The Finance Bill, 2021: Conceptual Issues & Constitutional Challenges

Hon’ble Mr. Justice, P. P. Bhatt, President of the ITAT – Chalta hai-approach must be discouraged.

All India Federation of Tax Practitioners (AIFTP) has organized a two-day Virtual National Tax Conference on 17th and 18th February, 2021 for an in-depth discussion on the Finance Bill, 2021 and its implications, more than1,000 participants enrolled as delegates for the Virtual National Tax Conference.

The Virtual National Tax Conference was inaugurated by Hon’ble Mr. Justice, P.P. Bhatt, President of the ITAT. He released the Souvenir and Directory of core group committee.

Speaking on the occasion the Honorable Justice appreciated the role of the AIIFTP which has completed 44 years. He further appreciated that the members are well equipped in their knowledge. Technical subjects discussed are of Direct and Indirect taxes and Brain Trust is chaired by eminent senior Practitioners. Hon’ble President stated that the Chaltahai-approach must be discouraged.

He further stated that this is his third year as a President of the ITAT. With the able assistance of the Hon’ble Members of the ITAT, the virtual Court functioning is a great success. The disposal of appeal more than the filing of fresh appeals. They are in the process of improving the functioning of the ITAT. At Ahmadabad, the Government has allotted 11000 square feet for the proposed ITAT Building.

One of the subjects for discussion is the expectation of the stakeholders from the ITAT. The participants may send their suggestions

The First Technical session was on the subject of Finance Bill, 2021. The said session was chaired by Dr. K. Shivaram, Senior Advocate, Bombay High Court. His presentation was titled – The Finance, Bill 2021:  Conceptual issues & Constitutional Challenges.

Mr.Pradip Kapashi, Chartered Accountant,analyzed important provisions of the Finance Bill, 2021.The presentations are published in the e-souvenir of the AIFTP, and the same is hosted here with for the benefit of the readers.


The Finance Bill, 2021: Conceptual issues& Constitutional Challenges

by Dr.K.Shivaram, Senior Advocate &Mr.Shashi Bekal, Advocate


The Hon’ble Finance Minister, Smt. Nirmala Sitharaman, presented the Union Budget on February 1, 2021 (2021) 430 ITR 33 (St)&(2021) 430 ITR 54 (St). Several bold and unexpected amendments have been proposed in the Finance Bill 2021 (2021) 430 ITR 74 (St) vis-à-vis the Income-tax Act, 1961(Act); The intention of these proposed amendments is better understood on perusing through the Notes on clauses of the Finance Bill (2021) 430 ITR 160 (St) and Memorandum explaining the provisions in the Finance Bill, 2021 (2021) 430 ITR 214 (St). This Article has attempt to explain few key provisions of the Finance Bill, 2021, which may face the constitutional challenges and open a pandora’s box of unintended litigation.

This Article is divided into 8 parts

  • Introduction
  • Amendments proposed to overrule well settled judicial pronouncements
  • Income escaping assessment and search assessments
  • Interim Settlement Commission Board
  • Dispute Resolution Committee
  • Board for Advance Ruling
  • Faceless Income -tax Appellate Tribunal
  • Dénouement

1. Introduction

1.1. Six Pillars (2021) 430 ITR 33 (St) 36
The Hon’ble Finance Minister Mrs. Nirmala Sitharaman in her first digital budget which was presented on February2021,shared her vision for the “Amrut Mahotsav of 2022”i.e., the 75thyear of our Independence. India seeks to achieve the goal of “AtamaNirbhar Bharat” wherein six Pillars are referred to, they are:
i. Health and Well -being,
ii. Physical and Financial Capital and Infrastructure,
iii. Inclusive Development for Aspirational India,
iv. Reinvigorating Human Capital,
v. Innovation and R&D, and
vi. Minimum Government and, MaximumGovernance,

For the overall development of the economy, the innovative vision of the Hon’ble Finance Minister,deserves to be appreciated.However,thejudiciary is also one of the pillars of Democracy anddeserves allocation of fundsfor infrastructure, modernizationanddigitalization.The same was neglected in the Budget. All India Federation of Tax Practitioners(AIFTP) has made representations from time to time that every year a separate budget should be preparedfor allocation of funds to the Judiciary.The infrastructureinlower judiciary is poor, and requires immediate attention

1.2. Judiciary

Hon’ble Attorney General ofIndiaShri K.K. Venugopal, Senior Advocate -in his article titled “Access to Justice the Indian Experience” on the occasion of Golden Jubilee Souvenir of the Income tax Appellate Tribunal in the year1991is usefully extracted as under:

“Any number of laws may be passed by the legislatures for the welfare of the people but if non-implementation of the same or wrongful implementation cannot be remedied except 10 or 15 years, then surely the judicial system itself needs drastic overhaul.

It is unfortunate that Governments have not been setting apart the necessary funds in the financial budgets for expanding the Court system to keep space with veritable litigation explosion. The advance planning that Governments do in  regard to the economy generally, including the industries run by it for meeting the increasing demands for its products is absent when it comes to the area of litigation which, by and large, receives a step -motherly treatment at the hands of the Government.”

The most effective manner to convince the government on this issue should be made a matter of debate.Professional Organizations like AIFTP shouldmake representation every year until the Government’s attention is drawn towards this.

1.3. Amendments – The maddening instability of Income tax Law
There are 93  clauses in the Finance Bill 2021,(2021) 430 ITR 74 (St)some of the provisions proposed in the Billwill have far reaching implications.

Mr.N.A.Palkhivala,Senior Advocate in his article, published in the Souvenir of the ITAT in the year1991titled“The maddening instability of Income tax Law”, reads as under:
“To day the Income -tax Act, 1961, is a national disgrace. There is no other instance in Indian Jurisprudence of an Act mutilated by more than 3300 amendments in less than thirty years. Simple provisions like sections 11 to 13 (Which deals with exemption of charitable trusts) have suffered no less than fifty amendments.”
“A telling example of the total absence of a sense of time in our tax admiration isafforded by the Supreme Court’s decision rendered last Novemberin the case of Sutlej Cotton Mills Ltd v. CIT (1990) 2 SCALE 931.It was a case under Business Profits Tax Act, 1947. The accounting period was 1946 -47. The amount involved was a paltry sum of a few lakhs of rupees. The High Court’sjudgement was renderedin 1965. The Supreme Court sent the matter back to the Tribunal to re hear the appeal 44 years after the close of the accounting period. Is there any other civilized country wherea tax payer would not knowthe quantumofhis liability for 44 Years.?”
“India is waiting for a Finance Minister who will have the courage, caliber and vision to put a stop to the maddening instability of our Income -tax law”

Most of the amendmentswhichproposed in the Finance Bill 2021 areto overturn the decisions of the Hon’ble Supreme Court or High Courts which are in favour of the Assesses, further some amendments have the retroactive implications.Former Hon’ble Finance Minister, Late Shri Arun Jaitley whileaddressing the Parliamenton July 18, 2014 has stated that, India will not levy any tax with retrospectiveeffect that createsadditional burden and existing anomalies in this regard would be corrected, he stated“One thing we have made very clear: No retrospective tax creating fresh liabilities will be imposed”.The Former Minister also stated that“At this juncture I would like to convey to this august house and also the investors community at large that we are committed to provide a stable and predictable taxation regime that would be investor friendly and spur growth”.

2. Amendments proposed to overturn settled judicial pronouncements

2.1. Clause 3: seeks to amend section 2(11) of the Act, ‘Block of assets’– Goodwill is proposed to be excluded from the Block of assets.

As per the decision of the Hon’ble Supreme Court in the case of CIT v. Smiff Securities Ltd. (2012) 348 ITR 302 (SC) on merger Goodwill isvalued and depreciation is provided as an intangible asset. The goodwill is merged with the block of intangible assets and loses its independent identity.However, on account of this amendment, taxpayers will have to remove the goodwill from the Block of assets, and not claim depreciation on the same.Working capital of the taxpayers may be affected and for this year the assessee’s calculation of advance tax may lead to levy of interest. The amendment has been made applicable retrospectively with effect from assessment year 2021-22

In CIT v. National Dairy Development Board [2017] 397 ITR 543/ 249 Taxman 61 / 83 109 (Guj)(HC)held that where there was no shortfall in advance tax payment when such liability arose, and advance tax liability arose later on only due to retrospective amendment in statute, no interest could be charged on advance tax.

The legislature could have stated no depreciation would be available on any goodwill acquired after April 1, 2021 the depreciation is not available.

Further, bifurcation on what constitutes as goodwill or an intangible asset will be a matter of litigation.

2.2. Slump Exchange is held to be taxable

Clause 3.The definition of the term Slump sale by amending the provision of clause (42C) of section 2 of the Act so that all types oftransfer as defined in clause (47) of section 2 of the Act are included within its scope. The amendment has been made applicable retrospectively with effect from assessment year 2021-22

This has overruled the decision of the Hon’ble High Courts in the case of CIT v. Bharat Bijlee Ltd. [2014] 365 ITR 258 (Bom.) (HC),Areva T & D India Ltd. v. CIT[2020] 428 ITR 1 (Mad)(HC).

The intention of the legislature in providing clarity and plugging colourable transaction, is appreciated. However, the retrospective application of the law will lead to unintended litigation.

2.3. Clause 6: Section 11 of the Act Charitable Trust carried forward of losses

Carry forward of deficit of earlier year and its set off against the surplus of subsequent years is allowable.

The law laid down in the case of CIT v.Shri Plot SwetamberMurtiPujak Jain Mandal [1995] 211 ITR 293 (Guj) (HC),CIT v. Institute of Banking Personnel Selection (IBPS) (2003) 264 ITR 110(Bom.)(HC), and CIT (E) v.Subros Educational Society (2018) 303 CTR 1 / 166 DTR 257 (SC)have been reversed.

As per new explanation to Section 12AB of the Act, no set off of or deduction or allowance of any excess application of any year preceding the previous year shall be allowed. For the purpose of this sub-section,it is hereby clarified that the calculation of income required to be applied or accumulated during the previous year shall me made without any set off or deduction or allowance of any excess application of any of the year preceding previous year. As per notes on clauses these amendments will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-23 and subsequentyears.

The issue for considerationis whetherearlier years deficit if any cannot be set off from the AY 2022-23. One argument could be that any deficit of earlier years should be allowed and any deficit from the AY. 2022-23 will not be allowed to be carried forward.Debatable issues would give rise to litigations.

2.4. Clause 8 – Section 36 (1)(va) of the Act–No deduction on employee’s contribution made after the due date

Notes on clauses suggests some courts have applied the provision of section 43B on employeecontribution as well. By late deposit of employee contribution, the employee gets unjustly enriched by keeping the money belonging to employees, clause (va) of sub section (1) of Section 36 of the Actwas inserted to the Actvide Finance Act, 1987 as a measure of penalizing employers who mis-utilizeemployee’s contribution.Amendment is effect from Ist April 2021, will apply to the assessment years 2021-22.
There were around eight Courts in favour and around threeagainst and some of the cases SLP of the revenue was dismissed.

Favour: Popular Vehicles &Services (P.) Ltd. CIT (2018) 406 ITR 150 (Ker.)(HC), CIT v. Manglam Arts (2017) 398 ITR 594 (Raj) (HC), PCIT v. Rajasthan State Beverages Corpn. Ltd. (2017) 250 Taxman 32 (Raj) (HC) SLP of revenue is dismissed, PCIT v. Rajasthan State, Beverages Corpn. Ltd. (2017) 250 Taxman 16 (SC), Bihar State Warehousing Corporation Ltd. v. CIT (2017) 393 ITR 386(Patna) (HC), CIT v. Nuchem Ltd. (2015) 371 ITR 164 (P&H)(HC), CIT v. Kichha Sugar Co. Ltd. (2013) 356 ITR 351 (Uttarakhand) (HC), CIT v. NipsoPolyfabriks Ltd. (2013) 350 ITR 327 (HP)(HC),  CIT v. GhatgePatil Transport Ltd. (2014) 368 ITR 749 (Bom.)(HC) Kashmir Tubes v. ITO (2017) 85 299 (2018) (J&K)(HC), Sagun Foundry (P.) Ltd. v. CIT (2017) 291 CTR 557 (All.) (HC) CIT v. Sabari Enterprises (2008) 298 ITR 141 (Karn) (HC)

Against: CIT v. Gujarat State Road Transport Corporation (2014) 366 ITR 170 (Guj) (HC), Unifac Management Services (India) Pvt. Ltd. v. DCIT (2018) 409 ITR 225 (Mad) (HC), CIT v. Bharat Hotels Ltd. (2019) 410 ITR 417 (Delhi)(HC)

2.5. Clause 14– Section 45 (4) Partnership firm reevaluation.

The Hon’ble Supreme Court in the case of AddankiNarayanappa v. Bhaskar Krishnappa AIR SC 1300 held that share in the partnership firm is moveable property.

InCIT v. Dynamic Enterprises (2013) 359 ITR 83 (Karn.)(HC)(FB) held that where Cash towards the value of shares, there is no transfer of capital asset and, therefore, no profits or gains chargeable to tax in the hands of the assessee-firm.

In D. S. Corporation v. ITO (TM) (Mum.)(Trib.) held thatthe revaluation of asset being land held by the partnership firm which results into enhancement of value of asset and this enhanced amount credited in capital account of partners and when a retiring partner takes amount in his capital account including enhanced value of asset, it does not give rise to Capital gains.

In India most of the business is carried on through the mode of partnership.
Types of litigation that may arise is very difficult to imagine.

Whether mere change in the profit-sharing ratio in the amended provisions is applicable is debatable. Reference is drawn to the decision in the case ofS. Srinivasan v.CIT (1967) 63 ITR 273 (SC).

Amendments will take effect from 1stApril 2021 and will apply in relation to assessment year 2021 -22

3. Income escaping assessment and search assessments(2021) 430 ITR 110 (St)

Clauses 35, 36, 37, 38, 39, 40,4142, 43

Memorandum explaining the provision (2021) 430 ITR 250 (St), states that due to advancement of technology, the departmentis now collecting all relevant information related to transactions of taxpayers from third parties under section 285A of the Act(Statement of financial transaction or reportable account). Similarly, informationis also shared with the tax payer through Annual Information Statement under section 285BB of the ActDepartment uses this information to verify the informationdeclared by a taxpayer in the return and to detect non-filers or those who have disclosed the correct amount of total income. Therefore, assessment or reassessmentor re-computation of income escaping assessment, to a large extent, as information-driven.

Inview of above, there is a need to completely reform the system of assessment or reassessment or re-computation of income escaping assessment andsearch related cases.

The Bill proposes a completely new procedure of assessment of such cases. It is expected that the new system would result in less litigation and would provide ease of doing business to tax payers as there is reduction in time limit by which a notice for assessment or reassessment or re computation can be issued. The salient features of new procedure are as under:

(i). The provisions of section 153A and section 153C, of the Actare proposed to be made applicable to only search initiated under section 132 of the Actor books of accounts, other documents or any assets requisitioned under section 132A of the Act, on or before 31st March 2021.

(ii) Assessments or reassessments or in re -computation in cases where search is initiated under section 132 or requisition is made under section 132A, after 31st March 2021 shall be under the new procedure.

New Procedure
(i) Section 147 of the Act proposestoallow the Assessing Officer to assess or reassess or re-compute any income escaping assessment for any assessment year (Called revenant assessment year)
(ii) Before issue of notice u/s 148 when there is information the Assessing Officer has to get the prior approval of specified authority.
(iii) Information flagged is in accordance with risk management strategy formulated by the Board shall be considered as information. The flagging would largely done by the computer bases system
(iv) Objection raised by the Comptroller and Auditor General of Indiais also considered as information
(v) Search, survey or requisition cases initiated or conductedon or after 1st April 2021shall be deemed that the Assessing Officer has the information.
(vi) Section 148A new provisionbefore issue of notice under section 148 of the Act, Except search and requisitioned cases.

(i) Before issue of notice u/s148shall conduct enquiries, if required and provide an opportunity of being heard to the assessee.
(ii) Before Conducting an enquiry, the Assessing Officer has to obtain approval of specified person
(iii) After receiving the replythe assessing Officer shall pass an order and serve the order along with the notice to the assessee, with the approval of the Specified authority.
(iv)Thereafter the regular proceedings will be initiated.
(v) The specified Authority is Principal Commissioner orPrincipal Director or Commissioner or Director if three years or less than three yearshave elapsed
(vi) Principal Chief Commissioner or Principal Director General, if more than three years have elapsed from the end of relevant assessment years.

– In normal cases, no notice shall be issued if there years have elapsed from the end of the relevant assessment year

– Beyond three yearsbut not exceeding 10 yearsfrom the end of relevant assessment years can be in a specified cases

– Where the Assessing Officer has in his possession evidence in the form of asset amounts to or likelyto amount to fifty lakh rupees or more

– There are exceptions to the search initiated before 31stMarch2021.

– Except search and Requisitioned cases mandate of section 148A has to be followed.

Issues for consideration:

– The concept of “borrowed satisfaction” or “Reason to believe” is done away with, and may not hold good in the future.

– Whether assessment is under section 143(1) of 143(3) of the Act assessment cannot be reopened beyond the period of three years, unless it falls in the exceptionclause. Which is a welcome provision

– Even for with in there years or beyondthree years, mandate of section 148A has to be followed,except search and requisitioned cases. In built mechanism of sanction form the prescribed authority has to be obtained at three times.

– Guidelines prescribed in GKN Driveshafts (India) Ltd v.ITO (2003) 259 ITR 19 (SC) is prescribed in the provision of section 148A of the Act.

– Once the order on the basis of the notice u/s 148 is passed, the said order may be challengedbefore the High Court by writ if the sanction is not proper or the order is not speaking order
– Judicial pronouncement on the issue of sanction, not passing of speaking order will hold good.

– The ratio laid down by the High Courts that after passing the order disposing the objectionsthe Assessing Officer may have to wait four weeks to proceed with regular assessments. Allana Cold Storage Ltd v ITO 287 ITR 1 (Bom) (HC), Kamlesh Sharma (Smt) v.B.L.Meena,ITO (2006) 287 ITR 337 (Delhi) (HC)should stillhold good.

– objections not properly dealt withas held in the case of Scan Holding P Ltd v. ACIT (2018) 402 ITR 290 (Delhi) (HC), Ankita A.Chokssey v.ITO ( 2019) 402 ITR 207 ( Bom) (HC),Swastic Safe Deposit and Investments Ltd (2019) 263 Taxman 303 (Bom) (HC) (SLP rejected (2020) 270Taxman 8 (SC)may still be good law.

– While giving the sanction the prescribed Authority has to apply their mind – Sanction granted by writing “Yes, I am satisfied” is not sufficient to comply with the requirement of section 151 of the Act will also hold good for the provision of section 148A of the Act.
[Gernman Remedies Ltd v.Dy CIT (2006) 287 ITR 494 (Bom) (HC)
CIT v. Suman Waman Chaduahry (2010) 321 ITR 495 (Bom) (HC)
Central India Electricity Supply Co Ltd v.ITO (2011) 333 ITR237 (Delhi) (HC)]

– The Hon’ble Bombay High Court in the case of CIT v. Jet Airways (I) Ltd. [2011] 331 ITR 236 (Bom)(HC) held that if after issuing a notice under section 148, he accepts contention of assessee and holds that income, for which he had initially formed a reason to believe that it had escaped assessment, has, as a matter of fact, not escaped assessment, it is not open to him to independently assess some other income. This proposition should continue to hold good under the new law as well.

– Whether specific Survey for TDS will lead to deemed information for reassessment is another debatable issue

At present 80 % of Writs before the Bombay High Court on the issues relating to reassessment. If the tax administrationfollowsthe due process of the law, we are of the view that the tax litigation on the issue of reassessment may be minimised.

4. Interim Board – Settlement Commission

The Settlement Commission was set up with effect from 1-4-1976as per the recommendation of the Direct Taxes Enquiry Committee headed by the Former Chief Justice of Supreme Court of India, Shri K.N.Wanchoo.In CIT v. B.N. Bhattachargree (1979) 118 ITR 461 (SC),the honourable Supreme Court discussed in detail the objectand purpose of introducing the provision.
Section 245B (3)reads as under:
“The Chairman, Vice Chairman and others members of the Settlement Commission shall be appointed by the Central Government from amongst persons of integrity and outstanding ability, having special knowledge of, and experience in problems relating to direct taxes and business accounts.”

The AIFTP was making representation to the Honourable Finance Ministry from time to time thatan ideal Forumof Settlement Commissionshould be one from the Department, One from the legal profession and One from the Accountancy profession.We have made representation that the follow the procedure of appointment as per the methodology adopted by the Government for appointment of Honourable Members of the ITAT, the Committee consists of Sitting Judge of Supreme Court, as Chairman and nominees from Ministry of law, Ministry of financeand a nominee from the Attorney General. By inviting applications, having interviews etc.However, the CBDT has appointed only theCommissioners from the Department as members, that is why nowthe Govt has abolished the institution itself.

Relevant clauses of the Bill, are, 54, 55, 56, 57,58, 59,60.All amendment will take effect retrospectivelyfrom IstFebruary 2021. Clauses 61, 62, 63, 64 of the Bill seeks to amend sections 245DD, 245F, 245Gand 245H of the Actso as to provide that powers and functions of Settlement Commission under the said sections shall be exercised or performed by the Interim Board on or after 1st day of February 2021 and all the provisions of the said sections shall mutatis mutandisapply to interim Board as they applied to Settlement Commission.

The decision of the Hon’ble Supreme Court in the case of UOI v. Star Television News Ltd. (2015) 373 ITR 528/231 Taxman 341 (SC)affirmed the decision of the Hon’ble Bombay High Court in the case ofStar Television News Ltd. v. UOI [2009] 317 ITR 66 (Bom.) (HC)

On petitions challenging the validity of sections 245HA(1)(iv) and (3) of the Income-tax Act, 1961, as amended by the Finance Act, 2007,provision for abatement of proceedings where no order passed by cut-off date-Discrimination likely among applicants for factors not under their control-Provisions arbitrary. High Court read down so that proceedings treated as abated only where failure owing to reasons attributable to applicant-Direction to proceed with applications as if not abated where delay not attributable to applicant the High Court found the provisions violative of Article 14 of the Constitution, but did not invalidate the provisions, and instead, read them down, in particular, the provisions of section 245HA(1)(iv), so that only where the application could not be disposed of for any reasons attributable on the part of the applicant would proceedings abate under section 245HA(1)(iv) of the Act. The court directed the Settlement Commission to consider whether the proceedings had been delayed on account of reasons attributable to the applicant and if they were not, to proceed with the application as if not abated. On appeal to the Supreme Court:

Held, affirming the decision of the High Court, that the judgment of the High Court was a well-considered one and did not call for any interference.

Clause 54 -Amendment isproposed to section 245A, there will be interim Board, Section 245AA member of the Interim Board.

Clause 55- New Section 245AAonly deciding pending application by the Interim Board

Clause 56 – Seeks to amendmentsection 245Bso as to provide that the Settlement shall cease to operate on or after the Ist day of February2021

Clause 57 – Seeks to amend section 245BCof the said Actshall not apply on or after the Ist day of February, 2021.

Clause 58 – Seeks to amend Section 245BD of the Actexisting provisionsshall not apply on or after the Ist day of February, 2021.

Clause 59 Seeks to amend Section 245C of the Actso as to provide that no application shall be made under this section on or after I st day of February, 2021.

Clause60 seeks to amendsection 245D of the Act saving clause for passing the pending ordersrectifications etc. All amendmentsare procedural.

There could be some challenges on the provisions, how the taxpayers will gain the confidence of the tax payers, the time will decide the fate of the new forum.
-Some of the assesses might have paid the tax on the proposed application to be filed, the consequences of the same is not known, can they approach the High court stating that they may be allowed to approach the Interim Board
– Some of the assessee might have written to the Assessing Officers informing that they are approaching the Settlement Commission hence their matters to be kept in abeyance.
– Finance Bill has not became an Act hence restraining the SettlementCommission with effect from 1-2-2021 may not be constitutionally valid.

5. Dispute Resolution Committee (DRC)for Small and medium tax payers-Chapter XIX-AA ( 2021) 430 ITR 124 ( St)

5.1. Background

The Honourable Supreme Court in the case of National Co-Operative Development Corporation v.CIT (2020) 427 ITR 288 (SC)observed as under:
“A number of litigations arise inter se the Government and its bodies. One of the main impediments to such a resolution, plainly speaking, is that bureaucrats are reluctant to accept responsibility of taking such decisions, apprehending that at some future date their decision may be called into question and they may face consequences post retirement. In order to make the system function effectively, it may be appropriate to have a committee of legal experts presided over by a retired judge to give their imprimatur to the settlement so that such apprehensions do not come in the way of arriving at a settlement. It is our pious hope that a serious thought would be given to the aspect of dispute resolution amicably, more so in the post-COVID period.
In so far as taxation matters are concerned, they are consistently sought to be carved out as a separate category of cases. A vibrant system of advance rulings can go a long way in reducing taxation litigation. Instead of first filing a return and then facing consequences from the Department because of a different perception which the Department may have, an advance ruling system can facilitate not only such a resolution, but also avoid the tiers of litigation which such cases go through as in the present case. In 2000 public sector companies were added to the definition of “applicant”, and in 2014, it was made applicable to a resident who had undertaken one or more transactions of the value of Rs. 100 crores or more. In so far as a resident is concerned, the limit is so high that it cannot provide any solace to any individual, and it is time to reconsider and reduce the ceiling limit. The aim of any properly framed advance ruling system ought to be a dialogue between taxpayers and revenue authorities to fulfil the mutually beneficial purpose for taxpayers and revenue authorities of bolstering tax compliance and boosting tax morale. This mechanism should not become Anr. stage in the litigation process.
Thus, the Central Government must consider the efficacy of the advance tax ruling system and make it more comprehensive as a tool for settlement of disputes rather than battling it through different tiers, whether private or public sectors are involved. A council for advance tax rulings based on the Swedish model and the New Zealand system may be a possible way forward.”

The Finance Bill, 2021 has proposed an amendment vide clause 66 to introduce a new section viz. section 245MA to the Act under Chapter XIX-AA. vide clause 54-65. It can be understood that DRC is constituted as the ITSC did not cater to the small and medium tax payers. The idea for DRC was envisaged in the Union Budget, 2020.

The DRC will be an alternative dispute mechanism, the taxpayer will be given an option to opt foror not out of this mechanism. The DRC will provide cost effective and easy access to justice than to be drawn into the rigorous appellate system. The DRC shall have the powers to reduce or waive any penalty imposable under the Act or grant immunity from prosecution for any offence under the Act. Further, on account of early resolution of dispute, the interest costs would be relatively lesser.

Similar to the other faceless schemes that have leveraged technology and modern science, the Government shall introduce a scheme for DRC in a faceless manner and the same shall be issued on or before March 31, 2023.

5.2. The Proposed Law

For an in depth understanding of the proposed law, the amendment shall be explained clause-wise in light of the Memorandum explaining the Finance Bill, 2021.

Section 245MA (1) – Constitution: This sub-clause empowers the Central Government to constitute, one or more DRCs, as may be necessary, in accordance with the rules made under this Act. The DRC is empowered to entertain such persons or class of persons, as may be specified by the Board. Further, the tax payer has the option to opt for dispute resolution under this Chapter in respect of dispute arising from any variation in the specified order in his case and who fulfils the specified conditions.

“Specified conditions” means the following:

  • A person in respect of whom an order of detention has been made under the provisions of the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.
  • A person, in respect of whom prosecution for any offence punishable under the provisions of the Indian Penal Code, the Unlawful Activities (Prevention) Act, 1967, the Narcotic Drugs and Psychotropic Substances Act, 1985, the Prohibition of Benami Transactions Act, 1988, the Prevention of Corruption Act, 1988 or the Prevention of Money Laundering Act, 2002 has been instituted and he has been convicted of any offence punishable under any of those Acts.
  • A person in respect of whom prosecution has been initiated by an income-tax authority for any offence punishable under the provisions of this Act or the Indian Penal Code or for the purpose of enforcement of any civil liability under any law for the time being in force, or such person has been convicted of any such offence consequent upon the prosecution initiated by an Income-tax authority.
  • A person who is notified under section 3 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.
  • Any such conditions, as may be prescribed.

“Specified Order” means such order, including draft order, as may be specified by the Board, and:

  • Aggregate sum of variations proposed or made in such order does not exceed ten lakh rupees.
  • Such order is not based on search initiated under section 132 or requisition under section 132A in the case of assessee or any other person or survey under section 133A or information received under an agreement referred to in section 90 or section 90A i.e. the order is not emanating from a search & seizure action or information obtained from other countries under the DTAA.
  • Where return has been filed by the assessee for the assessment year relevant to such order, total income as per such return does not exceed fifty lakh rupees.

Section 245MA (2) – Powers: The DRC shall have the powers to reduce or waive any penalty imposable under this Act or grant immunity from prosecution for any offence punishable under this Act in case of a person whose dispute is resolved under this Chapter.

Section 245MA (3) – Scheme: The Central Government may make a Scheme for the purpose of DRC so as to impart greater efficiency, transparency and accountability by:

  • Introducing a Faceless procedure for the functioning of DRC
  • Optimising utilisation of the resources through economies of scale and functional specialisation
  • The DRC shall have a dynamic jurisdiction

Section 245MA (4) – Power to make changes: The Central Government may, for the purposes of giving effect to the scheme by notification 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 said notification.

5.3. Challenges
Some of the challenges, or provisions that require clarification are as under:

a) Appeal Mechanism: From a reading of the proposed section 245MA to the Act, it appears that the eligible tax payer can approach the DRC after the receipt of the order of ld. AO/ Faceless Assessment.

It is yet to be understood whether, the assessee/ tax payer waives off his right of first appeal before the CIT(A) upon making an application before the DRC.

Further, if the assessee is aggrieved by the order of the DRC, does the assessee have the right to appeal against such order. Since section 253 of the Act, “Appeals to the Appellate Tribunal”, does not acknowledge an order passed under the proposed section 245MA of the Act. It appears that there is no prescribed appeal under the law.

In the event there is no alternative efficacious remedy in place, the small-medium assessee will have no choice but to exercise the extra ordinary jurisdiction of the Hon’ble High Court by way of a Writ Petition, this will be an expensive and cumbersome exercise which would defeat the intention of the legislature i.e., to reduce the tax litigation for the small & medium tax payers.

b) Waiver of Interest: The ITSC had the power to waive interest and penalty. However, the Hon’ble Supreme Court in the case of Kakadia Builders (P.) Ltd. v. ITO ((2019) 412 ITR 128/103 53 (SC) held that Settlement Commission in exercise of its power under section 245D(4) and (6) of the Act does not have power to reduce or waive interest statutorily payable under sections 234A, 234B and 234C of the Act.

On the other hand, as per section 6 of the Direct-tax Vivad se Vishwas Act, 2020, the designated authority shall not institute any proceeding in respect of an offence; or impose or levy any penalty; or charge any interest under the Income-tax Act in respect of tax arrear.

Since the Memorandum explaining the Finance Bill, 2021 has emphasised on the indicative success of the Direct-tax Vivad se Vishwas Scheme while explaining the DRC. It would be imperative to understand the nature and powers of the DRC.

c) Rectification Application: A rectification application under section 154 of the Act is preferred when there is an apparent mistake or error on the face of the Order. It needs to be understood, whether the taxpayer-assessee would have the option to simultaneously avail the benefit of section 154 of the Act as well as the proceedings before the DRC. Ideally, as followed under the Direct tax Vivad Se Vishwas Scheme, a rectification application must be given effect and then the declarant was allowed to declare the rectified order under the Scheme. Similarly, a rectification application should be allowed before giving effect to the order of the DRC.

d) Capitalisation: Under the ITSC, the appellant would be granted the benefit of capitalisation of the undisclosed income offered before the ITSC, in the event its prayed for, and allowed. There is no clarity on such provisions before the DRC.

e) Repetitive application before the DRC: An application can be made by an assessee for settlement before the Commission only once in a lifetime. There is no such explicit mention of any such mention under the proposed section 245MA to the Act.

f) Effect of DRC order on other years: Under the Direct-tax Vivad Se Vishwas Scheme and before the ITSC, the adjustments had no effect on the other assessment years.

Section 8 of Direct-tax Vivad Se Vishwas Act is usefully extracted as under:
“Save as otherwise expressly provided in sub-section (3) of section 5 or section 6, nothing contained in this Act shall be construed as conferring any benefit, concession or immunity on the declarant in any proceedings other than those in relation to which the declaration has been made.
Emphasis supplied

Similarly, the it would be expected from the Scheme to throw some light on this issue of.

g) Departmental Appeal/ Writ: Since DRC is akin to the ITSC. The purpose of ITSC was to avoid long drawn litigation in complicated matters and the order of the ITSC was binding on the tax payer and the Department. However, both the department and the tax payers have been approaching the High Courts in form of a Writ Petition against the order of the ITSC. The Hon’ble High Court of Kerala in the case of CIT v. ITSC(2017) 391 ITR 374 (Ker) (HC)wherein Writ Petition filed by the Commissioner of Income Tax against the Order of Settlement Commission was held Maintainable as theSettlement Commission had not properly considered issue of addition or genuineness of claim of advances from others, matter was remanded to Settlement Commission.

Would the DRC challenge the order of the DRC before an appropriate forum? The binding nature of the Order of the DRC on the department is not yet known.

h) Settlement or Adjudicating: Would the DRC be in the nature of a forum for settlement of disputes or would there be an element of adjudication involved? Further, in the event of adjudication, it is important that the DRC be bound by the Judicial pronouncements, Circulars, Notifications etc.

The Hon’ble Supreme Court in the case of CIT v. B.N. Bhattacharjee [1979] 118 ITR 461 (SC) held that settlement commissions are Tribunals and section 245l declares all proceedings before settlement commission to be judicial proceedings.

The decision of the Honourable Supreme Court is binding on all courts, Tribunals and tax authorities across the country as per the provisions of Article 141 of the Constitution of India. Reference is drawn to the decision of the Hon’ble Supreme Court in the case of CWT v Aluminium Corporation of India Ltd (1972) 85 ITR 167 (SC).

Similarly, in respect of the High Courts, the High Courts has the power of superintendence over the Tribunals and authorities under Article 227 of the Constitution. The Hon’ble Supreme Court in the case of East India Commercial Co Ltd v Collector of Customs AIR 1962 SC 1893 observed that the law declared by the highest court in the State is binding on authorities or Tribunals under its superintendence and they cannot ignore it. Similar view was also expressed by the Honourable Supreme Court in the case of Baradakant Mishra v. Bhimsen Dixit AIR 1972 SC 2466.

Similarly, Circulars of CBDT explaining the Scheme of the Act have been held to be binding on the Department repeatedly by the Hon’ble Supreme Court in a series of judgments including Union of India v. Azadi BachaoAndolan [2003] 263 ITR 706 (SC), Navnit Lal C. Jhaveri v. K.K. Sen IAC [1965] 56 ITR 198 (SC) and UCO Bank v. CIT [1999] 237 ITR 889 (SC).

Therefore, the DRC should consider the prevailing law of the land and the biding instructions while adjudicating matters before it.

i) Faceless Scheme: It has been abundantly clarified that the DRC would perform in a faceless manner and with dynamic jurisdiction. This raises two important queries.

  • Whether the tax-payer would be granted an opportunity of being heard in person i.e., via virtual mode?
  • Whether it would be possible for such small-medium tax payers to avail the required infrastructure to contest the matter in a faceless manner?

5.4. Conclusion

The constitution of DRC is a welcoming legislation. The administration should be effective in communicating to the tax payers the benefits of the DRC. As on date, a Scheme of DRC is awaited. Several questions viz. time limit for approaching the DRC, time limit for passing the Order, manner of providing additional evidence, issues emanating from TDS etc. cannot be evaluated at this stage.

Any conclusion at this premature stage would be myopic. However, the proposed amendment appears to be promising, and capable resolving & mitigating tax litigation.

6. Board for Advance Rulings ( 2021) 430 ITR 126( St)  (Authority for Advance Rulings)

Clauses, 67,68, 69, 70, 71, 72, 73, 74 75,76, all are procedural applicable with effect from 1st April 2021.Clause77 of the Bill seeks to insert a new section 245W to the Income-tax Act relating to Appeal. According to the proposed amendment,any ruling pronounced or order passed by the Board for Advance Rulings; The appellant or the Assessing Officer,on the directions of the Principal Commissioneror Commissioner appeal to the High Court with in sixty days from the date of Communication of such ruling or order,in such form and manner as may be provided by the Rules.

In the case ofCIT v. Mohd. Farooq (2009) 184 Taxman 191 / 317 ITR 305 (FB)(All.)(HC)and CIT v. Grasim Industries Ltd. (2009) 319 ITR 154(Bom.)(HC) has held thattheperiod of limitation prescribed for filing an appeal under section 260A(2) of the Income Tax Act, 1961, is not subject to the provisions contained in section 4 to 24 of the Limitation Act, 1963 as provided under section 29(2) of the Limitation Act, therefore, High Court has no power to condone the delay in filing the appeal.Section 260A(2A) was inserted by the Finance Act, 2010 w.r.e.f. 01.10.1998 to give the High Court the power to condone delay.

There is no clarity whether the receipt is relevant or not or published in the website of the Department is to be considered.Whereas Section 260A appeal to High Court against the order of the Appellate Tribunalrefersorder passedreceived by the assessee. In Bombay High Courtappeal which was admitted in the year 2000are still pending for final hearing.At present the Authority for Advance Ruling is chaired bytheRetired Judge of the Hon’ble Supreme Court.

Ideally, the power should have been given to the ITAT, which has the infrastructure, highly experienced members who have the knowledge of the International taxationwho are functioning under the Ministry of law and justice is most suited for discharging thefunction asmembers of the Board for Advance Ruling.

Right of appeal is given to the assessee as well as the Department. In Mumbai the appeal for admission it takes minimum three years and after admission for final hearing another minimum of 10 years. The appealsadmitted in the year 2002 still pending for final hearing. The purpose of Advance ruling has lost its importance.

7. Faceless Income tax Appellate Tribunal ( 2030) 430 ITR 130( St)

Clause 78 of the Bill, seeks to amend the section 255 of the Income-tax Act, 1961relating to procedure of the Tribunal – Provision for Faceless Proceedings before the Income-tax Appellate Tribunal (ITAT) in a jurisdictional less manner. (2021) 430 ITR 253 (St)

Relevant extracts ofthe speech of the Hon’ble Finance Minister(2021) 430 ITR 55 (st) is reproduced as follows:

Faceless ITAT
Para. 158. For ease of compliance and to reduce discretion, weare committed to make the taxation processes faceless. The Government has already introduced faceless assessment and appeal this year.

Para 159. 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.

Provision for Faceless Proceedings before the Income- tax Appellate Tribunal( ITAT ) in a jurisdiction less manner .Relevant extracts ofthe Memorandum to the Finance Bill are reproduced as follows follow.( 2021) 430 ITR 253 (St)

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.

This amendment will take effect from Ist April, 2021

 Clause. 78. Relevant extract of the proposed Amendment to the Income-tax Act, 1961, are reproduced as follows .( 2021) 430 ITR 130 ( St)
“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.”.

According to us the proposed amendmentmay not be in the interest of tax payers, on following reasons:

a) Acceptance of the orders of the ITAT
ITAT has completed 80 years on January 25, 2021, total pendency as on January 1, 2021 in Mumbai is only 12,000 appeals whereas highest pendency in the year 1998-99 was 3,04,594. As per the data published in the Platinum Jubilee Souvenir of the ITAT on January 25, 2016, at Page No 37 it has shown that on an average 96.10 % of the Orders of the Tribunal are accepted.

Even after insertion of appeal provision under Section 260A of the Act with effect from October 1, 1998, 70% of the appeals from the order of the Tribunal were dismissed by the various High Courts at the stage of admission itself.

The figures clearly demonstrate that the ITAT is discharging its duty to the satisfaction of the tax payers as well as the Tax Department.

b) Final fact-finding Authority and transparency in hearing

Under the Act, the ITAT is the final fact-finding authority as per Section 254 (4) of the Act, except as provided in Section 260A where orders passed by the Appellate Tribunal are considered final. The assessee or the department can file an appeal before the High Court as per Section 260A (1) of the Act and this appeal can be entertained by the High Court only if the Court is satisfied that the case involves a substantial question of law. According to us more than 80% of matters which are argued before the ITAT on facts. There are instances where for ascertaining facts, the ITAT has had to requisition the original record of recorded reasons, the sanctions given by the tax authorities, and in some of the instances, the Hon’ble Members have visited the actual fields to verify whether the agricultural activities are carried on or not! In some cases, the Hon’ble members have summoned witnesses and examined them in the witness box. Often, the paper-books filed before the Tribunal are of more than 1000 pages, and an appreciation of most of the pages if not all, may be required to ascertain the correct facts. At present the arguments of opposing representatives are made in open court. When the argument of the appellant is over, the respondent gives their reply and the appellant has right to bring correct facts or positions of law on record in rejoinder. In the course of hearing, the case laws cited by the both the sides are discussed often intricately about the provisions of law and the interpretation to be given to them.

The present system is working very smoothly following the honour, dignity and convention of the open Court, which is so integral to the common law system. There is complete transparency in the proceedings of the ITAT. The assessee as well as the public can watch proceedings as then happen.The tax payers have reposed their confidence in the institution for over 80 years due to continuous efforts on the part of the institution to improve the justice delivery system. The times have evolved and so has the Tribunal.

Recent decision of the Hon’ble Supreme Court in the case of Pradyuman Bisht v. UOI &Ors. (2020) 1 SCC 443.The Hon’ble Court was observing the question of closed-circuit television cameras to 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 not 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 would help the constitutional authorities and the High Courts exercising jurisdiction under Articles 226 and 227 of the Constitution over such Tribunals if required. The bench directed that this aspect be taken up by the then 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.

c) ITAT was established by continuous study and considering the various reports.

The idea of setting up the Income -tax Appellate Tribunal was first mooted in the Income-tax Enquiry Report 1936, which was submitted to the Government of India. The select committee was appointed to consider the Bill to amend the Indian Income-tax Act 1922. The report was presented to the Legislature Assembly on 10th November 1938. In pursuance of these recommendations, Section 5A was introduced in the Income-tax Act, 1922 and on 25-1-1941 was notified as the appointed date from which that section came in to force. The section remained unchanged in its essentials till the repeal of the Income-tax Act 1922, with effect from April 1, 1962. In the Income-tax Act, 1961, the Constitution and functions of the Tribunal have been set out in sections 252 to 255 of the Act. There is no fundamental change either in the constitution or functions of the Tribunal due to enactment of the new Income tax Act, 1961.

d) Opportunity of Hearing – Tribunal has the trapping of court.

Section 254(1) of the Income -tax Act,1961 reads as under:
“The Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit.”

Further, Rule 33 of ITAT Rules, 1963, clearly states that the proceedings before the Tribunal shall be open to the public. Relevant portion of the rule is usefully extracted as under:

“Proceedings before the Tribunal.

33. Except in cases to which the provisions of section 54 of the Indian Income-tax Act, 1922, and/or section 137 of the Act are applicable and cases in respect of which the Central Government has issued a notification under sub-section (2) of section 138 of the Act, the proceedings before the Tribunal shall be open to the public. However, the Tribunal may, in its discretion, direct that proceedings before it in a particular case will not be open to the public.”

In the case of Ajay Gandhi v. B. Singh (2004) 265 ITR 451 (456) the Supreme Court observed that the Income tax Appellate Tribunal exercises judicial functions and has the trapping of a court.

In the case of ITAT v. V. K. Agarwal (1999) 235 ITR 175 (SC), before the Court the counsel for Union of India conceded that the Income Tax Appellate Tribunal performs judicial functions and was a court subordinate to the High Court. The Court held that the Tribunal is competent to initiate contempt proceedings under Contempt of Courts Act, 1971.

The Hon’ble 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 preserved.Section 254 (1) of the Income -tax Act 1961 states that Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit.

In the case of NareshbhaiBhagubhai&Ors v. UOI (2019) 15 SCC 1, The Hon’ble Supreme Court has held that the right to be heard even in an administrative decision-making process is not mere formality. The right of hearing is mandatory and substantive right and must be strictly followed and not following the same is violative of principle of natural justice.

When an assessee approaches the ITAT Justice must not only be done but also be seen to be done. The current open court system is in consonance with the said principles said down by the Hon’ble Supreme Court from time to time.

e) Functioning of the ITAT cannot be compared with the functioning of the Commissioner (Appeals).

The proceedings before the Commissioner (Appeals) are a continuation of assessment proceedings, whereas appeal before the ITAT is an independent adjudicating body. The former proceedings are internal proceedings in as far as the Income tax Department is concerned. The Tribunal 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.

f) Oral hearing – A statutory right -Cannot be dispensed with

One will appreciate that since the establishment of the ITAT in the year 1941, the appeals have been disposed by orally hearing the parties in appeal.  In Automotive Tyres Manufacturers’ Association v. Designated Authority (2011) 2 SCC 258, the Honourable Court has held that even written arguments are no substitute for an oral hearing. A personal hearing enables the authority concerned to watch the demeanour of the witness etc. and also clear up his doubts during the course of arguments.  In G.N Rao v. Andhra Pradesh State Road Transport Corporation AIR 1959 SC 308 the Court held that personal hearing enables a party appearing at such hearing to persuade the Authority concerned by reasoned arguments to accept his point of view by removing the authority’s doubt and by answering the question. In P.N.EswraIyer v.Registrar , Supreme Court of India (1980) 4 SCC 680, the Court held that the normal rule of judicial process is oral hearing and its elimination an unusual exception. The Apex Court further held that justicing is an art even as advocacy is an art. It was held that no judicial “Emergency” can jettison the vital breach pf spoken advocacy in an open forum and there is no judicial cry for extinguishment of oral argument all together.

Accordingly, the decision to deny oral hearing at the Income Tax Appellate Tribunal stage needs to be reconsidered as otherwise the same shall not only be in violation of principle of natural justice but the same shall also suffer from the vice of unfairness. 
Not providing an opportunity of personal hearing before the Tribunal is a violation of principles of natural justice and contrary to the safe guard guaranteed by the Constitution of India under Articles 14, 19 and 21 of the Constitution of India.

g) Power to constitute the Bench with Honourable President of the ITAT

As per section 255(5) of the Income -tax Act, 1961 it is the Appellate Tribunal that shall have the power to regulate its own procedure and procedure of the Benches thereof, in all matters arising out of the exercise of its powers or in the discharge of its functions, including the places at which the Benches shall hold their sittings. The ITAT functions under the Ministry of Finance whereas the ITAT functions under the Ministry of law and Justice. The Income tax department is always one of the parties before the ITAT either as appellant or respondent. If at all any scheme is to be framed it should be by the Ministry of law and Justice and not by the Ministry of Finance headed by the CBDT.In the case of Madras Bar Association v. UOI (2014) 109 DTR 273/ 227 Taxman 151, the Court held that the dispensation of justice by the Tribunals can be effective only when they function independent of any executive control. The Court also observed that the Parliament must ensure new Tribunal conforms to salient characteristics and standards of court sought to be substituted. A failure to do so will be violative of “Basic structure” of Constitution of India and the said ratio is also applicable to the Income tax Appellate Tribunal. Weare of the opinion that the dispensation of justice an open court hearing is a must in before the ITAT.

h) Proposed amendment of faceless hearing without deliberation and without taking in to feedback from the stake holders.

The proposed amendment to face less hearing is proposed without consulting various stake holders. Now, while the ITAT is hearing the Virtual hearing of matters, a number of technical problems, such as poor internet connectivity and other technological and technical difficulties are often encountered. The filing of appeal by email is not implemented even as of today. The assesses must first be made aware of the use of technology, development of software etc in order for them to have confidence in the system. Both the faceless assessment and faceless appeals [before the Commissioner of Income tax (Appeals)] are yet to be tested and stand the trial of time. When Virtual hearing themselves have not proven to be confidence inspiring, the proposed Faceless functioning of the ITAT may prove to be a step that does not benefit the taxpayers.


1. The proposed amendment may be dropped.

2. In case the Government is keen to introduce the faceless ITAT, the following procedures may be followed:

(a) The law commission may be requested to prepare the report on the Virtual and face less hearing of the ITAT, after interacting with the stake holders across the country.

(b) After receipt of the report the proposed amendment may be referred to a select committee.

(c) After receipt of the report from the Parliament committee the suitable amendment if any desired may be introduced.

We make an appeal to all the stakeholders to write to the Hon’ble Finance Ministry to drop the proposal.

8. Dénouement

Ease of doing business cannot be achieved by increasing the compliances. When the TDS provisionwas introduced only threetypes of payments were covered i.e., Section 192 – Salary,Section 193 – Interest on Securities and Section 194 – Dividendsprovisions; now there are more than 30sectionswhere the assessee is required to deduct tax at source. As per the Proposedprovision 194Q of the Actthe assessee has to deduct the tax even on purchases. The failure to deduct tax atsource or delay in depositing the tax at source, the assessee is made liable to pay interestpenalty and some offences may lead toprosecution.Once the prosecution is launchedfor reaching finality it will take more than two decades. Unless the procedure compliance is reduced the investors may not get the confidence to invest in India.The legislature is trying toimplement newprovisionspertaining to commercial laws and labour legislation that is the reason the Income-tax Act is becoming more complications which lead to unintended litigation.We hope the Government will also interactwith theprofessional organisations and consider their views.The readersare requested to send their objective suggestions to the aiftpho@gmail.comwhich will enable to them their suggestions to the CBDT.

5 comments on “The Finance Bill, 2021: Conceptual Issues & Constitutional Challenges
  1. Release of special issue of the AIFTP Journal – 80 glories years of the ITAT and 80 landmark judgments of special benches of the ITAT.

    We are obliged to the Hon’ble Justice P. P. Bhatt, President, ITAT for giving an opportunity to release our above special issue at the inaugural session of two days national conference on 27-2-2021 at Gujarat. The said publication is available for download at the website of the AIFTP at

    One of the session was on the subject of Expectation of stake holders. Our Past National President Dr. K. Shivaram, Senior Advocate has written a detailed article which is published in the ( which can be considered. We have requested our members to send us objective suggestions, when we receive we will forward to the Hon’ble Justice Mr. P. P. Bhatt, President, ITAT.

    Mr. M. Srinivasa Rao,
    National President

  2. AIFTP has made representation to the judiciary and Law Ministry to institutionalise the process of elevation of judicial members of the ITAT to High Court. We are pleased to share that our view is also supported by Shri Mukul Rohatgi former Attorney General of India, when he spoke on valedictory function of the ITAT Members conference on 28 – 2-2021 at Gujarat .
    Mr. M.Srinivasa rao
    National President, AIFTP

  3. Subramaniyan Advocate says:

    I agree with the suggestion made by the Authors that faceless appeal before the ITAT is not desirable now . Use of technology is welcome move how ever it cannot substitute oral hearing before the ITAT which is final fact finding authority . We hope the Govt will not implement faceless scheme before ITAT without interacting with stake holders

  4. Rege CA says:

    Settlement commission is a very good concept . It is a good forum to settle the matters relating to search and survey . Instead of abolishing the forum , the Govt could have considered the suggestion made by the learned Author to bring transparency in the appointment of members and appointing the professionals from the Legal and accountancy profession .

  5. Parikh CA says:

    We endorse the view of the learned Author, amendments to overcome the favourable judgments of the High Courts and Supreme Court is not desirable it will not bring stability in tax law

Leave a Reply

Your email address will not be published. Required fields are marked *