Bombay High Court Restores Natural Justice in Tax Appeals Process
In July 2018, the Central Board of Direct Taxes released its Central Action Plan for 2018-19, in which it announced a plan to incentivise the Commissioner of Income Tax (Appeals) for accelerating disposals of appeals. In a previous column on BloombergQuint, I called this ‘A Retrograde Change to the Income Tax Appeal Process’. Subsequently, a prominent tax bar body, the ‘Chamber of Tax Consultants’, petitioned the Bombay High Court against the CBDT plan. Last fortnight, the High Court quashed the portion of the action plan which would have caused grave prejudice to a taxpayer’s constitutional rights. This article details the contentions and grievances put forth before the court and their implications.
The issue in the aforementioned judgment was with respect to the responsibility of the CIT(A) to discharge functions under the framework of the statute. The impugned guidelines sought to channel the powers under Section 251 of the Income Tax Act to the CIT(A), by incentivising him or her for orders passed. This would have stripped away the impartiality bestowed on the office, which is a central principle to any adjudication proceeding.
The court held that the effort of the CBDT to supplant this neutrality, by a bias hidden in the form of an ‘assessment of performance’, is unconstitutional and against the principle of natural justice, with blatant interference in the duties of the first adjudicating body.
It’s a well-settled principle that an appellate authority should pass an order in an impartial manner and no administrative supervisory authority should interfere with its judicial functioning. The court held that the instructions were inconsistent and violative of the statute requirement (Section 119(1) of the Act), which while empowering the CBDT to pass directions or instructions to subordinate officials for proper administration of the statute, specifically provides an exception that no such instructions shall interfere in exercise of CIT(A)’s appellate functions. These instructions were also inconsistent with observations and holdings of Supreme Court and various High Courts in a number of judgments as regards to the independence of the judiciary. The courts have held that such instructions are violative of Article 265 of the Constitution of India, which provides for the collection of tax as per the law.
“It is true that tax officials and first appellate authorities are judges in their own causes; yet they are called upon to decide disputes and hence it is incumbent upon them to act independently and impartially.
If such instructions were followed (in a real sense, it had been done till the date of this judgment), the First Appellate Authority would be deprived of its independence, a cardinal principle for delivery of justice. If the first principle was not followed, it would be a misnomer to call the orders as their judgments; they would essentially be the judgments of the authority that gave the directions. The Supreme Court, in the case of Orient Paper Mills Ltd., observed: “it is regrettable that when administrative officers are entrusted with quasi-judicial functions, oftentimes they are unable to keep aside administrative considerations while discharging quasi-judicial functions.” The Supreme Court went ahead in Union of India v. R Gandhi advocating the independence of the judiciary and observed that impartiality, independence, fairness, and reasonableness in decision making are the hallmarks of the judiciary.
Without independence, impartiality cannot thrive.
The Supreme Court further remarked that independence is not the freedom for judges to do what they like. It is essentially the independence of judicial thought, meaning freedom from interference and pressures which provide the judicial atmosphere with an absolute commitment to the cause of justice and constitutional values. Hence, the instructions of CBDT with incentives were contrary to observations made by the apex court.
Before the Bombay High Court, it was argued by the tax bar body that the prescription of higher weight for disposal of cases through quality orders was entirely impermissible. This had every possibility of consciously or subconsciously influencing the mind of the appellate body on the ultimate outcome of the appeal, besides influencing the outcome of the appeal on merits. We all know the basic postulate of the rule of law ‘justice should not only be done but it must also be seen to be done.’ Credibility in the functioning of the justice delivery system and the perception of affected parties are relevant considerations to ensure the continuance of public confidence in the credibility and impartiality of the judiciary, a principle emphasised by the Bombay High Court.
While deciding the writ petition, the Bombay High Court held that the policy provided for an incentive for qualitative orders. This points to circumstances where the order passed by the CIT(A) would be in favour of the revenue department. For example, the policy refers to the enhancement made by the CIT(A) or a case where the CIT(A) has levied penalty under section 271(1) of the Act. This necessarily refers to enlargement of the assessee’s liability before the CIT(A) as compared to what may have been determined by the assessing officer. Therefore, the High Court held that such a policy was wholly impermissible and invalid. Any CBDT directive which gives an additional incentive for an order that the CIT(A) may pass, necessarily transgresses in the commissioner’s exercise of discretionary quasi-judicial powers.
The High Court also observed that such guidelines have a propensity to influence the appellate commissioners who may be tempted to pass an order in a particular manner to achieve a greater target of disposal.
Any temptation, referred to in the guidelines as incentives for disposal of an appeal in a particular manner, would not stand the test of law.
During the proceedings before the High Court, wisdom prevailed on the CBDT which decided to withdraw the guidelines from the current financial year, which the High Court took note of. The effect of these instructions would have had serious repercussions on the independent decision-making authority of the CIT(A), in discharging its functions as an appellate authority.
While taxpayers will hail the recent judgment with enthusiasm, we continue to live in a system which offers limited reprieve unless a law is laid down by the final court in the land. In a bold judgment in June 2018, the Karnataka High Court had disposed over 300 appeals arising out of transfer pricing cases decided by the tribunal that were largely in favour of the taxpayer. The government went in appeal to the Supreme Court, where its law officer argued that the matter dealt with a ‘substantial question of law’ and ought not to have been decided by rejecting the appeals. The Supreme Court will hear these cases after the summer break.
On the CBDT Action Plan, another tax body, the ‘All India Federation of Tax Practitioners’ had filed a writ before the Delhi High Court on the same issue last year. The matter is sub judice and considering the issue is no longer res integra, given that CBDT has already decided to withdraw the incentive policy, the Delhi High Court has scheduled to hear the matter after the summer break.
In summary, the judgment of Bombay High Court is a reiteration of the first principle of administrative and constitutional law that there is no room for impartiality and bias and that justice should not only be done but it must also be seen to be done.
Mukesh Butani is the founder of BMR Legal. Shreyash Shah is a Managing Associate at the Firm and an advocate at Bombay High Court.