Budget 2020 Move Hobbles Income Tax Appellate Tribunal, Hurts TaxpayersBloombergQuintOpinion
Of the various proposals made in the Finance Bill 2020, one proposal illustrates the perpetual tussle between the legislature and the judiciary. This is the legislative override on the scope of discretion accorded to the Income Tax Appellate Tribunal in granting interim relief of stay to taxpayers during the pendency of their appeals before it.
Section 254(2A) of the Income Tax Act, 1961, which provides for such statutory power, has constantly been a subject of legislative glare through successive amendments, with the latest coming by way of the Finance Bill, 2020.
Setting The Context
The Income Tax Act allows tax authorities to initiate recovery proceedings towards the tax demand by precipitate action, while the appellate challenge to the merits case is still pending. As a result, it is expected that the aggrieved taxpayer would seek the shelter of interim relief from ITAT as a judicial forum during the pendency of such appeal.
The ITAT was judicially declared to possess the power to grant a stay on recovery proceedings by the Supreme Court in the Mohammed Kunhi case, which allowed the ITAT to pass such orders that are necessary to meet the ends of justice. Subsequently, these powers were statutorily conferred by way of legislative amendment.
Subsequently, the Income Tax Act was amended to provide an outer limit of four years for the disposal of an appeal by the ITAT, while it continued to exercise its inherent power to grant stay against recovery. Perhaps anxious to ensure that a stay-granted appeal did not remain pending for such a long period, the Act was thereafter amended to stipulate that in the first instance, the ITAT could stay the recovery for a maximum period of 180 days and dispose the appeal within that period. Further, where the appeal could not be so disposed, the ITAT could extend such stay up to a maximum of 365 days, subject to being satisfied that the delay was not attributable to the taxpayer.
The Bombay High Court considered these changes in the statutes in the Narang Overseas case and concluded that there was still no restriction upon the power of the ITAT as a judicial forum and the period of stay could be extended well beyond 365 days where the taxpayer showed sufficient cause, and the reason for such delay was not attributable to the taxpayer. Hence, legislative curtailment of such power of extension of stay beyond 365 days, was viewed as violative of fundamental rights under Article 14 of the Constitution. This binding judgment—besides being a vindication of the law laid down by the Supreme Court—ensured that taxpayers were not required to approach the High Courts for extension of stay and such extension could be granted by the ITAT itself.
The very next year witnessed legislative intervention again. The Income Tax Act was amended to provide that if the merits appeal was not disposed within 365 days, the stay would automatically stand vacated even if the delay in disposal of the appeal was due to no fault of the taxpayer.
Taxpayers obtained judicial redress even against this change. In the Pepsi Foods case, the Delhi High Court found objection with the change declaring this part of the amendment as violative of Article 14 again.
The High Court was of the view that it was antithetical to treat a diligent taxpayer—and thus consider the stay available as vacated—similar to an errant taxpayer.
The High Court quashed the changes and its view was subsequently affirmed by the Supreme Court.
The Latest Attempt
The Finance Bill 2020 has again proposed amendments to Section 254(2A). Adding to the woes of troubled taxpayers due to assessments and cumbersome litigation, the proposals in the Bill may cause an added burden, while tax litigation becoming even more expensive for taxpayers.
The first proposed change mandates a minimum deposit of 20 percent of the demand to be paid by the taxpayer (or equivalent security) as a pre-condition to obtain the interim relief from the ITAT.
The second proposed change, surprisingly, proposes to re-enact the law invalidated by the Bombay and Delhi High Courts, by stipulating that the period of stay shall not be extended beyond 365 days even where the delay in disposal of the appeal is not attributable to the taxpayer. This change undoubtedly opens up for a constitutional challenge.
The idea that a person must be punished for an alleged assessment even before it is proven before a quasi-judicial forum, and the stay against recovery would lapse without any fault of the taxpayer is fundamentally repugnant.
Given extensive judicial guidelines, eight decades of functioning as the oldest tribunal, in any case, the ITAT is required to be cautious in exercising this power. It is not to be exercised routinely, but only in deserving and exceptional cases where non-grant of stay would be ostensibly unjust. As a practice, the ITAT examines the merits of each stay petition with a tooth-comb to assess ‘balance of convenience’, ‘financial hardship’, cases that are covered by was of precedence of its own orders or orders of higher appellate forums, before adjudicating on stay petition.
Furthermore, the memorandum explaining the Bill has not addressed the reasons for withdrawing judicial discretion permitting grant of interim relief beyond 365 days against any coercive action of recovery till the appeal is disposed.
Instead, it would have been appropriate had the proposed law made efforts towards empowering the ITAT – institutionally and in infrastructure – to dispose matters such that a situation like pendency of appeals for more than a period of one year does not even arise.
If the pendency of litigation is what is troubling lawmakers, it is equally troubling for the taxpayer – both in terms of costs and delays. In fact, from a policy perspective, it takes away the credit for announcement followed by a separate bill in the Parliament, to deal with the settlement of past litigation.
A higher objective needs to be pursued of working towards institution building and addressing the ills plaguing the delay in the disposal of pending cases. Any legislative and executive intervention in this respect would be indeed laudable and carry an appreciable and deeper impact. This proposal deserves to be re-examined after assessing its impact.
Mukesh Butani is Founding Partner, BMR Legal. Assisted by Shreyash Shah - Managing Associate, and Madhura Bhat - Associate.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.