Words Of ‘Supreme’ Importance On Tax Litigation In India
Birds fly over the Supreme Court in New Delhi, India. (Photographer: T. Narayan/Bloomberg)

Words Of ‘Supreme’ Importance On Tax Litigation In India


Despite the improvement in India’s ease of doing business rankings in recent years, one thing that haunts businesses in India is tax litigation. An open tax litigation in India can trouble even the most experienced tax teams of multinationals accustomed to operating across countries and tax laws. The problems are many. While the inordinate time taken to achieve closure of a tax dispute is quite easily the most significant, there are others such as the litiguous nature of the income tax department – taking most matters right up to the Supreme Court by challenging every decision in favour of the taxpayer at lower levels.

The Supreme Court recently pronounced its verdict in a case (involving National Cooperative Development Corporation) which has taken many decades to finally close. The case was heard and decided by a bench consisting of Justice Sanjay Kishan Kaul and Justice Indu Malhotra. The joint judgment penned by Justice SK Kaul is a rare treatise with postscripts.

Justice Kaul begins the 50-page judgment with this statement – “Which pocket of the Government should be enriched has taken forty-four (44) years to decide – a classic case of what ought not to be!”

The issue in question was the tax treatment of grants and disbursements of a central government undertaking. That explains the reference to ‘which pocket of the government’ in the opening remark. The classic case of ‘what ought not to be’ is because irrespective of the decision, the government would not stand to lose.

The specific tax issue on which the litigation arose is of little significance when compared to the observations of the Supreme Court on the state of tax litigation and the approach of the Income-tax department in respect of the same.

The Supreme Court decided the actual tax issue in favour of the tax payer and concludes by stating that the case resulted in “the wastage of judicial time on deciding, who is principally right when in either eventuality it benefits the Central Government.”

Thereafter, Justice Kaul pens two postscripts to the judgment. The postscripts are Justice Kaul’s views on multiple aspects of tax litigation and ways to address the problems currently ailing it. The postscripts recommend that the government reconsider the way Advance Rulings currently work.

What do these postscripts mean? And, are they binding?

Obiter Dictum

In a concept derived from English Common Law, a judgment comprises of two elements: ratio decidendi and obiter dicta. Ratio decidendi, the latin phrase, means ‘the reason’ or ‘the rationale for the decision’ and obiter dicta means ‘by the way’ which is really a remark said in the passing. While a ratio decidendi is binding, the obiter dicta (or dictum in plural) only has persuasive value for the purposes of judicial precedents.

While the postscripts in this judgment are obiter dictum, they raise several pertinent points for consideration and it is noteworthy that the Supreme Court has taken note of these.

Justice Kaul pens two insightful postscripts.

Postscript 1 deals with his comments on the burden cast on courts with innumerable cases filed by governments (ie: bureaucrats) and the reason for the same. He ends this postscript with a suggestion that India should seriously consider institutionalising mediation.

Postscript 2 deals with how certainty in taxation matters is important, and the role that binding advance rulings play in avoiding tax disputes. He evaluates the efficacy of the current Authority for Advance rulings and how time consuming they are. Justice Kaul concludes the second postscript with a recommendation to the government to reconsider the way advance ruling authority currently functions.

These obiter dictum, if taken seriously can solve two of the most serious problems currently being faced by taxpayers. The observations by Justice Kaul are very accurate and touch upon the real issues.

Burden On The Legal System

Justice Kaul observes that the ‘Indian legal system is reeling under a docket explosion’ and the ‘Government and public authorities are active contributories to this deluge’.

This has been one of the most oft spoken facts. The postscript also identifies the root cause of this problem which again has been discussed ad nauseam in the past. Justice Kaul identifies that the government doesn’t have a well laid out litigation policy and even if it does it is ‘observed in breach’. He talks of the non-decision holy grail when he says “bureaucrats are reluctant to accept responsibility of taking such decisions, apprehending that at some future date their decision may be called into question and they may face consequences post retirement”.

This has probably been the single reason why all tax matters the department loses are appealed.

Justice Kaul suggests the constitution of a committee of legal experts presided by a retired Judge to approve any settlement of dispute decisions taken by bureaucrats. This is a suggestion worth considering along with the other suggestion of meditation that has been made in the judgment.

Advance Rulings And Certainty

Justice Kaul deals with another very important issue in the second postscript.

At the outset, he rightly identifies that “a vibrant system of Advance Ruling can go a long way in reducing taxation litigation.”

According to him advance rulings help those taxpayers who are “willing to comply with the law of the land but find some ambiguity.” This view would would be music to the ears of several taxpayers.

He then says, and most corporate tax payers, especially forreign companies, would agree with this, that taxpayers would prefer advance rulings as against “first filing a return and then facing consequences from the Department because of a different perception which the Department may have”.

He notes that Advance Rulings can “avoid the tiers of litigation which such cases go through as in the present case.”

While advance rulings can be obtained in both direct and indirect tax matters, the advance ruling authority for direct tax matters hasn’t been functioning efficiently. Justice Kaul points to ground realities. He states “ground level situation is that this methodology has proved to be illusionary because there is an increasing number of applications pending before the AAR due to its low disposal rate and contrary to the expectation that a ruling would be given in six (6) months.” It needs to be noted that the 6 month time limit is provided in law and is rarely adhered.

Justice Kaul signs off with a discussion on international practice on advance rulings and how they have benefited taxpayers and tax administrators alike. He considers “it appropriate to recommend to the Central Government to consider the efficacy of the advance tax ruling system and make it more comprehensive as a tool for settlement of disputes rather than battling it through different tiers, whether private or public sectors are involved.”

“Backbreaking Dockets”

Justice Kaul, writing for himself and Justice Indu Malhotra, states they “have been persuaded to write two postscripts on account of the backbreaking dockets which are ever increasing and as a move towards a trust between the tax department and the assessee, and we hope that both the aspects meet consideration at an appropriate level.”

The judgment ends with two notable references. The judges are reminded of the letter penned by legal luminary Nani Palkhivala to Soli Sorabjee at the time of the latter’s appointment as the Attorney General.

Palkhivala reminded Sorabjee that ‘the greatest glory of Attorney General is not to win cases for the Government but to ensure that justice is done to the people’. He quoted in his letter the motto of the Unites States Department of Justice.

“The United States wins its case whenever justice is done to one of its citizens in the courts.”

The two judges hope this would be the objective of government litigation in India as well, recalling Martin Luther King Jr.’s words:

“We must accept finite disappointment, but never lose infinite hope.”

Ajay Rotti is Partner at Dhruva Advisors LLP.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.

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