INTRODUCTION

The Income Tax Appellate Tribunal (Hon’ble ITAT) country’s first tribunal instituted for administering the appeals under Direct Taxes Act. It is known as the “Mother Tribunal” of India. With its institution in 1941, the tribunal has been discharging it functions in a fair and efficient manner. It was the success of Hon’ble ITAT that inspired the Government to establish similar tribunals. The rulings of the tribunal are final and the next appellate forum from it is its jurisdictional High Court. The appeal in High Court is only admitted if there is a substantial question of law, that makes Hon’ble ITAT the last fact-finding authority.

By virtue of section 86 of the Finance Act, 2021, an amendment was carried on to section 255 of Income-tax Act (“the Act”) to bring in new sub-section (7), (8) and (9) with effect from April 01, 2021. The amendment proposed to replace the existing tribunal with “‘National Faceless Income Tax Appellate Tribunal Centre”. The amendment proposes to change the current mode of physical hearing to a virtual faceless hearing thereby eliminating interface between the appellants.

The manoeuvre of faceless process started with scrutiny assessment. Eventually, the functioning before Commissioner of Income-tax (Appeal) [CIT (A)] was redeveloped in faceless format. Now subsequent to the amendment, the intent of the Government is to change the functioning of the Tribunal into a faceless format thereby eliminating an opportunity of an oral hearing in all the fact-finding stages.

The objective of this research paper is to analyse the constitutional validity of the amended section 255 of the Act. It is divided into four chapters that analyses the due process of law with respect to the functioning of the tribunal, legislative competence, state of law in other countries for faceless courts, digital revolution in judiciary and concludes based on analysis of each chapter. The author for the purpose of analysing legislative competence has assumed that the course of action for notifying faceless ITAT would be analogous to the one of CIT (A).

DUE PROCESS OF LAW AND FUNCTIONING OF THE TRIBUNAL

• Quasi-Judicial Body

  The Hon’ble ITAT is a quasi-judicial body instituted under the Income-Tax Act. In Ajay Gandhi v. B. Singh¹, it was held that “The Income-Tax Tribunal exercises judicial functions and has the trappings of a court.” In Rajesh Kumar v. DCIT², it was observed that proceedings before Tax Authorities is a part of judicial process. It specifically states that the proceedings before the Hon’ble ITAT shall be considered as judicial proceedings within the meaning of Section 193 and 228 of the Indian Penal Code, 1860 and for the purpose of Chapter XXXV of the Code of Criminal Procedure, 1898 the proceedings of Hon’ble ITAT shall be considered of a civil court.

  Rule 33 of the Income-tax (Appellate Tribunal) Rules, 1963 states that:

  “Proceedings before the Tribunal.

  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.”

  The importance was oral hearing in open court was highlighted in Naresh Shridhar Mirajkar & Ors. v. State of Maharashtra.³ It was observed that as a general principle all the cases in court shall be in open court. In order to administer justice in a healthy, impartial, and fair manner, public trials in open court are indubitably necessary. The public scrutiny and gaze of a trial operates as a inherent check against judicial notion and it is a potent tool for instilling public faith in the integrity, objectivity, and rationality for the administration of justice.

  In Brajnandan Sinha v. Jyoti Narain⁴, it was held that “a body or forum must have power to give a decision or a definitive judgment which has finality and authoritativeness which are essential tests of a judicial pronouncement, if it has to be treated as a ‘Court’.”

  In Suraj Mall Mohta and Co. v. A. V. Viswanatha Sastry⁵ it was held by the Supreme Court that the hearings before Income tax officer are judicial proceedings. That it is the right of the assessee to inspect the relevant records and documents before he is called to lead the evidence.

  One of the most important advantages is that it ensures that courts follow the rules. Nonetheless, practical factors frequently necessitate balancing the goal of open justice against other objectives like as confidentiality, costs, and national security. There are three reasons why open justice is important: First, it contributed in the pursuit for truth and performed a critical role in educating and instructing the people. Second, it increased accountability and discouraged misconduct. Third, it had a psychological purpose by assuring that justice had been served.

  The proceedings before the Assessing Officer and the Commissioner of Income-Tax (Appeal) are internal proceedings. The proceedings before Hon’ble ITAT are open to public thereby not subjected to any influence by the parent bodies of income-tax authorities. The rule inherently promotes transparency, efficiency and impartiality. The amendment to Section 255 of the Act directly threatens the quasi-judicial nature of this quasi-judicial body and therefore, is unconstitutional. The most critical aspect of any quasi-judicial institution is the independence of such institution. Independence of the institution remains intact, when there is no interference, internal or external, in the work of the quasi-judicial authority by any person. Further, it is because of this independent nature of the institution that the faith of the taxpayers has remained intact. The moment, there is any transgress in this feature of the institution, the entire institution would crumble down.

  The Hon’ble ITAT being a quasi-judicial body must have its independence. The legislature being a different organ mustn’t interfere with the functions of the Judiciary. The underlying principle of Doctrine of Separation of Powers is that one organ of the Government cannot exercise or interfere with the functions of any other organ of the Government. It is settled that the Hon’ble ITAT has trappings of a court and is recognisable as a judicial body. In Keshavanand Bharti v. State of Kerala⁶ it was held that separation of powers and independence of judiciary is an important part of the basic structure doctrine. The amendment of section 255 of the Income tax Act dictates upon the most essential functions of the judiciary, which amounts to violation of Doctrine of Separation of Powers.

• Audi Alteram Partem

  The concept of natural justice takes effect when no individual is treated unfairly in any regulatory or judicial action. The concept of natural justice is founded on the principle of Audi Alteram Partem. Principles of Natural Justice are not just mere formality. There principles reflect significant rights of a citizen. Audi Alteram Partem forms a part of it. It states that no person shall be judged without being heard. The maxim ensures that the parties to the case will have a fair hearing and that the court will not make its verdict until both sides have been heard. Both parties have the ability to defend themselves.

  The Principle of Audi Alteram Partem comprises of two elements:

  1. An opportunity of hearing must be provided.

  2. Such opportunity must be adequate, credible and reasonable.

  In Mineral Development Ltd. v. The State of Bihar⁷, it was held that “The concept of reasonable opportunity is an elastic one and is not susceptible of easy and precise definition. What is reasonable opportunity under one set of circumstances need not be reasonable under different circumstances.”

  The opportunity provided should not be a paper opportunity and the same should not be for name sake. It is crucial for effective operation of the case that the parties to the case are given an opportunity of heard whereby they can present their own contentions and respond to the contentions put forward by their opponents.

  The rule of hearing is an essential part of natural justice and applies in the matters before Hon’ble ITAT. In Uma Nath Pandey & Ors v. State Of UP⁸ it was held that when a quasi-judicial institution is deciding on a dispute between the parties, compliance to the principles of natural justice is crucial. That the first and most important element is of audi alteram partem.

  In P. N. Eswara Iyer v. Registrar, Supreme Court of India⁹, it was held that audi alteram partem is the most fundamental part of judicial framework. It further stated that providing an opportunity of fair hearing to the affected party is profoundly ingrained in the principles of the Constitution.

• Oral Hearing – A Statutory Right

  Section 254 of the Act specifically states that an opportunity of being heard is to be given to both the parties to the appeal in Hon’ble ITAT. Thus, it is obligatory on the part of Hon’ble ITAT that such opportunity is provided. It is the duty of the Tribunal to provide an opportunity and effectively conduct the hearing considering the facts, contentions and legal position.

  In Automotive Tyres Manufacturers’ Association v. Designated Authority¹⁰, it was held that written arguments is not an alternative to oral hearing. An oral hearing allows the authority to observe the persona of the witness and clarify its uncertainties.

  Oral hearing is an important ingredient of judicial system. It is a framework where judge is personally involved in the assessment of facts and evidences. In P.N Eswara Iyer v. The Registrar, Supreme Court of India¹¹, it was held:

  “23. The magic of spoken word, the power of the Socratic process and the instant clarity of the bar-Bench dialogue are too precious to be parted with…”

  In Chief Election Commissioner of India v. M. R. Vijayabhaskar and Ors.¹², it was stated that:

  “20. Courts must be open both in the physical and metaphorical sense. Save and except for in-camera proceedings in an exceptional category of cases, such as cases involving child sexual abuse or matrimonial proceedings bearing on matters of marital privacy, our legal system is founded on the principle that open access to courts is essential to safeguard valuable constitutional freedoms. The concept of an open court requires that information relating to a court proceeding must be available in the public domain. Citizens have a right to know about what transpires in the course of judicial proceedings. The dialogue in a court indicates the manner in which a judicial proceeding is structured. Oral arguments are postulated on an open exchange of ideas. It is through such an exchange that legal arguments are tested and analysed. Arguments addressed before the court, the response of opposing counsel and issues raised by the court are matters on which citizens have a legitimate right to be informed. An open court proceeding ensures that the judicial process is subject to public scrutiny. Public scrutiny is crucial to maintaining transparency and accountability. Transparency in the functioning of democratic institutions is crucial to establish the public‘s faith in them………………….”

  The Income-Tax Act is innately very intricate in nature. There are comprehensive elucidations that require complex cross-referencing with relevant evidences and establishing how the circumstances in the case are comparable to the factual information of the rulings and judgments so relied on. There is no replacement for expressing the subtleties of difficult subjects face to face, whether in person or via digital mode, no matter how effectively one communicates oneself. Even during Covid-19 the Hon’ble ITAT was functioning virtually whereby parties were allowed to appear through video-conferencing and the process of oral hearing was followed.

  In Charan lal Sahu v. Union of India¹³, it was observed that “Justice is a psychological yearning, in which men seek acceptance of their view point by having an opportunity of vindication before the forum or the authority enjoined or obliged to take a decision affecting their right.”

• Precedent and Jurisdiction

  Precedents play an important role in administration of justice. If the Bombay High Court has provided its verdict on particular issue, it would be a binding precedent on all the ITATs in the state. However, if the National faceless ITAT is instituted then there would arise a jurisdictional issue as to which High Court will have a binding effect on the Tribunal.

  In The Commissioner of Income-Tax v. Thana Electricity Supply Ltd.¹⁴, it was held that the decision of one High Court cannot have a binding effect on other High Courts or other quasi-judicial bodies outside its territorial jurisdiction. It was further held that even the doctrine of stare decesis doesn’t empower the decisions of one High Court to have a binding effect on other High Courts. It is only the decision of Supreme Court that shall have a binding effect on all the courts in the country under Article 141 of the Constitution.

  It is settled that decision of High Court shall have a binding effect in its own State. However, the assessment is now carried on by the NEAC which is situated in national capital, through its Regional Assessment Centres. Therefore the situs of the Assessing officer becomes obsolete.

  In Suresh Desai Associates v. CIT¹⁵, it was held:

  “On account of the abovesaid doctrine of precedents and the rule of binding efficacy of the law laid down by the High Court within its territorial jurisdiction, the questions of law arising for decision in a reference should be determined by the High Court which exercises territorial jurisdiction over the situs of the assessing officer. Else it would result in serious anomalies. An assessee affected by an assessment order at Bombay may invoke the jurisdiction of the Delhi High Court to take advantage of the law laid down by it and suited to him and thus get rid of the law laid down to the contrary by the High Court of Bombay not suited to the assessee. This cannot be allowed.”

  The above ratio settles the fact that the jurisdiction of the High Court will be dependent on situs of the Assessing Officer. However, determination of such situs under Faceless Assessment Scheme still becomes a nodus.

• Fundamental Rights

  The Principle of Equality is enshrined in Article 14 of the Indian Constitution. It states “the State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India”. It is responsibility of the State to ensure that all Indian citizens are treated equally under the law. It is the responsibility of the state to give equal legal protection to all citizens of India. However, with the manoeuvre to eliminate interface between department and assessee, the State itself has curtailed the opportunity of hearing to the Assessee thereby violating the right of natural justice.

  The principle of reasonableness and rationality in the provisions is the desideratum in Article 14. It must also be observed that oral hearing is offered before other tribunals like, Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Competition Appellate Tribunal (COMPAT) and Securities Appellate Tribunal (SAT) etc.

  In Naresh Shridhar Mirajkar v. State of Maharastra¹⁶, Bachawat, J. elaborated on open justice as follows “Long ago Plato observed in his laws that the citizen should attend and listen attentively to the trials. Hegel in his Philosophy of Right maintained that judicial proceedings must be public since the aim of the Court is justice, which is a universal belonging to all save in exceptional cases, the proceedings of a Court of justice should be opened to the public.” The object behind the hearing in open court has been to provide legal assistance readily available to a person facing trial and it is in consonance with Article 21 of the Constitution.

LEGISLATIVE COMPETENCE: MINISTRY OF LAW VIS-À-VIS MINISTRY OF FINANCE

• Timeline of Events and the Intent of the Government

Timeline of events

Sr. No.	Date	Event
1.	1961	The Income-tax Act was enacted that contained the provisions for Appeals to Commissioner of Income-tax (Appeals) and Income-tax Appellate Tribunal.
2.	01.02.2020	Finance Bill, 202017 was introduced in the Parliament with an explanatory memorandum.
3.	27.03.2020	Finance Act, 202018 was enacted which inserted sub-sections (6B), (6C) and (6D) in section 250 of the Income-tax Act, 1961 empowering the Central Government to notify scheme for faceless appeals to CIT (Appeals).
4.	25.09.2020	Notification No. 76 of 2020 notified by under section 250(6B) of the Act rolling out the Faceless Appeal Scheme, 2020.
5.	01.02.2021	Finance Bill, 202119 was introduced in the Parliament with an explanatory memorandum.
6.	28.03.2021	The Finance Act, 202120 was enacted which inserted sub-sections (7), (8) and (9) in section 255 of the Income-tax Act, 1961 empowering the Central Government to notify scheme for faceless appeals to Hon’ble ITAT.

It is imperative to analyse the intent of legislature to understand the future implication of the amendment on the tribunal.

The Finance Act, 2020 empowers the Central Government to notify the Scheme for faceless appeals to CIT (Appeals) by amendment to section 250 of the Act.

The relevant extract of section 250:

“(6B) The Central Government may make a scheme, by notification in the Official Gazette, for the purposes of disposal of appeal by Commissioner (Appeals), so as to impart greater efficiency, transparency and accountability by—

(a) eliminating the interface between the Commissioner (Appeals) and the appellant 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 in which appeal shall be disposed of by one or more Commissioner (Appeals).”²¹

Subsequently, within six months of such enactment the Faceless Appeal Scheme was brought into existence under sub-section (6B) of section 250 of the Act by Notification No. 76 of 2020 dated 25.09.2020.

The Finance Act, 2021 empowers the Central Government to notify the Scheme for faceless appeals to Hon’ble ITAT by amendment to section 255 of the Act.

The relevant extract of section 255:

“Procedure of Appellate Tribunal

255. (1) ……

……

(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.

….” ²²

The Memorandum of the Finance Bill, 2021 elucidates the reasoning behind the amendment, so made, to section 255 of the Act.

The relevant extract from the Memorandum:

“Provision for Faceless Proceedings before the Income-tax Appellate Tribunal (Hon’ble ITAT) in a jurisdiction less manner

……

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 Hon’ble 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.”

It is pertinent to acknowledge that the elaborate scheme for Faceless Appeals has not been discussed in Parliament due to the rising crisis of the pandemic. However, on perusal of the above mentioned provisions it can be observed that the terminology of the section 250(6B) and section 255(7) of the Act is exactly the same except for the appellate authority. It was subsequent to the amendment to section 250 that the Faceless Appeal Scheme for CIT (Appeals) was introduced by the Central Board of Direct Taxes (CBDT). The relevant extract of the Memorandum to the Finance Act, 2021, establishes that the Government is firm on its view to have a Faceless Hon’ble ITAT thereby reducing human interface and disposing off the appeals. Considering the series of events by the Finance Acts and the subsequent notifications it can be evidently deduced that the course of action of issuing notification for faceless appeals before Hon’ble ITAT would be analogues to that of the notification issued for appeals before CIT (Appeals), whereby rules will be framed under the Ministry of Finance.

• Illegal Delegation

The Faceless Scheme for CIT (Appeals) was issued by Central Board of Direct Taxes. The powers to notify the scheme are derived from section 255 (8) of the Act. The Parliament under Article 246(1) of the Constitution of India has an exclusive power to make laws on subjects mentioned in List I in the Seventh Schedule. Parliament also, under Article 246(2) of the Constitution, has power to make laws on subjects mentioned in List III in the Seventh Schedule. Entry 82 of the List I specifies ‘Taxes on income other than agricultural income’ and Entry 11A of List III specifies Administration of justice; constitution and organisation of all courts, except for Supreme Court and the High Courts. Thus, power to enact laws in respect of administration of justice and tax rests with the Parliament. Such power cannot be exercised by the CBDT by way of an executive notification.

Furthermore, it must be noted that Hon’ble ITAT functions under the directions issued by Ministry of Law and Justice. The CBDT is under the aegis of Department of Revenue in the Ministry of Finance. The President of the Hon’ble ITAT has the authority to constitute Benches, regulate procedure of the benches, transfer members, transfer applications or appeals, etc.²³ The procedure with respect to the functioning of the Hon’ble ITAT should principally be determined by the President of the Hon’ble ITAT.

It is pertinent to notice that the CIT (A) is a party before Hon’ble ITAT. CIT (A) functions under the directions of Department of Revenue under Ministry of Finance. It would be out of bounds if CBDT issues notification with respect to the procedure of Hon’ble ITAT as it would be a framework where Department of Revenue is making law for the Department of Revenue.

In A.K. Kraipak v. Union of India²⁴, the selection of the post of Chief Conservator of forests was made by a committee in which the one of the member was the acting Chief Conservator of forests. It was held that there was presence of bias and the decision made by the committee was against the principles of natural justice.

The law on this issue is settled that a particular department of the government cannot create law for itself thereby preserving the sanctity and fairness in its functioning. Therefore, notification with respect to the procedural aspects of the tribunal issued by CBDT would certainly be an illegal delegation.

POSITION IN OTHER JURISDICTION

The faceless justice system has been adopted by some countries to combat terrorism whereby the trial of the accused are conducted by faceless judges. The tribunals were instituted for such purpose. Such system was primarily adopted as a consequence of extra-ordinary situation where there is threat to national security.

• Colombia

  In 1980’s Colombia was going through a difficult time. The violence was at its peak as a cause of Guerilla warfare. The M-19 was accused of being funded by narcotic supplier Pablo Escobar in 1985 to assault the Apex Court of Colombia and destroy information that may have led to his extradition. That attack claimed the lives of up to 95 persons, including 11 judges.²⁵ The state of warfare was such that the violence against administrators, judges, activists etc. was a daily practice for criminals. The judicial systems were tarnished and the judiciary lost the capacity to hold the criminals guilty as it would lead to the death of judges. In 1991, the Colombian government adopted a new constitution and code of criminal procedure to solidify the judicial system and react aptly to the warfare. The new constitution and code of criminal procedure institutionalised the faceless justice reform approach by creating special courts that ensured the secrecy of judges, prosecution officials, and eyewitness testimony.²⁶ Special courts were instituted to deal with the cases of drugs trafficking, terrorism, extortion and arms trafficking. In the courts, no one but the prosecutor was in knowledge of the identity of the judge. There was no public hearings granted to the accused. The hearings were held in defensive military fortification that had one way mirrors and sound transmitters were installed for the privacy and safety of judges.

  The fundamental goal of the faceless justice system was to improve the operation of judiciary during the peak of the security crisis by eliminating injustice and reducing the risk of judicial authorities and witnesses being killed.²⁷ However, this strategy eventually failed to achieve its goal. Initially the system acted as a bribe-taking platform: justices, law enforcement officials, and bureaucratic personnel working in the framework routinely accepted douceur in return for tampering the evidence. The endeavour to protect criminal justice system and increase judicial capability through this method eventually eroded the court’s credibility. The efforts of the administration to develop a reputation of judicial credibility and independence were further undermined by corruption scandals and claims of impunity. Human rights and civil liberties were also sacrificed as a result of faceless reforms.

  The Organization of American States condemned the faceless justice method, citing violations of the principles of natural justice and American Convention on Human Rights.²⁸

  In spite infructuous system, in late 1990’s the Colombian Congress enacted a legislation that would prolong the faceless method of conducting proceedings.²⁹ As a result of such enactment, protests emerged in the country. The human rights organisations and global institutions started putting pressure on the incumbent Government.³⁰ On 6th April, 2000, the Constitutional Court of Colombia held that the anonymity and in the framework and functioning of special courts violated due process and principles of natural justice. Eventually the laws on faceless judicial systems were struck down.³¹

• Peru

  Around 1980, Peru witnessed an internal armed conflict between the then Peruvian Government and the Maoist guerrilla group Shining Path. In 1992, the then incumbent Government enacted laws to deal with terrorism and treason. The laws enunciate rules pertaining to the trail of persons accused of political violence by undisclosed or faceless prosecutors and judges in faceless civilian courts and tribunals. The laws were implemented at a time when the country was suffering from the effects of increasing terrorist activity. The framework was efficient in convicting guerrilla’s however it also lead to unlawful detention of hundreds of innocent people. Since 1992, there have been extensive human rights violations by the faceless justice system.³²

  In Berenson Mejía v. Peru³³, the author in this case was confined and subjected to inhumane conditions. The Inter-American Court of Human Rights held that the right of fair trial was violated under Article 1– obligation to respect rights Article 8 – Right to fair trial, of American Convention on Human Rights.

  A book titled “The Innocents Have Names” was jointly seven human rights organizations, as well as church groups and independent lawyers in November 1995. The book gave details of 300 cases they were defending.³⁴ The arbitrariness of the courts and their systematic violations of elementary rights of defence and due process have been criticized by several United Nations human rights bodies, as well as the Inter-American Commission on Human Rights. The absence of credibility in justice delivery system led to corruption and ineffectiveness. Eventually in 1997 the Peruvian government announced it would end the highly criticized practice of trying accused terrorists before “faceless” judges.

  The Inter-American Commission on human rights also distinguished “faceless justice system as violation of fundamental rights to the defendant. Its Report of Terrorism and Human Rights³⁵ denounced the use of “faceless” justice systems practised by the Inter-American Commission on Human Rights as violating the right to be tried by a proficient, distinct, and unbiased tribunal, primarily because the secrecy of the prosecution, justices, and witnesses precludes the defendant of fundamental rights. In such situations, a defendant has no way of knowing who is judging or accusing him, and thus has no way of knowing whether that individual is competent to do so, or whether there is any basis to request that these officials extricate themselves due to incompetence or lack of impartiality. With respect to the security of judges it stated that “The states are obliged to take all necessary measures to prevent violence against judges, lawyers and others involved in the administration of justice. This may in turn require that certain exceptional measures be taken to protect the life, physical integrity and independence of judges on a case by case basis, always providing, however, that the nature or implementation of such measures does not compromise a defendant’s non-derogable fair trial guarantees, including the right to a defense and the right to be tried by a competent, independent and impartial tribunal.”

DIGITISATION OF JUDICIARY

• Need for digitisation

  The outbreak of novel corona virus has advanced the use of virtual mediums for conducting the court proceedings. The use of technology has been of prime importance to deal with such situation. Technological developments in legal practice have been given a lot of importance in recent times and acknowledgement of it has led to a thought as to what will be the future of law. It makes one wonder why there has been sudden hype in recent years in analysing technological development as browsing, email, search engines, error free software etc. has already been in the market and impacting the legal business.

  Digitisation of judiciary acknowledges the most crucial problem of Indian judicial system i.e. affordable legal service and speedy disposal of trial. The efficiency of lawyers will rise when court visits and lengthy waiting hours become the exception. If this method is applied to similar civil cases, court efficiency will dramatically improve.

  The use of technology found judicial recognition in precedent of this Court in State of Maharashtra v. Praful Desai³⁶. This Court held that the term ‘evidence’ includes electronic evidence and that video conferencing may be used to record evidence. It observed that developments in technology have opened up the possibility of virtual courts which are similar to physical courts. The Court held:- “Advances in science and technology have now, so to say, shrunk the world. They now enable one to see and hear events, taking place far away, as they are actually taking place…Video conferencing is an advancement in science and technology which permits one to see, hear and talk with someone far away, with the same facility and ease as if he is present before you i.e. in your presence. In fact he/she is present before you on a screen. Except for touching one can see, hear and observe as if the party is in the same room. In video conferencing both parties are in presence of each other. Recording of such evidence would be as per “procedure established by law”

  In Meters and Instruments v. Kanchan Mehta, it was pointed by the Supreme Court that the “Use of modern technology needs to be considered not only for paperless courts but also to reduce overcrowding of courts. There is need to categorise cases which can be concluded online without physical presence of the parties where seriously disputed questions are not required to be adjudicated like traffic challans and cases of Section 138 of the NI Act.”

• Current status of Digitisation

  The initiation in using digital platforms for judiciary began in the year 2004 by an order of Law ministry to institute an e-committee of the Supreme court. The then Chief Justice of India, Mr Justice R.C. Lahoti, suggested the formation of the e-Committee after recognising the essential requirement to transform India’s judicial system by the use of modern technologies and to develop a “National Policy and Action Plan” to incorporate Information and Communication Technology (“ICT”) in courts. The e-Committee was set up to facilitate the formulation of a National Policy that would allow the Indian judiciary to prepare for the digital age by adapting and implementing technologies and communication tools that would make the judicial system more coherent, benefiting all stakeholders. The present Chairman of the e-Committee is Justice D Y Chandrachud, Judge, Supreme Court of India.

  In India the courts are burdened with vast pendency and long delays causing adversity to the litigants. As per the statistics released by the e-courts committee of the Supreme Court, the total pendency of cases before courts is 3.27 crores.

  The “National Policy and Action Plan for Implementation of Information and Communication Technology (ICT) in the Indian Judiciary – 2005” gestated the eCourts project. The objective of the project was to:

  1. To provide citizen centric service in an time bound and effective
     manner.

  2. To create, install and utilize the decision support systems.

  3. To develop judicial efficiency to in order to make judicial system more economical, accessible and transparent.³⁷

  The e-Committee has released three phases in the eCourts project. Phase I and II have introduced e-filing, judicial services like uploading judgments and order, case status, cause list, display board, e-service of summons etc.³⁸ The draft vision of phase III has been introduced by the e-committee on April 20, 2021.³⁹

  Phase III plans to upgrade the electronic infrastructure of the judiciary. The objective of the phase is to provide digital case registry, a comprehensive repository of case laws, machine readable documents, Interoperable Criminal Justice System (“ICJS”), digital case management systems, e-filing, open digital hearings, service of notice, remote digital assistance, administration of legal aid etc.⁴⁰

  However, there are certain limitations to Phase III. The theme of Phase III revolutionises the functioning of courts at scratch of judicial system where there are issues of bandwidth, specifically in remote areas.

  There also has to be acceptance as well as literacy with respect to digital courts. Justice DY Chandrachud at the inauguration of Model Virtual Courtroom observed that “There is a major digital divide in India. We cannot really ignore the fact that persons who access our services do not necessarily have an awareness of access to technology. The common litigants do not necessarily have access to technology which we have as judges. Lawyers again, who are critical to the success of the mission, do not, in many instances, have access to technology which we have. For the simple reason that lawyers perform services in id of society across the spectrum, earning a small pittance of a fee for a junior member of the bar, we have to ensure that we bridge the digital divide for the members of bar.” ⁴¹

  Another hurdle to the digital courts is paperwork and e-filing. There is no standard paper filing that is used across the nation. Different High Courts have different method of filing. This can be a greatest hurdle to the digitisation of all records as well as e-filing. With respect to e-filing and digitisation of records Justice Chandrachud stated that “We are in the process of now commencing a very ambitious scheme of digitising court records across the country. We had set up a broad-based committee of High Court judges as well as experts from the private sector and governmental institutions. A detailed SOP has now been prepared which has now been prepared which has now been unveiled for all the chief justices. We have chosen certain High Courts as pilot high courts for the implementation of the pilot project. Another initiative is to have a nationwide consultant for taking the message forward of digitisation of court records across the country. But the e-filing of cases filed by the state government should be looked at from the perspective of digitisation. Now that we are commencing digitisation, we are digitising legacy records, previous records. Five years down the lane, we should not be required to digitise records all over again. That we can avoid by ensuring that we start e filing of cases in tandem with digitisation of old records. Because it is only when we e-file cases today that we will obviate the need for digitisation in the future.”

CONCLUSION

The Hon’ble ITAT is the last fact-finding authority. The Hon’ble ITAT being the last fact-finding authority has greater obligation and duty to provide a hearing to the party affected under the aegis of the act. To deny such opportunity would lead to unfair conclusions and cause injustice to the party. In the matters involving complex laws like the Income-tax Act, proper hearing needs to be provided.

It cannot be denied that presentation of law and facts verbally is significantly simpler than replicating and communicating them in writing. Granting a reasonable appearance, even via video conferencing can be far more effective than bundles of electronically uploaded submissions, which the judge may or may not read.

It is settled that the Hon’ble ITAT has the trappings of a court. The essential element in the proceedings before the court room is public hearing. Public hearing is the mechanism to keep a check on judicial functioning as well as to ensure transparency. When it comes to transparency, an open court hearing is the best method where all arguments occur in the plain sight of the public. In open court hearings the Revenue and the assessee present their cases before the Hon’ble ITAT in a collegial manner. Written submissions in faceless mode is not a substitute to open court hearings for the purpose of ensuring fairness. In reality, it would completely obfuscate the mechanism. Faceless proceedings at CIT (A) were may be justified in part as it was held behind closed doors with only the Assessee, lawyers and the CIT (A) being present. The best performance of courts all across the globe is due to public hearings. A public hearing is transparent, and the extent of leeway is likewise limited.

Institution of Faceless courts in other parts of world have been for a specific purpose to deal with terrorism emerging within the state. The situation in Peru and Colombia created a compulsion on the respective Governments to secure the sovereignty of the nation. The breakdown of judicial machinery by attacks on judges and judicial officers created a situation of judicial emergency in the state. Such internal war must be observed as an exceptional situation. It must also be noted that the system of faceless courts was eventually withdrawn and was highly criticized because of the human rights violations caused to the innocent people. The fundamental principle and the reasoning for such withdrawal was violation of “audi alteram partem.”

The judiciary must be at the disposal of the public’s rights in order to ensure an actual reformation of the dispensation of justice. In other words, the judiciary’s presence is justified by the preservation of human rights against state and private power abuses. This implies that courts must change their stance on the law since basic rights were originally only legitimate within the confines of the law, they are now only valid within the confines of the fundamental rights.

According to the author, digitisation will revolutionise the future functioning of the judicial system. With Artificial Intelligence changing the perspective of each sector of the society, advancement of judiciary through technology is imminent. Technology has prepped into almost every sector of the society including medical, finance, defence, media, accounting etc. The use of technology in delivery of justice has become essential and will evolve in coming times. As observed by Justice D Y Chandrachud at the inauguration of Model Virtual Courtroom – “Virtual Courts Are The New Symbol And New Image Of the Indian Judiciary.” With changing times the judiciary also has to evolve to be in lines with the society. However, Faceless Scheme of Appeals cannot be in lines with the concept of using technology for judicial purposes. Technological advancements must not be installed at the cost of suspension of fundamental rights.

The digital courts or a judicial setup can be instituted for the best use to deal with petty offences. The offences where the footfall is huge and needs a robust system to dispose off the matter quickly. In such cases where the punishment is just of an ordinary fine, the cost and burden on both the government and the accused can be reduced. An example like violation of traffic rules can efficiently be tried online where if the person so accused pleads guilty, he/she can pay the fine and the matter is put to rest; and if the pleads not guilty they can be offered proper hearing before the courts. However, in matters pertaining to complex laws like Income Tax, oral hearing must be provided as the facts and law and the connection between them have to be clearly explained.

The amendment to Section 255 must be dropped. However, if the Government is keen to implement the “Faceless Scheme for ITAT” it must ensure that the scheme is in compliance with principle of natural justice and the legislative competence with respect to formulation of rules must also be taken into consideration. The ITAT has been instituted under the Income tax Act. The Act empowers the government to frame rules. However, the rules must be formulated with great care and requisite due diligence.

The Scheme for Faceless Proceedings before ITAT” must be formulated with great care and should not be plainly analogous to the existing Faceless Appeal Scheme, 2020, in in compliance with principles of natural justice and the principle of “audi alteram partem” i.e. providing a reasonable opportunity to be heard.

BIBLIOGRAPHY

BOOKS

• V.N. Shukla’s Constitution of India by Prof (Dr.) Mahendra Pal Singh (Revised), Edition: 13th 2017

• Commentary On The Constitution Of India; Vol 1, by D.D. Basu

• Kanga & Palkhivala’s – The Law and Practice of Income Tax, (January 2020)

• Taxmann’s Faceless Assessment & Appeals Ready Reckoner with Real Time Case Studies – Updated till 10th December 2020 | 3rd Edition 2020 by Mayank Mohanka

• Taxmann’s Master Guide To Income Tax Rule – Rule Wise Commentary on the Income-tax Rules,1962 with Analysis of all Statutory Provisions & Judicial Changes in the Income-tax Rules | 28th Edition | 2021

• Bharat’s FACELESS Assessment, Appeals & Penalties by R. P. Garg

JOURNALS

• The Chamber’s Journal Vol. IX, No. 5, February 2021

• All India Federation of tax Practitioners Journal Vol. 23, No. 11, February 2021

REPORTS

• Law Commission Of India Report No.272 Assessment of Statutory Frameworks of Tribunals in India.

ARTICLES

• Faceless Income Tax Appellate Tribunal not in keeping with Indian legal system? By Pawan Jhabakh And Salai Varun in the New Indian Express.

• Faceless ITAT – Whether Denial of Oral Hearing is in Violation of Principles of Natural Justice – Dr. Ashok Saraf.

• Final Fact-Finding Appellate Authority Also Going Faceless w.e.f. 1.4.2021 by Mayank Mohanka published in Taxmann.

• Ecourts In India From Policy Formulation To Implementation by Shalini Seetharam Sumathi Chandrashekaran published in Vidhi Centre for Legal Policy.

• New Standards of Justice: Uncovering Motivations for Mexico’s Recent Judicial Reforms amid a Security Crisis by Kindra Mohr

• Colombia’s judicial reform: what now? by Maya Smith

WEBSITES

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• Doj.gov.in. 2021. Digital Courts Vision & Roadmap Phase III of the eCourts Project. [online] Available at: <https://doj.gov.in/sites/default/files/Draft%20Vision%20Document_eCommittee_0.pdf>

• Hrw.org. 2021. Peru. [online] Available at: <https://www.hrw.org/reports/1996/Peru.htm>

• Murphy, H., 2021. Colombia elects ex-guerrilla in sign peace possible. [online] U.S. Available at: <https://www.reuters.com/article/colombia-election-idUKN1E79U12R20111031> [Accessed 8 November 2021].

• Cidh.org. n.d. THE POLITICAL AND LEGAL SYSTEM IN COLOMBIA. [online] Available at: <http://www.cidh.org/countryrep/colombia93eng/chap.3a.htm>

• system?, F., 2021. Faceless Income Tax Appellate Tribunal not in keeping with Indian legal system?. [online] The New Indian Express. Available at: <https://www.newindianexpress.com/business/2021/feb/13/faceless-income-tax-appellate-tribunal-not-in-keeping-with-indian-legal-system-2263590.html>

(Source: Best Paper of Padma Vibhushan Nani A. Palkhivala Memorial National Research Paper Competition 2021 published in souvenir of Padma Vibhushan Nani A. Palkhivala Memorial (Virtual) National Moot Court Competition 2021)

 

1. [2004] 2 SCC (120)

2. [2006] 287 ITR (91)

3. [1966] 3 SCR (744)

4. [1966] 3 SCR (744)

5. [1954] 26 ITR 1 (SC)

6. (1973) 4 SCC 225

7. AIR 1960 SC 468

8. AIR 2009 SC 2375

9. [1980] 4 SCC (680)

10. [2011] 2 SCC (258)

11. [1980] 4 SCC (680)

12. [2021] SCC OnLine SC (364)

13. [1990] 1 SCC (613)

14. [1994] 206 ITR 727 (Bom)

15. [1998] 230 ITR (912)

16. 1966 SCR (3) 744

17. Bill No. 26 of 2020

18. Act No. 12 of 2020

19. Bill No. 15 of 2021

20. Act No. 13 of 2021

21. Sub-section (6B) of section 250 of the Income-tax Act, 1961.

22. Sub-section (7) of the Income-tax Act, 1961.

23. https://www.Hon’ble ITAT.gov.in/files/uploads/categoryImage/RTI/OfficersPowers&Functions.pdf

24. Writ Petitions Nos. 173 to 175 of 1967

25. Murphy, H., 2021. Colombia elects ex-guerrilla in sign peace possible. [online] U.S. Available at: <https://www.reuters.com/article/colombia election-idUKN1E79U12R20111031> [Accessed 8 November 2021]

26. Cidh.org. n.d. THE POLITICAL AND LEGAL SYSTEM IN COLOMBIA. [online] Available at: <http://www.cidh.org/countryrep/colombia93eng/chap.3a.htm> [Accessed 8 November 2021].

27. Luz Estella Nagle, Colombia’s Faceless Justice: A Necessary Evil, Blind Impartiality or Modern Inquisition?, P. 912-913

28. http://www.cidh.oas.org. 2021. ADMINISTRATION OF JUSTICE AND RULE OF LAW. <http://www.cidh.oas.org/countryrep/Colom99en/chapter-5.htm.> [Accessed 8 November 2021].

29. U.K. HOME OFFICE, IMMIGRATION AND NATIONALITY DIRECTORATE COUNTRY ASSESSMENT – COLOMBIA (2002), <http://www.unhcr.org/refworld/docid/3c2b4e097.html> [Accessed 8 November 2021]

30. Larry Rohter, Secretive Colombian Courts Survive Protests over Rights, N.Y. TIMES, June 20, 1999, http://www.nytimes.com/1999/06/20/world/secretive-colombian-courts-survive-protests-over-rights.html

31. U.K. HOME OFFICE, supra note 30.

32. Human Rights Watch/Americas, “The Two Faces of Justice,” Hrw.org. 2021. Peru. <https://www.hrw.org/reports/1996/Peru.htm> [Accessed 8 November 2021].

33. IACHR Series C no 119 (Official Case No)

34. APRODEH et al, Los Inocentes Tienen Nombre: 300 Historias de Prisión Injusta en el Perú, (Lima: Grafimace S.A., 1995).

35. Cidh.org. 2021. Report on Terrorism and Human Rights

    <http://www.cidh.org/terrorism/eng/toc.htm> [Accessed 8 November 2021].

36. (2003) 4 SCC 601

37. ecommitteesci.gov.in. E-Courts Mission Mode Project.

    <https://ecommitteesci.gov.in/project/brief-overview-of-e-courts-project/> [Accessed 8 November 2021].

38. Doj.gov.in. Brief on eCourts Project. <https://doj.gov.in/sites/default/files/Brief-on-eCourts-Project-(Phase-I-%26-Phase-II)-30.09.2015.pdf> [Accessed 8 November 2021]; Doj.gov.in. Digital Courts Vision & Roadmap Phase III of the eCourts Project. <https://doj.gov.in/sites/default/files/Draft%20Vision%20Document_eCommittee_0.pdf> [Accessed 8 November 2021].

39. ecommitteesci.gov.in/. Draft Vision document for Phase III of eCourts Project. <https://ecommitteesci.gov.in/inviting-suggestions-on-the-draft-vision-document-for-phase-iii-of-ecourts-project/> [Accessed 8 November 2021].

40. Ibid

41. National Informatics Centre (NIC, O). Event Calendar | Orissa High Court, Cuttack. Orissahighcourt.nic.in. <https://orissahighcourt.nic.in/about-orissa-high-court/event-details/135/11/> [Accessed 8 November 2021].

SUPREME COURT OF INDIA

VVF (INDIA) LTD.

V/S

STATE OF MAHARASHTRA

[DR. DHANANJAYA Y. CHANDRACHUD, J]

CIVIL APPEAL NO.7387 OF 2021

Date of Decision: December 3, 2021

Predeposit—whether payment made under protest can be adjusted towards payment of predeposit after passing of assessment order—Held: plain reading of the statute indicates that 10% of the entire disputed tax liability would have to be deposited as per Sec 26(6A)- Amount deposited anterior to the order of assessment cannot be excluded from consideration in the absence of the statutory language to that effect impugned order set aside

After a notice was issued to the appellant in November 2016, proposing tax liabilities for the year 2013-14, a payment under protest was made towards tax and interest for the said Assessment Year. In the same year in April, 2017 Sections 26(6A), 26(6B) and 26(6C) were introduced into the VAT Act mandating a pre-deposit for filing of appeals. An assessment order in December 2017 was passed imposing tax, interest and penalty. The department adjusted the amounts paid under protest towards the demand raised. An appeal was filed which was rejected on the ground that payments made under protest could not be considered towards pre-deposit for the purpose of Sec.26(6A). The writ filed against the assessment order was dismissed against which an appeal is filed before the Apex Court.

It is contended that since the entirety of tax is disputed, 10% of the amount required to be deposited for the hearing of the appeal cannot be excluded from the consideration. On the other hand, the respondent has contended that since the dispute arose after passing of assessment order, 10% of the amount of tax has to be paid in pursuance of the order passed.

The court has observed that the plain language of the statute says that 10% of the entire disputed tax liability would have to be deposited as per Sec 26(6A). The amount deposited anterior to the order of assessment cannot be excluded from consideration in the absence of the statutory language to that effect. A taxing statute is to be construed strictly without any intendment. There is no reason why the amount paid under protest cannot be considered towards payment of predeposit. Therefore, rejection of appeal by the Appellate Authorities was not in order and the appeal shall be restored to the file of the appellate authority. The appeal is allowed and the impugned order of the High Court of judicature at Bombay is set aside.

HIGH COURTS

ORISSA HIGH COURT

ASHOK KUMAR MEHER

v.

COMMISSIONER OF SALES TAX & GST, ODISHA, CUTTACK AND OTHERS

[DR. S. MURALIDHAR & B. P. ROUTRAY, JJ]

W. P. (C) No. 12763 of 2021

Date of Decision: December 1, 2021

Registration—cancellation of—Registration cancelled for failure to file returns –restoration of RC ordered by Revisional authority– New Registration applied by petitioner in meanwhile due to compelling circumstances to carry on business – Old RC not restored by authorities contending that application of new registration did not permit restoration of old RC under the portal—technical difficulty thus pleaded by department- Held technical difficulty not to come in way of right of petitioner – directions given to authorities accordingly to enable petitioner to avail its ITC

The registration of the petitioner was cancelled for failure to file returns under the erstwhile VAT Act. The petitioner filed for revision which was allowed as the said registration had been cancelled without issuance of show cause notice. However, in the meanwhile, it had applied for fresh RC in order to transact its business.

The department did not implement the order of Revisional authority contending that since a new registration was applied for, the portal did not support restoration of old RC. The Hon’ble court has held that it cannot be held against him that his application for the new RC should be construed as his having given up his claim for restoration of his old RC. On the contrary, he has an order in his favour by the Revisional authority for restoration of his old RC. The plea of technical difficulties or technical glitches will not come in the way of the above order being given effect to. For this purpose a direction is issued to GSTN to either modify or make changes in the portal to facilitate the Petitioner filing TRAN-1 to claim the ITC or accept returns manually against the old RC so that the Petitioner can avail of the ITC.

GUJARAT HIGH COURT

ARCELORMITTAL NIPPON STEEL INDIA LTD.

v.

ASSISTANT COMMISSIONER

[MS. SONIA GOKANI & MS. NISHA M. THAKORE, JJ]

R/SPECIAL CIVIL APPLICATION NO. 11043 OF 2020

Date of Decision: November 24, 2021

Show cause notice—refund—rejection of—application for refund u/s 54 of CGST Act r/w section 16 of IGST Act filed—Show cause notice issued with ambiguous reasons—reply by petitioner pointing out deficiency in notice not taken into account—contrary thereto order of rejection passed—Held : impugned show cause notice passed in violation of natural justice- arbitrary act of authority—order set aside—authorities to grant opportunity of hearing to petitioner and process its application within two weeks

The application for refund of unutilized compensation cess under Section 54 of the CGST Act read with Section 16 of the IGST Act read with Rule 89 of the CGST Rules was accompanied by the requisite documents. The refund was rejected . The show cause notices stated that the petitioners’ refund applications were liable to be rejected on the ground that rejection as per the said show cause notices was “other”. A writ is thus filed.

It is held that the show cause notice has no foundational facts contained in it. The reply to the show cause notices given by the petitioners also clearly pointed out to the authority that the show cause notices given lack any reason since it simply mentions the reason as “other” without elaborating or specifying the grounds on which the proposal to reject the refund the amount is made. The column of remark as mentioned refers only as “error in adjusted total turnover.” Instead of correcting the error in the notice, the respondent had chosen to pass the orders of rejection. The order of rejection also is a non-speaking order and the same had been passed without giving any reasons for rejection. The entire proceedings initiated by the respondent in rejecting the refund claim since is in complete violation of the principles of natural justice and can be termed as an arbitrary act on the part of the authority, the same deserves interference by quashing and setting aside. The respondent is directed to consider of the applications of the refund claim and process after granting the opportunity of personal hearing to the petitioner within two weeks from the receipt of copy of the order.

BOMBAY HIGH COURT

MERITAS HOTELS PVT. LTD.

v.

State of Maharashtra

[DIPANKAR DATTA, C.J. & M.S. KARNIK, J]

W.P. NO. 7793 OF 2021

Date of Decision: December 3, 2021

Limitation—Appeal—whether period to be reckoned from date of uploading of order on GSTN portal or date of email sent— Impugned order posted on email to General manager in April 2019 – non reporting to petitioner—attempt to file appeal after uploading of order on portal in Jan 2020- expiry of limitation—writ filed—Held : As per section 107(1) of MGST Act appeal to be filed within 3 months from date of communication—date of communication being date of email sent—no case that recipient not authorized or competent to receive e mail—Court cannot add or subtract words in a statute—Rule 108 specifies the requirement to file appeal electronically or as notified by commissioner—subrule 3 mentions copy of impugned order to be submitted alongwith within a period of 7 days from date of filing—nowhere mentioned that appeal to be filed after uploading of order on GSTN Portal— period of imitation to be reckoned from date of communication being April 20, 2019- writ dismissed

Due to delay in filing GST returns for February 2019, a summary assessment order was passed under Section 62 of MGST Act, 2017 which was neither served physically nor uploaded on GST portal but was sent through email to the General Manager of the Petitioner company on April 20, 2019. The petitioner came to know about it only after attachment of bank account in July. The petitioner filed a physical appeal after obtaining the certified copy of the order on November 06, 2019. However, it was refused to be accepted. When the impugned assessment order was uploaded on GSTN Portal on January 10, 2020, the petitioner tried to file online appeal which showed that there was delay in filing of appeal. Hence, a writ is filed alleging that the period of limitation should have been reckoned from the date of uploading on GSTN Portal and not from the date of posting it on e-mail.

It is held that as per Section 107(1) of the Act the appeal should have been filed within three months from the date of communication of order. The said order was communicated on April 20, 2019. It is not the case that the General Manager was not competent or not authorized to receive the communication on behalf of the petitioner. Failure of the General Manager to inform the petitioner will not have the effect of extending the period of limitation prescribed under the above mentioned section.

The contention that the date of limitation should be reckoned from the uploading of the order on the portal is in the teeth of the provision of sub-section 1 of Section 107. The court cannot add or subtract the words to a statute.

As per Rule 108(1) of the Rules the appeal under Section 107 is to be filed either electronically or as notified by the Commissioner. Further Sub-rule 3 says that the copy of order appealed against shall be submitted within 7 days of filing of appeal under Sub-rule 1. The proviso to Sub-rule 3 prescribes that if the certified copy of the impugned order is filed after 7 days, the date of filing of appeal shall be the date of submission of such copy. Therefore, Rule 108 nowhere prescribes that the appeal is to be filed only after impugned assessment order is uploaded on GSTN portal.

Therefore, for the purpose of limitation the date of communication of the impugned assessment order is regarded as April 20, 2019 i.e. the date on which the order was sent by e-mail to the petitioner. The petitioner has lost the statutory remedy of appeal. The writ petition is dismissed.

CHHATTISGARH HIGH COURT

NAGORAO AUTO ENGINEERING WORKS

v.

UNION OF INDIA

[P. SAM KOSHY, J]

WRIT PETITION NO. 129 OF 2021

Date of Decision: December 2, 2021

Transitional Credit—TRAN 1—Expiry of proprietor of establishment in the year of GST regime introduction—non submission consequently—Technical glitches later preventing submission—Representation before commissioner not dealt with—Hon’ble court approached for seeking its credit—Following decision of High court all over the country, considering compelling circumstances of death of proprietor and technical glitches, respondent directed to permit submission of the Form online or manually and process the claim of ITC

After the introduction of the new GST regime the petitioner wanted to avail the benefit of ITC by submitting TRAN-1 Form for which the cut off date was specified initially and extended subsequently till December 2017. The proprietor of the petitioner establishment expired on September, 2017 and because of the compelling circumstances the Form could not be submitted uptil the extended period. Later the date was extended upto March 2019 during which an attempt was made to file TRAN-1 for the year 2017. But because of technical difficulty the Form could not be uploaded. Despite representation to the Commissioner being made to submit TRAN-1 electronically or manually nothing was done. Therefore, the petitioner has approached the Hon’ble Court.

Following the authoritative decisions given by the High Courts in the country and taking note of the fact that the husband of the petitioner who was the proprietor who expired in the midst of the introduction of GST regime and further technical glitches preventing from submissions of the Form, this Court allows the writ petition in similar terms as decided by the various High Courts. Therefore, the respondent is directed to permit submission of the Form online or manually and process the claim of ITC within a period of 60 days from the date of receipt of this order.

GUJARAT HIGH COURT

NAYARA ENERGY LIMITED

v.

UNION OF INDIA

[SONIA GOKANI, J AND HEMANT M. PRACHCHHAK, JJ]

CIVIL APPLICATION NO.12860 OF 2021

Date of Decision: October 28, 2021

Disbursement of refund—section 56 of CGST Act—refund sanction order issued—bifurcation of amount towards petitioner and consumer welfare fund required—technical glitch / system not supportive of said bifurcation—delay in grant thereof—respondents directed to outsource experts for solving software problem—if nothing works, petitioner to be granted refund alongwith interest

The Refund Sanction Order had been issued in favour of the petitioner by the Principal Commissioner whereby credit of sum of Rs.50 lacs approx in favour of petitioner and about Rs.39 lacs towards Consumer Welfare Fund was ordered. However, the Refund Sanction Order was issued online and needed bifurcation for crediting the amount. Since the option of bifurcation was not available in the system the amount could not be disbursed in favour of the petitioner due to limitation of the software system. The petitioner has thus approached the Court.

It is held that the refund order was passed in August, 2021 and circular dated November 2019 mentioned about imposing of interest on the refund amount after expiry of 60 days from the date of receipt of application till the date of refund. Considering that the issue is not attended which is otherwise not disputed by the respondent but has caused hardship to the petitioner the Court has directed that the authority may outsource experts for solving the problem. However, if nothing works out the amount shall be paid at the end of 4 weeks with interest. If unpaid at the end of four weeks the rate of interest on the sum due shall be 12% from the due date of payment till the actual date of payment.

MEGHALAYA HIGH COURT

PIONEER CARBIDE PVT. LTD.

v.

UNION OF INDIA AND ORS

[SANJIB BANERJEE, CJ & W. DIENGDOH, J]

WP (C) No.404/2021

Date of Decision: December 6, 2021

Transitional Credit—Inadvertent mistake—Revising of Declaration—TRAN 1 filed—show cause notice served—reply filed explaining that inexperience led to mistake in filing—no request for revising Form made specifically—Held- petitioner permitted to make a request to commissioner for extending period for revising of declaration—in case of denial of opportunity commissioner to furnish reasons- writ allowed

As contended an inadvertent mistake was made while submitting a declaration electronically in Form GST TRAN-1. Consequently, a show-cause notice was issued which was challenged and the petitioner was permitted to respond to the show-cause notice. It was explained through the reply that that it was due to lack of experience due to which the mistake had been committed, though no specific request for any revised declaration to be filed was made. A writ is filed against the impugned order passed thereafter.

The court has observed that the petitioner doesn’t appear to have availed of such opportunity or requested the relevant Commissioner for a specific extension so that the petitioner could revise the declaration already furnished. Accordingly, the petition is allowed by permitting the writ petitioner to make a specific request to the relevant Commissioner under Rule 120A of the said Rules of 2017 to extend the time for the petitioner to file a revised declaration. If such request is made by the petitioner within a fortnight from date, the Commissioner will consider the matter in appropriate perspective. In the unlikely event that the Commissioner declines the request, due reasons in support of such decision should be communicated to the petitioner.

BOMBAY HIGH COURT

XEC METALS AND M/S. S.M. CONSTRUCTIONS

v.

COMMISSIONER OF COMMERCIAL TAXES, GOA, STATE OF GOA

[REVATI MOHITE DERE & M. S. JAWALKAR, JJ]

WP NO.2177 OF 2021 (Filing No.) WITH WP NO.2180 OF 2021 (Filing No.)

Date of Decision: November 27, 2021

Provisional attachment- No pendency of proceedings—no notice issued prior to freezing—Impugned orders passed by officer appointed to determine tax liability—Held: mere appointment of appropriate officer is no ground to take such an action—petition allowed

The bank account was provisionally attached u/s 83 of Goa GST Act, 2017. It is contended that neither any proceedings were pending nor any notice was issued to the petitioner.

It is held that the impugned order is passed only because the respondent No.1 has appointed an appropriate officer for determining the tax liability of the petitioners. Mere appointment of an appropriate officer for determining the tax liability will certainly not be a ground to initiate any action, like the present one i.e. of provisionally freezing the bank accounts of the petitioners under the Goa GST Act. The impugned order cannot be sustained – petition allowed.

KERALA HIGH COURT

SALIM K.M.

v.

THE STATE OF KERALA

[BECHU KURIAN THOMAS, J]

WP(C) NO. 24176 OF 2021

Date of Decision: November 19, 2021

Goods in transit—notice issued u/s 130 of CGST Act—interim relief sought –notices issued suspecting invoice and e way bill—Held not a fit case to issue interim order or direct release of goods which are subject matter of proceedings—courts ought to be slow in interfering with powers conferred by statute u/s 130 of the Act—alternative remedy available—writ disallowed

Two notices were issued u/s 130 of CGST Act, 2017 to furnish an explanation regarding confiscation of goods and imposition of tax and penalty as estimated. A writ is filed challenging the notices and seeking interim relief for stay of proceedings. It is contended by the petitioner that the issuance of notice is illegal as there were sufficient documents accompanying the goods. The respondent contends that an attempt to evade tax existed as the goods were loaded from places unregistered and were different from addresses mentioned in invoices.

Considering the circumstances it is held that it is not a fit case for issuing any interim order or directing release of goods confiscated which are subject matter of proceedings. The statute itself provides for a remedy. The courts must be slow in exercising power under Article 226 in such matters as it will interfere with the power conferred by the statute.

KERALA HIGH COURT

THOMAS MATHEW, LILLYKUTTY MATHEW, M/S. K.E. AGRO PRODUCTS (P) LTD., M/S. GEE YEM AGRO MILLS

v.

THE STATE TAX OFFICER (IB)

[BECHU KURIAN THOMAS, J]

W.P.(C) Nos.20447, 20453 20455 & 20475 of 2021

Date of Decision: November 19, 2021

Supply of copy of statements—pursuant to summons issued request for copy of statements recorded made by petitioner—Reply stated that such request cannot be considered—No reasons recorded—Held: reasons ought to be recorded in impugned order—affidavit filed later stating risk to investigation cannot supplement reasons for impugned order—difference between refusing an application and rejecting an application for reasons pointed out—Respondent directed to consider the applications afresh

The tax payers against whom summons were issued had requested for copies of statements already recorded. The officer had replied stating that such a request ‘cannot be considered.”

It is held that it is pleaded by the respondent that issuing copies at this stage will prejudicially affect the investigation, such a reason is absent in the impugned order.”. The Proper Officer did not have a case in Ext.P10 that giving copy of statements would cause prejudice to the investigation. He refused to consider the request. It is the settled proposition of law that an affidavit cannot enlarge or supplement reasons which the order did not contain at the time it was issued. Reasons recorded in the pleadings of an affidavit cannot contribute to the validity of an order when impugned. The reason must be reflected in the order impugned.

There is a marked distinction between refusing to consider and rejecting an application for reasons. The respondent is directed to reconsider the application of the petitioners for giving a copy of the statements already obtained in the course of investigation and pass fresh orders.

ALLAHABAD HIGH COURT

CALCUTTA SOUTH TRANSPORT CO.

v.

STATE OF U.P. AND 3 OTHERS

[JAYANT BANERJI, J]

WRIT TAX NO. – 650 OF 2021.

Date of Decision: November 15, 2021

Natural Justice—Show cause notice—Petitioner, the owner of vehicle, served with SCN raising demand u/s129 of the Act—contention raised that SCN is defective—held: SCN reflected date of appearance prior to date of issuance—improper notice—deprivation of right to opportunity of hearing leading to order of confiscation u/s 130—had notice been proper, petitioner would have got an opportunity to present its case against the imposition of liability u/s 130 of GST Act—impugned order is thus quashed –

The petitioner, owner of vehicle, had given the vehicle to a transporter for transporting interstate transfer of goods of a dealer. On interception the goods and conveyance were seized. An order of demand under Section 129 was issued against which neither tax nor penalty was deposited by the owner of the goods or the transporter but proceedings were initiated against the petitioner. It is contended before the Court that the show cause notice issued reflected the date of appearance which was prior to the date of issuance of the said notice. Moreover, the confiscation order was passed without affording an opportunity of hearing.

The Court has observed that the show cause notice in the given case does not comply with the requirement as the date of appearance is prior to the date of issuance. Had the show cause notice been properly prepared, the petitioner would have got adequate opportunity to present his case and furnish proof to prevent himself from being saddled with liability under Section 130 of the Act. The defective show cause notice resulted in denial of opportunity to the petitioner and cannot be said to be a notice in the eyes of law. There is non-compliance of principle of natural justice. There is nothing on record to show that opportunity of hearing as mandated by sub-Section 4 of Section 130 of the Act was granted. Therefore, the impugned order is hereby quashed. Petition allowed.

KERALA HIGH COURT

STATE TAX OFFICER

v.

Y. BALAKRISHNAN

[BECHU KURIAN THOMAS, J]

W.P. NO. 18169 OF 2021

Date of Decision: November 29, 2021

Release of goods—confiscation proceedings pending—payment of fine in lieu of confiscation—whether goods can be released provisionally before adjudication of confiscation proceedings; Held: Yes, section 130(2) envisages the words’ Officer adjudging it’ which indicates that goods can be released while proceedings are going on—two stages of release as per section 130 observed- during proceedings and after adjudication

Stage of payment of fine—dealer not to be compelled for payment of tax and penalty before adjudication as adjudication requires hearing—tax, penalty and other charges fall due not necessarily alongwith payment of fine—

Quantum of fine—Section 130(2) states that the fine leviable is not to exceed the market value of the goods confiscated.

The perishable goods, Beedis were seized from the godown for which an interim order was passed permitting release of such goods from the Officer. In the meanwhile show cause notices proposing to confiscate the said goods was issued under Section 130 of the Act specifying imposition of tax, penalty and fine in lieu of confiscation of the goods. A Writ was filed whereby the Tax Officer was directed to release the goods to the dealer on payment of amount contemplated under Section 130(2) of the Act. The State Tax Officer has filed a review against the order directing it to release goods in question against payment of amount in lieu of confiscation.

Issues

(i) Whether the provisions of section 130 of the Act contemplate any provisional release of goods, as directed in the interim order of this Court?

(ii) Whether the amount payable for release of the goods under Section 130 of the Act is fine alone or is it fine, penalty and tax to be paid together for securing releases of the goods? and,

(iii) What is the basis or rate of calculating the fine under section 130 of the Act?

Section 129 incorporates provisional release of goods by referring to Section 67(6) of the Act which is absent in Section 130. As per Section 130(2) it can be discerned that the option to pay fine in lieu of confiscation is mentioned twice: once in sub-Section 2 and in sub-Section 7 of Section 130. As per the words in sub-Section 7 of the Section 130 it can be assumed that it deals with post-adjudicatory situation. But sub-Section 2 of Section 130 reveals that the words ”Officer adjudging it” indicate that there is an option to the owner to redeem the goods while the process of adjudication is going on. Incorporating provision in the form of Section 130(2) apart from Section 130(7) is an indication of the wisdom of the legislature that even before owner is divested of his ownership he must have an option to pay fine in lieu of confiscation. Sub-Section 2 of Section 130 authorizes that the owner may get his goods released at such prior to final order of confiscation.

Absence of the words “provisional release” or non-reference to Section 67(6) of the Act is not determinative of the intent of the Section. Section 130 must be viewed independently. Section 130 incorporates a provision for release of goods at two stages-during adjudication and after adjudication. The two different stages as mentioned are created with the purpose. The owner of goods may pay the fine for release its goods without going into unnecessary procedural formalities without causing prejudice to the revenue. By virtue of Section 130(7) the fine can be paid after adjudication order is issued. Therefore, the Section 130(2) is not a case of provisional release of goods on payment on fine in lieu of confiscation while proceedings of confiscation are continuing.

Regarding the stage of payment of fine, the words ”pay liable” suggest that tax, penalty and charges will fall due upon the owner of goods at any point thereafter and not unnecessary along with payment of fine in lieu of confiscation. The words “in addition” “be liable” “payable” in sub-Section 3 of Section 130 indicate that the obligation will be fall over an apart from fine and not immediately. There is need to ascertain the quantum of tax, penalty other charges payable. Before such adjudication the dealer cannot be compelled to pay tax or penalty. And adjudication required hearing.

The words in a statute take their meaning from the context of the statute as the whole. As is clear from the magazine “exposition ex visceribus actus”. The words “be liable” only import a possibility of attracting liability. Lastly, the provision to Section 130(2) states that the fine leviable is not to exceed the market value of the goods confiscated. Market value is defined in Section 2(73) which means that it is a sale price that is agreed to between bonafide supplier and bonafide purchaser not related to each other.

Petition is dismissed.

ALLAHABAD HIGH COURT

AAMIR AND SONS

v.

COMMISSIONER COMMERICAL TAX AND 2 OTHERS

[NAHEED ARA MOONIS & SAUMITRA DAYAL SINGH, JJ]

WRIT TAX NO. – 910 OF 2021

Date of Decision: November 17, 2021

Parallel proceedings—civil proceedings u/s 74 and criminal proceedings arising out of offence under section 132—no principle in law to grant injunction against proceedings u/s 74 merely because criminal proceedings are pending arising out of same transaction—both may continue simultaneously

Arising from investigation carried out on the basis of certain information received from the petitioner’s bank, two proceedings have arisen – one under Section 74 of the Central Act and another seeking prosecution, under Section 132(1)(c) of the Central Act. A writ is filed contending that the respondent the respondent cannot initiate or continue parallel proceedings under Section 74 of the Act while criminal proceedings are going on. It is held that there is no difficulty in recognizing the principle that the single transaction may give rise to both criminal and civil consequences. There is no principle in law as may warrant any interference in the present petition to either grant injunction against the pending proceedings under Section 74 of the Central Act or to quash the same, merely because the criminal proceedings is pending against the petitioner arising from the same transaction under (Section 132(1)(c) of the Central Act). Both proceedings may continue simultaneously such that the rule of evidence applicable to each may be applied independently. While criminal prosecution may conclude applying the rule of strict proof, the civil proceedings may conclude on the rule of balance of probabilities. Also, at the conclusion of a criminal prosecution, punishment may be awarded, whereas at the conclusion of a civil proceeding, only recoveries may be made.

“One declares so many things to be a crime that it almost becomes impossible for men to live without breaking law.” – Ayn Rand

Taxation is backbone of a country’s economy. A perfectly administered system will hold the nation in difficult times and eventually leading to easy access to justice for the people. Tax raises money for food, cloth, shelter, education and various other things for the people, helps in reducing the already present inequality between the two classes. Taxation strengthens and protects channels of political representation: when citizens are taxed, they demand representation in return from their ruler,¹ manage the growth of economy, and fuels its industrial activity. India’s three-tier federal structure consists of Union Government, the State Governments, and the Local Bodies which are empowered with the responsibility of the different taxes and duties, which are applicable in the country. The local bodies would include local councils and the municipalities. The government of India is authorized to levy taxes on individuals and organisations according to the Constitution. However, Article 265 of the Indian constitution states that the right to levy/charge taxes hasn’t been given to any except the authority of law. The 7th schedule of the constitution has defined the subjects on which Union/State or both can levy taxes. As per the 73rd and 74th amendments of the constitution, limited financial powers have been given to the local governments which are enshrined in Part IX and IX-A of the constitution.²

Taxation basically is the imposition of compulsory levies on individuals or entities by the governments that state. Taxes are levied in almost every country of the world, primarily to raise revenue for government expenditures, although they serve other purposes as well.³ Tax matters refer to assessment and payment of your individual income tax/Corporate tax every financial year, on the day to day purchase of goods and services, tax evasion – voluntary or involuntary, other disputes related to it. Ever since the economy started growing and the already present high number of active taxpayers, India has been working on the present judicial system to make it hassle free. In FY 2010-11, the prosecution launched 244 cases, out of which 356 were decided, 51 were convicted, 83 were compounded with the acquittal rate of 62.4%. This figure drastically changed over the years, crossing 2225 cases launched by prosecution in FY 2017-18. 50% of these opted for Compounding. The two types of taxes in India are Direct and Indirect taxes. One of the biggest and most successful tax reforms in India is the GST(Goods and Services Tax). It assists as a comprehensive indirect tax which helps in eliminating the flowing effect of tax as a whole.

Direct tax, is a tax imposed on corporate units and individual people. It is a type of tax that can’t be moved or accepted by anyone else. Direct tax examples are wealth tax, income tax, gift tax, etc. In the Ministry of Finance, the Central Board of Direct Tax is a part of the revenue department. This board has a two-fold role that gives important ideas, significant inputs of planning, and policies to be implemented regarding direct tax in India. The management of direct taxes which is done by the Income Tax department is helped by the Central Board of Direct Taxes in doing so. Taxes that are indirectly imposed on the public through goods and services are called indirect taxes. The government bodies collect taxes from people who sell goods and services. When a good or product is sold in a state, then a sales tax is levied on it and its rate is decided by the government, this is called Value Added Tax (VAT). After GST came into force, direct and indirect taxes were collected by the three bodies of the government until 1 July 2017. Various indirect taxes which were imposed by the central and state government are incorporated by GST. Both the central and state government collect indirect tax through the intrastate supply of goods and services.⁴

India is a big country with people belonging to different communities and different wealth groups and income. Taxation to all cannot be the same. This is the reason for the tax system in India being a complicated one for long. India has been grappling with the problem of tax evasion which seems to be making our taxation system hollow from the core. India has a high tax rate but a low yield of direct taxes. So, over the years the government has made an attempt to reduce the taxes. Also, for a nation to prosper its tax collection system has to be strong and efficient even if the tax rates are not high else its coffers will be depleted and developmental programmes truncated. One of the biggest problems faced by India’s taxation system is the power of the government to make retrospective amendments regarding the tax statues. The practice began with the judgement given by the supreme court in the case of Chhotabhai Jethamal Patel & Co v. UOI & Others⁵ after which an amendment bill was passed for retrospective levy of excise duties.

After the implementation of the GST which is an all-inclusive indirect tax, the process has become smoother and helped prevent the cascading effect it had earlier. The Constitution of India has provisions with respect to the distribution of financial resources under chapter two of part twelfth which is in rhythm with the Federal, State and Concurrent list under 7th Schedule. To sum up, the Parliament rights are not bound and the Indian Constitution gives wide powers to the Parliament and it is neither rigid nor the same. So, according to future needs, there are provisions that can change the said rules of law. Paying taxes may not be the best task, however, it pays for all the development and infrastructure that one enjoys.

The taxation system in India is such that the taxes are levied by the Central Government and the State Governments. Some minor taxes are also levied by the local authorities such as the Municipality and the Local Governments. While direct taxes are levied on taxable income earned by individuals and corporate entities, the burden to deposit taxes is on the assessees themselves. On the other hand, indirect taxes are levied on the sale and provision of goods and services respectively and the burden to collect and deposit taxes is on the sellers instead of the assessees directly.

India has opted for a self-assessment procedure, in which the taxpayers assess the taxes for themselves and file returns. Taxpayers having turnovers or receipt over certain limits are also required to get their books audited and file tax audit reports. Taxpayers must file tax returns (for example, income tax and value added tax returns) each year. The Income Tax Act 1961 (Income Tax Act) outlines the detailed procedure for the assessment of income and also governs the, a) Redress of disputes arising from assessments, b) Levy of penalties, c) Commencement of prosecution proceedings.

Central tax laws provide for a three-tiered appellate mechanism. A person aggrieved by the tax officer’s assessment order may approach the first appellate authority, who is generally a designated senior officer of the department. The first appeal is essentially an administrative appeal to the commissioner (appeals), with the appellate authority having powers concomitant to the powers of the tax officers. An appeal can be filed against points of law, against findings of fact or if the order of the ITAT is unreasonable or unacceptable. Furthermore, Special Leave Petition can be filed in Supreme Court, either against points of law, findings of fact or if the order of the ITAT is unreasonable or unacceptable

An appeal from the appellate authority’s order goes to the appellate tribunal. The appeal may go before a single-member or a two-member bench, depending on the complexity of issue and the tax effect involved. For what appears to be an arbitration approach, Indian tax treaties also contain provisions relating to Mutual Agreement Procedures (MAP), and resolutions under MAP provisions have also been recognized by Indian courts, if one wants to go forward with it.

Costs as to litigation before the courts and tribunals of the country generally have to be borne by the appellants themselves. However, under exceptional circumstances the courts may award costs to the appellants. In practice, cost awards by courts are extremely rare as regards tax litigation. Accordingly, the costs of the litigation ultimately fall on the particular party: even if successful, the chances of recovering the costs from the other party are minimal.

Recent amendments made to Indian tax laws have sought to rationalise corporate tax rates. Although indirect tax has been reformed through the introduction of the GST, difficulties in implementation are yet to be fully ironed out. In terms of direct taxes, reforms are expected; and while there has been talk of a Direct Taxes Code for several years, there has been a further impetus by the present government. Over the last few years, the Central and many State Governments have undertaken various policy reforms and process simplification towards great predictability, fairness and automation. This has consequently lead to India’s meteoric rise to the top 100 in the World Bank’s Ease of Doing Business ranking in 2019 as India jumps 79 positions from 142nd in 2014 to 63rd 2019 in ‘World Bank’s Ease of Doing Business Ranking 2020’. In terms of tax disputes, the government appears to have adopted a policy of concentrating on high-value disputes confirming a bright future for people working in taxation field and the taxpayers.

The old adversarial system in tax dispute has been a big roadblock in nation’s growth for so many years and has been continuously ignored. The disputes get locked up for years, rarely get amicably settled. This has a reason it has created an image of not being in favour of the taxpayer and somehow discouraging the foreign investment. According to the procedure provided by Income Tax Act, 1961 (“ITA”), the taxpayer is the one to initiate it by assessing his income and filling a return for the same to the Assessing Officer.⁶ In case if there is any issue with the assessment and it gets rejected after getting re-examined by the Assessing Officer and the taxpayer is dissatisfied, he can approach the Tax Appellate Tribunal (“ITAT”)⁷. ITAT is a quasi-judicial body which after re-examination of facts and evidence, decides on the matter. Further, the parties have option to approach the High Court and then the Supreme Court however, for the appeals on the ‘substantial question of law’ will be questioned and heard. Except for the appeal, the High Court and Supreme Court could also be approached through a judicial review by filing a write petition.

This may appear to be a similar process but it is not, in reality tax litigation takes 1- to 20 years before any judgement is passed on the dispute. Filing income tax returns is something which is done by a every taxpayer once a year and however, small dispute can put him in circle of years of legal hearing with a huge finically loss. An estimate of 2,59,523 tax disputes are pending at all level of court and tribunals which adds upto a sum of almost Rs. 45,000 crores (2012). Over the years, continuous stress had been given on the tax litigation by both the legislature judiciary and as the latter as pointed it out the prevalence of the delay. Courts have endlessly attempting to curb the delay however; the situation has never really improved remarkably. Moreover, the transfer pricing dispute cases of Vodafone and Nokia recently have just presented the vulnerability of government of a international level. Even with the implementation of General Anti-Avoidance Rules (“GAAR”), not much has changed.

The most appropriate alternative that should be persuaded to reduce the pile of tax dispute would be Authority for Advance Rulings (“AAR”). AAR id basically a quasi-judicial body chaired by retired judges of Hon’ble Supreme Court who will act as an independent third party adjudicatory body. A taxpayer can approach AAR to obtain a ruling a on any question of law or fact be it related of international transaction. All ruling made by AAR are binding on parties, taxpayer and revenue department. The biggest advantage of AAR is its speed disposal approach. The ITA mandates that all applications must be disposed of within 6 months from filing and only allowed for extension of 1 year maximum, which a blessing considering the normal ligitation on a similar matter might take a decade or two to reach over any decision. However, the advance ruling does lack a proper administration as there is no authority of pass order over them.

Efficiency of delivery of Justice

Back in 2015, the then hon’ble Chief justice of India H.L. Dattu, constituted a special bench which would take only tax matters. With the increase in number of taxation cases that got piled up at apex court, he realized the need to address the issue and therefore came up with this approach. With adding political recognition of the link between profitable growth and involved duty laws and action, it was a reform that sounded necessary. Fortunately, the figures feel to suggest that the duty bench has been a success each around. The bench of judges A.K. Sikri and Rohinton Nariman heard duty cases until the alternate week of December, and in 2015, the Supreme Court delivered 197 judgements in duty law.

This is nearly as numerous as the apex court managed in the three times antedating 2015, when it passed 206 duty judgements; or a nearlyfour-fold increase in its productivity in each of 2014 and 2013. The vast increase in figures was really due to the effectiveness of the duty bench — in the nine months that it was functional, the bench delivered 170 out of the 197 duty case judgements delivered in all of 2015. The results of this trial were also phenomenal at the duty judgements delivered by Supreme Court in 2015 came the loftiest. And if one counts the orders where the Supreme Court did n’t claw in depth into the logic, also a aggregate of 289 similar orders and judgements were delivered, disposing of cases. The bulk of the judgements were rendered in central circular duty cases, both relating to central and state circular levies. Of the 170 judgements delivered by the duty bench, an astounding 149 were penned by Sikri and 21 by Nariman. Indeed when not sitting on the duty bench, Sikri delivered a farther seven duty judgments relating to earlier times, bringing his census to 156 over the course of the time. While detailed figures aren’t available for earlier times, Sikri now presumably holds the record for having delivered the loftiest number of duty judgements in a time in the Supreme Court. Matters were conjoined up and heard together as numerous of them had been multiple times. This meant that through the 197 Supreme Court judgements in 2015, a aggregate of 518 connected cases that dealt with analogous points of law were disposed of (the duty bench’s judgements themselves were directly responsible for clearing 400 cases off the books in 2015 with an fresh 490 being disposed of through orders). This was a major advance in the history of duty matters as it came a light force for all unborn times and other pending cases present for times. A small step taken by the Hon’ble H.L. Dattu made a huge impact by creating a precedent for not only the Apex Court but also the other profit authorities and petitioners. While numbers haven’t yet been made public by the profit department, it’s likely that the overall value of duty profit held up in duty action in the Supreme Court will have come down by a substantial quantum as a result of the work of the duty bench over the course of the time. What the disposal of such a large number of duty cases also reveals is the detainments that have taken place in these cases. The duty bench seems to have concentrated on disposing those duty cases that have been pending for long, including, as the table below shows, one dating back to 1997.

The bulk of the duty matters disposed of by the Supreme Court thus feel to be cases that are 8-12 times old. This doesn’t inescapably mean that more recent cases have taken a back- seat; they’re likely to have been tagged with the aged cases and disposed of when the questions of law were analogous or identical.

By all accounts, Supreme Court attorneys and petitioners are happy that the duty bench was set up to serve over the course of the time to decide only duty cases. Without the routine change of canon, the judges were suitable to concentrate and go in depth into the area of law in question. “ I hope the new Chief (Justice of India) will also come up with some plan like this and can form a separate bench to concentrate just on direct duty this time,” said Singh. Another word of caution is also needed. While the number of duty judgements delivered by the Supreme Court has indeed seen a dramatic jump, the overall number of judgements delivered by the Supreme Court in 2015 didn’t see such an increase.

Although only two judges retired during the course of the time and the Supreme Court was at near 90 capacity, it didn’t deliver mainly further judgments than the former time, 2014, where 10 judges retired over the course of the time. In Central Commission for Central Excise vs Hindustan Lever Ltd⁸, the Supreme Court clarified that Vaseline intensive care heel guard was a drug and not a cosmetic and it was up to the tax authorities to prove that there was no prophylactic or curative value to a product. In The Commissioner of Income Tax v. Veena Developers,⁹ the court laid down that deductions for construction of low-cost residential apartments will also be available to those who constructed mixed commercial and residential buildings, thereby resolving a large batch of pending cases.

Foreign Investors Perspective

FDI (Foreign Direct Investment) is a virtual gold every country thrives for. The major reason behind it is that is provides new technology, generate new jobs for locals and creates a healthy environment where employment can easily be promoted. The government not always ha high amount of budget to investment in huge projects and they also have to cater to the people and at the same time look out for the defense and security at the border. FDI provides exactly was the demand it, huge investment in the economy. Developing countries like India open their market, try to provide which hassle free, has a smooth taxation system and less legal formalities before starting at new business. The resulting net increase in domestic income is shared with government through taxation of wages and profits of foreign-owned companies, and possibly other taxes on business (e.g. property tax). FDI may also positively affect domestic income through spillover effects such as the introduction of new technologies and the enhancement of human capital (skills).¹⁰

And because of these huge benefits that come with it, the government usually re-examines their Tax laws in order to attract more investment. Even the outbound investment provides efficient access to foreign markets and production scale economies, leading to increased net domestic income. However, the government keeps trying to maintain a balance between the desire to offer a competitive tax environment for FDI, with the need to ensure that an appropriate share of domestic tax is collected from multinationals.¹¹ But in reality the actual factors that attracts these FDI’s the most are well developed infrastructure for work, cheap and skilled labour in abundance, heavy profits opportunities, cheap raw material and transportation and a predictable and nondiscriminatory legal and regulatory framework; macroeconomic stability.

To how the FDI may react to the taxation policy depends a lot of the host country’s corporate tax burden. FDI is not exactly highly sensitive towards a taxation policy but it does create a huge difference if the host country has a favorable policy as there is always a pressure present globally. Investors, before moving on with any investment, take in account of the different locations and draw a comparing between their tax burdens with country who have provide similar market conditions.

“A widely-held view is that taxes are likely to matter more in choosing an investment location as non-tax barriers are removed and as national economies converge. There is broad recognition that international tax competition is increasing, and that what may have been regarded as a competitive tax burden on business in a given host country at one point in time may no longer be so after rounds of tax rate reductions in other countries. However, it is not always clear that a tax reduction is required (or is able) to attract FDI.”¹²

Even though many OECD Countries have a high corporate tax policy, if hardly effects the investment as they provide with other facilites with the it like well structured infrastructure. Due to that, developing countries fell more pressured, as they cannot provided the same but by loosening the tax burden they still have a chance. the size of market the host country provides also has a huge role to play in it and thr location specific profits attract the investors. It is also clear that a low tax burden cannot compensate for a generally weak or unattractive FDI environment. Tax is but one element and cannot compensate for poor infrastructure, limited access to markets, or other weak investment conditions. However, business-friendly the tax administration is perceived to be. Investors look for certainty, predictability, consistency and timeliness in the application of tax rules, and in many cases these considerations are as important as the effective tax rate paid. The tax environment will also be influenced by the need of governments to introduce anti-abuse measures to protect the tax system from sophisticated tax planning and aggressive tax schemes which exploit differences across tax systems. A key challenge is striking a balance in devising rules to adequately protect the tax base, without imposing excessive compliance cost on business. In doing so, it can be difficult to accurately weigh business arguments that FDI will locate elsewhere unless the scope of tax base protection measures is reduced. To put it all in simpler words, a less burdening tax policy has a lot to do in attracting FDI investments. With the strong competitive, it becomes more important for countries like India to capture them. The government is constantly trying to make a balance between the environmental laws, the well being of the people, government treasure and the economic growth.

Financial Independence of Judiciary

In order to appreciate this ground of attack on Section 99 of the Finance Act, 2020 amending the first contingency to Section 254 (2-A) of the Act, it’s first necessary to appreciate the background in which the Bars in India have come to stay and have come an essential part of our bar who has the task of discharging judicial functions.

Secondly, the difference between the Courts and the Bars (which are substituting the Courts) would have to be considered. Despite the differences, the two authorities are participating the judicial power of the State. Thus, just as independence of the Court is shielded, it becomes necessary to guard the independence of the Bars as well.

We largely need to appreciate the proposition of separation of powers as per the scheme of our Constitution which is specifically handed under Composition 50. Simply put, it’s the discrimination of the functions of the State to the three organs as handed under the Constitution. First, it’s the Legislature (includes the Centre as well as the State), second, it’s the administrative authorities (for illustration Income Tax Department, the Police Department, etc.) and third is the bar ( courts and bars). It has been emphasised that every organ of the State must perform and exercise the functions entrusted to it without inching upon the functions terminated to the other.

In Indira Nehru Gandhi v. Raj Nara¹³, it was held that division of three main functions is recognised in our Constitution. Judicial power of the State is vested in the bar. Also, the Administrative and the Legislature are vested with powers in their spheres. Judicial power has lain in the hands of the bar previous to the Constitution and also since the Constitution. It isn’t intended that powers of bar be passed to or be participated by the superintendent or the Legislature or that the powers of the Legislature or the Executive should pass to or be participated by the bar. The Constitution has a introductory structure comprising the three organs of the Republic viz. the Legislature, the Administrative and the Judiciary. It’s through each of these organs that the autonomous will of the people has to operate and manifest itself and not through only one of them. Neither of these organs of the Republic can take over the function assigned to the other. No Constitution can survive without a conscious adherence to its fine checks and balances. “Just as Courts ought not to enter into problems entwined in the ‘political copse’, Parliament must also admire the save of the Courts. The principle of separation of powers is a principle of restraint.”

In Chandra Mohan v. State of U.P¹⁴, it has been held that the people of our country come by close contact with the inferior bar in comparison to the Higher Judiciary and therefore, it’s no less important and presumably indeed more important that their independence should be placed beyond question than in the case of Superior Judges. Composition 50 of the Directive Principles of State Policy states that the State shall take way to separate the bar from the superintendent in the public services of the State. Simply stated, it means that there shall be a separate judicial service free from the administrative control. In S.P. Sampath Kumar (supra), it was held that judicial review is a introductory and essential point of the Constitution and Parliament can not take it down else, the Constitution would cease to be what it is. Every organ of the State must act within the limits of the authority and power deduced from Constitution. A question may arise as to whether the superintendent has acted within the compass of its power. Originally, determination of this question is within the sphere of bar because it requires interpretation of the Constitution and the laws and this would pre-eminently be a matter fit to be decided by the bar. Secondly, the protection swung to the citizen would come illusory, if it were left to the superintendent to determine the legitimacy of its own action. The same principle applies for determination of acts of Legislature as well. It’s only an independent bar under the Constitution assigned with the delicate task of determining what’s the extent and compass of the power conferred on each branch of Government, what are the limits on the exercise of similar power under the Constitution and whether any action of any branch transgresses similar limits. It’s also a introductory principle of the rule of law which permeates every provision of the Constitution and which forms its veritably core and substance that the exercise of power by the superintendent or any other authority mustn’t only be conditioned by the Constitution but also be in agreement with law and it’s the bar which has to insure that the law is observed and there’s compliance with the conditions of law on the part of the superintendent and other authorities. In view of the above, it is clear that Article 50 of our Constitution has been interpreted and it has been held that there is a requirement to have an independent judiciary for the purpose of adjudicating the disputes. Judicial review by an independent judiciary has been considered to be a basic and essential feature of the Constitution. “On a combined reading of the above decisions, it is submitted that judiciary also includes authorities such as the Tribunals which are below the High Courts and Supreme Court. Whenever the rights of parties are affected, the forum of last resort is a judicial forum. This forum must necessarily be independent and must be in a position to uphold the rights and condemn the wrong. The Supreme Court has expressed its displeasure in at least five¹⁵ if its Constitutional Bench decisions in the manner in which the minimum standards of judicial independence as are required to be maintained have been diluted.

Digitalization of Judiciary

When the whole world was hit back the COVID-19 and everything suddenly shifted to online, judiciary was not exception to it. Where on the one hand online services like Amazon, Zomato, Ola bloomed, the court on the other hands had a huge setback. The ‘work from home’ conception was accepted very easily by other field however, the judiciary faced a lot of challenges. It was quite impossible to replace all daily physical activities to a packed online one to one user interface. The pendency of cases in various courts in India is staggering. The Economic Survey of 2019-2020 dedicates a chapter to pendency of tax cases and revenue cases. The Survey mistakenly argues for more court infrastructure and judges to solve the problem. On the contrary, the existing infrastructure is grossly under-utilised. There are tribunals such as the Income Tax Tribunal that function only half-day most of the time. To make matters worse, most courts are closed for Christmas and summer vacations. Judges are not accountable for efficiency and performance. Thousands of Indians cannot afford to go to court as legal costs are high and legal procedures are complicated.

It’s a fact that utmost duty matters don’t bear particular sounds. Duty cases reach bars and advanced courts after lower authorities record all the data. The High Courts and the Supreme Court deal with issues or interpretation of the law. The bane of the court system is that attorneys on both sides need to be physically present in court. Cases are frequently suspended due to colorful reasons. It’s in this environment that we make the case for a virtual bar.

In such a script, we can submit all the papers via correspondence. The judge can decide the case grounded on all the available information. Wherever the judge requires interpretations, he or she can seek the same through dispatch. Generally, the judge, after considering all the material available, can pass a draft order and shoot it to both sides for any commentary which they may want to give. Later, the judge can, after considering the commentary, pass the final order. This will enhance the quality of the judgment and also exclude egregious crimes.

The use of the court hall to decide analogous matters is spare. Not only will a virtual bar result in substantial savings in costs but will also lead to speedy disposal of cases. The productivity of attorneys will increase substantially as visits to courts and long waiting hours will be more an exception than rule. However, effectiveness will doubly, indeed treble, If this practice is extended to other civil cases.

The fact that the governance of a court is defined by terrain makes no sense in matters analogous as taxation and company law. The change to-particular electronic court sounds will change this. All judges should be empowered to handle any case, wherever it originates. This will affect in multiple advantages — the top bone being better utilisation of force and structure by equitably distributing the work. Also, malpractices will be limited as there will no longer be familiarity between attorneys and judges in a municipality.

While India grapples with a extremity on the health and profitable front, we need to suppose out of the box. We need a change in mindset regarding the way we work. Imagine the overall savings and extent of improvement of the judicial ecosystem if 70 of the cases get decided without going to court? If vested interests are kept down and cooperative will to initiate what is for the common good takes precedence, a virtual bar can come a part of our lives.

A drive for complete digitization of the judicial system amid the lockdown is being echoed throughout the country. This doesn’t just mean conducting regular sounds over Video Conferencing (although a vital first step). It’s an occasion to revise the way the entire legal system constitutionally functions beyond just this epidemic.

The opinions taken now in the short term will really have a continuing effect for months to come, as social distancing morals are not likely to be completely eased in the foreseeable future, atleast till a vaccine for the Novel Coronavirus is developed and posted.

The Supreme Court issued guidelines to reduce physical presence in courts so as to maintain social distancing. Recently, Justice DY Chandrachud stated that video conferencing in the Supreme Court was performing fluently and ane- form software was being developed and was in the advanced stages of trial. Though this is a welcome development, ane- form system alone is not nearly enough. There must also be a corresponding change in the manner of arguments. Any analogous change in the system of form and arguing must be precisely analyzed so as to ensure that the effectiveness and sanctity of the process are saved.

While it can’t be disputed that shifting of the legal profession to a technology-dependent practice is going to pose a large number of challenges, the same can be gauged in an effective manner, by icing a numerous simple tweaks to the present way of practice.

The biggest chain in shifting the working of the courts to an online platform is the time operation and related logistical issues that would be demanded to be ironed out to ensure the functioning of the court in an effective manner.

The present form of practice, where attorneys are anticipated to be physically present in the court till their cases are called out, is not the most provident operation of the time of those engaged in the legal profession. Attorneys rehearsing regularly in the High Courts/ Supreme Court and other bars are abnegated to the fact that the first half of their day is to be spent staying for their matter to be called up, if it indeed does get called up. Physical presence at all times needs to be assured in the courtroom, lest the matter be is called out of order due to adjournments in the former matters.

This diminishes openings to attend matters in multiple courts, due to deficiency of time and long distances, constantly forcing attorneys to prioritize certain matters over others at the cost of irking guests and harming bones’ character. Still, the technological shift can count this mystery and save invaluable time, allowing attorneys to appear in different courts within beats of each other, If planned properly. One of the biggest challenges that will be faced in administering such an approach will be proper logistical operation in the calling out of cases. A shift to online courts, still, would bear perfection in time operation since both the parties and the attorneys would be anticipated to join the virtual courts at a pre-determined time.

In such a script, it becomes imperative that the cases listed for the day are dealt with in a time-bound manner to ensure lower online business ( so as to help overfilling of the system), and most importantly, to ensure quick and effective justice. In this terrain, it becomes imperative to re examine the 99th Report of the Law Commission published in the time 1984. The report tried to address the question of certain time saving changes to the system of‘ Oral and Written Arguments in the Higher Courts’. To address this question, the Law Commission released a questionnaire aimed at seeking opinions of knowledgeable persons and bodies on certain questions concerning the association and improvement of the functioning of the advanced Judiciary.

Fast-forward to the present day, judges are now equipped with state-of-the- art computers and other technological paraphernalia allowing quick and effective disquisition. Further, there now live a plethora of programs analogous as Judicial Church at Supreme Court and High Courts and other internship openings which not only allow the immature legal minds to be shaped by the judges, but also provides judges with the resources to help them sift through large amounts of information which was understandably considered insurmountable in 1984.

“Written advocacy has played the part of the poor alternate kinsman to oral advocacy but decreasingly, written advocacy has taken on a more significant and important part. Opening and closing cessions are generally filed in civil matters and in prayers written arguments must be filed before the hail. The written argument therefore provides an occasion to convert the Court before oral address has any part.”

This would really cut down the time of oral arguments and streamline the whole process. It is, still, material to note that a standardized format must be espoused so that brief and precise Written Statements can be filed before courts.

The High Court of Delhi has stressed the rudiments of an effective written detail in the case of Mst. Kiran Chhabra And Anr. v. Mr. Pawan Kumar Jain. Though written submissions must not be viewed as an volition to the oral arguments in toto, they may be the most effective tool to save time. This would have the fresh advantage of weeding out matters with little merit, especially those that do not have a prima facie case made out, especially in appellate courts and bars where a large number of prayers are filed simply to defer from having to fulfill the awards passed by the lower courts.

Another recommendation of the report was that in the advanced courts, a day may be set incremental for holding conferences between judges. The practice of the Federal Court of the United States of America was analyzed wherein the courts hear to arguments on 4 days and take up one day to just go through written submissions and operations. Performing on only four days may not be possible given the being weight on the Indian Judiciary. Still, High Courts can follow the practice of the Supreme Court, which reserves two days of the week for miscellaneous matters alone. Certain days can be kept for matters in which the proceedings are at a purely procedural stage, which would take a truly limited amount of time.

In such a case, the functioning of the court would not be only for a numerous hours, and latterly, time can be taken by the judges to confer amongst themselves on pressing points of law and to read the operations of cases to be taken up in the coming week. Such a model would allow the entire judicial structure-from the attorneys to judges-to save large amounts of time. Another pre-needful for the success of such a model would be the laying down of a unified set of rules for the online functioning of all the courts. The Judiciary of England and Wales has come up with a unified protocol regarding remote hail of civil matters and the same has been executed with effect from March 26. The protocols give introductory guidelines as to the conduct of remote sounds and have declared Skype as the platform to be used by all courts for online sounds. A similar protocol needs to be developed for Indian courts across all authorities to ensure ease of use and vacuity to the parties as well as practitioners.

A commone- form practice needs to be developed. As on- form is present in only a sprinkle of courts across the country. Still, it’s also necessary to ensure that the rules of analogous form are harmonious throughout the legal system. Not only will this allow for faster form, it will also allow for easier movement of lines in cases of transfer and prayers to advanced courts. This also presents the bar with a unique occasion to reaffirm the faith of the public and ultimately apportion with the cloak that covers the functioning of this most vital popular institution. In multitudinous courts, the general viewing public can’t indeed gain access to the court unless their matter is being heard. This has really led to sustained negativity amongst the public, which has little faith in the ideals of open justice and translucence. Fortunately the Supreme Court in the case of Swapnil Tripathi v. Supreme Court of India¹⁶ has stated that in the interest of the general public, live streaming of court proceedings in matters of public interest and Indigenous matters must be eased.

This also has the added advantage of reaffirming the hourly- ignored ideal of a ‘Court of Record’ under Composition 129. This has unfortunately regressed to mean simply publication of the courts’ judgments. Still, a court of record should be one that retains records of its proceedings- including oral arguments in the course of cessions-to perpetual memory.

In the Swapnil Tripathi case¹⁷, the Supreme Court has painstakingly anatomized the practices of several authorities around the world and the advantages of recap and broadcasting. However, perhaps this epidemic is the drive demanded for our legal fraternity to decelerate down and introspect, so that we may crop more effective, If other courts have been doing this for several times now.

Conclusion

It’s argued that the council is the applicable authority to make the policy choices it considers necessary to increase public goods. Consequently, courts bound by the principle of executive compliance would limit remedies in duty matters must, hence, be grounded on objective principles of legislative interpretation. Still, given the overreaching governance that the Supreme Court has developed as a result of the principles in cases similar as Tullow, the profit authority and taxpayers are maybe correct in viewing the court of law as an institution with unusual and extraordinary power to resolve duty disagreement in their favor. Judicial activism (that is enabled by nebulous duty legislations) reduces abstract clarity of a taxpayer’s rights or a government’s profit entitlements under the Indian legal system. Petitioners (including government authorities and taxpayers) must have certainty about the limited nature of the court’s powers and shouldn’t be misled into lengthy action in the stopgap of extraordinary remedies. However, the coming stylish 119 AP SteelRe-Rolling Mill Ltd, If civil courts are to continue enjoying an extraordinary governance in duty matters (where executive compliance is more applicable). v. State of Kerala and Ors,¹⁸ IVRCL Structure and Systems Ltd. v. Commissioner of Customs,¹⁹ Zuari Diligence Ltd v. Volition²⁰ is for the courts to laboriously apply effectiveness in the duty administration by relating and administering a broad set of well- innovated principles. According to the Organization of Economic Development (OECD)²¹, the transnational norms for an effective duty system include impartiality in duty issues, effectiveness, certainty and simplicity, effectiveness and fairness, and inflexibility in the duty system. It’s possible to apply these norms in a way that doesn’t bear the court to overreach its limits in judicial review. For case, if a particular department has unreasonably delayed the issue of a instrument that a taxpayer requires for carrying a duty impunity, it’s applicable for the courts of law to first estimate the taxpayer’s claims under similar broad principles. This may help a court identify a better result to the taxpayer’s disagreement caused by executive detention – for case, a writ remedy. This principle- grounded approach will insure that civil courts will be able of tone- regulation and may avoid awarding unhappy rights and remedies in duty controversies. Further, government departments will be under stricter judicial scrutiny for icing an effective duty system and duty controversies. Controversies that may be resolved at the stage of the departmental inquiry need not affect in long times of pending action – a violation of a taxpayer’s licit anticipation to effective duty collection may be remedied by warrants against executive authorities that unnecessarily delay the duty administration process. In substance, the principle- grounded approach reinforces abstract clarity about the complex nature of a duty system and the significance of the bar to exercise executive compliance. I admit that a principle- grounded approach alone may not be sufficient to address the incompatibility of judicial remedies with consonance in the duty system. A long- term result to reducing the prevalence and pendency of duty controversies involves a deliberate cohesion between duty administrations and the bar. A duty policy that’s taxpayer and business friendly, transparent and coherent will significantly reduce action. Till similar time that cohesion is achieved in duty policy and duty justice, the remedies of the courts and executive practices may remain inharmonious to a great degree and affect in public profit undesirably being congested in the appellate medium.

Justice is not an idea or thought that can be achieved easily by any person in their daily lives. It requires time, patience and money even for the slightest ordeal. Even when we see the blooming state of tax matters in India is still very far from being easily accessible, with proper administration and mutual efforts by the authorities and the taxpayers it can reach up to a level where it don’t be treated as a threat by assesses. As litigation are hefty for even the MNCs, a push towards the quasi judicial approaches like Authority for Advance Rulings (“AAR”) a positive outlook towards it. Even promoting compounding of offences in certain cases would leaded to huge improvement.

BIBLOGRAPHY

1. Nicholas Shaxson, The Tax Conesus has failed, 2007 Volume 3, Number 2, Tax Justice Focus, https://www.taxjustice.net/cms/upload/pdf/TJF_3-2_Final.pdf

2. Ashutosh Singh, Law of taxation and the Constitution of India, https://blog.ipleaders.in/law-taxation-constitution-india/

3. Defination of tax, https://www.britannica.com/topic/taxation

4. Rachit Garg, Taxation: a comprehensive view, Dec 2017, https://blog.ipleaders.in/concept-taxation-comprehensive-view/

5. 1962 AIR 1006, https://indiankanoon.org/doc/1404351/

6. Tax Effects on Foreign Direct Investment, February 2013, Policy Brief OECD, https://www.oecd.org/investment/investment-policy/40152903.pdf

7. 120 Robort Thornton Smith, Tax Treaty Interpretation by the Judiciary, (1996) 49 (4) The Tax Lawyer 845, 882. NUJS Law Review 12 NUJSL.Rev. 2 (2019) April-June, 2019

8. Tax Effects on Foreign Direct Investment, February 2013, Policy Brief OECD, https://www.oecd.org/investment/investment-policy/40152903.pdf

9. Surbhi Gupta, Various Tac Authi\oritiea and their powers, Asian Journel of Managemnt, 2015, https://ajmjournal.com/HTMLPaper.aspx?Journal=Asian%20Journal%20of%20Management;PID=2015-6-1-5

10. Sri Ram Govid, Dispute Resolution in tax matters, International Taxation , Vol 9, Sep 2013, https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Articles/Dispute_Resolution_in_Tax_Matters.pdf

11. Robort Thornton Smith, Tax Treaty Interpretation by the Judiciary, [1996] 49(4) The Tax Lawyer 845, 882.

12. Richard K.Gordon and Victor Thuronyi, Tax Legislative Process in TAX LAW DESIGN AND DRAFTING (1st ed., 1996).

13. Harish Salve, Retrospective Taxation – the Indian Experience, British Institute of International and Comparative Law, available at https://www.biicl.org/files/6722_panel_two_harish_salve.pdf

(Source: 2nd Runner up of Padma Vibhushan Nani A. Palkhivala Memorial National Research Paper Competition 2021 published in souvenir of Padma Vibhushan Nani A. Palkhivala Memorial (Virtual) National Moot Court Competition 2021)

 

 

1. Nicholas Shaxson, The Tax Conesus has failed, 2007 Volume 3, Number 2, Tax Justice Focus, https://www.taxjustice.net/cms/upload/pdf/TJF_3-2_Final.pdf

2. Ashutosh Singh, Law of taxation and the Constitution of India, https://blog.ipleaders.in/law-taxation-constitution-india/

3. https://www.britannica.com/topic/taxation

4. Rachit Garg, Taxation: a comprehensive view, Dec 2017, https://blog.ipleaders.in/concept-taxation-comprehensive-view/

5. 1962 AIR 1006, https://indiankanoon.org/doc/1404351/

6. Section 139 of the Income Tax Act, 1960.

7. Section 143 of the Income Tax Act, 1960.

8. 2002 ECR 279 SC

9. (2015) 277 CTR 297 Commissioner of Income-tax v. Veena Developers

10. Tax Effects on Foreign Direct Investment, February 2013, Policy Brief OECD, https://www.oecd.org/investment/investment-policy/40152903.pdf

11. Ibid, 4

12. Tax Effects on Foreign Direct Investment, February 2013, Policy Brief OECD, https://www.oecd.org/investment/investment-policy/40152903.pdf

13. (1987) 1 SCC 124

14. 1975 Supp SCC 1

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

16. (2018) 10 SCC 628

17. ibid

18. 2007) 2 SCC 725

19. (2015) 13 SCC 198

20. (2007) 8 RC 568

21. Robort Thornton Smith, Tax Treaty Interpretation by the Judiciary, (1996) 49 (4) The Tax Lawyer 845, 882. NUJS Law Review 12 NUJSL.Rev. 2 (2019) April-June, 2019

ABSTRACT

India has undergone a series of developmental changes in taxation that has contributed to the evolution of the Goods and Services Tax framework as we know it today. The most consistent thing during this growth has been legislature’s endeavour to create a comprehensive indirect taxation scheme to lessen the burden on both the supplier of services as well as the consumers. India has been persistent in its approach to not tax exports to create a level-playing field for domestic suppliers in international market. However, export of intermediary services has been excluded from this benefit and suppliers of intermediary services are still getting taxed. Recently, this controversy was brought to light again by the Bombay High Court where the strong stance was observed against this anomaly. By way of this paper, it is proposed that taxation of export of intermediary services defies constitutional, legal and commercial logic. This paper develops around the idea that the operation of provisions in the IGST Act is doing more harm than good and this situation warrants government intervention to put this controversy to rest in favour of supplier of intermediary services.

INTRODUCTION

The courts have examined the issue of supply of services abroad on various occasions, and so far, they have upheld the constitutionality of the legislative provisions in relation to it. A two-judge bench of Bombay High Court analyzed this issue in a recent judgment,¹ wherein the transaction involved was a situation where a supplier provided intermediary services with respect to certain goods to a recipient located outside India and subsequently, this overseas recipient sold the goods to the Indian customer directly. Here, out of the amount paid to the overseas recipient, a commission was paid in convertible foreign currency to the supplier of services. Justice Ujjal Bhuyan tipped the scale against the constitutionality of taxing provisions, whereas Justice Abhay Ahuja presented a dissenting opinion.

Generally, exports are exempted from tax. However, by virtue of section 13(8) read with section 8(2) of the Integrated Goods and Services Tax Act, 2017 (“IGST Act”), export of intermediary services incurs GST liability. The current scheme of the IGST provides for taxation of supply of services which should have been otherwise exempt. It begins with the general rule that the location of supply is the location of the recipient of goods or services, but subsections (3) to (14) of Section 13 carve out exceptions to this rule. The effect created thereafter is that although the recipient of some services is located outside India, the place of supply will be the location of the supplier (i.e., within India). This is done to specifically bring certain supplies within the tax net.

Section 13(8) states that “place of supply” of intermediary services is the location of supplier, and section 8(2) states that in cases where “place of supply” and “location of supplier” are in the same State or Union Territory, the supply is treated as intrastate supply. And thus begins the curious conundrum of deeming fiction, because when for any prudent person, the transaction is in the nature of export of services, the IGST Act considers it as a local supply. This is because the two factors that determine the nature of supply (place of supply and location of supplier) will always be the same. So, when a supplier renders intermediary services to a foreign recipient, and that foreign recipient sells that good to a customer in India, the cross-border transaction is treated as intra-state supply. It is widely understood and accepted that the Parliament can legislate on laws regarding Goods and Services Tax (“GST”) on recommendations of the GST council, but it is the constitutional provisions that determine the scope as well as limits of levying of GST on such transactions.

This paper construes that scope and examines whether the deeming fiction created is within the constitutional framework and if it derives its legislative competence from the Constitution of India (“Constitution”). Part I of this paper analyzes the IGST provisions on the cornerstone of the Constitution. It starts by examining the pattern of judicial review in India with respect to tax legislations to understand the factors considered while examining constitutional validity of a tax statute. Then it examines whether the deeming fiction in the IGST Act is in consonance with Article 286 of the Constitution. Part II of this paper traces legislative competency of IGST Act through the lenses of Article 14 of the Constitution. It sets forth the history of taxing the export of intermediary services and then examines current provisions of IGST Act on the dual test of arbitrariness of Article 14. Part III of this paper contemplates the extra-territorial operation of the deeming fiction to scrutinize whether such extra-territoriality is permissible. Part IV highlights best practices for taxing export of services across the globe. This is done by examining global trends in levying tax on intermediary services and identifying the intention of legislature behind the existing framework. Part V of the paper deals with the question of whether such supply can be classified as inter-state under section 7(5) instead of intra-state under 8(2) of the IGST Act. The paper then concludes with discussion on the consequences of continuing with the present framework.

PART I: LEGISLATIVE COMPETENCE AS PER CONSTITUTION

JUDICIAL REVIEW OF TAX POLICIES

Judicial review by Indian courts has evolved in three dimensions: first, to demonstrate fairness in administrative action; second, to preserve constitutionally guaranteed fundamental rights; and third, to decide on matters of legislative competence between the center and states. When the constitutionality of a legislation is questioned, the court has to presume that the legislature knows and rightly understands its own people’s interests and its laws are tailored to resolve problems faced by people, and therefore, its discriminations are based on sufficient justifications.² In the matter of State of Madhya Pradesh v. Rakesh Kohli and Anr.³, the Apex Court coined certain guiding principles to be kept in mind while dealing with the legitimacy of taxation statutes, which are as follows:

1. The constitutionality of a legislation by the Parliament or a State Legislature is always to be presumed.

2. A Legislation cannot be struck down on the mere ground of it being arbitrary or irrational; its invalidity has to be backed by some constitutional infirmity.

3. Since the Parliament and State Legislatures are bound to take care of the needs of people, they represent and devise policies as per people’s requirements, the courts are not concerned to examine the wisdom or unwisdom of the law.

4. In the domain of taxation, legislators have more leeway with regards to classification of policies.

The Supreme Court has reiterated on multiple occasions that economic policies contain an element of trial and error, and that as long as the trial and error is genuine and with the greatest intentions, such policies cannot be challenged as arbitrary, capricious, or unlawful.⁴ The court cannot overturn a policy decision made by the government just because it believes that another policy option would have been fairer, better, more scientifically or logically sound. However, the court could intervene only if the policy legislated is patently arbitrary, discriminatory, or malicious.⁵

The legislature has greater freedom on issues of taxes and economic policies than on aspects of civil rights such as freedom of speech, religion, and so on. The legislature is granted considerable leeway in economic matters since they are complex, and no straitjacket formula is appropriate.⁶ From the precedents it can be well understood that the judicial authority to review the taxation policies is limited and remedy can be granted in either of two circumstances: if a legislation is enacted in contravention to legislative competence or if the rights of person enshrined under Part III of the Constitution are affected.⁷

IGST VIS-À-VIS ARTICLE 286

By joint reading of Section 13(8)(b) and Section 8(2) of the IGST Act, it can be reckoned that when an intermediary supplies a service to a person outside India, the tax on the same is covered under the ambit of intra-state supply by way of deeming fiction. It is prudent to examine the validity of such provisions vis-à-vis the constitution. The relevant provision in this aspect is Article 286, which is reproduced below:

“286. (1) No law of a State shall impose, or authorise the imposition of, a tax on the supply of goods or of services or both, where such supply takes place—

1. outside the State; or

2. in the course of the import of the goods or services or both into, or export of the goods or services or both out of, the territory of India.

(2) Parliament may by law formulate principles for determining when a supply of goods or of services or both in any of the ways mentioned in clause (1).”⁸

Article 286 in its clause (1) explicitly prohibits states from imposing or authorizing the imposition of tax when (a) inter-state supply takes place, and when (b) supply in the course of import or export takes place. In clause (2), the constitution empowers the Parliament to decide principles for determining the time or event as to when inter-state supply or supply in the course of import or export takes place. After reading the above-mentioned articles harmoniously, there is no shadow of a doubt that the constitution intended Parliament to legislate on laws on interstate supply and states to legislate on intrastate supply only.

The scheme of GST is of a consumption-based tax as opposed to origin-based tax.⁹ The fundamental objective of the IGST Act is to make provisions for imposition and collection of tax on inter-state supply by the Central Government. It is evident that the State Legislatures cannot formulate laws for taxation on exports. However, a supply of services by an intermediary to a business outside India, which should be regarded as an export of services, has been deemed to be an intra-state supply through the IGST Act.

For intra-state transactions, State Goods and Services Tax Act, 2017 is applicable. This becomes problematic from the constitutional perspective because although the supplier is rendering his services outside India, the states get the authority to impose a tax on the services of the supplier and such taxation is prohibited.¹⁰ Therefore, the effect created by provisions of the IGST Act is contrary to Article 286(1) when by operation of IGST provision, states are empowered to tax export of supply. It is upon the legislature to rectify a situation that goes contrary to the cornerstone of the constitution.¹¹

PART II: FUNDAMENTAL RIGHTS OF INTERMEDIARY SERVICE PROVIDERS UNDER THE IGST ACT

GST is a consumption-based destination tax that is levied in the case of supply of goods and services where consumption of such supply takes place i.e., location of the recipient.¹² However, section 13(8)(b) allows a situation wherein the location of export of intermediary services is the location of the supplier instead of the recipient. Then, by virtue of Section 8(2) a cross-border supply is treated as a local supply. This treatment of intermediary services leads to extra-territorial operation of provisions of a central Act and this situation is prohibited in India.¹³

The present issue is regarding such operation of provisions that the export of services is deemed as local supply. The relevant provisions of the IGST Act are reproduced below:

“2(6) defines ‘export of services’ means a supply of any service where:

1. The supplier of service is located in India;

2. The recipient of service is located outside India;

3. iii. The place of supply of service is outside India;

4. Payment for such service has been received by the supplier of service in convertible foreign exchange; and

5. The supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8.

. . .

2(13) ‘intermediary’ means a broker, agent, or any other person who facilitates supply of goods or services between two or more persons and does not include a person who supplies goods or services by himself.”

Gujarat High Court considered the issue of in the case of Material Recycling Association of India v. Union of India and OR’s.,¹⁴ and held that because the third condition, i.e., the place of supply must be outside India, is not satisfied, intermediary services do not qualify as ‘export of services’. However, it is only in pursuance of section 13(8)(b) that intermediary services do not satisfy the condition. When a provision is challenged on the basis of it being discriminatory, its support should not be derived by presupposing that the position of discrimination is justified. In simple words, the justification for excluding certain services should not be based on an unreasonable provision. A service provider that renders services to foreign recipients would fall within the ambit of export of service, if it was not for section 13(8), as it meets the requisite criteria for it.

HISTORY OF TAXATION OF EXPORT OF INTERMEDIARY SERVICES

In the foregoing paragraphs, the history of export of services with reference to intermediary services has been discussed. The Finance Act, 1994 (“Finance Act”) was the first to impose a service tax, which took effect on July 1, 1994. The relevant service tax provisions were laid out in Chapter V of the FA. Section 64 (1) of the Finance Act stated that Chapter V would apply to all of India except Jammu and Kashmir and according to Section 64(3) service tax applied to taxable services on or after the commencement of the Act. Section 93(1) of the Finance Act empowered the central government to exempt a taxable service of any specified description from all or part of the service tax levied on it, either generally or subject to conditions. Section 93(2) allowed the central government to issue a special-order to exempt individuals from paying service tax in exceptional circumstances.

Pursuant to the same, the central government issued the Export of Services Rules 2005 (“ESR”) under sections 93 and 94(2)(f) of the Finance Act. As per rule 4 of ESR, any service that is taxable under section 65 of the Act, clause (105), may be exported without paying service tax. As per rule 3(2) of the ESR, the following are the conditions for any taxable service specified in Rule 3(1) to be treated as export of service, namely:

1. such a service must be provided and used outside of India; and

2. the service provider must receive payment in convertible foreign exchange for such services provided outside of India.

Out of these two conditions, the first condition was omitted after subsequent amendments in 2007 and 2010. Prior to 1 July 2012, the position with regards to the export of taxable service was that even if a portion of the service was performed outside India and the rest was performed in India, it would still be treated as having been performed outside India and thus be construed as an export of service. And all taxable services, if exported, were exempt from taxation. This position continued until July 1, 2012.

The Finance Act of 2012 made significant changes to Chapter V of the Finance Act, which took effect on July 1, 2012. The term ‘taxable service’ was defined in Section 65B (51) of the Finance Act to mean any service that is subject to service tax under the charging provision i.e., Section 66B. The resultant effect was that service tax was only levied on services provided or agreed to be provided in the ‘taxable territory,’ i.e., the entire country of India, excluding Jammu and Kashmir.¹⁵ In terms of section 66B, to be a taxable service, a service must be:

• Provided by a person to another

• In the taxable territory

• And must not form part of the negative list under section 66D.

As a result, services specified in the negative list and the service rendered outside of India’s taxable territory were not considered a ‘taxable service’ under the FA.

Subsequently, the Place of Provision of Services Rules, 2012 (“PoPS”) were brought, through a notification¹⁶ in terms of section 66C, to replace two operating rules of that time regarding cross-border transactions, namely: Export of Services, Rules, 2005 and the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006. PoPS outlined how to determine a taxing jurisdiction for services, since identifying the same in case of import and export of services was difficult at that time. The rationale behind this was to harmonize rules for determining the place of service with international practices to avoid double taxation or non-taxation. ¹⁷

It was common to tax services provided by businesses to other businesses based on the location of their customers, as well as services provided by businesses to consumers based on the location of the service provider. An amendment was brought in Service Tax Rules, 1994, which inserted rule 6A, defining “export of services”. The same is reproduced below: ¹⁸

“(1) The provision of any service provided or agreed to be provided shall be treated as export of service when, –

1. the provider of service is located in the taxable territory,

2. the recipient of service is located outside India,

3. the service is not a service specified in the section 66D of the Act,

4. the place of provision of the service is outside India,

5. the payment for such service has been received by the provider of service in convertible foreign exchange, and

6. the provider of service and recipient of service are not merely establishments of a distinct person in accordance with item (b) of Explanation 2 of clause (44) of section 65B of the Act.”

To determine place of provisions of service under sub-clause (d) of clause (1) of Rule 6A of PoPS rules had to be referred. Rule 3 provided place of provision generally to be location of recipient,¹⁹ and Rule 9 provided place of provision of specified services to be location of service provider.²⁰ Both of the rules are reproduced below:

“3. The place of provision of a service shall be the location of the recipient of service.

. . .

9. The place of provision of following services shall be the location of the service

provider: —

1. Services provided by a banking company, or a financial institution, or a nonbanking

2. financial company, to account holders;

3. Online information and database access or retrieval services;

4. Intermediary services;

5. Service consisting of hiring of all means of transport other than, —

   1. Aircrafts, and

   2. Vessels except yachts, up to a period of one month”

Intermediary services fell within the operation of Rule 9, due to which the place of provision for these services was the location of the service provider. Central Board of Indirect taxes and Customs issued a guidance note which provided the scope of intermediary services to be a person who arranges or facilitates a supply of goods, a provision of service, or both, between two people without any material alteration or additional processing.²¹ The guidance note further provided that, at any given time, an intermediary is involved in two supplies: the supply between the principal and the third party; and the supply of his own service (agency service) to his principal, for which a fee or commission is typically charged. An intermediary in the sale of goods (such as a commission agent, a buying or selling agent, or a stockbroker) was by definition excluded from this rule. A person who arranges or facilitates the provision of a service (referred to in the rules as “the main service”) but performs the main service on his own account was also exempted from this sub-rule.

The following factors were enumerated to determine whether a person is an intermediary, namely:²²

• Nature and value: Although the principal may authorise the intermediary to negotiate a different price, an intermediary cannot change the nature or value of the service he facilitates on behalf of his principal. Furthermore, the principal must be aware of the exact price at which the service is provided (or obtained) on his behalf, and any discounts obtained by the intermediary must be passed on to the principal.

• Separation of value: The value of an intermediary’s service must be distinguishable from the main supply of service that he is coordinating. It can be based on a percentage of the sale or purchase price that has been agreed upon. The amount charged by an agent to his principal is referred to as “commission” in most cases.

• Identity and title: Intermediary services provided on behalf of the principal are clearly identifiable from the main supply.

An amendment was brought to PoPS wherein the definition of intermediary was changed with effect from October, 2014, to include a broker or an agent with respect to supply goods.²³ Earlier, if an intermediary was engaged in supply of goods, the location of service was location of recipient, qualifying such supply as export of service when provided to a foreign recipient. The amended definition given in Rule 2 is reproduced below:

“(f) “intermediary” means a broker, an agent, or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the ‘main’ service) or a supply of goods, between two or more persons, but does not include a person who provides the main service or supplies the goods on his account”²⁴

Additionally, through an amendment, online information and database access or retrieval (“OIDAR”) services were excluded from Rule 9 of PoPS with effect from December, 2016.²⁵ OIDAR services are primarily delivered over the internet or an electronic network that relies on the internet or a similar network for delivery. Another important feature of these services is that they are fully automated and require very little human intervention. The effect of this amendment was that in case of supply of OIDAR services, the location of provision of services changed from location of supplier to location of recipient. It qualified supply of these services as export of services when provided to a foreign recipient. Thus, the position prior to this amendment was reversed, export of OIDAR services was exempted instead of their import.²⁶ This amendment was brought to provide a level playing field to suppliers of OIDAR services located in India and tax their import.²⁷

Representations were made to on similar provisions for intermediary services as well, to exclude them from Rule 9 and bring the position at par with global best practice.²⁸ However, the position after this amendment was continued in the GST regime as well. Section 13(8) is analogous to Rule 9 of the PoPS. Numerous representations have been made in the GST regime to give relief to suppliers of intermediary services so that they could efficiently participate in international trade. With this background, the next portion examines the IGST Act on the bedrock of all statutes – Article 14.

IGST ACT VIS-À-VIS ARTICLE 14

When it comes to an economic or financial legislation, the state is the vested with utmost flexibility. However, such laws must not be in violation of Article 14 of the Constitution, i.e., it must not violate the people’s right to equality, and if it does, it will be declared void up to the degree of such repugnancy under Article 13(2) of the Indian Constitution.²⁹ As a result, every law must satisfy the constitutionality test, which is nothing more than a sparkly term for the rationality test. It is a general understanding that anytime fiscal legislation is enacted with the aim of levying taxes on a certain product or exempting some other product from taxation, the creation of a classification is essential.³⁰

The Supreme Court in the case of East India Tobacco Co v. State of Andhra Pradesh³¹ held that it is incumbent on the person who challenges a law as discriminatory to prove that it is not based on a valid classification, and this burden is amplified when the law being challenged is a taxing statute. While the state has broad discretion in deciding which people or things to tax, and the statute would not be open to challenge merely because it taxes some people or things but not others, the statute must pass the constitutional test of Article 14. For a classification to be valid, it must not create a class of person or things to put them in a disadvantageous position than others. Article 14 states that all people who are subjected to legislation should be treated equally in the same circumstances and under the same conditions.

To pass the test of reasonable classification, a legislation must not be arbitrary. To prove reasonability of a legislation, two conditions must be met: ³²

(i) the classification done in the legislation must be based on an intelligible differentia that distinguishes those who are grouped together from those who are not, and

(ii) the differentia must have a rational relationship to the object that the statute is attempting to achieve. While classification can be based on a variety of factors, there must be a link between the basis of classification and the purpose of the Act under consideration.

The IGST Act discriminates certain services provided under section 13(8) of IGST Act from other services. The same is reproduced below:

“13(8) The place of supply of the following services shall be the location of the supplier of services, namely: –

(a) services supplied by a banking company, or a financial institution, or a non-banking financial company, to account holders;

(b) intermediary services;

(c) services consisting of hiring of means of transport, including yachts but excluding aircrafts and vessels, up to a period of one month.”³³

Intelligible Differentia

In the above-mentioned provision, apart from intermediary services, banking services and transport services are also kept out of the purview of export of services by designating location of services as location of supplier. The group of classes created therein is not based on an intelligible differentia because there is no reason provided to designate the location of these services in a manner different from the rest of the services. The absence of reason was first noted during the service tax regime and continued in the GST regime.

The mechanism to tax intermediary services provided to foreign enterprises is arbitrary, with reference to other similar services provided to foreign enterprises. The rationale behind taxing an intermediary for providing services to foreign enterprises is not specifically stated by the government, and the same was not a part of discussion in the parliamentary speeches or debates. There are several exemptions available for exports with the aim of increasing foreign reserves, however, no such exemption has been granted to the intermediary suppliers.

Relation of differentia with the object of the Act

For a classification to pass the test of Article 14, it must not be arbitrary but has to be rational, it means that the classification must be based on some qualities or characteristics that are shared by all those grouped together, but not by those who are excluded, and those qualities or characteristics must have a reasonable relationship to the legislative object.³⁴ In the present case there are no shared objective qualities provided by the government which the banking services, intermediary service and transport service share that distinguish them from the rest of the services.

Furthermore, the statement of objects and reasons accompanied by one hundred and twenty second bill carves out the scope of entire IGST Act, which is to levy GST on inter-state transactions.³⁵ The preamble to the IGST Act is given below:

“An Act to make a provision for levy and collection of tax on inter-State supply of goods or services or both by the Central Government and for matters connected therewith or incidental thereto.”³⁶

It is clear that the legislation was enacted to tax inter-state supply of goods and services. The classification of the specified services under section 13(8) artificially creates an opportunity to tax the export of those services. Even if the same is permissible, it is not related to the object of the act in any way. The rationale for treating export of intermediary services differently from export of other services has not been specified by the Parliament. It has been merely stated that the concept of ‘intermediary’ was borrowed from the Service Tax Regime into the GST, but no reasoning for such a contrasting treatment of intermediary has been given. Thus, differentia created is not intelligible and must be viewed as arbitrary.

CLASS DISCRIMINATION WITHIN INTERMEDIARY SERVICES

Article 14 clearly prohibits class legislation, but it does not prohibit reasonable classification. The implication is that the classification must be reasonable i.e., the differentia, that separates those who are grouped together from those who are not, must have relationship with the object of the legislation.³⁷ To pass the Article 14 criteria of reasonable classification, the classification must not be “arbitrary, artificial, or evasive,” but must be founded on some actual and substantial distinction that has a just and reasonable relationship to the legislative intent and object.³⁸

The aim of this part is to highlight unequal treatment of services under the IGST Act within the class of intermediary services, otherwise known as class discrimination, which is prohibited by virtue of Article 14. There is differential treatment in violation Article 14 of the Constitution because some intermediary services have been kept beyond the operation of section 13(8) and thereby do not invoke 8(2) and classify as export of services. This framework creates a discriminatory advantage for some service providers who export their services, such as suppliers of research and development in the pharmaceuticals sector³⁹, Marketing agents,⁴⁰ management consultants and advisors,⁴¹ from other service providers. This discriminatory advantage has been provided without proper reasoning and does not have a reasonable relationship with the object of the IGST Act.

Supply of these services is also intermediary because they are involved with two supplies simultaneously, one between principal and third party, and the other between himself and the principal, for which a fee or commission is charged.⁴² However, they are exempted from the tax net when they are exported to a foreign recipient. This creates a dichotomy because although taxing some intermediary services are provided, taxing other services are prohibited and this class discrimination that does not align with the object of the Act is in violation of Article 14 of the Constitution.⁴³

It is imperative to refer to the 139th Parliamentary Committee Report with regard to place of supply of services wherein it was recommended to rectify this error, but the same was not given effect to. The Parliamentary Committee Report precisely pointed out that the mechanism to charge taxation on intermediary services is erroneous. It was further stated in the report that the Government needs to use the power given under Section 6(1) to exempt the intermediary services provided to a foreign enterprise from tax and consider them as export of services.

PART III: EXTRA-TERRITORIAL OPERATION

The relevant constitutional provision to analyze the extra-territoriality aspect is Article 245, which is reproduced below:

“245. Extent of laws made by Parliament and by the Legislatures of States. —

(1) Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the Legislature of a State may make laws for the whole or any part of the State.

(2) No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.”⁴⁴

Due to the phrase “Subject to provisions of this Constitution” in Article 245(1), the legislative powers of the Parliament are limited in two ways: i) legislative competence; and (ii) law must be subject to provisions of the Constitution and not hinder the rights conferred by Part III.⁴⁵ Clause (2) prima facie seems restrictive in its approach to state that Parliament has no bounds when it comes to legislating extra-territorial laws. However, the Supreme Court has construed the scope of sub-clause (2) in the case of GVK Industries Limited v. ITO,⁴⁶ wherein it has been ruled that a law cannot have extra-territorial operation unless the taxing event has some reasonable nexus with India.⁴⁷ The IGST Act levies intrastate tax on export of services and this extra-territorial operation is prohibited in India unless there is some reasonable nexus of export of the intermediary services with India. The element of reasonable nexus is the deciding factor in establishing validity of the taxing statute.

Sub-clause (8) of section 13 contains three classes of services: banking services, intermediary services and transport services. It is proposed that intermediary services are different from the other two services enumerated. This is because when intermediary services are rendered to foreign recipients, there is no reasonable nexus with India. Thus, while the other two kinds of service may have a reasonable nexus, keeping intermediary services in the same pool leads to unjustified extra-territorial operation.

To understand this preposition better, banking services (or services of financial institutions or services of non-banking financial institutions), are rendered to its account holders. Thus, even if the recipient is located outside India, a nexus is created with India by virtue of recipient’s choice of opening an account in India. A bank is different from a private transaction because it is regulated by Reserve Bank of India and has direct relationship with the stability in the economy. Whenever banks render services to account holders, bank charges service fee irrespective of their resident status. It is the Indian bank which derives benefit from operation of account by non-resident. Thus, the act of opening an account in an Indian bank creates the requisite reasonable nexus.

With respect to transport services, it must be kept in mind that these services are associated with some movable property only. The idea of transporting a service is inconceivable. Goods that are transported within India on behalf of foreign recipients will have to be physically present within the taxable territory to constitute a reasonable nexus. Although transport services may be rendered to a foreign recipient, they are consumed or utilized within India. So, when transport services are included in this list, they are meant to be taxed by virtue of the nature of their consumption.

Regarding intermediary services, there is no reasonable nexus with India because services are not rendered physically in India and the benefit is accrued to foreign recipients only. For instance, in a case where advertising services are provided to a foreign recipient, the services are received outside India because the benefit is accrued to the foreign recipient. It is immaterial that such services are rendered with respect to the Indian consumer base because the reasonable nexus must be associated with the location where the services are consumed. If the Indian framework permitted origin-based tax, these services might have had a reasonable nexus with India as the services are originating from here, but this is not the case. The flow of supply chain is of vital importance here because it determines from where services begin and where they terminate.

It is crucial to point out that intermediary services which are exported to foreign recipient with respect to consumer base located outside India are treated as export of services.⁴⁸ However, in cases where services are rendered with respect to the consumer base in India, the treatment changes and supply ceases to be an export of services, triggering the deeming fiction. To simplify, let’s assume an Indian supplier exports services to an American recipient. This is the first supply. From here on a subsequent supply takes place having two possibilities of supply chain: The American recipient of services can direct his supply to customers located either in India or outside India. When the subsequent supply is made to customers located outside India, the first supply is treated as export of services. In contrast, when the American supplier directs his supply to customers located in India, the first supply is treated as an intrastate supply.

This change in treatment is unwarranted because the location of the customers is immaterial. The beneficiary of supply of services is the foreign recipient and not the Indian customers. It is not the case for continuous supply of services because there is a break in the supply chain when these services are exported to the foreign recipient. The intermediary services when rendered to a recipient located outside India come to an end then and there. The subsequent supply from thereon begins with the supply of goods from the foreign supplier and ends with the Indian customer receiving those goods in India. Thus, this discrepancy with respect to location of the consumer base should be resolved and supply of intermediary services to the foreign recipient should be regarded as export of services, irrespective of where the goods or services of main supply are received.

PART IV: CONSTRUING THE BEST PRACTICES

The scheme of the IGST Act is to tax supply in the course of inter-state trade and imports. Exports are excluded from the purview of the GST scheme to encourage Indian suppliers to participate in international trade. The statement of Objects and Reasons accompanying the GST bill emphasized that through this framework, there would be seamless transfer of input tax credit from one stage to another in the supply chain.⁴⁹ Export of services are charged on a reverse charge mechanism and considered zero-rated supply, meaning that although it is incumbent upon the supplier of services to pay GST, the government refunds the amount paid by such supplier.⁵⁰ In addition, the supplier can claim input tax credit even if the supply is exempted.

This is done to ensure that goods produced in India for export are not disadvantaged by domestic tax burden and remain competitive internationally.⁵¹ This is a form of incentive provided to the supplier of services to engage in exports and, in the long run, this mechanism invites persons from other jurisdictions to participate in business with India which in turn results in an increase in exports. However, in cases where a supplier provides intermediary services to a foreign recipient, the supplier cannot claim input tax credit on the taxes paid because these services are not treated as export of services, regardless that both of these services are of the same nature. The intermediary service providers struggle financially because they are deprived of the crucial benefits which are generally available to exports’ suppliers.

TREATMENT OF EXPORT OF SERVICES GLOBALLY

The prevalent scheme of GST worldwide (or otherwise known as ‘VAT’ in some jurisdictions) is identical.⁵² In the European Union, VAT liability is exempted in the case of exports of goods or services.⁵³ Moreover, supply of intermediary services is specifically excluded from the purview of VAT liability.⁵⁴ Similarly, in the United States, VAT liability is imposed based on where the services are rendered or the benefit is accrued, meaning that exported services are not subject to sales tax.⁵⁵ Imports are taxed because the goods are consumed within the taxable territory, but exports are tax-free. The rationale for referring to global practice is to highlight that supply going outside taxable territory is not taxed because the importing country will levy tax on such supply.

In the present Indian GST framework, if a supplier exports his intermediary services to non-resident recipients, the services will be liable for GST in the importing country as well in India. The policy of Indian government has been to avoid double-taxation. Levying domestic tax on cross-border supply, which will not go untaxed otherwise, will be against the public policy of India. This mechanism levies unwarranted tax that leads to double-taxation. Hence, even though a service falls within the category of intermediary services, it should be considered as export because the supply is still export of intermediary services and as per the long-standing policy of Government of India, it is prudent for the government to not tax export duty on such supply.

SCOPE OF INTERMEDIARY SERVICES

The Central Board of Indirect Taxes and Customs (“the department”) issued a circular in July 2019 to try and clarify the scope of intermediary services, regarding IT Enabled Services providers by providing its different models and categorizing when they will be considered intermediary services.⁵⁶ This was subsequently withdrawn ab initio by the department after receiving numerous representations expressing concerns about the circular’s implications. Thereafter, the department recently issued a clarificatory notification on the scope of intermediary services.⁵⁷ Sine qua non for an intermediary service as per that notification is given below:

• Minimum of three parties: An intermediary is a person who arranges or facilitates the supply of goods, services, or securities between two or more people. As a result, the arrangement necessitates a minimum of three parties, two of whom transact in the supply of goods, services, or securities (the main supply), and one who arranges or facilitates the said main supply (the ancillary supply). As a result, an activity involving only two parties cannot be classified as an intermediary service. An intermediary is a person who “arranges or facilitates” another supply (the “main supply”) between two or more other people, but does not provide the main supply himself.

• Two distinct supplies: There must be two supplies, namely: Main supply between two principals, and ancillary supply, which is the service of facilitating supply between two principals. The latter must be clearly identifiable and will be considered intermediary services.

In the notification there are certain exclusions provided to these requirements as well. For a person to not be included in the ambit of intermediary services, he:

• must not be engaged in supply of goods or services or both or securities on his own account

• must not be a sub-contractor engaged in the main supply.

Thus, the legislature intended that a third party who is supplying certain services to the foreign recipient on a principal-to-principal basis will not be considered to provide intermediary services.⁵⁸ The notification mentions certain illustrations where supply of certain services will not be considered intermediary services, such as outsourcing of the main supply. On the other hand, services of arranging outsourcing of supply or identifying client base (brokering) for the main supply will be considered intermediary services.

The definition of intermediary services provided in the IGST Act states that:

“Intermediary means a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities between two or more person…”⁵⁹

The phrase “any other person by whatever name called” is somewhat problematic because it widens the scope of intermediary services to cover every business that performs a supporting role which may or may not have a reasonable nexus with India. The circular provides that the definition is not inclusive and that an intermediary service provider must have the character of either an agent or a broker to fall within the ambit of this definition. However, the general practice so far has not been in consonance with this practice because all businesses engaged in export of services that are supporting roles are made liable to pay taxes in India.

By definition, the intention of the legislature is not to tax all suppliers of services who facilitate main supply. The objective is to tax those suppliers who are acting as agents or brokers. Thus, there must be some definitive tests or factors that should be taken into consideration while determining which supplies will qualify as intermediary services. Such factors may include:

1. Whether the main supplier exercises a degree of control over the activity of an ancillary supplier: A supplier of ancillary services will be considered to be an agent if he carries on business of the main supplier in India. It is a natural corollary that the main supplier exercises control over the operations of ancillary suppliers, similar to a principal-agent relationship. There is a certain degree of exclusivity involved therein. For instance, if A, a foreign supplier of services engages B, an Indian service provider for rendering services exclusively to A, B will be considered as supplier of intermediary service and the supply must not be considered as export of services.

2. Whether ancillary supplier renders services in India on behalf of main supplier: For this, the actual amount of work undertaken by the agent as compared to the main supplier will be irrelevant. For instance, if A, a foreign supplier of main services engages B, an Indian service provider, for only identifying specific client base on behalf of A and then concludes the contract with the client itself, then B will be considered to provide intermediary service. On the contrary, if A engages B for advertising A’s product in India generally, as a result of which, a client base is constituted which directly initiates contract with A, B is not providing intermediary services.

III. Nature of ancillary services provided: If the nature of service is such that the ancillary service provider who was engaged in the beginning of supply continues to have prolonged engagement with the consumer beyond the initial supply as part of the agent services provided to the foreign recipient, the service provider will be considered intermediary service provider. For instance, if A, a foreign supplier of machinery or equipment, engages B, Indian service provider, to advertise product of A in India and to communicate documentary requirements to the client and after verification, forward the said verified documents to A. Additionally, B is also entrusted to install the machinery or equipment in client’s premises after finalizing the contract and to handle customer care services as well. Here, after the initial supporting role, B is providing services to A until the contract is agreed upon, and even after such agreement, continues to provide his services to A. B will be considered a supplier of intermediary services.

The circular provides clarity to some extent, but at the same time, there is still room for ambiguity in the interpretation of intermediary services. It is incumbent upon the courts to implement the statute but the ambiguity leaves space for judicial discretion. And when it comes to taxing statutes, judicial discretion is bound to favour the statute to a great extent to uphold the present framework. It is necessary for the legislature to remove the unreasonableness to ensure efficient mechanism of levying the tax. It is imperative that certain definitive guidelines are formulated for this provision so that some clarity is provided to the courts as well as to the suppliers.

PART V: CONCLUDING REMARKS

CLASSIFICATION OF SUPPLY – SECTION 8(2) OR SECTION 7(5)?

In accordance with Section 13(8)(b), it is specifically stated that the place of supply of services provided by an intermediary to an overseas customer is to be taken as the location of the supplier of services, which is the location of that intermediary. This is where section 8(2) is invoked to create the controversial deeming fiction. This portion analyzes whether the supply could be classified under section 7(5)(c) instead of section 8(2). Relevant provisions are reproduced below:

“7. Inter-State supply

(5) Supply of goods or services or both, ––

(a) when the supplier is located in India and the place of supply is outside India;

(b) to or by a Special Economic Zone developer or a Special Economic Zone unit; or

(c) in the taxable territory, not being an intra-State supply and not covered elsewhere in this section,

shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce

. . .

8. Intra-State supply

(2) Subject to the provisions of section 12, supply of services where the location of the supplier and the place of supply of services are in the same State or same Union territory shall be treated as intra-State supply:

Provided that the intra-State supply of services shall not include supply of services to or by a Special Economic Zone developer or a Special Economic Zone unit.”

On the one hand, section 8(2) states that in cases where the location of supplier and the place of supply are in the same state then such a supply would be treated as intrastate supply. On the other hand, section 7(5)(c) of the IGST Act covers all other supplies within India. Section 8(2) of the IGST Act becomes applicable for transactions through Section 13(8)(b), which covers the gamut of supply within a state by intermediary and it specifically designates the location of supplier as the place of supply of such services.

The intermediary services rendered by an Indian service provider to a foreign recipient would be ascertained as intra-state supply, as the place of supply of service is location of supplier. Seemingly, it can be argued that such a transaction shall be classifiable under Section 7(5)(c) as it has a wide ambit covering all kinds of supply of services except intra-State supply. Section 13(8)(b) explicitly states that the place of supply for intermediary services shall be the location of the supplier of services and that by virtue of such allocation, the place of supply and location of services will always be the same. Thus, the supply will be treated as intra-state supply. This framework leaves no confusion for the application of Section 8(2).

CONSTITUTIONAL, LEGAL AND COMMERCIAL VIABILITY OF THE PRESENT FRAMEWORK

The current framework creates class discrimination without a rationale nexus and thus, creates an arbitrary taxing mechanism for intermediary services. The adoption of mechanisms of service tax regime without molding them as per the current principles on which GST is based has led to the controversy of this paper. The argument on which the government pleaders have relentlessly relied upon is the 2014 PoPS rules that permitted taxing the export of intermediary services. However, that framework was different and the country underwent major tax reform in 2017 when GST was introduced. The previous service tax regime had flaws that hampered the efficient application of taxation that caused unnecessary hardships to taxpayers. GST was brought in to tackle those challenges and thus, the rationale of the previous regime cannot be carried forward to this regime as it is. Due to this borrowing, the unnecessary controversy with respect to intermediary services has also been carried forward in the GST regime as well.

The overall scheme leads to a consequence which is commercially not viable for exporters of intermediary services. Once services are rendered, those services are taxed in two jurisdictions, in India as well as the jurisdiction where services are exported. Additionally, intermediary services are not big conglomerates with huge profit margins. They are small and medium enterprises who earn a small commission by giving their services abroad. If they continue to pay 18% GST on those earnings, their operation no longer remains financially viable. This discourages intermediary service providers from engaging in international trade and may drive some enterprises to terminate functioning in domestic markets as well.

In addition, continuing with the present framework will impact India’s gross value added as well, 54% of which was contributed by services sector in financial year 2021.⁶⁰ According to the RBI, India’s service exports stood at US$ 19.72 billion in June 2021, while imports stood at US$ 11.14 billion.⁶¹ During 2000-2021, India attracted a total of US$ 87.06 billion in foreign direct investment (FDI) and the services sector ranked first in terms of FDI inflows. This data highlights that potential of growth in the service sector despite the levy of domestic tax. This sector has the scope to flourish further after this controversy is resolved. The revenue that the government will be foregoing could be easily retrieved if it will make more sense for domestic service providers to engage with foreign recipients. As a result of this engagement, imports will increase as well.

Thus, the ideal solution would be to remove section 13(8)(b) of the IGST Act and prevent designating place of supply as location of the supplier in case of export of intermediary services. This will mean that place of supply will be location of recipient and thus, would be out of the purview of tax net in India. Alternatively, it is proposed that an amendment could be made to replace intermediary services in 13(8) (b) with “services in nature of an agent or broker” for the sake of clarity.

BIBLIOGRAPHY

Cases:

• A K Gopalan v. State of Madras, 1950 SCR 88.

• All India Federation of Tax Practitioners v. Union of India, (2007) (7) STR 625.

• Anant Mills Co Ltd v. State of Gujarat & Ors, (1975) 2 SCC 175.

• Arun Kumar Agrawal v. Union of India, (2013) 7 SCC 1.

• Central India Spinning and Weaving and Manufacturing Co Ltd v. Municipal Committee, Wardha, AIR 1958 SC 341.

• Dhampur Sugar (Kashipur) Ltd v. State of Uttaranchal, (2007) 8 SCC 418.

• Dharmendra M. Jani v. Union of India, (2021) SCC OnLine Bom 839.

• GoDaddy India Web Services Pvt Ltd v. Commissioner of Service Tax, (2016) 54 GST 681.

• GVK Industries Limited v. ITO, (2011) 332 ITR 130.

• Income Tax Officer v. M K Mohammed Kunhi, (1969) 2 SCR 65.

• Kerala Hotel and Restaurant Association and Ors v. State of Kerala and Ors, (1990) 2 SCC 502.

• K K Kochuni v. State of Madras, AIR 1960 SC 1080

• Material Recycling Association of India v. Union of India and Ors (2020) 79 GSTR 232

• M H Quareshi v. State of Bihar, (1959) 1 SCR 629.

• R K Garg and Ors v. Union of India (UOI) and Ors, (1981) 4 SCC 675.

• Sondur Gopal v. Sondur Rajini, AIR 2013 SC 2678.

• State of Madhya Pradesh v. Rakesh Kohli & Anr, (2012) 6 SCC 312.

• State of Travancore, Cochin v. Bombay Co Ltd, AIR 1952 SC 366.

• Union of India v. Exide Industries Ltd, (2020) 425 ITR (SC) 1.

• Union of India v. VKC Footsteps India Pvt Ltd, 2021 SC OnLine 706.

Online Material:

• Pre-budget Memorandum 2017, available at https://idtc-icai.s3.amazonaws.com/download/preBudget-Memorandum-2017-IndTaxes.pdf

• Taxation of Services: An Education Guide, available at https://www.cbic.gov.in/resources//htdocs-servicetax/EducationGuide.pdf;jsessionid=FA9A99938B2A6FE98E20B1079D130402

• Services Sector in India, available at https://www.ibef.org/industry/services.aspx

• United States – Indirect Tax Guide, available at https://home.kpmg/xx/en/home/insights/2018/10/united-states-indirect-tax-guide.html

• Council Directive 2006/112/EC on the common system of value added tax, available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32006L0112&from=EN

Websites:

• www.cbic.gov.in

• www.indiabudget.gov.in

• www.ibef.org/

• home.kpmg

• pib.gov.in

• www.revenue.ie

• eur-lex.europa.eu

• www.scconline.com

• www.taxmann.com

• www.manupatrafast.com

(Source: Runner up of Padma Vibhushan Nani A. Palkhivala Memorial National Research Paper Competition 2021 published in souvenir of Padma Vibhushan Nani A. Palkhivala Memorial (Virtual) National Moot Court Competition 2021)

 

1. Dharmendra M. Jani v. Union of India (2021) SCC OnLine Bom 839

2. M H Quareshi v. State of Bihar (1959) 1 SCR 629

3. State of Madhya Pradesh v. Rakesh Kohli & Anr (2012) 6 SCC 312

4. Arun Kumar Agrawal v. Union of India (2013) 7 SCC 1

5. Dhampur Sugar (Kashipur) Ltd v. State of Uttaranchal (2007) 8 SCC 418

6. R K Garg and Ors v. Union of India (UOI) and Ors (1981) 4 SCC 675

7. Union of India v. Exide Industries Ltd (2020) 425 ITR (SC) 1

8. The Constitution of India 1950, Article 286.

9. ‘Goods and Service Tax (GST) Concept & Status’ (Central Board of Indirect Taxes and Customs, 1 February 2019) Pg 12 <https://www.cbic.gov.in/resources/htdocs-cbec/gst/01022019-%20GST-Concept%20and%20Status.pdf> accessed 20 October 2021

10. GVK Industries Limited v. ITO (2011) 332 ITR 130; Central India Spinning and Weaving and Manufacturing Co Ltd v. Municipal Committee, Wardha AIR 1958 SC 341; State of Travancore, Cochin v. Bombay Co Ltd AIR 1952 SC 366

11. Income Tax Officer v M K Mohammed Kunhi (1969) 2 SCR 65

12. ‘Circular 90/09/2019-GST’ (Central Board of Indirect Taxes and Customs, 18 February 2019) https://www.cbic.gov.in/resources//htdocs-cbec/gst/circular-cgst-90.pdf;jsessionid=7D2467955A3E03067727C9DEF5B6CE7E accessed 20 October 2021

13. All India Federation of Tax Practitioners v. Union of India (2007) (7) STR 625

14. Material Recycling Association of India v. Union of India and Ors (2020) 79 GSTR 232

15. The Finance Act 2012, combined reading of § 66B, § 64(1), and § 65B (52).

16. ‘Notification No. 28/2012’ (Central Board of Indirect Taxes and Customs, 20 June 2012)
    <https://www.cbic.gov.in/resources//htdocs-servicetax/strules-place-of-provsn.pdf;jsessionid=49590A61A53ED791B4F07A0A09B3D4FE> accessed 20 October 2021

17. ‘Taxation of Services: An Education Guide’ (Central Board of Indirect Taxes and Customs, 20 June 2012) Pg 51 <https://www.cbic.gov.in/resources//htdocs-servicetax/EducationGuide.pdf;jsessionid=FA9A99938B2A6FE98E20B1079D130402> accessed 20 October 2021

18. ‘Notification No. 36/2012-ST’ (Central Board of Indirect Taxes and Customs, 20 June 2012) <https://www.cbic.gov.in/htdocs-servicetax/st-notifications/st-notifications-2012/st36-2012>

19. Place of Provision of Services Rules 2012, Rule 3.

20. Place of Provision of Services Rules 2012, Rule 9.

21. ‘Taxation of Services: An Education Guide’ (Central Board of Indirect Taxes and Customs, 20 June 2012) Pg 67 <https://www.cbic.gov.in/resources//htdocs-servicetax/EducationGuide.pdf;jsessionid=FA9A99938B2A6FE98E20B1079D130402> accessed 20 October 2021

22. Ibid.

23. ‘Notification No. 14/2014 – Service Tax’(Ministry of Finance (Department of Revenue), 11 July 2014) <https://www.indiabudget.gov.in/budget2014-2015/ub2014-15/cen/142014ST.pdf>

24. Place of Provision of Services Rules 2012, Rule 2.

25. ‘Notification No 46/2016-Service Tax’ (Central Board of Indirect Taxes and Customs, 09 November 2016) <https://www.cbic.gov.in/resources//htdocs-servicetax/st-notifications/st-notifications-2016/st46-2016.pdf;jsessionid=C521FE5D0EFB96805E52B6AAE0082A4B>

26. ‘Press Release’ (Central Board of Indirect Taxes and Customs) <https://www.cbic.gov.in/resources//htdocs-cbec/press-release/cbec-press-release-11-11-16.pdf;jsessionid=66848EBF7E5B4322B44DB434906A1910> accessed 20 October 2021

27. Ibid.

28. ‘Pre-budget Memorandum 2017’ (The Institute of Chartered Accountants of India) Pg 38 <https://idtc-icai.s3.amazonaws.com/download/preBudget-Memorandum-2017-IndTaxes.pdf> accessed 20 October 2021

29. Kerala Hotel and Restaurant Association and Ors v. State of Kerala and Ors (1990) 2 SCC 502

30. Ibid.

31. East India Tobacco Co v. State of Andhra Pradesh (1962) AIR 1733

32. Motor General Traders v. State of Andhra Pradesh (1984) 1 SCC 222

33. The Integrated Goods and Services Tax Act 2017, § 13(8).

34. R K Garg v Union of India (1981) 4 SCC 675

35. ‘The Constitution (One Hundred and Twenty-seventh Amendment) bill, 2014’ (Central Board of Indirect Taxes and Customs) <https://www.cbic.gov.in/resources//htdocs-cbec/gst/consti-amend-bill-122-2014-new.pdf;jsessionid=466BDBD15560E9FD065FF7CE99716184> accessed 20 October 2021

36. The Integrated Goods and Services Tax Act 2017, Preamble.

37. Anant Mills Co Ltd v. State of Gujarat & Ors (1975) 2 SCC 175

38. R K Garg v. Union of India (1981) 4 SCC 675

39. Ministry of Finance, Notification No. 04/2019- I.T. (Central Board of Indirect Taxes and Customs, 20 June 2012) (Issued on September 30, 2019) <https://www.cbic.gov.in/resources//htdocs-cbec/gst/notfctn-4-2019-igst-english.pdf;jsessionid=6090858CC7B0271C6998FB3109985FA5> accessed 20 October 2021

40. ‘Notification No. 53/98-S.T. 70’ (Central Board of Indirect Taxes and Customs, 16 October 1998) <https://www.cbic.gov.in/resources//htdocs-servicetax/st-profiles/mkt-research.pdf;jsessionid=736E3CEFCDD276A4ED7C33CB66A931D2> accessed 20 October 2021

41. ‘Notification No. 53/98-S.T. 66’ (Central Board of Indirect Taxes and Customs, 16 October 1998) <https://www.cbic.gov.in/resources//htdocs-servicetax/st-profiles/mgmt-busconsultnt.pdf> accessed 20 October 2021

42. ‘Taxation of Services: An Education Guide’ (Central Board of Indirect Taxes and Customs, 20 June 2012) <https://www.cbic.gov.in/resources//htdocs-servicetax/EducationGuide.pdf;jsessionid=FA9A99938B2A6FE98E20B1079D130402> accessed 20 October 2021

43. R K Garg v. Union of India (1981) 4 SCC 675

44. The Constitution of India 1950, Article 245.

45. A K Gopalan v. State of Madras 1950 SCR 88

46. GVK Industries Limited v. ITO (2013) 7 SCC 426

47. Sondur Gopal v. Sondur Rajini AIR 2013 SC 2678; K K Kochuni v. State of Madras AIR 1960 SC 1080

48. ‘Notification No. 20 /2019- Integrated Tax (Rate)’ (Central Board of Indirect Taxes and Customs, 30 September 2019) <https://cbic-gst.gov.in/pdf/integrated-tax-rate/notfctn-20-2019-igst-rate-english.pdf> accessed 20 October 2021

49. Union of India v. VKC Footsteps India Pvt Ltd 2021 SC OnLine 706

50. The Integrated Goods and Services Tax Act 2017, § 16.

51. ‘Tax Exemptions to Indian Exporters’ (Press Information Bureau, 20 November 2019) <https://pib.gov.in/Pressreleaseshare.aspx?PRID=1592380> accessed 20 October 2021

52. ‘Exports’ (Revenue Irish Tax and Customs) <https://www.revenue.ie/en/vat/goods-and-services-to-and-from-abroad/vat-and-exports/index.aspx> accessed 20 October 2021

53. ‘Council Directive 2006/112/EC on the common system of value added tax’ (Official Journal of the European Union, 11 December 2006) <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32006L0112&from=EN> accessed 20 October 2021

54. Ibid, Article 153.

55. ‘United States – Indirect Tax Guide’ (KMPG) <https://home.kpmg/xx/en/home/insights/2018/10/united-states-indirect-tax-guide.html> accessed 20 October 2021

56. ‘Circular 107/26/2019-GST’ (Central Board of Indirect Taxes and Customs, 20 18 July 2019) (Issued on July 18, 2019). <https://cbic-gst.gov.in/pdf/circular-cgst-107.pdf> accessed 20 October 2021

57. ‘Circular No. 159/15/2021-GST’ (Central Board of Indirect Taxes and Customs, 20 September 2021) <https://www.cbic.gov.in/resources//htdocs-cbec/gst/Circular%20No.%20159_14_2021_GST.pdf> accessed 20 October 2021

58. GoDaddy India Web Services Pvt Ltd v. Commissioner of Service Tax (2016) 54 GST 681

59. ‘Circular No 159/15/2021-GST’ (Central Board of Indirect Taxes and Customs, 20 September 2021) <https://www.cbic.gov.in/resources//htdocs-cbec/gst/Circular%20No.%20159_14_2021_GST.pdf> accessed 20 October 2021

60. ‘Services Sector in India’ (India Brand Equity Foundation, 12 October 2021) <https://www.ibef.org/industry/services.aspx> accessed 20 October 2021

61. Ibid.

Introduction:

Authority and power to conduct search and seizure operations is strident and caustic power authorized by law to be taken recourse to when the conditions mentioned under different clauses of Section 132 (1) of the Act are satisfied.

The jurisdictional facts that have to be established before a search under Section 132 (1) of the Act can be authorised are that (i) the authority issuing the authorisation is in possession of some credible information, other than surmises and conjectures (ii) that the authority has reason to believe that the conditions stipulated in clauses (a), (b) and (c) of Section 132 (1) qua the person searched exist; and (iii) the said information has nexus to such belief.

The law is well settled that a warrant of search and seizure under Section 132(1) can only be issued on the basis of some material or information on which the Commissioner/Director has reason to believe that any person is in possession of money, jewellery or other valuable articles representing wholly or partly income or property which has not been or would not be disclosed, under the IT Act. The satisfaction of the authorities under Section 132 must be on the basis of relevant material or information. The word used in Section 132(1) are “reason to believe” and not “reason to suspect”.

Search and seizure provisions in the Income Tax Act, 1961 were introduced by Finance Act, 1964 and have undergone a number of amendments including substantial amendments made by the Taxation Laws (Amendment) Act, 1975 and Direct Tax Laws (Amendment) Act, 1987. Sections 132(1) and 132(1A) of the Act as they exist read as under:—

“132. (1) Where the Principal Director General or Director General or Principal Director or Director or the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner or Additional Director or Additional Commissioner or Joint Director or Joint Commissioner in consequence of information in his possession, has reason to believe that—

1. any person to whom a summons under sub-section (1) of section 37 of the Indian Income-tax Act, 1922 (11 of 1922), or under sub-section (1) of section 131 of this Act, or a notice under sub-section (4) of section 22 of the Indian Income-tax Act, 1922, or under sub-section (1) of section 142 of this Act was issued to produce, or cause to be produced, any books of account or other documents has omitted or failed to produce, or cause to be produced, such books of account or other documents as required by such summons or notice, or

2. any person to whom a summons or notice as aforesaid has been or might be issued will not, or would not, produce or cause to be produced, any books of account or other documents which will be useful for, or relevant to, any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act, or

3. any person is in possession of any money, bullion, jewellery or other valuable article or thing and such money, bullion, jewellery or other valuable article or thing represents either wholly or partly income or property which has not been, or would not be, disclosed for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or this Act (hereinafter in this section referred to as the undisclosed income or property),

then,—

(A) the Principal Director General or Director General or Principal Director or Director or the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, as the case may be, may authorise any Additional Director or Additional Commissioner or Joint Director, Joint Commissioner, Assistant Director or Deputy Director, Assistant Commissioner or Deputy Commissioner or Income-tax Officer, or

(B) such Additional Director or Additional Commissioner or Joint Director, or Joint Commissioner, as the case may be, may authorise any Assistant Director or Deputy Director, Assistant Commissioner or Deputy Commissioner or Income- tax Officer, (the officer so authorised in all cases being hereinafter referred to as the authorised officer) to—

(i) enter and search any building, place, vessel, vehicle or aircraft where he has reason to suspect that such books of account, other documents, money, bullion, jewellery or other valuable article or thing are kept;

(ii) break open the lock of any door, box, locker, safe, almirah or other receptacle for exercising the powers conferred by clause (i) where the keys thereof are not available;

(iia) search any person who has got out of, or is about to get into, or is in, the building, place, vessel, vehicle or aircraft, if the authorised officer has reason to suspect that such person has secreted about his person any such books of account, other documents, money, bullion, jewellery or other valuable article or thing;

(iib) require any person who is found to be in possession or control of any books of account or other documents maintained in the form of electronic record as defined in clause (t) of sub-section (1) of section 2 of the Information Technology Act, 2000 (21 of 2000), to afford the authorised officer the necessary facility to inspect such books of account or other documents;

(iii) seize any such books of account, other documents, money, bullion, jewellery or other valuable article or thing found as a result of such search:

Provided that bullion, jewellery or other valuable article or thing, being stock-in-trade of the business, found as a result of such search shall not be seized but the authorised officer shall make a note or inventory of such stock-in-trade of the business;

(iv) place marks of identification on any books of account or other documents or make or cause to be made extracts or copies therefrom;

(v) make a note or an inventory of any such money, bullion, jewellery or other valuable article or thing :

Provided that where any building, place, vessel, vehicle or aircraft referred to in clause (i) is within the area of jurisdiction of any Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, but such Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner has no jurisdiction over the person referred to in clause (a) or clause (b) or clause (c), then, notwithstanding anything contained in section 120, it shall be competent for him to exercise the powers under this sub-section in all cases where he has reason to believe that any delay in getting the authorisation from the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner having jurisdiction over such person may be prejudicial to the interests of the revenue :

Provided further that where it is not possible or practicable to take physical possession of any valuable article or thing and remove it to a safe place due to its volume, weight or other physical characteristics or due to its being of a dangerous nature, the authorised officer may serve an order on the owner or the person who is in immediate possession or control thereof that he shall not remove, part with or otherwise deal with it, except with the previous permission of such authorised officer and such action of the authorised officer shall be deemed to be seizure of such valuable article or thing under clause (iii):

Provided also that nothing contained in the second proviso shall apply in case of any valuable article or thing, being stock-in-trade of the business:

Provided also that no authorisation shall be issued by the Additional Director or Additional Commissioner or Joint Director or Joint Commissioner on or after the 1st day of October, 2009 unless he has been empowered by the Board to do so.

[Explanation.—For the removal of doubts, it is hereby declared that the reason to believe, as recorded by the income-tax authority under this sub-section, shall not be disclosed to any person or any authority or the Appellate Tribunal.]

(1A) Where any Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, in consequence of information in his possession, has reason to suspect that any books of account, other documents, money, bullion, jewellery or other valuable article or thing in respect of which an officer has been authorised by the Principal Director General or Director General or Principal Director or Director or any other Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner or Additional Director or Additional Commissioner or Joint Director or Joint Commissioner to take action under clauses (i) to (v) of sub-section (1) are or is kept in any building, place, vessel, vehicle or aircraft not mentioned in the authorisation under sub-section (1), such Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may, notwithstanding anything contained in section 120, authorise the said officer to take action under any of the clauses aforesaid in respect of such building, place, vessel, vehicle or aircraft.

[Explanation.—For the removal of doubts, it is hereby declared that the reason to suspect, as recorded by the income-tax authority under this sub-section, shall not be disclosed to any person or any authority or the Appellate Tribunal.]”

The sum, substance and intention of the legislation is though for curbing the menace of black money is a pre-requisite for equity, good governance and the welfare of the state but at the same time search and seizure action cannot be a fishing expedition. Before search is authorized the Director must on the relevant material have reason to believe that the assessee has not or would not disclose his income. It is again reiterated that the in conjecture to the intention of the legislature the courts have held unanimously that the jurisdictional facts that have to be established before a search under Section 132 (1) of the Act can be authorised are that (i) the authority issuing the authorisation is in possession of some credible information, other than surmises and conjectures (ii) that the authority has reason to believe that the conditions stipulated in clauses (a), (b) and (c) of Section 132 (1) of the act qua the person searched exist; and (iii) the said information has nexus to such belief. The word used in Section 132(1) are “reason to believe” and not “reason to suspect”.

The aforesaid legal position, viz., on the statutory mandate to record “reasons to believe” and their nexus with the three pre-conditions in clauses (a), (b) and (c) to Section 132 was thereafter emphasized and elucidated by the Supreme Court in DGIT (Investigation) v. Spacewood Furnishers (P.) Ltd. [2015] 57 taxmann.com 292/232 Taxman 131/374 ITR 545 which also refers to an earlier decision of the Supreme Court in ITO v. Seth Bros. [1969] 74 ITR 836 and Partap Singh v. Director of Enforcement Foreign Exchange Regulation [1985] 22 Taxman 30/155 ITR 166 (SC). Spacewood Furnishers (P.) Ltd. (supra) has laid down the following principles:—

“8. The principles that can be deduced from the aforesaid decisions of this Court which continue to hold the field without any departure may be summarised as follows:

8.1. The authority must have information in its possession on the basis of which a reasonable belief can be founded that—

(a) the person concerned has omitted or failed to produce books of account or other documents for production of which summons or notice had been issued

Or

such person will not produce such books of account or other documents even if summons or notice is issued to him

Or

(b) such person is in possession of any money, bullion, jewellery or other valuable article which represents either wholly or partly income or property which has not been or would not be disclosed.

8.2. Such information must be in possession of the authorised official before the opinion is formed.

8.3. There must be application of mind to the material and the formation of opinion must be honest and bona fide. Consideration of any extraneous or irrelevant material will vitiate the belief/satisfaction.

8.4. Though Rule 112(2) of the Income Tax Rules which specifically prescribed the necessity of recording of reasons before issuing a warrant of authorisation had been repealed on and from 1-10-1975 the reasons for the belief found should be recorded.

8.5. The reasons, however, need not be communicated to the person against whom the warrant is issued at that stage.

8.6 Such reasons, however, may have to be placed before the Court in the event of a challenge to formation of the belief of the authorized official in which event the court (exercising jurisdiction under Article 226) would be entitled to examine the relevance of the reasons for the formation of the belief though not the sufficiency or adequacy thereof.”

Issue under consideration:-

A vital question arises at this juncture and is also matter of prolong litigation so far as to whether the reasons to believe can come into existence after issuance of warrant of authorization ?

To put it differently in a more lucid manner, can the reliance be put on by the department on the incriminating material/ undisclosed income found during the course of search if later on it is found by courts that the reasons to believe as recorded by the “Principal Director General or Director General or Principal Director or Director or the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner or Additional Director or Additional Commissioner or Joint Director or Joint Commissioner” before issuing authorization of search doesn’t contain and/or record such findings.

Judicial Analysis:-

Before addressing let us go through various judicial pronouncements settling the legal position with regard to recoding of satisfaction and consequent issuance of warrant of authorization to conduct a legal search.

The courts have unanimously held time and again that before taking any action under section 132 of the Act the condition precedent which must exist should be information in possession of Director of Income-tax which gives him reason to believe that a person is in possession of some article, jewellery, bullion money which represents wholly or partly his income which was not disclosed or would not be disclosed. If the aforesaid condition is missing the Commissioner or Director of Investigation will have no jurisdiction to issue the warrant of authorization under section 132(1). Reliance placed on the decisions in cases of Ganga Prasad Maheshwari v. CIT [1983] 139 ITR 1043 (All.); Dr. Nand Lal Tahiliani v. CIT [1988] 170 ITR 592 (All.); Dr. Sushil Rastogi v. Director of Investigations [2003] 260 ITR 249 (All.); Ravi Iron Industries v. Director of Investigation [2003] 264 ITR 28 (All.) and Smt. Kavita Agarwal v. Director of Income-tax [2003] 264 ITR 472 (All.).

In CIT v. Vindhya Metal Corporation and Ors. (1997) 224 ITR 614 (SC), the Supreme Court observed :

“Mere unexplained possession of an amount, without anything more, could hardly be said to constitute information which could be treated as sufficient by a reasonable person, leading to an inference that it was income which would not have been disclosed by the person in possession for purposes of the Act.”

In Dr. Nand Lal Tahiliani v. CIT [1988] 170 ITR 592, the Allahabad High Court held that the averments of information under section 132 must be in good faith and there must be rational relation between the information and the material and reasonable belief. Mere rumour of roaring practice and charging of high rate of fee and living in a posh house, in the absence of any other material, could not be construed as constituting information in consequence of which the Director could have reason to believe that the petitioner had not disclosed his income or would not disclose it.

In L.R. Gupta v. Union of India [1992] 194 ITR 32, it was held by the Delhi High Court that the expression “information” must be something more than a mere rumour or a gossip or a hunch. There must be some material, which can be regarded as information, which must exist on the file on the basis of which the authorizing officer can have reason to believe that action under section 132 is called for. It was also observed (Therein): “. . . an assessee is under no obligation to disclose in his return of income all the moneys which are received by him which do not partake of the character of income or income liable to tax. If an assessee receives, admittedly, a gift from a relation or earns agricultural income, which is not subject to tax, then he would not be liable to show the receipt of that money in his income-tax return. Non-disclosure of the same would not attract the provisions of section 132(1)(c). It may be that the opinion of the assessee that the receipt of such amount is not taxable may be incorrect and, in law, the same may be taxable, but where the Department is aware of the existence of such an asset or the receipt of such an income by the assessee, then the Department may be fully justified in issuing a notice under section 148 of the Act, but no action can be taken under section 132(1)(c). . . .”

In Ajit Jain v. Union of India [2000] 242 ITR 302 (Delhi), it was observed (vide page 311): “. . . the mere fact that the petitioner was in possession of the said amount could not straightaway lead to the inference that it was his undisclosed income. . . . The intimation simplicitor by the CBI that the money was found in the possession of the petitioner, which, according to the CBI, was undisclosed, in our view, without something more, did not constitute information within the meaning of section 132 so as to induce a belief that the cash represented the petitioner’s income which has not been or would not be disclosed. A bare intimation by the police or for that matter by any person, without something more, cannot be considered sufficient for action under section 132 of the Act, for it would be giving naked powers to the authorities to order search against any person and prone to be abused. This cannot be permitted in a society governed by rule of law. Even assuming that the said amount was not reflected in the books of account of the company as claimed by the petitioner, the mere possession of the said amount by the petitioner could hardly be said to constitute information which could be treated as sufficient by a reasonable person, leading to an inference that it was income which has not been or would not have been disclosed by him for the purposes of the Act, particularly when the petitioner as well as the company, of which he was claiming to be the managing director, were regular assessees with the Income-tax Department.”

In Lajpat Rai and Ors. v. CIT (1995) 215 ITR 608 (All), the Court held that where the IT authorities had no information or material that any valuable asset or documents relating to company was stated in the locker, they had no justification to proceed with the search and seizure, and the warrant of authorization in question was passed on irrelevant considerations.

In Smt. Manju Tandon v. T.N. Kapoor 1978 UPTC 349, the Court held that the expression “reasons to believe” does not mean a purely subjective satisfaction on the part of the authority concerned. The reasons must be held in good faith and they cannot be merely pretence.

The Supreme Court in H.L. Sibal v. CIT [1975] 101 ITR 112 (Punj. & Har.), elucidated on compliance and satisfaction of the conditions of sub-clauses (a), (b) and (c) to Section 132 of the Act as recorded in the “reasons to believe”, which formation of opinion must be in good faith and not mere pretence and subterfuge on the part of the authorities. It was held that the Court while examining the said reasons would not adjudge or test adequacy and sufficiency of the grounds, but could go into the question and examine rational connection between the information or material recorded and formation of the belief as to satisfaction of conditions specified in clauses (a), (b) and (c) to Section 132 (1) of the Act. The “reasons to believe” as recorded should have relevant bearing on formation of the belief, for the search warrants cannot be issued for making a fishing and roving inquiry. It was held that there must be nexus between the information and the “reasons to believe”. Information, which is relied upon must not be in the nature of surmise or conjecture but must have tangible backing and some basis. It should not be mere ipse dixit but based upon reason. Simple “believe” was not sufficient, albeit satisfaction note must itself indicate and show whether the belief falls under clauses (a), (b) and (c) to Section 132(1) of the Act. “Likelihood and predisposition” in the “reasons to believe” for authorizing search were held to be in nature of surmise and conjecture.

In a recent judgment in case of Laljibhai Kanjibhai Mandalia v. Principal Director of Income-tax, (Investigation) [2019] 105 taxmann.com 260 (Gujarat), the Hon’ble Gujarat High Court quashed the warrant of authorization owing to the absence of existence of any of the three circumstances envisaged under clause (a) , (b) and (c) of sub-section (1) of section 132 of the Act. In the opinion of the court, on the information which has come on record there is no material on the basis of which a reasonable person could have formed the belief that action under sub-section (1) of section 132 of the Act is called for. It appears that merely because the first respondent does not have any other power under the Act to directly take action against the petitioner herein, resort has been made to the provisions of section 132(1) of Act by taking shelter behind the notification dated 13th November, 2014 issued by the CBDT in exercise of powers under sub-sections (1) and (2) of section 120 of the Act, which vests jurisdiction under Chapter XIII of the Act in respect of the territorial areas of the whole of India in the Director General of Income Tax specified in column (2) or the Principal Director/Director of Income-tax specified in column (4) of the Schedule to the notification.

Facts of the case:-

– The petitioner was a high net worth individual and has been paying tax regularly and the accounts of the petitioner are being audited on a regular basis. The petitioner was looking for an avenue to invest some money. By that time, a company by the name of Goan Recreation Clubs Private Limited was in the process of setting up a new business in Goa. The said company was in need of finance for setting up its business and consequently, approached the petitioner for a loan. On the petitioner asking for some sort of security, the said company offered that another company being Royale Recreation Private Limited would give its property bearing Sub Plot No.65 admeasuring 346 square metres and Sub-Plot No.68 admeasuring 463.50 square metres, in all, admeasuring 809.50 square metres constituting a part of Aldeia De Goa of property known as “Nauxim” or “Chicalium Bhat” bearing Survey No.31/1-A admeasuring 1,06,950 square metres situated in village Bambolim, in registration sub-District Ilhas, District North Goa in the State of Goa as security for the said loan. Subsequently, an agreement was reached and a registered deed of mortgage came to be executed for the property between the petitioner, Goan Recreation Clubs Private Limited (also referred to as the “borrower company”) and Royale Recreation Private Limited (also referred to as the “guarantor company”) on 22.6.2016. Pursuant to the said agreement, an amount of Rs.10,00,00,000/- (rupees ten crore) came to be given by the petitioner to the borrower company at the agreed rate of interest and on agreed terms. So as to avoid any technical breach of law, the petitioner was advised to become Director of the borrower company at the time of giving the loan. The petitioner, therefore, became a Director of Goan Recreation Clubs Private Limited on 18.5.2016. However, soon after the loan formalities were completed, the petitioner resigned as a Director of Goan Recreation Clubs Private Limited on 25.6.2016. Accordingly, the petitioner remained as a Director of the borrower company for a little over one month.

– The borrower company which was a new venture was in the process of setting up its business, had yet to start its business when the petitioner resigned as a Director of that company and in fact it did not commence business for a further period of one month after the petitioner resigned as a Director of the company. According to the petitioner, his only role was to give a loan of Rs.10,00,00,000/- to the company, which amount was completely accounted for and its source was not only disclosed but also very well-known to the department. In due course, the borrower company repaid the loan along with the interest due to the petitioner. Consequently on 10.7.2017, a deed for release of mortgage came to be executed between the petitioner, Royale Recreation Private Limited (the guarantor company) and Goan Recreation Clubs Private Limited (the borrower company). The petitioner that has diligently paid tax on interest that he had earned from the loan. However, on 10.8.2018, the officers of the Income Tax Department conducted a search on the residential premises of the petitioner which went on till 3.00 a.m. on 11.10.2018. During the course of search, the petitioner was orally informed that the warrant of authorisation in the present matter has been issued by the Principal Director of Income Tax (Investigation), Kolkata. According to the petitioner as such no reason to believe was shown to the petitioner; however, in the course of search, the officials told the petitioner that the reason for the search was the fact that the petitioner was a Director of Goan Recreation Clubs Private Limited and the Income Tax Department was conducting a search on the said company and the present search was being conducted since the petitioner was a Director of that company. It appears that subsequent to the search, the respondents have been raising query after query and calling for details of assets, etc. from the petitioner. It is the case of the petitioner that the respondents are without any rhyme or reason or legal justification harassing the petitioner and his family members and are grossly abusing the power vested in them under the provisions of the Income Tax Act.

– The case of the petitioner was that the impugned search action is bad in law and in violation of the provisions of section 132 of the Act. It was submitted that firstly, the conditions precedent for any action under section 132 of the Act have not been satisfied; and secondly, the action under section 132 as well as all further actions of the respondents pursuant to the said action are illegal and deserves to be quashed. The attention of the court was invited to the provisions of section 132 of the Act to submit that for the purpose of issuance of an authorisation for search under section 132 of the Act, the concerned authority in consequence of information in his possession should have reason to believe that either of the three situations mentioned under sub-section (1) of section 132 exist. It was submitted that in the facts of the present case, none of the three situations exist. It was submitted that insofar as the circumstance (a) as envisaged under section 132(1) of the Act is concerned, the same is not applicable to the facts of the present case as no summons or notice as contemplated therein has been issued to the petitioner. Insofar as circumstance (b) is concerned, it was submitted that there was no reason for the respondent to believe that if any summons or notice was issued to the petitioner, he would not produce or cause to be produced any books of account or other documents which would be useful or relevant to the proceeding under the Act. It was submitted that insofar as circumstance (c) is concerned, it is not the case of the respondents that the petitioner was in possession of any money, bullion, jewellery or other valuable article or thing which had not been or would not be disclosed by him. It was submitted that in the present case, the search action has been taken in respect of a loan advanced by the petitioner to Goan Recreation Clubs Private Limited which was duly shown in the return of income filed by the petitioner. It was submitted that the petitioner had disclosed the entire transaction and had paid the tax on the interest earned from the loan. The whole transaction was by way of cheque. The payment was made by cheque and was also received by way of cheque. It was submitted that from the facts as emerging from the record, it appears that post the petitioner’s resignation as a Director, the company namely, Goan Recreation Clubs Private Limited had entered into suspicious transactions and that having regard to the facts of the case, there was no need to carry out search and that it was always open for the respondents to carry out an inquiry.

– The case of the revenue was that the petitioner was not expected to comply with the notice of the as he would have brought the alibi of jurisdiction to evade compliance with the notice. The petitioner arguements was that the respondents have acted upon surmises and conjectures in coming to the conclusion that the petitioner would not comply with any summons or notice issued to him as contemplated under clause (b) of sub-section (1) of section 132 of the Act. It was submitted that there was no reason for the Commissioner, Kolkata to form the belief that the petitioner would not respond to the notice and that the only situation which would be applicable in the facts of the present case is clause (b) of section 132(1) of the Act, which would not be attracted having regard to the facts of the present case. Reference was made to the income tax return of the petitioner filed for assessment year 2017-18, to point out that in the return of income itself, the transaction in question has been reflected. It was pointed out that tax has been deducted at source in respect of the interest paid on the loan given by the petitioner and the department has also given credit to the petitioner.

Being aggrieved, the petitioner had filed the writ petition challenging the authorisation issued under section 132 of the Income Tax Act, 1961.

The court held as under:-

“12. Insofar as the first circumstance as laid down under clause (a) of sub-section (1) of section 132 is concerned, the same relates to a case where any person to whom a summons under sub-section (1) of section 131 of the Act or notice under sub-section (1) of section 142 of the Act was issued to produce, or cause to be produced, any books of account or other documents has omitted or failed to produce, or cause to be produced, such books of account, or other documents as required by such summons or notice, in which case an authorisation can be issued. In the facts of the present case, it is an admitted position that no such summons or notice as envisaged under clause (a) of sub-section (1) of section 132 has been issued in the present case. Therefore, the circumstance envisaged under clause (a) of section 132(1) of the Act does not exist in the present case.

13. Before adverting to the requirements of clauses (b) and (c) of sub-section (1) of section 132 of the Act, it may be noted that the learned counsel for the respondents had produced a satisfaction note for the perusal of this court. The satisfaction note which runs into thirty three pages, has been recorded in the case of Shri Sarju Sharma and other related groups. The petitioner’s name finds place in the list of key persons of the Group concern and is shown to be associated with Goan Recreation Clubs Private Limited. The satisfaction note refers to huge deposits made during the periods of demonetisation and introduction of undisclosed income in the form of unsecured loans. Reference to the petitioner finds place in allegations made against Goan Recreation Clubs Private Limited wherein reference is made to the loan given by the petitioner to the said concern, which has given rise to the belief that the transaction of loan was prearranged and was an accommodation entry provided through some entry operator thereby giving colour of genuineness to an otherwise bogus loan The satisfaction note refers to various other transactions; however, since the same is confidential in nature it would not be prudent to refer to the same. Suffice it to state that the allegation against the petitioner is limited to the above.

14. On reading the satisfaction note in its entirety, except for what is referred to hereinabove, this court could not find any other material whatsoever insofar as the petitioner is concerned, for the purpose of recording satisfaction under section 132(1) of the Act.

15. In the above backdrop, the question as to whether or not the provisions of clause (b) and clause (c) of sub-section (1) of section 132 of the Act are satisfied is required to be considered.

16. Clause (b) of sub-section (1) of section 132 of the Act provides for issuance an authorisation in case where the authority in consequence of information in his possession, has reason to believe that such person to whom a summons or notice has been issued or might be issued will not, or would not, produce or cause to be produced, any books of account or other documents which would be useful for, or relevant to, any proceeding under the Act. In the facts of the present case, it may be noted that the first respondent, namely the authority who has issued the authorisation under section 132 of the Act, is not the jurisdictional Assessing Officer. The first respondent Principal Director of Income Tax (Investigation), Kolkata, who has issued the impugned authorisation is based in Kolkata and, therefore, has no jurisdiction over the petitioner under the normal provisions of the Act. The only provision under which the said respondent can exercise jurisdiction over the petitioner is under section 132 of the Act in view of the CBDT notification dated 3.12.2001 issued under section 120(1) and (2) of the Act, whereby the Director General of Income Tax have been empowered to exercise jurisdiction in respect of territorial areas of the whole of India. In the affidavit-in-reply the reason given by the respondent for issuance of search warrant is that the petitioner was not expected to comply with the notice of the respondent No.1 or the respondent No.5 as the petitioner would have brought the alibi of jurisdiction to evade or non-comply with the notice. Thus, as rightly submitted by the learned counsel for the petitioner, the belief that the petitioner would not respond to a summons or notice issued as envisaged under clause (b) of sub-section (1) of section 132 is not based upon any information or other material but is based upon conjectures and surmises that the petitioner would take the alibi of lack of jurisdiction on the part of the respondents. This contention of the first respondent also lends support to the contention raised on behalf of the petitioner that powers under section 132 of the Act have been resorted to because that is the only provision which vests jurisdiction in the Kolkata authorities for taking action against the petitioner. Evidently, therefore, the circumstance envisaged under clause (b) of sub-section (1) of section 132 of the Act does not exist in the present case.

17. Insofar as the third circumstance as contemplated under clause (c) of section 132(1) of the Act is concerned, the same relates formation of belief that the person concerned is in possession of any money, bullion, jewellery or other valuable article or thing and such money, bullion, jewellery or other valuable article or thing represents either wholly or partly income or property which has not been or would not be disclosed for the purposes of the Act. In the present case, on a perusal of the satisfaction note as well as the affidavit-in-reply filed on behalf of the respondents and submissions advanced by the learned senior standing counsel for the respondents, it is evident that the sole ground on which the search is sought to be carried out is that the petitioner herein had advanced a loan of Rs.10,00,00,000/- (rupees ten crore) to Goan Recreation Clubs Private Limited. There is nothing on record to indicate that any belief has been formed by the competent authority to the effect that the petitioner has in his possession any money, bullion, jewellery or other valuable article or thing which would not have been disclosed by him for the purposes of the Act. On the contrary, in the facts of the present case, from the record of the case as produced by the respondents as well as by the petitioner, it is evident that the loan transaction whereby the petitioner had advanced Rs.10,00,00,000/- to the borrower company has been duly reflected in the books of account of the petitioner. In his return of income, the petitioner has duly shown the interest income from such transaction. The tax deducted at source in respect of such interest income, has been credited to the account of the petitioner by the concerned authority. Therefore, the entire transaction has been disclosed by the petitioner. There is no other material on record on the basis the respondents could have formed the belief as contemplated under clause (c) of sub-section (1) of section 132 of the Act. Evidently, therefore the circumstance envisaged under clause (c) of section 132(1) of the Act also does not exist in the present case.

18. In the opinion of this court, on the information which has come on record there is no material on the basis of which a reasonable person could have formed the belief that action under sub-section (1) of section 132 of the Act is called for. It appears that merely because the first respondent does not have any other power under the Act to directly take action against the petitioner herein, resort has been made to the provisions of section 132(1) of Act by taking shelter behind the notification dated 13th November, 2014 issued by the CBDT in exercise of powers under sub-sections (1) and (2) of section 120 of the Act, which vests jurisdiction under Chapter XIII of the Act in respect of the territorial areas of the whole of India in the Director General of Income Tax specified in column (2) or the Principal Director/Director of Income-tax specified in column (4) of the Schedule to the notification.

19. Another aspect of the matter is that the respondent authorities have proceeded on the footing that Goan Recreation Clubs Private Limited has received various unsecured advances leading to the belief that the transaction in question is non-genuine. In the facts of the present case, the petitioner has produced on record a mortgage deed dated 22nd June, 2016 executed by and between Royale Recreation Pvt. Ltd. as the First Party, Goan Recreation Clubs Private Limited as the Confirming Party or the Second Party and the petitioner Shri Laljibhai Kanjibhai Mandalia as the Mortgagee or the Third Party, which had been executed by way of a security for repayment of the amount advanced by the petitioner to Goan Recreation Clubss Private Limited. The genuineness of such document has not been disputed by the respondents. Under the circumstances, on the basis of the information referred to hereinabove, no reasonable person could have come to the conclusion that the ingredients contained in clauses (a), (b) or (c) of sub-section (1) of section 132 of the Act were attracted. In the absence of existence of any of the three circumstances envisaged under sub-section (1) of section 132 of the Act, the impugned authorisation is invalid and cannot be sustained.

20. For the foregoing reasons, the petition succeeds and is, accordingly, allowed. The impugned warrant of authorisation dated 7.8.2018 issued by the respondent No.1 under section 132 of the Income Tax Act, 1961 and rule 112(1) of the Income Tax Rules, 1962 (Annexure-A to the affidavit-in-reply filed by the respondent No.1) is hereby quashed and set aside. Consequently, all actions taken pursuant to such warrant of authorisation would also be rendered invalid. Rule is made absolute accordingly with no order as to costs.”

Now coming to the moot question as to whether the reasons to believe can come into existence after issuance of warrant of authorization ?

It is a well-established law as laid down by the Supreme Court of India that the order originally passed cannot be improved by way of affidavits vide Mohinder Singh Gill v. Chief Election Commissioner [1978] 1 SCC 405.

In the landmark judgement in case of Pooran Mal v. Director of Inspection (1974) 93 ITR 505 (SC), the Hon’ble Supreme Court held that an undisclosed property found during the course of search may not be justification for authorization of search when it was not a reasonable ground for recoding a reasonable belief as required by virtue of sub-clauses (a),(b) and (c) of Section 132(1) of the Income Tax Act,1961.

In case of Smt. Kavita Agarwal And Anr. v. Director Of Income Tax (2003) 185 CTR All 129, the Hon’ble High Court held that the material on the basis of satisfaction under Section 132 has to exist must be material brought to the knowledge of the Commissioner/Director prior to the search, and the authorities cannot rely in material found during the search. In Smt. Kavita Agarwal v. DIT [2003] 264 ITR 472/133 Taxman 848 (All.) the search of the premises of the Petitioner’s husband and his family resulted in the finding of keys to three lockers one of which stood in the couple’s joint names. The jewellery found in that specific locker was valued at Rs.6,28,861. Yet, the Court was not prepared to accept that this by itself satisfied the requirement of the law. It held:

“The law is well settled that a warrant of search and seizure under Section 132(1) can only be issued on the basis of some material or information on which the Commissioner/Director has reason to believe that any person is in possession of money, jewellery or other valuable articles representing wholly or partly income or property which has not been or would not be disclosed, under the IT Act. In the present case the respondents have not disclosed what was the material or information on the basis of which the Director/Commissioner entertained the belief that the lockers contained valuable jewellery or other articles representing undisclosed income. It is well settled that the satisfaction of the authorities under Section 132 must be on the basis of relevant material or information. The word used in Section 132(1) are “reason to believe” and not “reason to suspect”. In the counter-affidavit it has been specifically stated in para 18 that the authorized officer had reason to suspect and not reason to believe.”

The need for there to be, prior to issuance of the authorisation for search, of some credible information which leads to formation of a reason to believe that the conditions stipulated in Section 132 (1) (a) to (c) exists is the running theme of several decisions.

There should be existence of material which could lead to the formation of reason to believe that any of the three conditions mentioned in section 132(1) of the act had been fulfilled.

This very matter was taken up in case by the Hon’ble High Court of Allahabad in case of Dr. (Mrs.) Anita Sahai v.Director of Income-tax[2004] 136 TAXMAN 247 (ALL.).

The brief facts of the case before the Hon’ble Allahabad High Court were as under:-

The departmental authorities, the respondents, in purported exercise of the powers under section 132(1), searched the residential and business premises of the assessees-petitioners, who were husband and wife and both were doctors, and seized certain amount of cash and documents, etc., from their possession. The assessees filed a writ petition challenging, inter alia, the validity of the warrant of authorization under section 132(1) and the initiation of block assessment proceedings by issue of notice under section 158BC by respondent No. 5, and continuation thereof by respondent No. 6 by issuance of another notice under section 142(1) and in that regard it was submitted (i) that both the assessees were regularly assessed to tax, (ii) that there existed no material which could lead to the formation of reason to believe that any of the three conditions mentioned in section 132(1) had been fulfilled, (iii) that there did not exist any material which could lead to formation of reason to believe that any asset owned and possessed by the assessees was not, or would not be disclosed in due course, and (iv) that notice under section 131(1A) could be issued only before the authorized officer had taken action under section 132(1) and that while section 131(1A) uses the expression ‘reason to suspect’, section 132(1) uses the expression ‘reason to believe’ and that ‘reason to believe’ would stand on a higher footing than ‘reason to suspect’.

Their lordships held as under:-

“The respondents in their counter-affidavit had stated that it was respondent No. 4 who had sent the material to respondent No. 1 on the basis of which respondent No. 1 had recorded his satisfaction under section 132(1). It was respondent No. 4 himself who had issued summons under section 131(1A) after the search. As such, there could not possibly be any material, which could be the basis of having reason to believe in respondent No. 1. The very fact that respondents issued notice under section 131(1A) after the search and seizure operation under section 132 would show that there was neither reason to believe nor material before the authorising officer on the basis of which he could issue a warrant under section 132. [Para 25]

It is well-settled that before taking any action under section 132, the condition precedent which must exist should be information in possession of Director of Income-tax which gives him reason to believe that a person is in possession of some article, jewellery, bullion money, etc., which represents wholly or partly his income which was not disclosed or would not be disclosed. If the aforesaid condition is missing, the Commissioner or Director of Investigation will have no jurisdiction to issue the warrant of authorization under section 132(1). [Para 26]

The scheme of section 132 postulates that the mind has to be applied by two officers at two different stages that is,

(i) firstly by the Director of Investigation or the Commissioner while issuing a warrant of search on the basis of his reason to believe that any person is in possession of any jewellery, ornaments or money etc. which are believed to be an undisclosed property; and

(ii) Secondly by the authorized officer when during the search any particular jewellery, ornaments or money is found can be reasonably believed to be an undisclosed property.

Since the authorized officer has to form an opinion before seizing the particular ornaments, he will necessarily have to investigate the matter. In the instant case, no such investigation had been done by the authorized officer at the time of seizure and indiscriminate seizure had been made by him contrary to the guidelines of the CBDT, etc. [Para 27]

In the instant case, there had been an indiscriminate seizure without any application of mind inasmuch as, all the books of account which were duly reflected in the balance sheet, income-tax returns, patients’ case records which were required for medico legal case purposes, computers and other professionally related documents and certain other articles had been seized by the department. The respondents were trying to justify the seizure on the basis of post search materials, which could not be legally done. [Paras 29 and 30]

In the instant case, the department had acted only on rumours. The petitioners were admittedly leading doctors and were regularly assessed to tax and had filed income-tax returns up to date. [Para 37]

The assessees had clearly stated in the writ petition that there existed no material before the Director which could lead to the formation of reason to believe under section 132(1) for issuance of the warrant of authorization. [Para 38]

In the counter-affidavit, it was stated that the Additional Director of Income-tax (Investigation) and the Joint Director of Income-tax (Investigation) had brought material on record and they had made an analysis which showed that the assessees had been concealing their income in the income-tax returns and were in possession of undisclosed assets. The aforesaid averment was very vague. When a positive averment was made in the writ petition that there was no material which could lead to formation of reason to believe in the Director for issuance of warrant of authorization under section 132, the respondents must in their counter-affidavit give specific details as to what particular facts and material were taken into consideration by the Director which lead to formation of reason to believe under section 132. That material must be taken into consideration by the Director at the time when he issued warrant of authorization under section 132. If the Director considered that material after issuance of warrant of authorization it would be illegal, even if the material existed earlier. In the instant case, there was nothing to show that any relevant material was considered by the Director at the time of issuing the impugned warrant of authorization which led to formation of reason to believe that assessees had undisclosed assets or undisclosed income. [Para 39]

No doubt, in the counter-affidavit it had been mentioned that the Director had recorded satisfaction note on 26-2-2002 but the said note had not been annexed to the counter-affidavit. The instant case was heard on many dates but the respondents had not filed copy of the alleged satisfaction note dated 26-2-2002 and, hence, no reliance could be placed on the same. [Para 40]

Search and seizure cannot be a fishing expedition. Before search is authorized, the Director must on the relevant material have reason to believe that the assessee has not or would not disclose his income. [Para 41]

The reason to believe must exist and must be taken into consideration by the Director/Commissioner at the time of issuing a warrant of authorization. If the reason to believe comes into existence later, i.e., after issuance of warrant of authorization, then the warrant of authorization and entire search and seizure will be illegal even if the material on the basis of which the Director formed his opinion that there was reason to believe existed prior to the issuance of warrant of authorization. In the instant case, even assuming that there existed relevant material prior to issuance of warrant of authorization which could have led the Commissioner to form his reason to believe under section 132, it was an illegal warrant of authorization, since the aforesaid material was taken into consideration by the Director/Commissioner subsequent to the issuance of the warrant of authorization. [Para 42]

Therefore, the search and seizure in question was illegal and was liable to be quashed. The prohibitory orders under section 132(3), read with section 281B, expired on 27-2-2003 and no extension was on the record. Hence, the entire seizure and restraint order relating to the bank accounts in question had become infructuous and they were directed to be released forthwith. [Para 44]

Therefore, the warrants of authorization and all proceedings subsequent thereto were quashed. The cash and other articles and books seized from the petitioners shall be returned to them forthwith. [Para 47] “

It is also pertinent here to put forth another judgment of the Hon’ble High Court of Allahabad in case of Suresh Chand Agarwal v. Director General of Income-tax [2004] 139 TAXMAN 363 (ALL.)

The brief facts of the case before the Hon’ble Allahabad High Court were as under:-

The assessee’s case was that he had been carrying on business of manufacturing perfumed supari. He contended that in relation to such business activity as also other sources of income, he had been regularly assessed to income-tax by the Assessing Officer. It was also contended that he had been maintaining all such records as were required to be maintained under the Central Excise Act, and no discrepancy was ever found by the excise authorities either in his working or in the records so maintained. On 10-12-2002, search operations under section 132(1) were carried out at residential premises, business premises and at the bank locker of the assessee. In search operations, cash, gold, silver articles and certain documents were seized. Against the said act of revenue authorities, the petition was filed seeking directions to the respondent to quash the warrant of authorisation issued under section 132 and to restore the possession of the cash amount as well as other articles seized.

It was alleged in petition that the authorisation was issued by the respondent No. 2, the Director of Income-tax (Investigation) which was illegal as none of the conditions mentioned in section 132(1) existed and that there existed no material which could lead to formation of reason to believe that any asset owned and possessed by the assessee had not been disclosed or would not be disclosed in due course.

Their lordships held as under:-

“It was clear from the facts of the case that the assessee was regular income-tax payee and that he had been returning a progressive return of income over the last several years. [Para 9]

No material had been disclosed in the revenue’s counter affidavit to show that there were reasons to believe by the authority concerned for issuing the warrant of authorization. [Para 10]

The material on the basis of which the reason to believe by the Commissioner/Director is said to exist must be such material which was brought to the knowledge of the said authority prior to the search. In other words, the authorities cannot rely on material found during the search for taking the plea that this was the basis of the reason to believe, unless such material was brought to the knowledge of the authority, who signs the warrant of authorization, before, or at the time when he signs it. To take a contrary view would mean that the Commissioner/Director can issue a warrant of authorization under section 132(1) without considering any material, and thereafter, the income-tax authorities can indulge in a fishing enquiry to uncover some undisclosed asset. No such view can be countenanced as it would give unbridled and arbitrary powers to the income-tax authorities to harass the citizens. [Para 12]

For the reasons given above, the petition was allowed and the impugned warrant of authorization was quashed and the entire search and seizure was declared illegal. The respondents were directed to release the cash, articles and documents seized from the assessee and his wife from their residence as well as the bank locker forthwith. [Para 13] “

In Balwant Singh v. R.D. Shah, Director of Inspection, Income-tax, New Delhi [1969] 71 ITR 550 (Delhi), a Division Bench of the Delhi High Court held that before the Commissioner acts under section 132(1) of the Act, he must be reasonably satisfied that it is necessary to take the action contemplated by that section. If the grounds on which the belief is founded are non-existent or are irrelevant, or are such on which no reasonable man can come to that belief, the exercise of the power would be bad.

Recently the Hon’ble Delhi High Court in case of Shah E Naaz Judge v. Additional Director of Income-tax (Inv) [2018] 100 taxmann.com 346 (Delhi) while quashing the search warrants in respect of a locker held that validity or invalidity of search is not to be judged and decided on the basis whether or not anything was found in the locker. Validity of search has to be decided and adjudicated on the basis of satisfaction note; whether satisfaction note satisfies the statutory requirements and the respondents have acted in accordance with law.

Further the Hon’ble Delhi High Court in case of Khem Chand Mukim v. Principal Director of Income Tax (Inv.) [2020] 113 taxmann.com 529 (Delhi) at para 27 of the order held as under:-

“Before parting we may add that the opinion which has to be formed is subjective, and though the jurisdiction of the Court to interfere is very limited, and we are not to act as an Appellate Court and meticulously examine the information in order to decide whether an action under Section 132 is called for, yet at the same time we may emphasize that the power to search a person is a stringent power provided by law and this requires the officers to scrupulously follow the mandate and the rigor of the law prior to authorizing such an action, and unless the conditions to exercise such power are shown to exist, we would have no hesitation in striking down such an action. We are compelled to interfere as there was complete lack of information prior to the action of search, exhibiting gross non application of mind and arbitrariness by the authorities. The reason to believe in the present case was non existent prior to the search. Even after the search, there was no material to conclude that no such disclosure had been made, or that no disclosure would be made so as to satisfy the prerequisites of Section 132 of the Act. The Respondents have merely acted on the basis of surmises and conjectures, and without due authorization. Their actions are in contravention of law, making the action of search and seizure bad in law.”

Conclusion:

In my considered opinion, though it is undisputed fact that a search and search action to curb the menace of black money and evasion is necessary and strongly advisable, however at the same time such seizure and seizure action is a serious invasion made upon rights, privacy and freedom of the taxpayer, therefore the power must be exercised strictly in accordance with the law and only for the purpose for which the law authorises it to be exercised. Therefore keeping in view the discussion above, in my considered opinion justifying a search action on post search material is not the legal intent of Search and seizure legislation and thus cannot be legally permissible. Accordingly, reasons of believe should not come into existence after issuance of warrant of authorization.

The jurisdictional facts that have to be established before a search under Section 132 (1) of the Act can be authorised are that (i) the authority issuing the authorisation is in possession of some credible information, other than surmises and conjectures (ii) that the authority has reason to believe that the conditions stipulated in clauses (a), (b) and (c) of Section 132 (1) qua the person searched exist; and (iii) the said information has nexus to such belief.

The law is well settled that a warrant of search and seizure under Section 132(1) can only be issued on the basis of some material or information on which the Commissioner/Director has reason to believe that any person is in possession of money, jewellery or other valuable articles representing wholly or partly income or property which has not been or would not be disclosed, under the IT Act. The satisfaction of the authorities under Section 132 must be on the basis of relevant material or information. The word used in Section 132(1) are “reason to believe” and not “reason to suspect”.

1. Preliminary: There have been large number of amendments nearly amendments since 1961. The amendments have been made to eliminate the double deductions while calculating application or accumulation. These amendments rather than bringing clarity on the subject have created more chaos in the regulation of charity section.

2. Finance Act, 2021 have made following amendments in section 10 (23C) and Section 11.

   1. Threshold limit availing exemption increased for educational institutions and hospitals from Rs. 1 crore to 5 crores;

   2. Restrictions on the application out of corpus Funds;

   3. Restrictions on the application out of loans and borrowings

   4. Change in due date for filing of belated income tax return.

3. Amendment to Section 10(23C) under sub-classes (iiiad) and (iiiac)of Section 10(23C) provides for exemption of receipts removal of such university or education institution receipts of such hospital or institution do not exceed the amount of annual receipts of Rs.1 crore vide rule 2BC.

   Finance Act, 2021 with effect from assessment year 2022-23 sub-clause (iiiad) and (iiiac), it has been clarified that if the person has receipts from university or universities or educational institution or institutions as referred to in sub-clause (iiiad) as well as from hospital or hospitals or institution or institutions as referred to in sub-clause (iiiac). the exemptions under these clause shall not apply, if the aggregate of annual receipts of the person from such university or universities or educational institution or institutions or hospital or hospitals or institution or institutions exceed five crore rupees. In short, under the amended section 10(23C). sub-clause (iiiad) and (iiiac), university or universities or educational institution or institution or hospitals or institution or institution whose aggregate annual receipt does not exceed Rs. 5 crores.

4. Meaning of Annual Receipts: Neither the existing provisions/nor in the amended provisions of section 10(23c) (iiiad) and 10(23c) (iiiac) defines the meaning of “annual receipts” since no guidance is available in this respect under the Act, we have to rely on the judicial pronouncement in this regard.

   CIT v. Madrasa E. Bakhiyath – US – Salihath Arabic College 226 Taxman 372 (Mad.) held that sale proceeds of lad and bonds could not be equated to annual receipts while considering the monetary limit under section 10(23c) (iiiad) as the said sale went in nature of conversion of capital asset from one form to another. The Jaipur Tribunal in the case of Indian Medical Trust v ITO [2012] 18 taxmann.com 223 (Jaipur Tribunal) hold that the annual receipt is to be considered without excluding contribution towards the corpus of the trust.

   Rupees 5 crores limit to be applied in aggregate and not per institution. The Finance Act, 2021 provides that the revised threshold limit of Rs.5 crores shall apply for an assessee with respect to aggregate receipts from university or educational institution as referred to in sub-clause (iiiad) and hospital or institution as referred to in sub-clause (iiiac). In short, it a trust is running both educational and medical institutions, the annual receipt from all such institutions should be aggregated and if does not exceed Rs 5 crores, the exemption will be available.

   Earlier the provisions were silent about this aspect though there were various Courts rulings providing that limit of Rs. 1 crore to be available for each of the institution run by an organization. However there were contrary ruling as well.

   Illustration: If an organization is running 10 schools and the turnover of each school is less than Rs. 1 crore then the exemption was available for all ten schools without any registration or approval.

   CIT v. Children’s Education Society (2013) 34 Taxmann.com 285 (Kar) held that if an assessee is having more than one educational institution then the ‘aggregate annual receipt” of each such educational institutions then each of such institution will enjoy the Rs. 1 crore limit.

   PKP Trust v. ITO (2017) 79 Taxmann.com 282 (Chennai Trib.) held that each educational institution should be considered separately for applying threshold annual receipt of Rs. 1 crore for allowing exemption under section 10 (23C).

   Asst. CIT v. Shiksha Samiti (2015] 60 taxman 428 (del. Trib)

   Delhi Tribunal hold that for exemption under section 10(23C) (iiiad) “aggregate annual receipts” refers to receipts by a particular institution.

   Now Finance Act, 2021 has over ruled these judgments. The Finance Act, 2021 has instituted the words “receipts of each university or educational institution…….” with “receipts of the person from such university or universities or educational institutions ….” in sub-clause (iiiad) and sub clause (iiiac).

   Explanation: Explanation has been inserted with effect from 1-4-2022. Explanation is inserted to clarify that if the person has received from educational institution referred to in sub-clause (iiiad) and from medical institution referred to in sub-clause (iiiae), the exemption under shall not apply, if the aggregate of annual receipts of the person from such educational and medical institutions exceed Rs. 5 crores. In other words, if a charitable trust runs both a medical and educational institution, the total receipts from all such institutions shall be aggregated to compute the annual total receipt of Rs. 5 crores. This amendment has overruled various court rulings wherein it was held that limit of Rs.1 crore is to be seen separately for each medical and educational institutions. Above amendment affirms the ruling of Amritsar Tribunal in the case of ITO v. Vivekanand Society of Educational & Research [2014] 49 taxmann.com 386 that if the receipt of an assessee society from two institution run and run by it exceeds Rs. 1 crore, in the absence of exemption certificate, the receipts under section 10(23c) was rightly brought to tax.

5. Amendment to section 10(23C) and section 11:

   Investment of corpus donations in the modes specified in Section 11(5). The voluntary contributions with a specific direction that they shall not form part of the “Corpus donations” received by the trust or institutions, funds etc., are exempt from tax as the following provisions.

   Explanation to third proviso to section 10(23C) provides that income of a fund or trust or institution or any university or other educational institution or any hospital or other educational institution shall not include income in the form of Corpus donations.

   (b) Similarly Section 11(1) (d) provides that Corpus donation shall not be included in the total income of the trust or institution.

   The Fiancé Act, 2021 provides that the corpus donation shall be invested or deposited in one or more of the forms or mode specified in section 11(5) maintained specifically for such purpose. Thus the corpus donations received by an organization shall not be treated as exempt income unless it is invested or deposited to one or more of the forms or modes specified to section 11(5) maintained specifically for such corpus. It may be noted that the condition of investing the corpus fund in section 11(5) investment shall apply to that part of the corpus fund which has been created from corpus donations exempted under section 11(1)(d), because organizations may have corpus funds invested in business assets under section 11(4) or section 11(4A) which do not confirm to the requirements of section 11(5).

   It may be noted that the corpus fund of an organization may be created through many sources and may also include assets which do not confirm to the provisions of Section 11(5). The sources from which a corpus fund could be created are broadly as under:

   1. Corpus donation received with a specific direction;

   2. 15% accumulations after applying 85% of income;

   3. By payment of taxes e.g. an organization pays taxes against anonymous donations above 5%;

   4. At the time of creation of a trust, the corpus may come as cash, property or business;

   5. Corpus donation from any other exempt income not subject to an application under section 11.

   It may be noted that only the corpus fund to the extent created out of corpus donation received under section 11(1)(d) should remain invested as per section 11(5). Thus such corpus fund cannot be used for incidental business activity.

   There is no specific amendment as to the consequences if investment is made out of corpus donation is liquidated in the subsequent year and not reinvested in my opinion, in such a situation the amount realized should be treated as income subject to application otherwise the amendment made is useless.

6. No application out of corpus donation:

   Finance Act, 2021 with effect from 1-4-2022 has provided

   (i) that application for charitable or religious purposes from the corpus shall not be treated as application for charitable or religious purposes. However when it is invested or deposited back into one crore or more of the forms specifically for such corpus from the income of that year and to the extent of such investments or deposit and such amount shall be allowed as an application in the previous year in which it is deposited back to the corpus to the extent of such deposit or investment.

7. Application out of loan and borrowings:

   As per section 11(1), the exemption is available for income derived from property held under the trust or for the voluntary contributions, provides the organization applies the income for charitable purposes.

   As long as the expenditure is incurred out of the income of the trust on the objects of the trust, it would be considered as a valid application of income, even if such expenditure is for capital purposes. Thus all expenditure whether revenue or capital for charitable purposes shall be considered as on application of income. Finance Act, 2021 provides that an application from loans and borrowings shall not be considered as an application for charitable or religious purposes. However, when such loan or borrowing is repaid from the income of the previous year, such repayment shall be allowed as an application in the previous year in which it is repaid and to the extent it is repaid.

   It is to be noted that an organizations used to claim expenditure made out of corpus fund or borrowed funds as an application of current year’s income. After the amendments, the application towards charitable purposes shall be valid into following cases:

   1. Application out of current year income;

   2. Application out of corpus or the unconditional available funds of the organization; and

   3. Application made out of loans & borrowings.

   After the amendment, no application other than an application made out of income shall be allowed to be claimed as an application to the extent new investment is made under section 11(5) and repayment of the loan is made.

8. Set off & Carry forward of past deficits:

   There is a considerable legal controversy surrounding whether a charitable institution is allowed to carry forward the deficit and set it off against the income of a subsequent year. There is no such provision in the Income-tax Act to carry forward the deficit in subsequent year and set it off against the income of a subsequent year. There is no provision in the Income-tax Act to carry forward and set-off the excess expenditure by a charitable institution. Further there are conflicting decisions of the High Court and Tribunal in this regard.

   The Supreme Court of India in case of CIT(E) v. Subros Educational Society [2018] 96 Taxmann.com 652 has set to rest the controversy in favour of the assessee. Consequently, a charitable institution was held to be entitled to carry forward and set off the excess application of income of earlier years against income of the subsequent year.

   The Finance Act, 2021 has made an amendment to both sections 10(23C) and section 11, that for the computation of income required to be applied or accumulated during the previous year, no set off or deduction, of any of the year preceding the year shall be allowed. Thus pursuant to this amendment, the charitable trust shall not be permitted to carry forward the losses or excess application of earlier years.

   Now, the set off past deficit against the current year’s income will no longer be permitted for 85% application. Therefore from assessment year 2022-23, such deficit cannot be set up against subsequent year’s income.

9. Due date for filing belated return:

   Finance Act, 2021 reduces the time limit to file belated return of income or revised return of income, as the case may be, by three months. Thus, the belated return or revised return could now be filed three months before the end of the relevant assessment year or before the compilation of assessment, whichever is earlier. Therefore, the last date to file the revised or belated return shall be 31st December of the relevant assessment year.

   The entities registered under Section 12AA/12AB are now required to file the return of income without giving effect to the provisions of sections 11 and 12 exceeds maximum amount which is not chargeable to income-tax. Thus, after the amendment in order to claim exemption under section 11 & 12, the return is required to be submitted latest by 31st December of the assessment year, failure would result in loosing the benefit of sections 61 and 62 of the Act. The benefit of section 11 and 12 shall not be available.

1. Background

1.1 Section 40(a)(ia)

1.1.1 Sub-clause (ia) of section 40(a) was introduced in the statute vide the Finance (No. 2) Act, 2004 w.e.f. 01/04/2005. It provides for disallowance of 30% of certain business expenditure (which are otherwise allowable and claimed as revenue expenditure) when paid/payable to a resident, in case where the payer (tax deductor) fails to comply with the provisions of deduction of tax at source and such TDS is not deposited till the due date of filing of the return of income under section 139(1).

1.1.2 Further, as per the first proviso, in case where tax is deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in section 139(1), such sum shall be allowed as a deduction in computing the income of the relevant year in which such tax is paid.

1.1.3 Situation arose, where the recipient/payee duly offered the amount received from the payer as income and had also paid tax thereon, however, still on account of non compliance of the TDS provisions by the deductor/payer, disallowance of the corresponding expenditure were made in accordance with the above mentioned provisions. Thus, provisions of this sub-clause proved harsh and punitive for the deductor/payer.

1.1.4 In order to provide relaxation from disallowance in above scenario, the second proviso to this sub-clause was inserted by the Finance Act, 2012, w.e.f. 01/04/2013. It provides that in case the conditions provided in the first proviso to section 201(1) [for not being considered as ‘assessee-in-default’, viz. when payee has duly furnished his return of income wherein the amount paid/credited by the payer is included in total income, tax is paid on such income and the payer has obtained certificate in Form-26A from Chartered Accountant in this respect] are fulfilled, then it would be deemed as if the deductor/payer has deducted and paid the applicable TDS on the date on which the deduce/payee has furnished his return of income.

The implication of this proviso is that, even if the deductor actually does not either deduct tax or after deducting, does not pay the same; he shall still be deemed to have deducted and paid the tax on the date on which the ‘payee’ has furnished his return of income, if the conditions for not being considered as ‘assessee-in-default’ as per the first proviso to section 201(1), are fulfilled.

Consequently, following two scenarios may arise:

1) There will be no disallowance in case where the dedcutee/payee has furnished the return of income before the due date of filing the return of income for the dedcutor, because it would be deemed as if the TDS is paid before the due date of filing of the return as provided u/s. 139(1) [as explained in ‘para 1.1.1’]; or

2) In case where the deductee/payee files return of income after the due date of filing the return of income for the deductor, then as per the first proviso, expenses already disallowed u/s. 40(a)(ia), if any, will be allowed for the assessment year relating to the previous year in which the deductee/payee files the return of income (i.e. deemed date/year of payment in pursuant to the second proviso).

1.1.5 Though, inserted w.e.f. 01/04/2013, various High Courts and Appellate Tribunals held this proviso to have retrospective operation from the day on which the principal provision [section 40(a)(ia)] came into force, i.e. from 01/04/2005.]

1.2 Section 40(a)(i)

1.2.1 Sub-clause (i) of Section 40(a) forms part of the Income Tax Act, 1961 right from its inception i.e. 01/04/1962. It is similar to sub-clause (ia) [as explained above] and provides for disallowance in case where there is non-compliance of TDS provisions, when such specified payment/credit (i.e. interest, royalty, fees for technical services or other sum chargeable under the Act) are made outside India or in India to a Non-resident or to a foreign company.

1.2.2 The first proviso to this sub-clause is also identical to first proviso to clause (ia), as discussed above in ‘para 1.1.2’

1.2.3 Though, scenario as discussed in ‘para. 1.1.3’, above, persisted even in relation to sub-clause (i) of section 40(a), however, second proviso under this sub-clause was inserted only recently by the Finance (No.2) Act, 2019, w.e.f. 1-4-2020, it reads as:

“Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purposes of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee referred to in the said proviso.”

The above proviso is identical to second proviso to section 40(a)(ia) as explained in ‘Para 1.1.4’ above.

2. Analysis of effect of insertion of the second proviso to sub-clause (i) of section 40(a):

2.1 Position prior to insertion of the second proviso in section 40(a)(i):

2.1.1 The provision of section 40(a)(i)/(ia) were introduced to put check on the payer/deductor to comply with the provisions of tax deduction at source so that there is a track on the income/transactions undertaken by the payee/deductee and probability of revenue leakage is minimized. The purpose of these sub-clauses was never to act as a recovery provisions. Generally speaking, there is no point in disallowing expenditure once the department receives applicable taxes on such sum, irrespective of the source of the receipt of tax. It is not the case where there is any loss caused to the revenue when the deductee/payee has already paid the applicable taxes, though department has the right to recover the interest in case of delay in depositing the sum beyond its actual due date of receipt. Such practice will lead to taxation of the same amount twice; in the hands of payer as well as payee.

2.1.2 Sometimes, there are genuine cases where even after availing legal advice and maintaining the tax compliance to best possible; dispute regarding the applicability of TDS arises. Further, situation gets complex when provisions relating to non-residents persist and the assessing officers mechanically make disallowances u/s. 40(a)(i).

Ideally once a deductor/payer is able to justify and prove that the deductee/payee had duly deposited the impugned tax than there is no loss caused to the revenue w.r.t. the tax amount [though interest can be recovered u/s. 201(1A)] and thus there is no point in burdening the deductor/payer with such disallowance u/s. 40(a)(i)/(ia).

2.1.3 CBDT had issued Circular No. 275/201/95-IT(B) on 29/01/1997 which provides that no demand u/s. 201(1) should be enforced after the tax deductor has satisfied the department that taxes have been paid by the deductee (payee). However, this will not alter the liability of the deductor for interest u/s. 201(1A) or penalty u/s. 271C.

Even though not in context of section 40(a)(i)/(ia), the intention of this circular is to direct the assessing officer not to proceeds with any tax collection from the deductor/payer, once the tax is received from the deductee/payee. Hence, one may rely upon the said circular to derive the intention of the legislature in specifically inserting the second proviso to sub-clause (i)/(ia) which is to relax the disallowance in case where taxes are paid by the dedcutee/ payee

2.1.4 Even prior to insertion of the second provisos in either of the sub-clauses, Hon’ble Supreme Court in the decision of Hindustan Coca Cola Beverage (P.) Ltd. v. CIT [2007] 293 ITR 226 (SC), had relied upon the above circular and held that where deductee/payee has already paid taxes on amount received from deductor/payer, department once again cannot recover tax from deductor on same income by treating deductor to be assessee-in-default u/s. 201(1) for shortfall in its amount of tax deducted at source.

Thus, Hon’ble Supreme Court made it clear that the deductor/payer should not be punished if the department has received the tax from the deductee/payee.

2.1.5 Thus, based on the decision of Hindustan Coca Cola Beverage (P.) Ltd. vs. CIT (supra) and even without going into question of effective date of applicability of the second proviso to sub-clause (i) /(ia) of section 40(a), one may contend that disallowance u/s. 40(a)(i)/(ia) is not justified once the deductee/payee has paid the tax. This contention is also referred in the decision of Hon’ble Bombay High Court in case of PCIT v. Perfect Circle India Pvt. Ltd. [ITA 707/2016 order dated 07/01/2019](Bombay HC), wherein, in para 2 of the said order it was held as follows:

“…We may also note that the Supreme Court in the case of Hindustan Coca Cola Beverages P Ltd v. CIT even in absence of second proviso to Section 40(a)(ia) had noticed that the payee had already paid the tax. Under such circumstances, the Court held that the payer / deductor can at best be asked to pay the interest on delay in depositing tax.”

2.1.6 Further, in the case of Grindlays Bank v. CIT, (1992) 193 ITR 457 (Cal. HC), Hon’ble Calcutta High while examining the applicability of TDS provisions when certain salary payments were made by the assessee to its non-residents employees held as follows:

“A point has been made by the assessee that as a result of this deduction, the Department is realising the tax twice on the same income. It does not appear that this point was agitated before the Tribunal. We, however, make it clear that if the amount of tax has already been realised from the employees concerned directly, there cannot be any question of further realisation of tax as the same income cannot be taxed twice. If the tax has been realised once, it cannot be realised once again, but that does not mean that the assessee will not be liable for payment of interest or any legal consequence for their failure to deduct or to pay in accordance with law to the Revenue.”

2.1.7 Thus, considering the above explanations and legal precedents one may draw a conclusion that even in the absence of second proviso to section 40(a)(i)/(ia), it is not just on the part of the revenue to recover tax from the deductor/payer if it has received it from the deductee/payee.

2.2 Position post insertion of the second proviso in section 40(a)(i):

2.2.1 As discussed in ‘Para. 1’, above, the provisions of sub-clasue (i) as well as sub-clause (ia) are identical and disallowance under clause (ia) is warranted when the deductee/payee is a resident whereas disallowance under clause (i) is warranted when the dedcutee/payee is a non-resident, outside India or a foreign company.

2.2.2 As per the Finance (No. 2) Act, 2019, the second proviso to section 40(a)(i) is inserted w.e.f. 01/04/2020 and hence the dispute regarding the disallowance of the expenditure u/s. 40(a)(i) even in case where the conditions of first proviso to section 201 are complied, is now settled. However, the moot question here is whether insertion of this proviso can have retrospective effect?

2.2.3 Let us first understand the rationale for inserting this proviso in sub-clause (i) of section 40(a). Prior to this amendment, the relaxation of not being considered as ‘assessee-in-default’ in accordance with the first proviso to section 201(1) was provided only in case where the deductee/payee was a ‘resident’. Consequently, even the relaxation from the disallowance of expenditure was extended only for clause (ia) of section 40(a). Inspite of sub-clause (i) and (ia) of section 40(a) being identical provisions, such relaxations where not extended to cases where the deductee/payee was outside India, Non-resident or a foreign company.

2.2.4 In the Explanatory Memorandum explaining the rationale behind the proposed provisions of the Finance (No.2) Bill, 2019; it is stated that relief from not being considered as ‘assessee-in-default’ under first proviso to section 201(1) as well as relaxation from disallowance of corresponding expenditure even on non compliance of TDS provisions, were extended to the deductor/payer only in respect of payments made to a ‘resident’. In case of similar failure to comply with the TDS provisions on payments made to a ‘non-resident’, such relief was not available to the deductor and hence in order to remove this anomaly, these amendments in section 201(1) and section 40(a)(i) were made so as to extend such relaxation even in case where the deductee/payee is a ‘non-resident.’

2.2.5 It is very evident from the above that there were disparities among the identical provisions of the Act. It was in order to remove these disparities; the said amendments were made. Even the Explanatory Memorandum to the Finance (No.2) Bill, 2019, clearly spells that the amendments were been made so as to remove an anomaly i.e. to cure a defect/disparity. From the above discussion it is evident that the amendment was brought to cure the defect as there existed anomaly between two identical provisions. Thus now, second proviso to sub-clause (i) as well as sub-clause (ia) stand identical and parallel, the former provides relaxation form rigors in case where the payee (recipient) is ‘non-resident’ whereas the later provides relaxation in case where payee (recipient) is ‘resident’.

2.2.6 It is settled and undisputed position of taw that an amendment which is curative or declarative in nature has to be given retrospective operation from the point of time when the principal legal provision was introduced. In this respect, one may refer the following:

1. Krishnamurthi & Co. v. State of Madras & Anr. (1973) (2) SCR 54)

2. CIT v. Alom Enterprises (2009) 319 ITR 306 (SC).

3. CIT v. Calcutta Export Company [2018] 404 ITR 654 (SC)

4. Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677 (SC)

5. CIT v. Ansal Land Mark Township (P.) Ltd. [2015] 377 ITR 635 (Delhi)

6. CIT v. Chandulal Venichand [1994] 209 ITR 7 (Guj. HC)

2.2.7 Further, Hon’ble Supreme Court in the case of CIT v. Vatika Township P. Ltd., (2014) 367 ITR 466 (SC) has held as under:

“…If a legislation confers a benefit on some persons but without inflicting a corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect….”

2.2.8 As discussed earlier, second proviso to sub-clause (i) is identical to second proviso to sub-clause (ia) of section 40(a). Hence, we may refer to various judicial pronouncements wherein it has been held that the second proviso to section 40(a)(ia) will have retrospective operation; and apply the said legal propositions for determining the effect of second proviso to section 40(a)(i).

2.2.9 In case of CIT v. Ansal Land Mark Township (P.) Ltd. [2015] 377 ITR 635 (Delhi), Hon’ble Delhi High Court upheld the decision in case of of Agra Tribunal in case of Rajiv Kumar Agarwal v. ACIT [ITA 337Agra/2013] wherein it was held that second proviso to section 40(a)(ia) substantially mitigates the rigors of a harsh disallowance provision and a curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not be stated so specifically, the insertion of second proviso must be given retrospective effect from the point of time when the related legal provision was introduced.

Accordingly it was affirmed that insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004.

2.2.10 Similar decisions in context of section 40(a)(ia) have been expressed in the favour of assessee by various High Courts and Tribunals on the ground that second proviso is declaratory and curative in nature hence should be given retrospective effect. Some of such decisions are listed below:

1. CIT v. Bhanot Construction & Housing Ltd. [2019] 261 Taxman 262 (Delhi)

2. CIT v. Naresh Kumar [2014] 362 ITR 256 (Delhi)

3. Thomas George Muthoot v. CIT [(2015) 63 taxmann.com 99 (Kerala HC)]

4. PCIT v. Perfect Circle India Pvt. Ltd. [ITA 707/2016 order dated 07/01/2019](Bombay HC)

At this juncture it is pertinent to note that the Hon’ble Supreme court has admitted the SLP of the revenue against the order passed in the matter of Thomas George Muthoot v. CIT (supra). However, as the matter is not yet disposed of by the Hon’ble Supreme Court and hence the decisions of the Hon’ble High Courts will still remain in force.

2.2.11 Thus from the above, one may adopt an analogy that the second proviso to section 40(a)(i), even though inserted with effect from 01/04/2020, should be given retrospective operation from the point of time when the related principal legal provision was first introduced in the statute, as the said amendment is brought so as to cure an anomaly and hence is curative and directory in nature.

As explained earlier in ‘Para 1.2.1’, Sub-clause (i) of section 40(a) exists since the inception of the Act i.e. from the year 1962. However, the crux of this sub-clause has been amended thrice since inception in order to expand its ambit, firstly vide the Finance Act, 1988 w.e.f. 01/04/1989, Finance Act 2003 w.e.f. 01/04/2004 and then vide the Finance Act, 2004 w.e.f. 01/04/2005.

It is important to note that even though there have been amendments in the crux of clause (i) of section 40(a), the same were to expand its applicability. The purpose of clause (i) since its inception has always been to disallow that part of expenditure relating to which there is non-compliance of the TDS provisions and thus in author’s opinion the retrospective operation of this proviso will be effective from 01/04/1962 i.e. the year in which the Income Tax Act came into force.

3. Summarizing the implication of retrospective operation of second proviso to section 40(a)(i):

Following would be the series of implications of giving retrospective effect:

1. Even though inserted w.e.f. AY 2020-21 as per the Finance (No.2) Act, 2019; the provisions of this proviso can be applied for any of the prior assessment years from the year 1962.

2. Thus, even for the ongoing assessment or appeals before various appellate authorities, if question of disallowance u/s. 40(a)(i) comes up on account of non compliance with the applicable TDS provision, then the deductor/payer needs to first check whether the following conditions of the first proviso to section 201(1) are fulfilled:

   • The payee has furnished his return of income.

   • The payee has taken into account the amount paid/credited by the payer.

   • The payee has paid the tax due on the income declared by him in such return of income.

   • Payer has to furnish certificate of Chartered Accountant in Form-26A.

3. If the above conditions are met, then, such deductor/payee will not be considered as ‘assessee-in-default’ as per the first proviso to section 201(1).

4. Consequently, as per the second proviso to section 40(a)(i), it would be deemed that the deductor/payer has deducted and deposited the applicable TDS on the date on which the deductee/payee has furnished his return of income.

5. If the payee files his return of income before the due date for filing return of income as applicable for the payer:

   As per the second proviso, it would be deemed as if the taxes are paid before the due date for filing return of income as specified in Section 139(1) and hence no disallowance shall be attracted.

   If the payee files his return of income after the due date for filing return of income as applicable for the payer:

   Disallowance u/s. 40(a)(i) may be made for the year in which there is non-compliance of the TDS provisions.

   However, as per the first proviso, the expenditure which was disallowed in any preceding years will be allowed as deduction against the income of the year in which such tax amount is paid to the department.

   Accordingly, if payee files his return of income after the due date (belated return), then as per the second proviso it would be deemed as if the deductor/payer has paid that tax on such belated return and according to first proviso, the expenditure earlier disallowed will now be allowed in the year in which such date falls.

   However, there are certain judicial pronouncements in context of section 40(a)(ia), wherein the tribunals after upholding the position that the second proviso to sub-clause (ia) of section 40(a) operates retrospectively have either directed the assessing officer to delete the addition or have remanded the matter back to Assessing Officer for the limited purpose of verifying whether the payee has included the income in his return of income and has paid the applicable tax thereon; and if the same is done then to delete the disallowance. Thus, tribunals have taken liberal approach and allowed deduction of such expenses in the relevant year itself.

   1. Ballabh Das Agarwal v. ITO [ITA. No. 1278/KOL/ 2011]

   2. Shri Rakesh Tak v. ITO [ITA No. 888/JP/2014]

   3. R K P Company v. ITO [ITA No.: 106/RPR/2016]

   4. Santosh Kumar Kedia v. ITO [ITA. No.1905/Kol/2014]

   5. Shri G.Shankar v. ACIT [ITA No.1832/Bang/2013]

   6. Visu Iternational Ltd. v. DCIT (ITA No. 488/Hyd./2013)

   7. G. Shankar v. ACIT (ITA No. 1832/Bang/2013)

Considering the above discussion, the authors are of the opinion that even though the second proviso to sub-clause (i) of clause(a) of section 40 was inserted by the Finance (No.2) Act, 2019, w.e.f. 01.04.2020; however, the same would still have retrospective operation from the date on which sub-clause (i) of clause(a) of section 40 was introduced in statute books i.e. from 01.04.1962.

Introduction

The Article 11 of the Universal Declaration of Human Rights states that “Everyone charged with a penal offence has the right to be presumed innocent until proved guilty according to law in a public trial at which he has had all the guarantees necessary for his defence.” The Preamble to the Constitution of India states that the people of India have solemnly resolved to secure to all its citizens fraternity assuring the dignity of the individual and the unity and integrity of the nation. The Supreme Court has interpreted the Constitution of India to include ‘the right to live life with dignity’ under the ‘Right to Life’. The dimension of ‘dignity’ within the ‘Right to Life’ found a discussion in the case of Maneka Gandhi v. UOI & Onr. (1978) 1 SCC 248. The Supreme Court in the case of Samatha v. State of A.P. (1997) 8 SCC 191, categorically held that the right to life enshrined in Article 21 of the Constitution of India means something more than mere survival of animal existence. The right to live with human dignity also found resonance within Article 21. Dignity has, since then, been an important consideration in a variety of Judgements that have extended the protection accorded by the fundamental rights while exalting ‘Right to Privacy’ in K.S. Puttaswamy & Onr. (2017) 10 SCC 1 by a bench of nine Judges or in others such as Navtej Singh Johar & Ors. v. UOI (2018) 10 SCC 1.

It would then come as no surprise to anybody that the presumption of innocence goes to the very root of the dignity of an individual. The accusation of a crime, even a white collar one is clearly an assault on the dignity of an individual. To presume, even fractionally, that the person is guilty by shifting a part of the burden off the prosecution on to the defendant itself, is an annihilation of it.

The Supreme Court had, as long back in 1987, elevated economic offenses to the very near to the top of the pyramid of crime. In Gujrat v. Mohanlal Jitmalji Porwal & Ors. (1987) 2 SCC 364, the Court stated that “The entire Community is aggrieved if the economic offenders who ruin the economy of the State are not brought to books. A murder may be committed in the heat of moment upon passions being aroused. An economic offence is committed with cool calculation and deliberate design with an eye on personal profit regardless of the consequence to the Community. A disregard for the interest of the Community can be manifested only at the cost of forfeiting the trust and faith of the Community in the system to administer justice in an even handed manner without fear of criticism from the quarters which view white collar crimes with a permissive eye unmindful of the damage done to the National Economy and National Interest”. As the position stands today, the prosecuting agencies for murder need to prove the crime of the Accused beyond reasonable doubt, but in certain economic offenses, the burden of proof has been shifted onto the accused through the introduction of statutory presumption.

Subsequently, the Court in Ram Narain Popli v. CBI (2003) 3 SCC 641 reiterated its observations in Gujrat v. Mohanlal Jitmalji Porwal & Ors. further observing that “The cause of the community deserves better treatment at the hands of the Court in the discharge of its judicial functions. The Community or the State is not a persona non grata whose cause may be treated with disdain.. ..Unfortunately in the last few years, the country has seen an alarming rise in white-collar crimes which has affected the fibre of the country’s economic structure. These cases are nothing but private gain at the cost of public, and lead to economic disaster.” These judgements have been liberally used in a very general sense by prosecuting agencies to justify their actions in prosecutions in white collar crimes. They have also been cited generously in order to oppose bail of those accused to white collar crimes. They have also managed to, by a single stroke of the brush, paint all economic offenses in a single colour. As the world of business develops and regulation / compliances become increasingly complex, ‘economic offenses’ have greatly increased in number. The comparison of an economic offender with a murderer is telling.

Our Supreme Court has held that economic offenses are a class unto themselves. In Y.S. Jagan Mohan Reddy v. CBI, (2013) 7 SCC 439 while dealing with the Prevention of Corruption Act, the court was pleased to hold that “Economic offences constitute a class apart and need to be visited with a different approach in the matter of bail. The economic offences having deep-rooted conspiracies and involving huge loss of public funds need to be viewed seriously and considered as grave offences affecting the economy of the country as a whole and thereby posing serious threat to the financial health of the country.”

Bail in Economic Offenses

The differential treatment meted out to economic offences and consequently to those accused of indulging in such economic offences extends into the realm of bail. There is a golden rule of criminal jurisprudence that proclaims that Bail is the rule and jail is the exception. In fact courts have time and again considered the effect that refusal of bail has upon the right to life as enshrined by Article 21 of the Constitution of India. The eloquence of Justice Krishna Iyer captures the conundrum of “bail or jail” aptly in Gudikanti Narasimhulu & Ors. v. P.P. (1978) 1 SCC 240.

Justice Krishna Iyer made an erudite attempt to balance the rights enshrined in Article 21 as against the dangers posed to the society observing that “”Bail or jail?- at the pre-trial or post- conviction stage-belongs to the blurred area of the criminal justice system and largely binges on the hunch of the bench, otherwise called judicial discretion. The Code is cryptic on this topic and the court prefers to be tacit, be the order custodial or not. And yet, the issue is one of liberty, justice, public safety and burden of the public treasury, all of which insist that a developed jurisprudence of bail is integral to a socially sensitized judicial process.. ..Personal liberty, deprived when bail is refused, is too precious a value of our constitutional system recognised under Article 21 that the curial power to negate it is a great trust exercisable, not casually but judicially, with lively concern for the cost to the individual and the community. To glamorize impressionistic orders as discretionary may, on occasions, make a litigative gamble decisive of a fundamental right. After all, personal liberty of an accused or convict is fundamental, suffering lawful eclipse only in terms of ‘procedure established by law’. The last four words of Article 21 are the life of that human right. The doctrine of Police Power constitutionally validates punitive processes for the maintenance of public order, security of the State, national integrity and the interest of the public generally. Even so, having regard to the solemn issue involved, deprivation of personal freedom, ephemeral or enduring, must be founded on the most serious considerations relevant to the welfare objectives of society, specified in the Constitution.”

The grant of bail to a person accused of economic offences including tax crimes have been vehemently opposed by the prosecuting agencies. The Supreme Court has held that economic offences, being a class unto themselves, deserve to be considered more strictly and the conditions for bail need to be more stringent. In Y.S. Jagan Mohan Reddy v. CBI, (2013) 7 SCC 439, the Supreme Court held that “While granting bail, the court has to keep in mind the nature of accusations, the nature of evidence in support thereof, the severity of the punishment which conviction will entail, the character of the accused, circumstances which are peculiar to the accused, reasonable possibility of securing the presence of the accused at the trial, reasonable apprehension of the witnesses being tampered with, the larger interests of the public/State and other similar considerations.”

An apt example of the difficulty posed by this approach to economic offences can be captured by looking at The Prevention of Money Laundering Act. This act has the distinction of recently regularly featuring in most major newspapers allegedly as a weapon by whichever government of the day that holds the reins of administration at the junior level to be used against those in opposition. Without stoking up any controversies regarding the merits of that claim, the provisions of this act are those that can easily be abused. A prime example would be Section 45, that imposes a twin condition for grant of bail. The Supreme Court in the cases of UOI v. Varinder Singh (2018) 15 SCC 248, Gautam Kundu v. Directorate of Enforcement (2015) 16 SCC 1 and Rohit Tandon v. Directorate of Enforcement (2018) 11 SCC 46 held that adherence to the conditions envisaged in Section 45(1)(ii) of the Act is required for the grant of bail. Subsequently, the Supreme Court, while observing that the earlier Judgements had not examined the constitutional validity of the Section 45(1), declared Section 45(1) of PMLA, insofar as it imposes two further conditions for release on bail, to be unconstitutional as it violated Articles 14 and 21 of the Constitution of India in the case of Nikesh Tarachand Shah v. UOI & Onr. (2018) 11 SCC 1.

The Judgement of Nikesh Tarachand Shah v. UOI & Onr. (2018) 11 SCC 1, is especially important given that Section 45(1)(ii) of the Prevention of Money Laundering Act not only required the accused to satisfy the court that there are reasonable grounds for believing that he/she is not guilty of the offence “punishable for a term of imprisonment of more than three years under Part A of the Schedule” but also that he/she is not likely to commit any offence while on bail. These conditions for refusal of bail as prescribed by Section 45(1)(ii) of the act had loaded the dice in the favour of the prosecution, making offences under the Prevention of Money Laundering Act draconian in nature.

In P. Chidambaram v. Directorate of Enforcement, (2019) 9 SCC 24, the Supreme Court refused bail to the Applicant holding that the “Grant of anticipatory bail at the stage of investigation may frustrate the investigating agency in interrogating the accused and in collecting the useful information and also the materials which might have been concealed. Success in such interrogation would elude if the accused knows that he is protected by the order of the court. Grant of anticipatory bail, particularly in economic offences would definitely hamper the effective investigation.” This Judgement has been quoted widely to oppose anticipatory bail.

It is not difficult to imagine the chilling effect that is produced by making the conditions for bail onerous. A weapon that can be used for defence may often be used offensively. It is similar with law. Any law that can be used can be abused. It is perhaps wise then that statutes that seek to impose greater restrictions on judicial discretion to the grant of bail are whittled down so as to provide a greater discretion to grant thereof. Bail can and should be granted on the merits and facts and circumstances of each case. The jurisprudence with regards to bail has been settled time and again by the Supreme Court so as to maintain the delicate balance between the rights of the society and the rights of the individual. It is perhaps best left undisturbed.

Shifting of the Burden of Proof

The introduction of legal fiction and deeming provisions in criminal statutes or those that are quasi-criminal in nature, mark a seemingly benign but a seismic shift in the burden on proof that the prosecution needs to establish. Yes, the prosecution still does need to prove it’s case beyond reasonable doubt in criminal proceedings, a concept that cannot be diluted so as to ensure that the constitutionality of the legislations stands up to the examination of the constitutional guardians. However, the legislature, through statutory presumptions, have managed to erode that burden somewhat, in a manner most prejudicial to the dignity of the accused. This has been done by shifting the burden for the very basis of criminal trial jurisprudence ‘mens rea’ or ‘mental intention’. The presumption that a person was intending to commit a crime when he or she carried out the actions being tried, is without doubt the greatest affront to the dignity of an individual. The shifting of the onus of proof is sought to be examined through the lens of the Income-tax Act, 1961.

The importance of the existence of the ‘mental intention’ to be convicted in a criminal proceedings is the fundamental cornerstone of criminal law. It has been established that ‘mens rea’ is an indispensable part of prosecution proceedings under the Income Tax Act. Prosecuting someone for a crime without establishing his mental culpability would be against the principles of natural justice. In Selvi J. Jayalalitha v. UOI [2007] 288 ITR 225 (Madras) the Hon’ble Madras High Court when confronted with the argument that while the element of ‘mens rea’ being the basis for prosecution under the Income Tax Act, it should be the onus of the prosecution to prove the existence of the same, held that the Provisions of Sec. 278E is constitutionally valid. In doing so, it held that presumptions are regulations of burden of proof and not presumption of guilt. It discussed the observation of the Hon’ble Apex court in Shambhu Nath Mehra v. State of Ajmer AIR 1956 SC 404 that the burden which lies on the prosecution never shifts but that that in certain exceptional cases where it is impossible and disproportionately difficult for the prosecution to establish facts which are especially within the knowledge of the accused and which can be proved by him without difficulty or inconvenience, the burden to prove or establish those facts can be shifted and that it is well-established rule of law that, save in a very exceptional class of case, the burden is on the prosecution and never shifts.

The Apex Court in the case of Sasi Enterprises v. ACIT [2014] 361 ITR 163 (SC) while discussing the scope of Section 278E of the Act held that the court has to presume the existence of ‘mens rea’ and it is for the accused to prove the contrary and that too beyond reasonable doubt. The Hon’ble Supreme Court has also issued notice in the Special leave petition Nelofar Cirrimbhoy v. ACIT [2015] 228 Taxman 57 (SC) against the Judgement of the Hon’ble Delhi High Court holding that once the presumption u/s 278E is raised, the respondent would have to show during trail that there was no willful default. Also, in Prakash Nath Khanna v. CIT [2004] 266 ITR 1 (SC) the Hon’ble Supreme Court held that whether there was wilful failure to furnish the return is a matter which is to be adjudicated factually by the Court which deals with the prosecution case. The Court has to presume the existence of culpable mental state, and absence of such mental state can be pleaded by an accused as a defence in respect to the act charged as an offence in the prosecution during trial. Thus, the partial shifting of the burden of proof has been upheld by the Hon’ble Supreme Court.

Section 278E (2) of the Income Tax Act, 1961, states that for the purposes of Section 278E, a fact is said to be proved only when the court believes it to exist beyond reasonable doubt and not merely when its existence is established by a preponderance of probability. It is considered that there are two thresholds of ‘burden of proof’, one being ‘preponderance of probability’ and the other being ‘beyond reasonable doubt’, the former being a lower threshold than the latter. The Apex court in Sasi Enterprises v. ACIT [2014] 361 ITR 163 (SC) held that the absence of ‘mens rea’ must be established beyond reasonable doubt for the purposes on Sex. 278E. The Hon’ble Madras High Court in Selvi J. Jayalalitha v. UOI [2007] 288 ITR 225 (Madras HC) held that “there is no ambiguity with regard to what the Assessee has to prove—the Assessee has to prove that there were reasons for not filing the return in due time. If he proves that, then the prosecution fails, and the manner in which the words ‘beyond reasonable doubt’ should be construed has also been explained in various decisions; so, the non-usage of ‘preponderance of possibilities’ cannot be a vitiating factor. It is not the doubt of a vacillating mind or a timorous mind, but if from the circumstances which are proved by the Assessee that he was prevented from filing the return, then the Assessee would have rebutted the presumption of culpable mental state.”

In todays world, leaving a digital footprint is perhaps inevitable. With the rapid advances in technology, it is easier than ever perhaps to perpetrate an economic offence but it is also easier to gather evidence. Given the sheer number of statutory compliances that have been put in place in the last few years, the integration of data between different government departments and the fact that most economic activities leave a trail of documents, are all arguments to perhaps envisage a shift of the onus of proof back onto the prosecution. The assumption of the presence of a mental intention to commit a crime that needs to be rebutted beyond reasonable doubt is in my humble opinion an afront to an individual’s dignity and therefore this shifting of the burden perhaps merits if not a re-consideration, then a recalibration.

Conclusions

The scourge of economic offences seems to be unending. A casual perusal of newspapers would be enough for one to conclude that economic offences are a cancer that threaten to devour the utopian society that we as Indian citizens strive to establish. Of course, the malady is not new. Economic offences are as old as any other offence. What is striking however is the sophistication and the quantum at which modern-day economic offenders operate. In a highly globalised world that is rapidly converging with the advent of seamless integration thanks to the Internet and other aspects of technology, economic offences are perhaps the biggest global threat, given that many channels that are used for layering, placing and integrating the monies so obtained are also conduits for organised crime and terrorist activity.

It would then perhaps be a no-brainer that economic offences are taken seriously. On a global scale, countries have been constantly moving towards more compliance and transparency in order to combat this ominous scourge. The zeal and the sophistication that is displayed by modern-day law enforcement and the plethora of new age legislations to combat this malaise is praiseworthy. However, one may do well to remember that economic offences at the end of the day are still offences and in a civilised society, the short-circuiting of due process of law is as grave threat to the general public as it is to the economic offenders. We see that many legislations that have spawned to control economic offences, fall short of the high benchmarks that we have set out for dealing with the criminal elements in our society. Conditions for bail have, in certain cases been made more stringent than for offences that involve substantial body harm and in a few scenarios, we see that the onus of proof has shifted substantially onto the accused. The effort to curb economic offences may have perhaps led to some laws being quite unfair while others may border line on being considered draconian. The examples taken in this article are perhaps not even the tip of the colloquial iceberg. The provocation is to give rise to a constructive discussion. If not a rethink, perhaps a recalibration may be required.

Inaugural Session of the Maa Vaishno Devi National Tax Conference

THEME: IMPACT OF EMERGING TECHNOLOGY ON TAXATION

It is heartening to note that the All India Federation of Tax Practitioners – North India in association with the Income Tax Bar Association, Prayagraj and the Tax Bar Association, Jammu have chosen to organise National Tax Conference at the footsteps of Sri Mata Vaishno Devi. With the blessings of the goddess, this Conference would be a great success and the discussions held in the Conference shall prove productive and contributory to creation of a robust taxation regime.

Tax and technology are the two areas which are not my forte but as a tax payer and an aware citizen I may be able to put across my understanding of and my expectations from the taxation regime. From that perspective I would share my thoughts with you. I am glad that this conference has given me an opportunity to be with in company of you all.

As we all know the theme of Conference is “Impact of Emerging Technology on Taxation”. Taxation, understandably, is not a new phenomenon. Talking about India, moving from the ancient to medieval and to the modern era, the fundamental principles of taxation have remained by and large unchanged. The primary purpose of taxation has always been to collect sufficient money for the Government to administer the governance of the state, to pursue welfare measures for the countrymen, to develop better infrastructures, communication networks and the defence mechanism. As a matter of policy, from ancient times to the modern times, the common thread running through has been that taxes should be realistic – neither be at insignificantly low rates nor be excessive for the subjects to feel pinch. The taxation regime ought to be simple, predictable and hassle free. The taxation administration needs to be fair, honest, efficient, effective and free from arbitrariness. The two principles derived from “Shastric Law” that were prevalent in the ancient and medieval times still hold good, which commanded the King to collect taxes from the subjects in the same manner a bee collects nectar from the flowers and the sun draws moisture from the earth only to return it back in thousand folds. These ‘Shastric’ edicts mandated the Ruler to tax his subjects without creating any undesirable difficulty or putting them at unease, and that the taxes collected by the Ruler to be utilised for the benefit of the subjects.

With the avowed objectives aforesaid, we have moved quite far in the system of taxation world-over. Though, the objectives have remained fundamentally unchanged, the system of tax collection has undergone a sea change. From a bureaucratic driven system we are now into a technology driven system of taxation. In the present times we have mostly automated taxation systems – be it direct taxes or indirect taxes. Tax processes are now technology driven so as to use a specific nomenclature for it – the Tax Technology.

When we talk of technology, we do not mean only of having a few computer systems installed for facilitating the human resource employed in an organisation. The technology now has moved forward in leaps and bounds. We are living in a world which is now driven primarily by a technology, in that the utmost important being internet and computer technology (ICT). The present times are the time of ICT revolution. The revolution is happening at such a fast pace that with each passing day the technological developments are hard to keep track of.

We are now in the times of Big Data Analytics, Block Chain, Robotic Process and Automation (RPA), Artificial Intelligence (AI), Machine Learning (ML) and Cloud Computing. In the times to come, the trends which would emerge are difficult to predict. But it is very important to live up to the expectations of the present day ICT revolution. Most of the facets of ICT revolution, as noted above, are already in place so far as the taxation processes and tax regime is concerned. Of late, we in India have shifted to e-invoicing, e-way bills and Business to Consumer (B2C) QR Codes which are generated on real time basis. These facilities are meant to ensure the transparency, certainty and efficiency in the collection of taxes – be it GST or other equivalents. The Tax Operation Managers, the Business Conglomerates, Bulk Sellers, Retailers and the Consumers are meant to be equally facilitated by the tax technology. The intelligent automation is meant to ease out the burden of over-complicated tax processes, which are hard to be understood by the traders and the consumers in equal proportion. When we have to deal with the tax processes, it is not only the big corporate houses but we also have to take into consideration a petty retailer located in a narrow lane of a far flung village in the remotest corner of the country. The technology should benefit all of them.

For the tax technology to be effectively implemented and to be efficient in tax collection and to be a great facilitator for the tax payers, there has to be an effective network of technology working over the length and breadth of the country, for which we need an effective internet technology. Although, we have fast created the network spaces – be it the optic fibre networks or the fast mobile network, still there is great network divide between cosmopolitan cities and the remote villages. For creation of country wide and reliable tax technology network we cannot imagine the absence of fast and robust internet.

For the tax technology to work effectively and efficiently, we shall need to open up the horizons of opportunities. We need to create Enterprises Resource Planning (ERP) which is open ended for the tax technology development companies or organisations to develop technology for the end users, which can multiply the benefits of the technology for the tax collectors and tax payers. These enterprise solutions have to work on collaborative and coordinated basis. For the Government and tax collection Departments only to create and put in place technology would be to expect too much. For any technology to be successful there has to be collaborative involvement of the propounders of the technology and its users at all levels. In this regard, the involvement of ICT innovators and IT – Multi National Companies have greatly helped in creating the efficient and effective technologies. Involvement of IT – MNCs in the process of filing of income tax returns, though, has seen few technological glitches, is expected to greatly enhance the experience of a tax payers and the tax facilitators in the process of submitting their income tax returns and to have seamless and hassle-free consequences related therewith.

In the developed countries and few developing countries, the experience has been gained over a period of time that tax technology has greatly helped the Governments and its functionaries in broadening tax base and the consequent tax collections. The broadening of tax base has also helped the Governments in simplifying and lowering the tax rates thereby to help the tax payers enormously. In India, we are fast catching up with the developed countries in implementation of tax technologies in all forms of taxation. In some ways, understandably, India is becoming a global leader, given the fact that most of the IT Companies who are world leaders are willing to cooperate with the Government and its agencies in effective implementation of tax technologies.

Apart from implementing the policy of efficient tax technology and suitable network for its effective working, few more steps are imperative to be taken as supplemental exercise. It is very important to educate the tax payer for a smooth transition while there are technological advances in the taxation regime. Small and medium business enterprises and individual tax payers need to be updated in their knowledge of tax processes. A cyber-friendly atmosphere needs to be created by the government in collaboration with and in consultation with all the stakeholders. Collection of taxes needs to be simplified. Frequency of payment of taxes and filing of tax returns needs to be reduced. Instead of monthly basis it can be better on quarterly, half-yearly or annual basis thereby allowing more time to businessmen to focus on their business activities. Over-dependence of the small and medium enterprises and individual tax payers on the tax consultants or tax managers also needs to managed by putting in place simplified taxation processes.

Over a period of two days, the discussions in this conference shall focus on many areas related to use of existing technology and the emerging new tax technologies, which sessions shall be guided by the eminent experts, reputed educators and renowned tax professionals. These brainstorming sessions would yield very positive results and the take-away from these discussions are sure to be utilised by the Government, Managers of Tax, Tax Planners, Tax Consultants, Tax Compliance Officers and the Tax Payers equally.

Again, I wish a great success to the conference and thank the organisers of this Conference for organising it and for providing me an opportunity to share my thoughts with you.

(Source : Speech delivered at Inaugural Session of National Tax Conference held at Katra on 2nd October, 2021)

 

“When I despair, I remember that all through history the way of truth and love have always won. There have been tyrants and murderers, and for a time, they can seem invincible, but in the end, they always fall. Think of it–always.”

“Power is of two kinds. One is obtained by the fear of punishment and the other by acts of love. Power based on love is a thousand times more effective and permanent then the one derived from fear of punishment.”

– Mahatma Gandhi

Inaugural Session of the Maa Vaishno Devi National Tax Conference

THEME: IMPACT OF EMERGING TECHNOLOGY ON TAXATION

Brother Justice Pankaj Mithal, Chief Justice of High Court of Jammu & Kashmir and Ladakh

Shri Sanjay Kumar, Conference Chairman and officer bearers of All India Federation of Tax Practitioners, (North Zone); Income Tax Bar Association, Prayagraj and Tax Bar Association, Jammu

Dignitaries on the Dais and off the Dais Members of the Legal Fraternity Delegate and Esteemed Guests

Ladies and Gentlemen

A very Good Morning to you all.

It is indeed my privilege to be here for the inauguration of this National Tax Conference that is being organised on the pertinent theme of “Impact of Emerging Technology on Taxation”.

The Technological Revolution brought with itself a cascading avalanche of regulatory and administrative challenges. New development in technology have constantly changed the paradigm of doing business and dealing with financial transactions. This, in effect, raised several fundamental questions as to the regulation and taxation of such novel methods of doing business. However, India has been able to continuously synchronize its regulatory structures with the modern fast-paced developing technological world. A testament to this claim would be the fact that while most of the nations are still at the nascent stage of amending and adjusting their laws and taxation structures to incorporate the new developments in the technological world, India has already advanced to the secondary stage of Technological Adaptation. It has not only reformed its direct and indirect tax laws to meet the challenges of the dawn of technological revolution, but has also incorporated the technological advancements in its regulatory and administrative structures. This allows the public at large to reap the benefits of the modern developments and experience an updated streamlined service, designed to not only reduce the compliance burden upon the citizens, but also to instill and inspire a sense of confidence in the taxpayers.

One such latest measure implemented by the Indian Government is the launch of its new Income Tax Portal, “e-Filing 2.0”. This is an online portal developed under the National E-Governance Plan and aimed at providing a single window access to all the income tax related services for taxpayers and other stakeholders. Such initiatives encapsulate not only the impact of new emerging technology on Taxation, but also the efforts of Government to use the said technology to make compliance more taxpayer friendly.

The contemporary relevance of this National Tax Conference can be gauged from the fact that the very first technical session of the conference begins with a discussion on this new Income tax Portal. I am hopeful that this discussion, along with the other scheduled discussions on pertinent issues, would bring together diverse perspectives and orientations on these contemporary issues of relevance, and would enable the intelligentia gathered here today to unfold the complexities of these issues in a comprehensive manner. So as to come up with novel and targeted solutions to those problems that may miss the eye, unless discussed in such a holistic and intellectual environment that this conference would provide.

Speaking of a comprehensive approach, it is imperative for the governments worldwide, especially in post-covid era, to embrace the emerging technologies and incorporate them in their administrative and taxation structures to incessantly raise the standard of services rendered to the taxpaying citizens. The Covid-19 pandemic exposed the shortcomings of administrative set-ups worldwide that relied upon physical filings, in-person applications and other face-to-face transactions. Such learnings must pave the way for a more advanced system of taxation compliance, that not only minimizes the burden and efforts of the taxpayers, but also maximizes the regulatory grip over taxable activities so as to constantly curb the tax-evasive practices, by having a more centralised and digitalized approach of tracking and regulation.

Developing novel approaches regulation through technology assumes importance, as it would not only assist us to carry the benefits of the technological advancements to the taxpaying citizenry, but would also help us be prepared for the unforeseen challenges of tomorrow. To be able to achieve this, field experts must come together and share their valuable learnings and ideas. It is therefore I say, that this conference would inevitably prove to be of vital significance, by being a cradle for progressive ideas and templates, that would strengthen our revenue and taxation set-up, and thereby usher an age of prosperity.

The vision of the taxation authorities has been to be a partner in the nation building process through progressive tax policy, efficient and effective tax administration and improved voluntary compliance. A taxation set-up that fails to develop and update itself in tandem with the technological advancements, will neither be able to augment the revenue mobilization, nor be able to inspire confidence of the taxpayer in the system. Since businesses have found new ways to incorporate developing technologies like Blockchain, Cryptocurrency, Artificial Intelligence, Augmented Reality, Machine Learning et cetera, into their mode of operation and means of transactions, it becomes imperative for even the Tax authorities to engage in rigorous examination of such emerging technology, and adopt well-tailored approach to incorporate them into out taxation regime, and update our regulation to correspond with the developments. Such incorporation would invariably mitigate the regulatory uncertainties that surround modern enterprises, for instance, the ones based on blockchain and cryptocurrency. This reduction of uncertainty would prove to be directly proportional to increasing the ease of doing business in India, and would inevitably help the financial sector chart a course of robust recovery, post the covid crisis.

Therefore, the prerogative of this conference is not only to examine and discuss the contours of the existing taxation structures, but also to lay the groundwork for upcoming discussions around the emerging enterprises. To be able to comprehensively understand the contours of such studies and explore the possibilities to adequately transpose them in the Indian context, is something that I hope this present and the successive conferences of All India Federation of Tax Practitioners would meticulously discuss and vigorously work upon.

Seeing the pressing need for such discussions, I am glad that this National Tax Conference has been organized by the North Zone of the All India Federation of Tax Practitioners, in association with the Income Tax Bar Association, Prayagraj and the Tax Bar Association, Jammu. I heartily applaud and appreciate the efforts of the Federation and the organizing Associations, and wish them all the very best for the success of this conference. I would also want to extend my warm wishes to all the Delegates and subject experts present here today, who are gracing this conference with their valuable and diverse perspectives.

I once again profoundly thank the organizers for having me here and wish them all the very best for their upcoming endeavours.

Thank You.

Jai Mata Di.

(Source : Speech delivered at Inaugural Session of National Tax Conference held at Katra on 2nd October, 2021)