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The Author rues that the Direct Tax Code 2010 is a golden opportunity gone waste. What could have been a revolutionary exercise in tax reforms has been reduced to a pedestrian re-numbering of sections, agonizes the author. But, eternal optimist that he is, all is not lost, says the author and sets out an 11-point agenda to salvage the DTC 2010. Is the draftsman listening?

The discussion paper on Direct Taxes Code Chapter 1, reads as under “The Code is not an attempt to amend the Income-tax Act, 1961, nor is an attempt to “Improve” upon the present Act. In drafting the Code, The Central Board of Direct Taxes (The Board) has to the extent possible started on a clean drafting slate. Some assumptions which have held the ground for many years have been discarded. Principles that have gained international acceptance have been adopted. The best practices in the world have been studied and incorporated. The tax policies that would promote growth with equity have been reflected in the new provisions. Hence while reading the Code it would be advisable to do so without any preconceived notions, and as far as possible without comparing the provisions with the corresponding provisions of the Income-tax Act, 1961”. I have made an attempt to discuss certain conceptual issues which may be considered as we are proposing to bring new Income Tax to our country which will be in statute for at least for another 50 years.

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The author argues that non-residents dread the ‘Force of Attraction’ rule in Double Taxation Avoidance Agreements because it permits the taxation of income arising outside the Contracting State. The ‘Force of Attraction’ rule can also create an anomalous situation where an assessee may be better off under the domestic law than under the tax-treaty law, says the author

The recent judgement of the Tribunal in ITO vs. Linklaters LLP has put the spotlight on the dreaded “Force of Attraction” principle.

In an earlier judgement in DCIT vs. Roxon OY 106 ITD 489 (Mum), the Tribunal explained that the basic philosophy underlying the ‘Force of Attraction’ rule is that when an enterprise sets up a PE in another country, it brings itself within the fiscal jurisdiction of that another country to such a degree that such another country can properly tax all profits that the enterprise derives from that country – whether through the PE or not. Therefore, under the ‘Force of Attraction’ rule, the mere existence of a PE in another country leads all profits which can be said to be derived from that another country being taxable in that another country.

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The Finance Minister publicly expressed his anguish at the mounting number of frivolous cases filed by the department which are choking the Courts. The author, a public-spirited citizen ever eager to help the FM in such matters, puts on his thinking cap and formulates a 12-point agenda to cure the malaise. If implemented in real earnest, the mindless filing of departmental appeals will cease, assures the author. Is the FM listening?

The Hon’ble Finance Minister while addressing the Chief Commissioner’s Conference asked the CBDT to come out with a comprehensive proposal to address the issue of unwanted litigation with the tax payers. Federation has suggested proposals to reduce the tax litigation from time to time. “Kar Vivad Samadhan Scheme, 1998” (1998) 233 ITR 36 (St.), which was successfully implemented by the Government was the suggestion of the Federation. Hon’ble Justice Mr. V. C. Daga, Judge, Bombay High Court in Commissioner of Central Excise vs. Techno Economic Services Pvt. Ltd. (2010) 255 E.L.T. 526 (Bom.) has taken judicial notice and directed the Chairman, Central Board of Excise and Revenue, Ministry of Finance to frame guide lines similar to Income tax matters. The Hon’ble Justice observed that “Let the Court to decide, attitude needs to be given go bye”. The Comptroller & Auditor General of India (CAG), in its recent report has revealed that a whopping sum of Rs 2.2 lakh crores has got locked up in appeals at various levels. The report stated that “absence of centralized database on appeals, non production of records during audit was a major constraint and concern”. Even the Federation in spite of making a sincere attempt could not succeed to get the number of tax appeals, references and Writ petitions pending before the various High courts.

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The Author fondly refers to the Tribunal as ‘Mother’ and urges that by the time its Platinum Jubilee is celebrated, it must be regarded as the finest legal Institution in the Country. It is possible, he says, if the Bar and the Bench play their part in preserving the honour, dignity and purity of the Tribunal!

The Income Tax Appellate Tribunal is one of the oldest temples of justice in our country of which, the Bench and the Bar are its trustees. On the occasion of 40th anniversary of the Income Tax Appellate Tribunal, Shri N. A. Palkhivala in his article stated that “There is no doubt that over the period of 40 years, the Tribunal has been manned by some very able men. Quite a few of them would be fit to adorn any High Court Bench. No other Tribunal in India has won such well deserved popularity and confidence of the public as the Income Tax Appellate Tribunal”. The Income Tax Appellate Tribunal is even today considered as one of the finest institutions of our country, when compared with other institutions. For shaping this Institution the contribution of Late Shri N. A. Palkhivala, Late Shri R. J. Kolah, Late Shri S. P. Mehta and many others deserves to be remembered.

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The author is full of praise at the clarion call of the new Chief Justice of India that one must put duty to the Country before duty to the self. Inspired, he has formulated a 10-point agenda and implores us to follow it in the right spirit to bring some nobility into the noble profession

At the Inaugural function of the 12th National Convention of All India Federation of Tax Practitioners held at Mumbai on 24th December, 2002, the Hon’ble Mr. Justice S. H. Kapadia, then Judge of Bombay High Court addressed on the theme of “Tax Evolution to Economic Revolution”. (AIFTP Journal – January, 2003 P. 12). The delegates at the seminar and I, as a National President elect of the Federation had the privilege and opportunity of listening to the Hon’ble Justice on the economic subject and also on the issues relating to tax reforms. For the benefit of tax professionals, the Hon’ble Justice had made a noble suggestion which is as under:-

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The author is indignant at the proposal of the Law Commission to discriminate between the retirement age of heads of Tribunals and the retirement age of other Members. He argues that it is illogical to have different retirement ages for members of the same Institution. He, however, is in favour of a general increase in the retirement age and argues that retirement at an age when the Judges’ intellectual faculties are at their peak results in a sheer waste of abilities, expertise and experience

The news reports announcing the probable fixation of retirement age of heads of Tribunals at 70 and Members at 65 prompts the reaction that the two limits of members of the same institution is illogical. There has to be uniform age limit for Judges, Members and Heads of Tribunal because all are discharging judicial functions.

The Law Commission of India in its Report No. 232 dt. 22-8-2009 has recommended that the retirement age of all heads of Tribunal may be raised to 70 Years and of members to 65, for the reason that there is no uniformity of retirement age for the heads of various Tribunals. In almost all the Tribunals the members and the heads of the Tribunal discharge similar judicial functions, hence, there is no reason for fixing the retirement age for the heads of the institution at 70 years and those of the members 65. The distinction if any, is invidious.
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The author, who is usually very critical of the Government for its indifferent attitude to the Judiciary, is full of praise this time at the grant of Rs. 5,000 crores in the Budget for modernization of the justice delivery system. He urges that much more has to be done and makes the radical suggestion that visionaries like Sam Pitroda and Nandan Nilekani should be nominated to prepare a road map to reform the judicial process.

The Hon’ble Finance Minister pronounced: “The union Budget cannot be a mere statement of Government accounts, it has to reflect the Government’s vision and signal the policies in future”. In our editorial of AIFTP Journal for the month of March, 2008, we have made an appeal to Government to allocate a specific amount to modernisation of the institution of judiciary. We are pleased to state that in this year’s budget an amount of Rs. 5,000 crores have been provided as grants for the States to improve the justice delivery system, including strengthening of alternative dispute resolution mechanisms.

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The “curse of Lord Curzon” haunts the wheels of the tax administration. This vile system has caused colossal losses to the exchequer. Despite severe strictures by the Courts, it is impossible to get rid of it. The only way to cure the malady is to make the concerned officer personally liable to pay “costs” for his negligence and irresponsibility.

It was an unnecessary controversy and the delay in resolving it may have cost the exchequer several hundreds of crores in taxes.

The question whether courts have the power to condone delay in filing of appeals under section 260A of the Income-tax Act arose because of careless drafting. While all other provisions of the Act provide that the authority therein can condone a delay in filing an application/appeal, the draftsman forgot to add a similar provision in s. 260A. This bit of careless drafting lead to a spate of litigation.

The Full Bench of the Bombay High Court took the view in Velingkar Brothers 289 ITR 382 that the Court had inherent power to condone delay. However, the Supreme Court took a different view in Singh Enterprises 221 ELT 163 and Punjab Fibres 223 ELT 337 in the context of the pari-materia provisions of the Excise and Customs Act and held that the power of the Court to condone delay flows from the provisions of the relevant law and the inherent powers of Court to condone delay under the Limitation Act does not apply. Following this, the Bombay High Court in Arun Asher and Shruti Colorants held that the Full Bench judgement in Velingkar Brothers was not good law.

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In Ishikawajima-Harima Heavy Industries 288 ITR 408 the Supreme Court held {on a misreading of s. 9 (1) (vii)} that in order to be chargeable to tax in the hands of the non-resident, fees for technical services had to be rendered in India as well as utilized in India. It held that if both conditions were not fulfilled, the fees for technical services was not chargeable to tax in India.

That the judgement was wrong was said so by the AAR in Worley Parsons Services Pty. Ltd (AAR) 312 ITR 273. It observed that Ishikawajima had wrongly referred to s. 9(1) (vii) (c) instead of s. 9 (1) (vii) (b) even though the two dealt with different situations. It also noted that the Supreme Court had stated that s. 9 (1)(vii) (c) requires that the services have to be rendered as well as utilized in India in order to be taxable in India even though the word “rendered” was not to be found even in the inapplicable clause (c). It also noted that the law was that “a decision not expressed and accompanied by reasons and not proceeded on a conscious consideration of issue cannot be deemed to be a law having binding effect as is contemplated under Art.141 of the Constitution. That which has escaped in the judgment is not the ratio decidendi” though it finally found a way to “distinguish” Ishikawajima.

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National Tax Tribunal

The author is full of appreciation at the stellar roles played by the ITAT and the Bombay High Court in reducing arrears. He argues that the dwindling pendency of matters has rendered the concept of the NTT redundant. He makes out a strong case for increasing the role of the ITAT in judging income-tax disputes by making all non-appealable orders appealable to the ITAT

In the 61st year of Republic of India, the tax-payers of India will be getting speedy justice from the Income Tax Appellate Tribunal, which is considered as Mother Tribunal, within six months of the filing of an Appeal. As on 1-1-2010 the pendency before the Income Tax Appellate Tribunal is only 45,730 Appeals; sanctioned strength of Members is 102; hence, per member there are only 444 matters. In the year 1999, pendency was 3,00,597. In Mumbai, the pendency is only 14021 appeals and the sanctioned strength of 24 members which gives only 584 appeals per member (Source AIFTP Journal January, 2010 P. 53). The reduction in pendency is due to innovative procedure of the Income Tax Tribunal and the active support of the Tax Bar.

2. It is also heartening to know that pendency of tax appeals for final hearing before the Bombay High Court is only 1500. At present there is a permanent tax bench of the Bombay High Court to hear the tax matters. Bombay High Court is making a sincere attempt to group the matters and dispose of the same. Some of the matters, disposed of through this method, are dividend stripping, power of Settlement Commission, taxability of co-operative societies, depreciation on stock exchange card, option to claim depreciation, etc. This has helped to dispose of more than 3,000 appeals. One matters similarly clubbed and listed for disposal relates to disallowance of expenses incurred under section 14A of the Income Tax Act to earn exempted income under section 14A of the Act.

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