Hon’ble Shri Yaswant Sinha
Standing Committee on Finance
Sub: Representation on certain provisions contained in the Direct Tax Code Bill, 2010
1. Income Tax Appellate Tribunal, Mumbai, is one of the oldest and premier Tax Bar Associations of the Country. Many noted jurists and legal luminaries have adorned the chair as its President; one of the prominent among them being Late Shri Nani Palkhivala, who was President of the Association for almost 35 years. The Association has been a front runner for the cause of upholding and maintaining judicial independence of the courts and, more particularly, the Income Tax Appellate Tribunal.
2. We have very carefully pursued and analysed Direct Taxes Code, 2010 [“the Code”]. Our views on some issues affecting the Income Tax Appellate Tribunal and some other legal issues under the Code are as under:
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The Code has miserably failed to address this crucial and fundamental aspect. There is not even an attempt to reform the tax administration, which is besieged with inefficiency and other malice. Unless the tax administration is made accountable, transparent, efficient, unbiased and pragmatic in its approach and functioning, no amount of reform in mere tax laws will have any meaningful effect
2.1 Our observation, on a very broad and macro level, is that the Code has failed to address a very crucial and fundamental aspect, that is, of the tax administration. It can never be overemphasized that any reform in income – tax law is incomplete and without much value unless it is preceded by, or at least accompanied by, simultaneous review and overhaul of the tax administration. Unless the required reforms are carried out in tax administration, no amount of tax law reforms is going to be effective. Reforms in tax administration have to go side by side with the reforms in tax laws, as both are two sides of the same coin.
The Code has miserably failed to address this crucial and fundamental aspect. There is not even an attempt to reform the tax administration, which is besieged with inefficiency and other malice. Unless the tax administration is made accountable, transparent, efficient, unbiased and pragmatic in its approach and functioning, no amount of reform in mere tax laws will have any meaningful effect.
There are many aspects of tax administration that require review and reforms. One of the main aspects is the absolute lack of accountability for the action of the Assessing Officers / Commissioners of Income – tax. We may only reproduce an extract from Dr. Raja Chalayya Committee, which Committee was also formed to bring out reforms in income – tax laws. The report, in its para no. 5.9 reads as under:
“Ways must be found to hold the officer accountable for the kinds of assessments he makes. Under the present procedure an Assessing officer, whether he be a Superintendent of Central Excise or an Income Tax Officer, can over assess, raise additional demands without sufficient grounds and yet remain unconcerned and unaffected if his over assessments and additional demands or orders confirming demands raised by him are dismissed as untenable by the Tribunal. In fact, there is tendency on the part of some of the assessing Officers to recommend to the Commissioner / Collector that almost every case in which the Commissioner (Appeals) or the Collector (Appeals) has not sustained the additional demands created by them, should be referred to the Tribunal because they stand to lose nothing if the Tribunal also decides to rule against their action. The Assessing Officers should be made accountable for their actions by being blamed for raising demands which are not upheld by the Tribunal”.
The above observations are self explanatory. Unfortunately, there is no whisper in the entire Code touching this issue.
2.2 With these preliminary submissions, we proceed to narrate below some points of representation on the appellate provisions of DTC
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A. ON THE ASPECT OF APPELLABLE ORDERS:
In order to simplify the provisions relating to the orders that can be subject matter of appeals before the higher appellate authorities, it is suggested that any order passed by a lower authority, that is, assessing officer / Commissioner of Income Tax (Both- appellate and administrative) / Director of Income Tax (Exemption) that has the effect of adversely affecting an assessee in any manner should be made appellable before the higher appellate authority, if an assessee feels aggrieved by such order. This will, first of all, obviate the need to separately and specifically enumerate various types of orders passed under various sections of the Code against which an appeal can be filed, as listed in Twenty-First Schedule of the Direct Tax Code [“Code”] for the first appellate authority and section 183 of Code for the second appellate authority, that is, the Income Tax Appellate Tribunal [“Tribunal”]. This is because almost all orders are otherwise enumerated or get covered in the schedule and the section. This will also reduce complexities and avoidable litigations. This will be also fair to the stake holders / tax payers as any person who is adversely affected in any manner by an order passed by the quasi judicial authority should have appropriate forum to redress his grievances. This suggestion is revenue neutral and, in fact, does not affect the revenue in any manner.
B. WIDENING THE SCOPE OF REASSESSMENT [SECTION 159 (3) (c) (v), (vi) and (vii)]:
With due respect to the capacity of a High Court judge, it may be stated that his lack of knowledge about the functioning of Tribunal and being away from ground realities may not be conductive to the smooth functioning of the Tribunal and, instead, may create avoidable chaos and frictions in the matter of administration of the Tribunal
By above new three sub clauses, a deeming fiction has been introduced in the Code by specifying certain events that would deemed to be regarded as causing escapement of income, so as to enable Assessing Officers to reopen already completed and concluded assessments. In effect, these sub clauses provide that if an assessment is not made in accordance with an order, direction, instruction issued by the CBDT or by the superior authority of the assessing officer who has framed the order, then such assessment would amount to causing escapement of income.
Now, it is a very well settled principle under the tax laws that an A.O., while finalizing an assessment, acts as a quasi judicial authority and is required to frame the assessment with independent and unbiased mind. This fundamental legal position is very well settled through a series of judicial pronouncements by the Apex Court as well as various High Courts. This fundamental aspect has stood the test of time for over last 80 years, that is, even beyond the era of the present Act. At no point such basic position was even attempted to be diluted and the courts have zealously guarded this fundamental position. In fact, the courts have held that in the matter of assessment, an assessing officer should not ever be guided by the superior authorities and is expected to apply his own independent mind. Further, to compel an assessing officer to frame assessments in accordance with an instruction by a higher authority or CBDT, even if such instruction is contrary to the law or contrary to the Apex Court / jurisdictional High Court, would lead to very absurd situation. It is a trite law that an assessing officer is bound to take into account the law laid down by the Apex Court / jurisdictional High Court and not doing so amounts to contempt of court. As such, such provision is not only unnecessary, unjustified and against the legal jurisprudence but would also amount to pre-empting the courts jurisdiction. This is nothing but scuttling / curtailing judicial scrutiny. Such provision clearly overlooks the subtle distinction between a statutory mandate and a legal presumption which is rebuttable. Similar is the case with respect to allowing reopening on the basis of audit objection and the above discussion applies to audit objections as well.
It should be noted that the law of the aspect of reassessment as well as ‘escapement of income’ has been very well settled now and such provisions totally unsettle the established law. It is, therefore, submitted that the position as prevailing at present on this aspect should not be disturbed.
C. WIDENING THE SCOPE OF REVISION [SECTION 191 (8)]:
Vide above sub – section, for the first time, certain deeming fictions are introduced in the matter of revision that can be carried out by Commissioner. In effect, certain actions of assessing officer / certain types of orders passed by assessing officer while framing assessments are now deemed to be erroneous. A bare perusal of the various instances enumerated in this sub – section present a very disturbing aspect and its consequences are going to have far reaching adverse effects to the assessees, that too, for no fault of the assessees. The law in this regard is also very well settled, through a series of Apex Court and various High Court judgments. All such well settled legal position has been given complete go by this one amendment. Here again, the fundamental issue that arises is whether the assessing officers are to be allowed to apply their independent mind while framing assessment or they are to be kept under constant fear of their assessments being regarded as erroneous and revised just because their superiors, who happen to hold contrary view. The legal position is very well settled that no revision is possible just because the Commissioner holds a different view, including the view about the extent and the scope of verification that is required to be made. In fact, these clauses are going to create lots of litigations.
Again, clause (e), which stipulates that the A.O. should not follow even the jurisdictional High Court judgment if an SLP has been granted by the Supreme Court against the said decision of the High Court, is the most unjust, to say the least.. Not following a judgment of the jurisdictional High Court amounts to the contempt of the Court. This is fundamental legal position of jurisprudence. It is, therefore, submitted that the position as prevailing at present on this aspect should not be disturbed
D. RESTRCITION ON CONDONATION OF DELAY IN FILING APPEAL [SECTION 179 (3) (b) & 183 (7) (b) OF CODE]:
The present Income – tax Act, 1961, [“Act”] has operated very smoothly on this aspect, where there is no time limit / bar prescribed in the matter of the number of days for which a delay in filing appeal can be condoned. The fundamental understanding in such matter, as approved by the Apex Court also, is that no assessee will deliberately or negligently cause delay in filing his appeal as he has nothing to gain out of such delay. There are very few cases where the delay is for more than 365 days. In any case, there are well settled parameters laid down by series of judicial pronouncements as to under what circumstances a delay can be condoned. It is not that a request for condonation is always accepted or accepted by mere asking. The concerned authority scrutinizes the application for condonation of delay in filing of appeal and condones the delay only if it is satisfied that the delay was caused due to bona fide and genuine reasons beyond the control of the applicant. This position has been working without any complaint from any party.
It is therefore surprising that the Code provides that the condonation of delay in filing appeal before CIT (A) / Tribunal beyond the period of one year is not permissible. Now, there can be many genuine reasons for delay in filing appeal beyond one year. In any case, such cases are very exceptional and, if required, can be subject to close or strict scrutiny by the concerned authority. If it is found that the process is being abused by the concerned assessee, then the authority can always reject the condonation application and, in a given case, initiate appropriate other action against such assessee. But to altogether deny the important appeal remedy to redress one’s grievances to all assessees, whose appeal may be delayed beyond the stipulated period for various genuine reasons, is totally uncalled for and unfair. It should be noted that in almost all other fiscal laws as well as other civil laws, no such bar on the discretionary power of the judicial authority exists now. In any case, the jurisdictional High Court may, in exercise of its extraordinary jurisdiction under Article 226 / 227, can still condone the delay in deserving cases. Therefore, such restriction / bar should be removed and the present position be restored.
E. RESTRICTION ON THE POWER OF REMAND [SECTION 180 (5)]:
Under the present scheme of the power of first appellate authority [“CIT (A)”] as reflected in section 250 (4) of the Act, CIT (A) can, before disposing of an appeal before him, direct the AO to make further inquiry and report the result of the same to him. There is no restriction of any manner, including the aspects, points or the matter for which he can call for remand report.
As per section 180(5) of the Code, however, CIT (A) can ask for remand report only on the points arising out of any new question of fact or law. There is no such restriction in the present Act. Such system has been working very smoothly and has helped the first appellate authority to arrive at proper adjudication of the appeal before them, especially while dealing with factual aspects of the appeal. It has also helped many asesssees to redress their genuine and bona fide grievances against the assessment order. It is a matter of common knowledge that there can be numerous reasons that may lead to certain crucial aspects of the matter not getting adequately reflected in the assessment order. This is specifically true when the assessment order is passed as Best Judgment assessment u/s. 144 of the Act [section 156 of the Code]. Apart from this, the first appellate authority may find it necessary, to arrive at fair and proper adjudication of the appeal before him, to cause further inquiries by the A.O. on certain aspects of the appeal. This may include points arising out of the existing questions of fact or law. There is absolutely no logic or rationale for putting such restriction.
It should be appreciated that the limitation / restriction on the right of the assessee to raise additional ground or to refer additional evidence is already in place and the CIT (A) can grant such request only after being satisfied about the reasonable cause being proved in that regard. As such, there is no need to have such additional bar.
F. WIDENING THE SCOPE OF THE POWER OF CIT (A) [SECTION 181(2):
Sub – section 2 of section 181 of the Code, for the first time, incorporates a new provision empowering the CIT (A) to consider and decide any matter which was not considered by the A.O. there is no such provision in the present Act.
Such widening of the scope of the power of the CIT (A) is totally uncalled for. This is against the scope of traditional appellate jurisdiction. The basic concept of an appeal is that an appellant cannot be in worse position by preferring an appeal and there is finality on the points on which he has not preferred appeal. It should be noted that an assessment order passed by the A.O. is otherwise also under the scrutiny of administrative Commissioner and if certain wrong is committed, it can be corrected by invoking the revisional jurisdiction, reassessment jurisdiction or rectification jurisdiction. As such, there is absolutely no justification to have such power with the appellate authority as well. This not only may lead to unnecessary litigation but may create contradictions and frictions among these various authorities as such power overlaps with such others specific jurisdictions.
There are no checks, guidelines and safeguards about the scope and the limitation of such power. This may lead to abuse and misuse of such power.
In any case and otherwise also, similar power is already provided in sub – section 4 of this section. It is not clear how these two sub – sections are going to operate and to be reconciled. As such, from this point of view also, there is no need to have such provision.
G. CURTAINING THE RIGHT OF PUBLIC SECTOR COMPANIES [SECTION 183 (3)]:
Vide the above sub – section, for the first time, public sector companies are completely denied the right to redress their grievances through usual and normal appellate machinery, that is,, by filing an appeal before Income Tax Appellate Tribunal. Instead, they are now made to approach the Authority for Advance Rulings and Dispute Resolution, in terms of section 257 of the Act. It is not understood why such curtailment of right is provided. The Tribunal is the highest fact finding body under the Act and is also a judicial body whose decisions are well respected. It is, therefore, submitted that the position as prevailing at present on this aspect should not be disturbed.
H. PRESIDENT OF THE TRIBUNAL [SECTION 182 (6)]:
Clause 182 (6) – Chief justice of High Court to head the Income Tax Appellate Tribunal.
As per clause 182(6), the Central Government may appoint a person who is or has been a Chief Justice of High Court to be the President of the Appellate Tribunal. Under the present Income Tax Act the President of ITAT is selected amongst the Sr. vice president and Vice presidents on merit by a committee inter alia consisting of senior most judge of Supreme Court, and the system is working satisfactorily. At present the Income Tax appellate Tribunal has benches in 27 Cities with sanctioned strength of 126 members.
The present scheme of appointing the senior most Vice-President or one of the Vice – Presidents of the Tribunal to be the President thereof is working fairly well and smoothly. The advantages of having a President who has been a member of the Tribunal earlier are many and not far to seek. It should be appreciated that the job of President involves not only discharging judicial duties but also dealing with lots of administrative aspects. The President who has worked as a member for many years in various capacities and at various Benches all over India has very vide experience, understanding and knowledge about the functioning of the Tribunal as well as ground level realities and issues. Normally a Member is selected as President after serving more than 20 Years in the Tribunal. As a Member he has to undergo transfer at least once in four years. When a person is selected as a president he is fully aware of functioning of various benches of Tribunal, knowledge and integrity of each and every Member which makes it easy for him to discharge his duties more efficiently. He also develops good rapport with other Members so as to achieve and maintain cordial and smooth functioning of the Tribunal without compromising in any way dignity, status and independence of the office of the President and, at the same time, maintaining the requisite discipline.
With due respect to the capacity of a High Court judge, it may be stated that his lack of knowledge about the functioning of Tribunal and being away from ground realities may not be conductive to the smooth functioning of the Tribunal and, instead, may create avoidable chaos and frictions in the matter of administration of the Tribunal.
It should be appreciated that the Income Tax Appellate Tribunal, established almost 60 years ago, is regarded as the Mother Tribunal of all the Tribunals in India and, in fact, serves as a role model for the other Tribunals. The present system which has seen the Tribunal achieving highest glory and respect should not be disturbed, especially when there is no apparent reason for such drastic change. If at all any improper use of the office of the President is perceived, there already exist specific checks and controls.
It may be noted that most of the other Tribunals are constituted of retired employees and Judges who are appointed for fixed tenure ranging from 3 to 5 years and even the Benches are not there in more than three places, hence other Tribunals cannot be compared with the Income Tax Appellate Tribunal.
Further, as an order of Tribunal is subject to challenge before the High Court, it will lower the status of the so appointed Chief Justice of the High Court.
I. CONSTITUTION OF SPECIAL BENCH ON A REFERENCE FROM CBDT [SECTION 186 (5)]:
As per the sub – section 186(5), the President “shall”, on a reference received from the Central Board of Direct Taxes [“Board”] for disposal of any particular case, constitute a Special Bench consisting of five members or more. The word “shall” means whenever the reference is received from the Board, the President has to mandatorily constitute a special Bench.
Under the present system, only the President has power to constitute a Special Bench, keeping in mind various factors. Though, in a given case, such constitution may be on the basis of an application by one of the litigating parties, still, the ultimate prerogative is with the President who, after taking into consideration all circumstance, takes a final decision. The Income – tax Department is one of the parties of litigation before the Tribunal and its status, so far as in the matter of rights and obligations as an appellant is concerned, is the same as an assessee – appellant or respondent, before the Tribunal, nothing more and nothing less.
Therefore, it is surprising that it is provided in the Code that upon the reference received from the CBDT, the President will be under an obligation and compulsion to constitute a special bench, that too, consisting of five members or more. Granting of such drastic power to one of the party of litigation, which will control the judicial power and discretion of the highest judicial officer of the Tribunal, that is, the President, is totally unjustified and unwarranted. Such mandate directly affects the independent functioning of the Tribunal / President. It may be noted that in the past, whenever a suggestion for constitution of a Special Bench has been made by the Income – tax Department, the same has always been considered most seriously by the President.
J. ENLARGEMENT OF THE SCOPE OF ADVACNE RULING AND DISPUTE RESOLUTION [CHAPTER XVI]:
Under section 256, the advance ruling mechanism is now proposed to be extended to notified classes of residents as well, that too, pertaining to the issues which are pending before any income – tax authority or the appellate Tribunal. It is not understood the purpose and the rational behind creating such parallel authority for such purpose.
Conceptually, the advance ruling mechanism was introduced in the Act so as to enable the Non Residents, who intend to have any transaction with Indian Residents, to gain advance knowledge about the likely tax impact of such transaction. The fundamental aspects of the advance ruling mechanism are:
(a) It is available to only to Non Residents. This is for the simple reason that the Act is a self contained code and a fine mechanism is in place in the matters of redressing grievances of the assessees, namely, appellate mechanism. As such, conceptually, there is no need to have a parallel mechanism for the same purpose, which creates friction and overlapping within the same system. Therefore, this facility was provided only to Non Residents who would like to know, in advance, the legal position before they invest their monies in India.
(b) Secondly, what is contemplated is only advance ruling from an authority constituted under the Ministry of Finance and not judicial bodies like the Tribunal / High Court, which are independent to the Ministry of Finance. In any case, the purpose is only to have an advance ruling and not to have resolution of any dispute.
We have narrated above some of our observations and suggestions on some provisions of the Code with the hope that they will receive very serious attention and will be ultimately accepted. We, therefore, object to the Code in the manner in which it is presented.
We also request that an opportunity of personal audience be granted to us so that we can explain in detail, and support, our suggestions
For ITAT Bar Association
(Hiro Rai) (Vipul Joshi)