Get up to speed with the latest developments in the World of Tax. This week, the author wonders whether it is time to write an obituary for the DRP. Also another body-blow on the reopening front should shake the Babus of Aaykar Bhavan out of their reverie. And yes, don’t forget to tighten your seat belt because the CBDT Chairman’s missive on recovery might just prompt the AO to demand that you pay up that long outstanding arrear

Fasten Your Seat Belts – Its’ Recovery Time

The CBDT normally goes into “recovery & collection” mode in March when they have to report the figures of tax collection to the mandarins of South Block. So, the Chairman’s letter of 25th July telling his juniors that “focus” on “concerted efforts in certain categories may expedite cash collection” came as a bit of a surprise. However, it seems just to be more a case of saber-rattling rather than anything serious. The Chairman’s tone seemed quite casual. There was no sense of urgency in it. No words to shake the Babus of Aaykar Bhavan out of their reverie. His use of the words “I suggest” was significant. Also, the suggestions appear to have been casually made. The Chairman said “more than 20,000 crores have been stayed by courts/ITAT” and that “counsels should be advised to get the stay vacated” by bringing “the direction of the Supreme Court in the Vodafone case” to the notice of the concerned authority. Well, all that one can say politely and with humility is that a tutorial on the working of the Tribunal and the Courts may be in order! Meanwhile the ground reality is that assessees continue to enjoy unlimited stay from the Tribunal despite the clear legislative intent to the contrary. This is thanks to the blunders of the department (see Dear Department, Thank You For Giving Us Infinite Stay Of Demand). Mr. Chairman, can you do something to rectify this please?

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The author trains his guns again on the proposed National Tax Tribunal and makes out a compelling case on why it should never be implemented. Instead, a different approach is required to solve the problems of delay and cost in justice delivery says the author. The ten-point agenda formulated by the author will, if implemented in true earnest, deliver us the Nirvana of “Sulabh Nyay Satvar Nyay” (Simple justice, Speedy justice) assures the author

The Constitution of India is the Supreme Law of the Land. One of the most important provisions of the Constitution of India is Article 265, which provides that “No tax shall be levied or collected except by authority of law”.

In the year 1998-99, the total pendency of tax appeals before the Income Tax Appellate Tribunal were 3,00,597 it took six to seven years to hear the appeal before the Tribunal, and in High Courts the matters were heard after 10 to 15 years. Shri Palkhivala in his article “The Maddening Instability of Income Tax Law” (Income Tax Review – August-Sept, 1996 P. 57 has stated as under “A telling example of the total absence of a sense of time in our tax administration is afforded by Supreme Court’s decision rendered last November in the case of Sutlej Cotton Mills Ltd. vs. CIT (1990) 2 SCALE 931. It was a case under Business Profits Tax, 1947. The accounting period was 1946-47. The amount involved was paltry sum of a few lakhs of rupees. The High Court’s order was rendered in 1965. The Supreme Court sent the matter back to the Income Tax Appellate Tribunal to re- hear the appeal 44 years after the close of the accounting period. Is there any other civilized country where a tax payer would not know the quantum of his liability for 44 years?”.

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The author argues that the adverse outcome of the Aditya Birla Nuvo matter was the result of shoddy drafting of the JV agreements by AT&T’s lawyers which the department’s lawyers exploited to the hilt. But its too early to write an obituary for the India-Mauritius DTAA says the author.

The judgement of the Bombay High Court in Aditya Birla Nuvo vs. DDIT must have sent a chill down the spine of foreign investors hoping to escape tax in India by routing their investments through Mauritius.

On paper, Aditya Birla Nuvo had a seemingly cast-iron case. Like hundreds of foreign investors before it, AT&T USA set up a 100% subsidiary in Mauritius, funded it with enough capital and got it to invest in the shares of Idea Cellular.

So what if AT&T Mauritius was a dummy company with no operations worth its name. It had the ‘precious’ Tax Residency Certificate from the Mauritius tax authorities and that is all that was required to wish away all tax headaches as per the CBDT’s Circular Nos 682 & 789 dated 30.3.1994 and 30.4.2000 and the judgement of the Supreme Court in UOI vs. Azadi Bachao Andolan 263 ITR 706.

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The author raises the seminal question as to why, while the Tribunal has all the trappings of a Court, does it not have the power to punish for contempt. He cautions lower authorities that the lack of contempt power is no reason for not following the binding judgements of the Tribunal. He also makes a fervent plea to all practitioners to uphold the honour & dignity of the great Institution.

Under the Income tax Act, the Income Tax Appellate Tribunal is a final fact finding authority.  In Ajay Gandhi v B. Singh (2004) 265 ITR 451 Apex Court observed that “The Income tax Appellate Tribunal exercises judicial functions and has the trapping of a Court”. Apex Court in ITAT v V.K. Agrawal (1999) 235 ITR 175 has held that interfering with administration of justice of the Income Tax Appellate Tribunal will amount to contempt of Court. In an historic judgment then law secretary was held for contempt. It is now beyond doubt that the Income tax Appellate Tribunal has all the powers of Court. It can issue summons and  exercise all the powers vested in the Income tax authorities under section 131 of the income Tax  Act, hence any proceedings before the Income tax Appellate Tribunal shall be deemed to be judicial proceedings within the meaning of sections 193 and 228 for the purpose of section 196 of the Indian Penal code. The Tribunal shall be deemed to be a Civil Court for all the purposes of section 195 and Chapter XXXV of the Code of Criminal Procedure 1898.

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The author argues that the verdict of the Special Bench in Tata Communications vs. DCIT that stay of demand can be extended by the Tribunal beyond 365 days is the result of inept handling by the department. He calls the situation a “fiasco” for the department and dishes out advice on what can be done to remedy the situation

The judgement of the Special Bench in Tata Communications vs. DCIT that the Tribunal has the power to extend stay beyond 365 days despite the clear language of the Third Proviso to s. 254(2) of the Act must have come as a big surprise to even the most optimistic tax-payer. Certainly, the decision caught battle-hardened tax professionals by surprise.

The blame for the fiasco lie squarely with the department for their inept handling of the matter. Of course, it is another matter that the provision of law is itself grossly misconceived.

The Tribunal’s power to grant stay of demand was recognized by the Supreme Court as early as in the year 1969 in ITO vs. M.K. Mohammed Kunhi 71 ITR 815 where it was held that the power to give final relief in the appeal included the power to grant interim relief to stay the demand.

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The author pays rich tribute to the Tribunal for its exemplary functioning in the role of dispensing justice. However, this is not the time for the Tribunal to rest on its laurels, exhorts the author, and warns that there are several challenges ahead. To meet the challenges, the author has formulated an agenda for the Bar & the Bench to implement. If implemented in true earnest, the Tribunal will become the best judicial institution in the Country assures the author

The Income Tax Appellate Tribunal which was established on 25-1-1941 had 3 Benches in the year 1941, where as today, it has 63 Benches, in 25 Cities. As on today pendency before the Income tax Appellate Tribunal is only 53,650 appeals. This is one of the Tribunal of our Country which decides the matters within a year of filing of appeal. In Mumbai, only 15,320 appeals are pending. The logo of the Tribunal conveys the message that the Motto of the Income Tax Appellate Tribunal is “Sulab Nyay and Satvar Nyay”.

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The author says that modern day battles are fought in the court room and that lawyers and CAs are the new warriors. He lauds the efforts of the National Tax Moot Court Competition which hones the skills of budding professionals but says that the time has come to debate whether the desired objects are being achieved or there is some other way to benefit young professionals

16th January, 2004 was a memorable day in the history of the Federation. On this auspicious day the then Prime Minister of India, Hon’ble Atal Bihari Vajpayee, released a commemorative postage stamp in Mumbai which was dedicated to Shri N. A. Palkhivala. In his speech, Prime Minister stated as under

“In those days, the battle for democracy was fought by many people in many different ways. Many of us in politics under the leadership of Jayaprakash Narayanan fought it in prisons. But I have no doubt that one of the finest battles was fought in the court room and that fighter was Nani Palkhivala”.

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The author argues that non-residents dread the ‘Force of Attraction’ rule in Double Taxation Avoidance Agreements because it permits the taxation of income arising outside the Contracting State. The ‘Force of Attraction’ rule can also create an anomalous situation where an assessee may be better off under the domestic law than under the tax-treaty law, says the author

The recent judgement of the Tribunal in ITO vs. Linklaters LLP has put the spotlight on the dreaded “Force of Attraction” principle.

In an earlier judgement in DCIT vs. Roxon OY 106 ITD 489 (Mum), the Tribunal explained that the basic philosophy underlying the ‘Force of Attraction’ rule is that when an enterprise sets up a PE in another country, it brings itself within the fiscal jurisdiction of that another country to such a degree that such another country can properly tax all profits that the enterprise derives from that country – whether through the PE or not. Therefore, under the ‘Force of Attraction’ rule, the mere existence of a PE in another country leads all profits which can be said to be derived from that another country being taxable in that another country.

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The Finance Minister publicly expressed his anguish at the mounting number of frivolous cases filed by the department which are choking the Courts. The author, a public-spirited citizen ever eager to help the FM in such matters, puts on his thinking cap and formulates a 12-point agenda to cure the malaise. If implemented in real earnest, the mindless filing of departmental appeals will cease, assures the author. Is the FM listening?

The Hon’ble Finance Minister while addressing the Chief Commissioner’s Conference asked the CBDT to come out with a comprehensive proposal to address the issue of unwanted litigation with the tax payers. Federation has suggested proposals to reduce the tax litigation from time to time. “Kar Vivad Samadhan Scheme, 1998” (1998) 233 ITR 36 (St.), which was successfully implemented by the Government was the suggestion of the Federation. Hon’ble Justice Mr. V. C. Daga, Judge, Bombay High Court in Commissioner of Central Excise vs. Techno Economic Services Pvt. Ltd. (2010) 255 E.L.T. 526 (Bom.) has taken judicial notice and directed the Chairman, Central Board of Excise and Revenue, Ministry of Finance to frame guide lines similar to Income tax matters. The Hon’ble Justice observed that “Let the Court to decide, attitude needs to be given go bye”. The Comptroller & Auditor General of India (CAG), in its recent report has revealed that a whopping sum of Rs 2.2 lakh crores has got locked up in appeals at various levels. The report stated that “absence of centralized database on appeals, non production of records during audit was a major constraint and concern”. Even the Federation in spite of making a sincere attempt could not succeed to get the number of tax appeals, references and Writ petitions pending before the various High courts.

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The Author fondly refers to the Tribunal as ‘Mother’ and urges that by the time its Platinum Jubilee is celebrated, it must be regarded as the finest legal Institution in the Country. It is possible, he says, if the Bar and the Bench play their part in preserving the honour, dignity and purity of the Tribunal!

The Income Tax Appellate Tribunal is one of the oldest temples of justice in our country of which, the Bench and the Bar are its trustees. On the occasion of 40th anniversary of the Income Tax Appellate Tribunal, Shri N. A. Palkhivala in his article stated that “There is no doubt that over the period of 40 years, the Tribunal has been manned by some very able men. Quite a few of them would be fit to adorn any High Court Bench. No other Tribunal in India has won such well deserved popularity and confidence of the public as the Income Tax Appellate Tribunal”. The Income Tax Appellate Tribunal is even today considered as one of the finest institutions of our country, when compared with other institutions. For shaping this Institution the contribution of Late Shri N. A. Palkhivala, Late Shri R. J. Kolah, Late Shri S. P. Mehta and many others deserves to be remembered.

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