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Report No. 115

2.14. Two peculiar features of tax litigation deserve specific notice. In the matter of direct taxes such as Income Tax and Wealth Tax, the assessee has to submit his return every year. By the time the next return becomes due, in all probability the assessment in respect of the earlier years is generally not finalised. If the assessee has raised some legal contentions and if there is a variance in the approach as to fact-situation, the pendency of the proceedings of the earlier year will entail repetition of the same contentions. When the first assessment is finalised and the decision is adverse to the assessee, he would ordinarily prefer an appeal. By the time the appeal is disposed of, more returns have become due and the litigation multiplies at an yearly rate.

If the litigation moves vertically upto the Supreme Court, the dispute raising its head year after year will be pending for an average duration of 15 to 20 years. In the meantime, same contention has multiplied into numerous appeals, and if the Supreme Court finally accepts the view of the assessee, all the earlier assessment orders at whatever stage pending will have to be brought in conformity with the decision of the Supreme Court.

2.15. A company registered or deemed to be registered under the Companies Act, 1956, or a corporation set up under a statute will have to finalise its balance sheet and profit and loss account. It has to file its return. If the controversy arises about the stand taken by the company on the one hand and the revenue authority on the other and the litigation moves upward, question would arise how long the balance sheet can be kept in a state of flux. Finally, when the matter is disposed of by the highest court and the decision imposes some additional liability, the company will have serious difficulty in adjusting its financial affairs, the judgment of the Supreme Court in Lohia Machines Ltd. v. Union of India AIR 1985 SC 421, interpreting the expression "capital employed" in rule 19A of the Income-tax Rules, 1962 and retrospective amendment of section 80J incorporating rule 19A in the section effective from April 1, 1972, would necessitate numerous companies reopening their balance sheets in respect of the intervening period of 13 years. This is bound to cause dislocation in the financial and economic planning of the corporate sector.

2.16. The failure of the system to dispose of tax litigation finally within a reasonable time creates hardship both for the revenue and for the assessee. The delay over a period results in multiplicity of proceedings causing avoidable harassment. The special feature of tax litigation must induce a thinking as to how to provide for a disposal of tax litigation which may deal with the same expeditiously. Viewed from this angle, the present system is dilatory and prolix. In terms of results, it is counterproductive.

2.17. One additional unfair advantage flowing from the delay in disposal of tax litigation and which often appears to be the prime motive for filing an appeal is the interim stay order granted by the High Court or the Supreme Court, as the case may be, against payment or recovery of tax found due already by two or in some cases three authorities. Occasionally, a blanket stay is granted. If ultimately, the assessee loses, a fresh round of litigation for recovery of tax starts.

2.18. Having brought into focus some of the ugly features of the present assessment and recovery of direct tax proceeding, the question that surfaces itself is whether all these ugly features can be eradicated and the system can be restructured so as to make it effective, time-bound and result-oriented.

2.19. From the discussions that the Commission had with the President and Members of the Income-Tax Appellate Tribunal and a comprehensive note submitted by the former Resident of the Income Tax Appellate Tribunal, it transpires that the time lag between the date of assessment order and the order of the Income-Tax Appellate Tribunal disposing of the appeal is about three years. The delay really occurs after the decision is rendered by the Income Tax Appellate Tribunal, when either the assessee or the revenue moves an application for reference and the matter lands into the High Court.

The bottleneck is at the level of reference under section 256(1) or section 256(2) as the High Court is unable to handle the reference within a reasonable time. Tax experts, leading tax advocates and speakers at symposia workshops and seminars broadly concurred in the same opinion but there was wide divergence of views in the matter of remedial measures. There is a consensus amongst concerned interests that the reference procedure has outlived its utility.

2.20. Having given the matter anxious consideration the Commission has not been able to find valid, convincing and cogent reasons for retention of reference procedure.

2.21. This procedure found its way in the Indian law at a time when legislation was fashioned on colonial model. Section 64 of the Income-Tax Act, 1952 of United kingdom conferred a right both on the assessee as well as on the surveyor if dissatisfied with the determination of appeal as being erroneous in point of law, to declare his dissatisfaction to the Commissioners who heard the appeal and on payment of the prescribed fee was entitled to give notice in writing addressed to the clerk of the Commissioners requiring the Commissioners to state and sign a case for the opinion of the High Court thereon. It is not open to the Commissioners to reject the request. Simon described this procedure as conferring a right of appeal to the High Court against the determination by General or Special Commissioners, as the case may be.

Even though an appeal, if it can be so described under section 64, lies against a determination only on a point of law alleged to be erroneous, in truth and substance, a determination of facts may become the subject matter of appeal. To take one illustration, in Bomforde v. Qsborna, (1941) 2 All ER 426. Viscount Simon, L.C., observed that where the Commissioners deduce further conclusions of fact from the facts proved or admitted, they should state that the question of law is whether their further conclusions can be supported by the facts proved or admitted.

Whatever be the garb, this permits reopening of determination of facts. In such a situation 'the question of law is whether the facts found or admitted can support their further conclusions of fact.' This view has almost bodily permeated in the decisions-of the High Court and Supreme Court while deciding the cuntours of what constitutes 'question of law'. Once a device is devised to reopen determination on questions of fact, the whole determination becomes open-ended. Therefore, in this procedure, apart from anything else, there is an inherent tendency to delay the disposal of cases and to widen the area of jurisdiction of the High Court under sections 256(1) and (2).

2.22. What then is the justification for such a long drawn out procedure? Till very recently, property was considered so sacrosanct that its deprivation even by lawful means for lawful purpose was to be discouraged at all costs. Deprivation of property in contrast with denial of liberty has caused greater flutter in the courts. A.K. Gopalan1 in search of liberty did not secure liberal interpretation of Constitution. R.C. Cooper2 (Bank Nationalisation) in search of property reversed the trend. The 'history of Article 31 of the Constitution is replete with instances where every socially beneficent legislation met its Waterloo on the touchstone of Articles 31 and 19(1)(f) of the Constitution. These two articles built-up such an insurmountable roadblock in the pursuit of socio-economic justice that ultimately they had to be given a decent burial. Sections 256(1) and (2) are a relic of those bygone days.

Further, the courts generally leaned in favour of giving any benefit of doubt in the interpretation of taxing statutes to the assessee. The court went so far as to hold that "avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality but on the operation of the Income-tax Act. Legislative injunction in taxing statutes may not, except on peril of penalty, be avoided, but it may lawfully be circumvented."3 More often tax evasion donned the robe of tax avoidance. If the transaction is a device to avoid tax, then judicial process need not accord its approval to it.

This was first hinted in Wood Polymer Ltd. v. Bengal Hotels Ltd., 40 Company Cases 597 (Gujarat High Court). Finally, a Constitution Bench unanimously laid the ghost of Westminster in Mc Dowell & Co. Ltd. v. Commercial Tax Officer, 1985 (3) SCR 791. Conceding that there is no equity about tax, let it not be forgotten that no civilised society can exist unless taxes are paid without undue delay. This approach recently disclosed would provide an additional reason for doing away with the reference procedure which is a colonial relic.

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

2. R.C. Cooper v. Union of India, 1970 (3) SCR 530.

3. Commissioner of Income-Tax v. A. Raman & Co., 1968 (1) SCR 10 (15).

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