TIOL-DDT 2446
26.09.2014
Friday

IT was during the NDA regime in 2003 that the National Tax Tribunal Bills and Ordinance came into existence. The UPA Government took it forward and got the Bill enacted, but it did not yet come into existence as several High Courts stayed it - finally all the matters reached the Supreme Court. Now the NDA Government has come back to power, but the Supreme Court yesterday in a judgement that has far reaching consequences held that the NTT Act is ultra vires of the Constitution.

The precise question in the appeals concerns the constitutional validity of the National Tax Tribunals Act, 2005. The question raised on behalf of the petitioners is one of great public importance and has, therefore, been placed before the Constitution Bench consisting of five judges headed by the Chief justice. The precise question formulated on behalf of the petitioners is whether a tribunal can substitute the High Court in its appellate jurisdiction, when it comes to deciding substantial questions of law.

The Controversy:

The NTT, according to the counsel for the petitioners, is styled as a quasi-judicial appellate tribunal. It has been vested with the power of adjudicating appeals arising from orders passed by Appellate Tribunals (constituted under the Income Tax Act, the Customs Act and the Central Excise Act). Hitherto before, the instant jurisdiction was vested with High Courts. The pointed issue canvassed in this behalf is, that High Courts which discharge judicial functions, cannot be substituted by an extra-judicial body. Additionally, it is maintained that the NTT in the manner of its constitution undermines a process of independence and fairness, which are sine qua non of an adjudicatory authority.

The issues canvassed on behalf of the petitioners:

The first contention: That the reasons for setting up the NTT, were fallacious and non-existent. Since the foundational basis is untrue, the structure erected thereupon, cannot be accepted as valid and justified. And therefore, the same is liable to be struck down.

The second contention: It is impermissible for the legislature to abrogate/divest the core judicial appellate functions, specially the functions traditionally vested with the High Court.

The third contention: Separation of powers, the rule of law, and judicial review, constitute amongst others, the basic structure of the Constitution. Article 323B inserted by the Constitution (Forty-second Amendment) Act, 1976, to the extent it is violative of the components of the basic structure of the Constitution, is liable to be declared ultra vires the Constitution.

The fourth contention: A number of provisions including Sections 5, 6, 7, 8 and 13 of the NTT Act, undermine the independence of the adjudicatory process vested in the NTT, and as such, are liable to be set aside in their present format.

Decisions:

I. Constitutional validity of the NTT Act - Does the NTT Act violate the " basic structure " of the Constitution? NO

A perusal of the judgment rendered in Kesavananda Bharati case reveals, that "separation of powers" creates a system of checks and balances, by reasons of which, powers are so distributed, that none of the three organs transgresses into the domain of the other. The concept ensures the dignity of the individual. The power of "judicial review" ensures, that executive functioning confines itself within the framework of law enacted by the legislature. Accordingly, the demarcation of powers between the legislature, the executive and the judiciary, is regarded as the basic element of the constitutional scheme. When the judicial process is prevented by law, from determining whether the action taken was or was not, within the framework of the legislation enacted, it would amount to the transgression of the adjudicatory/determinatory process by the legislature. Therefore, the exclusion of the power of "judicial review", would strike at the "basic structure" of the Constitution.

The power of "judicial review" vested in the High Court under Articles 226 and 227 of the Constitution, has remained intact. This aspect of the matter, has a substantial bearing, to the issue in hand. And will also lead to some important inferences. Therefore, it must never be overlooked, that since the power of "judicial review" exercised by the High Court under Articles 226 and 227 of the Constitution has remained unaltered, the power vested in High Courts to exercise judicial superintendence over the benches of the NTT within their respective jurisdiction, has been consciously preserved.

In the above view of the matter, the submission that the NTT Act violates the "basic structure" of the Constitution cannot be acquiesced to.

II. Whether the transfer of adjudicatory functions vested in the High Court to the NTT violates recognized constitutional conventions? NO

III. Whether while transferring jurisdiction to a newly created court/tribunal, it is essential to maintain the standards and the stature of the court replaced? YES

The three wings of governance would operate in their assigned domain/province. But the judicial power could be allowed to be exercised by an analogous/similar court/tribunal, with a different name. However, by virtue of the constitutional convention, while constituting the analogous court/tribunal, it will have to be ensured, that the appointment and security of tenure of judges of that court would be the same, as of the court sought to be substituted. Parliament was not precluded from establishing a court under a new name, to exercise the jurisdiction that was being exercised by members of the higher judiciary, at the time when the constitution came into force. But when that was done, it was critical to ensure, that the persons appointed to be members of such a court/tribunal, should be appointed in the same manner, and should be entitled to the same security of tenure, as the holder of the judicial office, at the time when the constitution came into force. The newly constituted court/tribunal will be deemed to be invalidly constituted, till its members are appointed in the same manner, and till its members are entitled to the same conditions of service, as were available to the judges of the court sought to be substituted.

This Court has recognized, that transfer of jurisdiction is permissible, but in effecting such transfer, the court to which the power of adjudication is transferred, must be endured with salient characteristics, which were possessed by the court from which the adjudicatory power has been transferred. But whenever there is such transfer, all conventions/customs/practices of the court sought to be replaced, have to be incorporated in the court/tribunal created. The newly created court/tribunal would have to be established, in consonance with the salient characteristics and standards of the court which is sought to be substituted.

IV. Whether Company Secretaries should be allowed to appear before the NTT to represent a party to an appeal in the same fashion, and on parity with, Accountants? NO

V. Whether Section 13(1) of the NTT Act insofar as it allows Accountants to represent a party to an appeal before the NTT is valid? NO

Members of the NTT would most definitely be confronted with the legal issues emerging out of Family Law, Hindu Law, Mohammedan Law, Company Law, Law of Partnership, Law related to Territoriality, Law related to Trusts and Societies, Contract Law, Law relating to Transfer of Property, Law relating to Intellectual Property, Interpretation of Statutes, and other Miscellaneous Provisions of Law, from time to time. The NTT besides the aforesaid statutes, will not only have to interpret the provisions of the three statutes, out of which appeals will be heard by it, but will also have to examine a challenge to the vires of statutory amendments made in the said provisions, from time to time. They will also have to determine in some cases, whether the provisions relied upon had a prospective or retrospective applicability.

Keeping in mind the fact, that in terms of Section 15 of the NTT Act, the NTT would hear appeals from the Income Tax Appellate Tribunal and the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) only on "substantial questions of law", it is difficult to appreciate the propriety of representation, on behalf of a party to an appeal, through either Chartered Accountants or Company Secretaries, before the NTT. The determination at the hands of the NTT is shorn of factual disputes. It has to decide only "substantial questions of law". In our understanding, Chartered Accountants and Company Secretaries would at best be specialists in understanding and explaining issues pertaining to accounts. These issues would, fall purely within the realm of facts. We find it difficult to accept the prayer made by the Company Secretaries to allow them, to represent a party to an appeal before the NTT. Even insofar as the Chartered Accountants are concerned, we are constrained to hold that allowing them to appear on behalf of a party before the NTT, would be unacceptable in law. We accordingly reject the claim of Company Secretaries, to represent a party before the NTT. Accordingly the prayer made by Company Secretaries is hereby declined. While recording the above conclusion, we simultaneously hold Section 13(1), insofar as it allows Chartered Accountants to represent a party to an appeal before the NTT, as unconstitutional and unsustainable in law.

VI. The constitutional validity of Sections 5, 6, 7, 8 and 13 of the NTT Act: Not Valid

Section 5(2) of the NTT Act mandates, that the NTT would ordinarily have its sittings in the National Capital Territory of Delhi.

It is imperative for the legislature to ensure, that redress should be available, with the same convenience and expediency, as it was prior to the introduction of the newly created court/tribunal. Thus viewed, the mandate incorporated in Section 5(2) of the NTT Act to the effect that the sittings of the NTT would ordinarily be conducted in the National Capital Territory of Delhi, would render the remedy inefficacious, and thus unacceptable in law.

Section 5 of the NTT Act is not sustainable in law, as it does not ensure that the alternative adjudicatory authority, is totally insulated from all forms of interference, pressure or influence from co-ordinate branches of Government. There is no alternative, but to hold that sub-sections (2), (3), (4) and (5) of Section 5 of the NTT Act are unconstitutional.

Even though the Attorney General pointed out, that the power of "judicial review" under Articles 226 and 227 of the Constitution had not been taken away, yet he acknowledged, that there would be implicit limitations where such power would be exercisable. Therefore, all the more, the composition of the NTT would have to be on the same parameters as judges of the High Courts. So Section 6(2)(b) of the NTT Act is declared unconstitutional.

Section 7 cannot be considered to be constitutionally valid, since it includes in the process of selection and appointment of the Chairperson and Members of the NTT, Secretaries of Departments of the Central Government. The interests of the Central Government would be represented on one side, in every litigation before the NTT. It is not possible to accept a party to a litigation, can participate in the selection process, whereby the Chairperson and Members of the adjudicatory body are selected.

Chairperson/Member is appointed to the NTT, in the first instance, for a duration of 5 years. Such Chairperson/Member is eligible for reappointment, for a further period of 5 years. We have no hesitation to accept the submissions advanced at the hands of the counsel for the petitioners, that a provision for reappointment would itself have the effect of undermining the independence of the Chairperson/Members of the NTT.

Held: Sections 5, 6, 7, 8 and 13 of the NTT Act have been held to be illegal and unconstitutional on the basis of the parameters laid down by decisions of constitutional benches of this Court and on the basis of recognized constitutional conventions referable to constitutions framed on the Westminster model. In the absence of the aforesaid provisions which have been held to be unconstitutional, the remaining provisions have been rendered otiose and worthless, and as such, the provisions of the NTT Act, as a whole, are hereby set aside .

In a concurring judgement, Justice R F Nariman observed that tribunalization at the original stage was allowed subject to certain safeguards; the boundary has finally been crossed in this case.

The National Tax Tribunals Act is held as unconstitutional, being the ultimate encroachment on the exclusive domain of the superior Courts of Record in India.

This judgement was delivered yesterday. We bring it to you today. Please see 2014-TIOL-82-SC-MISC-CB.

Please also see NTT 'ghost' is back! FM needs to do 'same thing' only differently!

Income Tax - extension of due date for filing returns for those who have to get their accounts audited - Several High Courts direct CBDT to extend date - When is it coming?

MANY citizens will be happy to pay the taxes, but the hassles in paying them are frustrating. Those, who are to get their accounts audited, are required to file their returns latest by 30th September, but the time limit to file the Tax Audit Reports is extended till 30th November. But you can't file the return without getting the Audit Report. That is none of the business of CBDT.

Harried assessees are running frantically to the nearest High Court. Already Hyderabad, Madras, Gujarat and Bombay High Courts have directed the CBDT to consider extending the date.

The Gujarat High Court observed,

A very peculiar situation has arisen portraying the genuine hardship to the assessee, as also to the tax consultants, by way of representations made to the Board, it would have been desirable and expedient on the part of the CBDT to have considered such request and exercise the powers by way of a relaxation. What all that has been sought is to make the due date for filing the tax return harmonious with the filing of the TAR and without jeopardizing the issue of collection of tax, it was not impossible to exercise such powers of relaxation of provision prescribing extension of the due date.

The High Court directed the CBDT to extend the due date for furnishing the return of income to 30th November 2014.

The Bombay High Court observed,

We hope and trust that CBDT will look into all these practical difficulties enumerated above and take a just and proper decision on the matter, before 30 September 2014, as already directed by the Madras High Court.

We understand that the CBDT is seriously working on extending the date, but why did they push all these assessees to the High Courts?

Please see 2014-TIOL-1682-HC-MUM-IT and 2014-TIOL-1681-HC-AHM-IT

DDT cartoon

Jurisprudentiol – Monday's cases

Customs

At stage of Show Cause Notice, the department should have open mind - Madras High Court sets aside Show Cause Notice issued with pre-determined conclusions

THE petitioner has filed a writ petition challenging the show cause notice issued under Regulation 20(1) of the Customs Brokers Licensing Regulations, 2013.

The main ground on which the impugned notice is challenged is that the contents of the show cause notice disclose a pre-conceived and closed mind. Upto paragraph 7, the show cause notice contains the narration of the facts relating to investigation conducted, the evidence recorded in the course of enquiry, etc.,

But, thereafter, in paragraph 9, the first respondent has recorded a series of findings. These findings, are very categorical in nature, without leaving any scope for the petitioner to explain. Even the first respondent has asserted that a clear prima facie case has been made out against the petitioner and that if the petitioner is allowed to continue to operate, it would be detrimental to the interest of revenue.

Income Tax

Whether when assessee has been showing certain expenditure towards 'work-in-progress' for two years but not in year of filing return because its contract was terminated, such expenditure written off in books is to be allowed - YES: High Court

THE assessee company was awarded a contract by Madhya Pradesh Electricity Board for rehabilitation job for the Amarkantak Thermal Power Station near Jabalpur in MP. An amount of Rs.9,29,20,000/- was paid as advance. The assessee gave a bank guarantee for the said amount. The assessee commenced the work and incurred expenditure on the project. The total amount of expenditure incurred on the project was Rs..6,64,01,149/-. Assessee contended that MPEB arbitrarily terminated the contract and invoked the bank guarantee. The said contract was terminated by letter dated 8.10.2002. The assessee invoked the arbitration clause and put forth a claim. The amount of Rs.6,64,01,149/- included money spent on raw materials like tubes and pressure parts, consumables, freight and carriage and also bank charges, professional charges etc., in addition to the expenses on personnel, transport and communication and administrative expenses.

The issue before the Bench is -Whether when the assessee has been showing certain expenditure towards 'work-in-progress' for two years but not in the year of filing return because its contract was terminated and bank guarantee encashed, the expenditure written off in books is to be allowed. And the answer is YES.

Service Tax

Commercial training or Coaching service - Retrospective amendment by FA, 2010 - All institutes, whether charitable or not come within the scope of taxable service if courses are not recognized by law and a consideration is charged for the services rendered: CESTAT

AGAINST the appellant, a Service Tax demand of Rs.6.59 crores was confirmed by CCE, Pune-III by classifying the services rendered by them during the period 01/07/2003 to 31/03/2006 under ‘commercial training or coaching services'.

Before the CESTAT the appellant inter alia submitted that pursuant to the investigation and recording of statements of the President of the appellant society they applied for service tax registration with effect from 05.05.2006 and deposited an amount of Rs.8,76,42,162/- towards their tax liability upto December, 2006 which included an amount of Rs.5,27,37,740/- towards the tax liability for the period 01/07/2003 to 31/03/2006, under protest.

See our Columns Monday for the judgements

Until Monday with more DDT

Have a nice weekend.

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