows the lack of clarity employed while framing this scheme. The Tribunal has been fiercely independent and fearless in adjudicating tax disputes.It is the first level at which the sunlight of an open court hearing touches the otherwise secretive nature of adjudication of tax disputes. At a juncture where the populace is crying out for greater transparency in court proceedings, certain High Courts are live streaming proceedings, the government seeks to block out the sunlight of a public hearing and to introduce the secrecy in the name of transparency. This would not be the first time that a Finance Bill seeks to make processes more opaque under the excuse of introducing transparency. The highly controversial issue of electoral bonds comes to mind. Equally disturbing is the stated purpose of making the proceedings of the Tribunal ‘jurisdiction less’ before the Tribunal. The various benches of the Tribunal are bound by the decisions of the Jurisdictional High Courts despite the all India nature of the Tribunal. The Income tax authorities are in-turn bound by the orders of the benches of the Tribunal that exercise territorial jurisdiction over them. The admitted aim of making the tribunal ‘jurisdiction less’ is problematic in as much as it erodes the concept of judicial discipline and has the potential to disturb the clarity that tax payers get when a Jurisdictional Tribunal / High Court authoritatively rules upon a specific point of law.

A reading of the Memorandum to the Finance Bill clearly shows that the government seems to think that the Tribunal is an extension of the Department. This by itself shows the dangers of the faceless scheme. The scheme is an interference in the working of the Tribunal that is supposed to be independent and to that end regulate its own procedure. The President of the Tribunal under Section 255, is empowered with the powers to ensure that the resources placed at the disposal of the Tribunal are utilised in an efficient manner and to ensure an even distribution of work in different benches and the best utilisation of its resources. This is not and should never be the function of the Government. The interference of the Central Government in the working of the Tribunal is dangerous and arguably unconstitutional. The Central Government is a part to each and every litigation before the Tribunal. It has been a trend seen recently through the various Finance Bills tabled over the years that the Central Government seeks to not only expand its influence but also exert more control.This is a definite in violation of the principles of natural justice and is clearly against the interest of the taxpayers. The scheme requires reconsideration.

To re-iterate, the arguments that are made in favour for the faceless assessments and faceless first appeals, however flimsy those arguments may be, do not hold good for the faceless proceedings sought to be introduced in the Tribunal. The action is a serious affront to the independence of judicial function and the violation of natural Justice and it is hoped that the Government shall reconsider the same.

Relevant extracts of  the speech of the Hon’ble Finance Minister are reproduced as follows: –

Faceless ITAT
For ease of compliance and to reduce discretion, we  are committed to make the taxation processes faceless. The Government has already introduced faceless assessment and appeal this year.

The next level of income tax appeal is the Income Tax Appellate Tribunal.  I now propose to make this Tribunal faceless. We shall establish a National Faceless Income Tax Appellate Tribunal Centre. All communication between the Tribunal and the appellant shall be electronic. Where personal hearing is needed, it shall be done through video-conferencing.

Relevant extracts of  the Memorandum to the Finance Bill are reproduced as follows: –

Provision for Faceless Proceedings before the Income-tax Appellate Tribunal (ITAT) in a jurisdiction less manner. In order to impart greater efficiency, transparency and accountability to the assessment process, appeal process and penalty process under the Act a new faceless assessment scheme, faceless appeal scheme and faceless penalty scheme have already been introduced. Further, vide Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 the Central Government has been empowered to notify similar schemes in respect of many other processes under the Act that require a physical interface with the taxpayers. In order to ensure that the reforms initiated by the Department to reduce human interface from the system reaches the next level, it is imperative that a faceless scheme be launched for ITAT proceedings on the same line as faceless appeal scheme. This will not only reduce cost of compliance for taxpayers, increase transparency in disposal of appeals but will also help in achieving even work distribution in different benches resulting in best utilisation of resources. Therefore, it is proposed to insert new sub-sections in the section 255 of the Act so as to provide that the Central Government may notify a scheme for the purposes of disposal of appeal by the ITAT so as to impart greater efficiency, transparency and accountability by,— (a) eliminating the interface between the ITAT and parties to the appeal in the course of proceedings to the extent technologically feasible; (b) optimising utilisation of the resources through economies of scale and functional specialisation; (c) introducing an appellate system with dynamic jurisdiction. It is also proposed to empower the Central Government, for the purpose of giving effect to the scheme made under the proposed sub-section, for issuing notification in the Official Gazette, to direct that any of the provisions of this Act shall not apply or shall apply with such exceptions, modifications and adaptations as may be specified in the notification. Such directions are to be issued on or before 31st March, 2023. It is proposed that every notification issued shall, as 52 soon as may be after the notification is issued, be laid before each House of Parliament.

Relevant extractof the proposed Amendment to the Income-tax Act, 1961,are reproduced as follows: –

“In section 255 of the Income-tax Act, after sub-section (6), the following sub-sections shall be inserted, namely: –– “(7) The Central Government may make a scheme, by notification in the Official Gazette, for the purposes of disposal of appeals by the Appellate Tribunal so as to impart greater efficiency, transparency and accountability by— (a) eliminating the interface between the Appellate Tribunal and parties to the appeal in the course of appellate proceedings to the extent technologically feasible; (b) optimising utilisation of the resources through economies of scale and functional specialisation; (c) introducing an appellate system with dynamic jurisdiction. (8) The Central Government may, for the purposes of giving effect to the scheme made under sub-section (7), by notification in the Official Gazette, direct that any of the provisions of this Act shall not apply to such scheme or shall apply with such exceptions, modifications and adaptations as may be specified in the said notification: Provided that no such direction shall be issued after the 31st day of March, 2023. (9) Every notification issued under sub-section (7) and sub-section (8) shall, as soon as may be after the notification is issued, be laid before each House of Parliament.”.