2014 (9) TMI 821 - SC - Income Tax

Constitutional validity of National Tax Tribunal Act, 2005 Whether a tribunal can substitute the High Court in its appellate jurisdiction, when it comes to deciding substantial questions of law - Held that - The question 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 NTT 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) the jurisdiction was vested with High Courts - High Courts which discharge judicial functions, cannot be substituted by an extra-judicial body. Basic structure Power of judicial review - Whether the NTT Act violate the basic structure of the Constitution Held 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 - 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 has a substantial bearing to the issue it will also lead to some important inferences - 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 thus, the contention that the NTT Act violates the basic structure of the Constitution cannot be accepted. Transfer of jurisdiction Maintenance of standards - Whether while transferring jurisdiction to a newly created court/tribunal, it is essential to maintain the standards and the stature of the court replaced Held that - 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 - 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. 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. Allowability to made appearances by the CS - Interpretation of section 13(1) of NTT - 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 and Whether Section 13(1) of the NTT Act allows Accountants to represent a party to an appeal before the NTT is valid Held that - 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 these 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 provisions, from time to time - They will also have to determine as to whether the provisions relied upon had a prospective or retrospective applicability. 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 - Chartered Accountants and Company Secretaries would at best be specialists in understanding and explaining issues pertaining to accounts - The issues would fall purely within the realm of facts it is 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, it cannot be held that allowing them to appear on behalf of a party before the NTT, would be unacceptable in law thus, the claim of Company Secretaries is rejected to represent a party before the NTT - the prayer made by Company Secretaries is declined - also, Section 13(1), insofar as it allows Chartered Accountants to represent a party to an appeal before the NTT, is unconstitutional and unsustainable in law. Constitutional validity of Sections 5, 6, 7, 8 and 13 of the NTT Act Held that - 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 - 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 cannot be accepted - 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 thus, 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, 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 for a duration of 5 years - Chairperson/Member is eligible for reappointment, for a further period of 5 years - a provision for reappointment would itself have the effect of undermining the independence of the Chairperson/Members of the NTT thus, Sections 5, 6, 7, 8 and 13 of the NTT Act have been held to be illegal and unconstitutional and in the absence of these 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 Decided in favour of Petitioner.

Summary

Issues Involved:
1. Whether judicial review is a part of the basic structure of the Constitution.
2. Whether the transfer of adjudicatory functions vested in the High Court to the NTT violates recognized constitutional conventions.
3. Whether while transferring jurisdiction to a newly created court/tribunal, it is essential to maintain the standards and the stature of the court replaced.
4. 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.
5. 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.
6. The constitutional validity of Sections 5, 6, 7, 8, and 13 of the NTT Act.

Detailed Analysis:

I. Judicial Review as Part of Basic Structure:

The Court held that judicial review is an integral part of the basic structure of the Constitution. This was established through a series of landmark cases such as Kesavananda Bharati v. State of Kerala, Minerva Mills Ltd. v. Union of India, and L. Chandra Kumar v. Union of India. The Court emphasized that judicial review ensures that the executive and legislature act within their constitutional limits. The power of judicial review vested in the High Courts under Articles 226 and 227 and in the Supreme Court under Article 32 of the Constitution cannot be ousted or excluded. The NTT Act does not transfer any power vested in courts by the Constitution, as the power of judicial review under Articles 226 and 227 remains intact.

II. Transfer of Adjudicatory Functions and Constitutional Conventions:

The Court examined whether transferring adjudicatory functions from the High Courts to the NTT violates constitutional conventions. It was held that while the legislature can transfer judicial power to a tribunal, the tribunal must possess the same independence, security, and capacity as the court it replaces. The Court cited international precedents and constitutional conventions from countries following the Westminster model, emphasizing that judicial power must continue to be vested in persons appointed in the manner and on the terms prescribed for judges. The NTT Act was found to violate these conventions as it did not ensure the same standards and independence for the NTT as for the High Courts.

III. Standards and Stature of the Replaced Court:

The Court held that when transferring jurisdiction to a new tribunal, it is essential to maintain the standards and stature of the court being replaced. The NTT Act failed to meet this requirement as it allowed the appointment of Accountant Members and Technical Members, who do not possess the same qualifications and stature as High Court judges. The Court emphasized that only persons with professional qualifications in law and substantial experience in the practice of law could handle the responsibilities of the NTT.

IV. Representation by Company Secretaries:

The Court rejected the claim of Company Secretaries to represent a party before the NTT. It held that the determination at the NTT involves substantial questions of law, which require legal expertise. Therefore, allowing Company Secretaries to represent parties would be inappropriate.

V. Validity of Section 13(1) Allowing Accountants to Represent:

The Court held that allowing Chartered Accountants to represent a party before the NTT is unconstitutional. The NTT deals with substantial questions of law, which require legal expertise. Therefore, representation should be limited to legal practitioners.

VI. Constitutional Validity of Sections 5, 6, 7, 8, and 13 of the NTT Act:

- Section 5: The Court found that Section 5(2) of the NTT Act, which mandates that the NTT would ordinarily have its sittings in the National Capital Territory of Delhi, would render the remedy inefficacious and is thus unacceptable in law. Additionally, the involvement of the Central Government in determining the jurisdiction and postings of the NTT members was found to undermine the independence and fairness of the NTT.

- Section 6: The Court held that Section 6(2)(b) of the NTT Act, which allows the appointment of Accountant Members and Technical Members, is unconstitutional. These members do not possess the necessary legal qualifications and stature to handle substantial questions of law.

- Section 7: The Court declared Section 7 unconstitutional as it included Secretaries of Departments of the Central Government in the selection process of the NTT members, which could lead to executive influence over the tribunal.

- Section 8: The provision for reappointment of the Chairperson and Members of the NTT was found to undermine their independence. The Court held that Section 8 is unconstitutional.

- Section 13: The Court held that Section 13(1), insofar as it allows Chartered Accountants to represent a party before the NTT, is unconstitutional.

Conclusion:

The Court declared Sections 5, 6, 7, 8, and 13 of the NTT Act unconstitutional. Since these provisions constitute the edifice of the NTT Act, the entire enactment was declared unconstitutional. The Court emphasized the importance of maintaining the independence and standards of the judiciary while creating alternative adjudicatory mechanisms.