TAXATION THROUGH JUDICIAL VIEWPOINT

[Jatin Kukreja]

Taxation is a fundamental pillar of a well-functioning and balanced society, that facilitates the governments with the finance required to fulfill their obligations and deliver essential public services to its people. However, the intricate web of tax laws and regulations can often lead to disputes between taxpayers and tax-levying authorities, that necessitates the intervention of judicial bodies to resolve conflicts by confirming to the judicial principles of fairness, legality, and efficiency.

The principle of fairness in tax adjudication is based on the fundamental ideas of equity and justice delivery, to ensure that all taxpayers are treated impartially, irrespective of their wealth, social status, or political affiliation. Fair tax adjudication also demands transparency in the decision-making process, allowing taxpayers to understand the rationale behind rulings and providing them fair opportunities to appeal.

The legality principle is a cornerstone of the rule of law, emphasizing that tax authorities and judicial bodies must operate within the confines of established laws and regulations.  Efficiency is a critical consideration in tax adjudication, as protracted disputes can impose significant costs on both taxpayers and tax authorities that can lead to undermining public confidence in the taxation system of the country. The paper takes into consideration principles like res judicata and estoppel and their relevance in tax adjudication to maintain consistency in resolving disputes.

The interplay of these three principles – fairness, legality, and efficiency – forms the foundation of a robust and effective tax adjudication system. Judicial bodies play a pivotal role in navigating this complex landscape, balancing the competing interests of taxpayers and tax authorities while upholding the rule of law and promoting the broader objectives of the tax system. The paper examines the role of the judiciary in applying these natural justice principles in tax matters.

Through a comprehensive examination of relevant case laws and precedents, this paper explores the convoluted challenges and considerations surrounding tax adjudication. The study delves into the evolving legal facets like taxpayer rights, administrative discretion, and the interpretation of tax statutes, offering insights into the different approaches adopted by the Indian judiciary that have shaped the tax landscape.

This study aims to contribute to the ongoing discourse on tax policy and administration, ultimately fostering a more equitable, transparent, and effective tax system that serves the broader interests of society, by shedding light on the judicial principles that are the keystone for tax adjudication and dissecting their practical application.

Keywords: Tax adjudication, judicial principles, fairness, legality, efficiency.

I.  INTRODUCTION

A key component of government is taxation, which generates the money required for infrastructure and public services. India has a complicated tax system with several different direct and indirect taxes under a complicated legislative structure. As per the theory of separation of powers first proposed by Sir Montesquieu, the judiciary is essential to interpreting the laws and providing justice.

Adjudication can be defined as applying the available legal provisions to the facts of the case and determining it judicially. Thus, the judicial authorities play a crucial role in interpretation of tax legislation and settling of disputes that arise out of the application of complex provisions of taxation in India. Adjudication of tax by the judicial authorities also includes scrutiny, assessment, appeal penalties, etc as covered under the tax statutes.

The objective of this paper is to examine the judicial approach and principles like equity, lawfulness, and effectiveness in tax litigation by analysing the Indian court rulings and precedents.

II.  RESEARCH OBJECTIVES

• To study the judicial principles and their application to real-life taxation matters by the judicial and quasi-judicial authorities.
• To examine the relevant case laws and precedents to analyse the to study the role taken by the judiciary in effective tax adjudication.

III. RESEARCH METHODOLOGY

The research methodology for this paper relies on secondary data, encompassing an extensive review of existing literature, case laws, and judicial precedents. A comprehensive analysis was conducted through academic journals, legal databases, and authoritative sources to ensure a robust understanding of the topic. This approach facilitated the identification of patterns, interpretations, and implications with respect to the given topic within the legal framework

IV.  CHAPTERS

A.   FOUNDATIONS OF JUDICIAL PRINCIPLES IN TAXATION MATTERS

Adhering to the principles of natural justice forms the building block to administering justice in the true sense. Ensuring the fairness, transparency, and predictability of tax rules and their enforcement forms the cornerstone of judicial principles in taxation disputes. The broader ideas of natural justice, the rule of law, and the legality and certainty principle serve as the foundation for these ideas. Natural Justice principles are so important when it comes to adjudication of disputes that they need to be followed even when there is no explicit provision with respect to it. Income tax authorities that are also classified under quasi-judicial authorities and the judicial authorities should mandatorily adhere to the natural justice principles while adjudicating any tax matters as held by Supreme Court in the case of RAJESH KUMAR AND OTHERS VERSUS DEPUTY COMMISSIONER OF INCOME-TAX AND OTHERS - 2006 (11) TMI 135 - SUPREME COURT. On the same lines, the tax authorities whose main function is to assess tax, were also made bind to the principle of natural justice by the Supreme Court in STATE OF KERALA VERSUS K.T. SHADULI YUSUFF - 1977 (3) TMI 160 - SUPREME COURT.

In this section, the author explores the principles that form the foundation of natural justice and judicial approach in using these principles in tax matters.

Fairness in Nature
A cornerstone of legal systems, natural justice guarantees equitable treatment during judicial proceedings. It consists of two primary rules: the prohibition on prejudice and the right to a fair trial. The Supreme Court invalidated a tax statute in  KUNNATHAT THATHUNNI MOOPIL NAIR VERSUS STATE OF KERALA - 1960 (12) TMI 76 - SUPREME COURT. because it was unfair and arbitrary, in violation of Article 14 of the Constitution of India. In order to ensure that identical circumstances are handled equally, the Court underlined that tax legislation must be reasonable, just, and non-discriminatory.
The Audi Alteram Partem or fair hearing:
This rule guarantees that everyone with a stake in a tax dispute gets a chance to make their case. Taxpayers must have the chance to reply to any accusations or rulings that affect them, as well as sufficient notice of any procedures affecting their tax responsibilities.
For instance, the taxpayer should be given the opportunity to present proof or arguments in support of their position if the tax authority decides to reevaluate their income and should be informed of the reasons for the decision.

If there is any procedural deficiency in a pre-decisional hearing, it can be rectified through a post-decisional hearing. While pre-decisional hearings should generally be the standard, post-decisional hearings should only be used in exceptional cases and must be applied with careful consideration.

In M/S SAHARA INDIA (FIRM) , LUCKNOW VERSUS CIT, CENTRAL-I & ANR - 2008 (4) TMI 4 - SUPREME COURT, the Supreme Court emphasized that the affected party must be given a genuine opportunity to be heard, ensuring that the hearing is substantive and not merely a formal procedure. The Court clarified that a post-decisional hearing cannot replace a pre-decisional hearing. Additionally, the Apex Court stated that the principle of Audi alteram partem can only be bypassed if the statute explicitly provides for a post-decisional hearing that fully reviews the original order on its merits.

Nemo Judex in Causa Sua or the Rule Against Bias:
This regulation guarantees the impartiality of judgments made about taxes. Any individual or body making a decision shouldn't be personally invested in how the case turns out.
To prevent the impression of prejudice, tax officials should not be engaged in decisions about the tax obligations of companies they have a financial stake in.

Speaking Orders:

The concept of a speaking order is another fundamental aspect of the principles of natural justice. Providing reasons creates a connection between the decision and the decision-maker's rationale. Any authority's decision impacting people's rights without stated reasons constitutes a breach of natural justice principles.[RASIKLAL RANCHHODBHAI PATEL VERSUS COMMISSIONER OF WEALTH-TAX, GUJARAT IV - 1978 (9) TMI 21 - GUJARAT HIGH COURT]

In a recent decision by the Rajasthan High Court in COMMISSIONER OF INCOME TAX VERSUS RAM SINGH - 2014 (3) TMI 849 - RAJASTHAN HIGH COURT the Court emphasized the importance of providing reasons in orders and ruled accordingly that-

“Recording of reasons is part of fair procedure and reasons are harbinger between the mind of the maker of the decision in the controversy and the decision or conclusion arrived at and they always substitute subjectivity with objectivity and as observed in Alexander Machinery (Dudley) Ltd. Crabtree [1974 L.C.R. 120], failure to give reasons amounts to denial of justice and this is what was also observed by the Apex Court in MANGALORE GANESH BEEDI WORKS VERSUS COMMISSIONER OF INCOME TAX AND ANOTHER - 2005 (1) TMI 15 - SUPREME COURT”

In ASSISTANT COMMISSIONER, COMMERCIAL TAX DEPARTMENT, WORKS CONTRACT & LEASING, KOTA VERSUS M/S SHUKLA & BROTHERS - 2010 (4) TMI 139 - SUPREME COURT, the Supreme Court held that administrative authorities and tribunals must provide reasons for their decisions; otherwise, the orders would be subject to judicial review.

Legality and Certainty

According to the legality principle, taxes must be justified by the law. Only explicit legal provisions created by an authorized legislative body may serve as the foundation for the imposition, collection, and enforcement of taxes.
This concept guarantees that no one can be taxed arbitrarily. To ensure that taxpayers understand their responsibilities and can comply accordingly, tax regulations need to be specific and unambiguous.
For instance, it would be against the legality principle to apply a new tax retrospectively without the necessary legislative permission. In COMMISSIONER OF INCOME-TAX, BANGALORE VERSUS BC SRINIVASA SETTY (AND OTHER APPEALS) - 1981 (2) TMI 1 - SUPREME COURT; the Supreme Court clarified the capital gains tax's application in this instance, highlighting the need for the statute to define tax responsibility precisely. In order to prevent uncertainty and guarantee legal certainty, the Court emphasized the significance of precise statutory language and clear legislative intent.

Since taxes are certain, tax regulations ought to be transparent, explicit, and foreseeable. It should be reasonably certain for taxpayers to know how much tax they owe and when it's due.
For both individuals and corporations, this approach offers consistency in financial planning and helps prevent arbitrary enforcement. For instance, unclear tax laws that are open to different interpretations erode clarity and result in disagreements and uneven application. The VODAFONE INTERNATIONAL HOLDINGS BV. VERSUS UNION OF INDIA & ANR. - 2012 (1) TMI 52 - SUPREME COURT brought to light the difficulties in taxing cross-border transactions and the requirement for precise rules to prevent drawn-out legal proceedings. The ruling by the Supreme Court emphasized how crucial effective tax administration is, as well as how foreign commerce needs to be facilitated by clear, comprehensive tax rules.

The Bombay High Court also emphasized on the importance of clarity in application of tax laws for efficient administrative purposes. S. MAHENDRAKUMAR DEVICHAND VERSUS THE UNION OF INDIA & ORS. - 2023 (12) TMI 72 - BOMBAY HIGH COURT

Interpretation of Tax Laws: Court interpretation of tax rules is based on upholding the legality and certainty concept. They make an effort to interpret unclear provisions in a way that makes sense and is predictable. The Supreme Court ruled in MCDOWELL AND CO. LIMITED VERSUS COMMERCIAL TAX OFFICER - 1985 (4) TMI 64 - SUPREME COURT that tax planning is legal, but it shouldn't be used to get around tax regulations. In order to stop abusive tax avoidance methods, the Court underlined that the substance of transactions should be taken into account when determining their genuine tax implications.

Tax Administration: It is the duty of tax officials to apply the law in an equitable and open manner. They have to make sure that their processes and rulings follow the principles of natural justice and give taxpayers the chance to contest and appeal tax assessments and decisions.

The preservation of equity, openness, and predictability in the tax system depends on the judicial principles that underpin tax cases. They guarantee that taxes are administered in accordance with accepted legal standards and shield taxpayers from capricious rulings.[UNION OF INDIA AND OTHERS VERSUS A. SANYASI RAO AND OTHERS - 1996 (2) TMI 4 - SUPREME COURT]

B.  PRINCIPLES FOR UPHOLDING FAIRNESS AND CONSISTENCY

Res Judicata

Res Judicata, literally means ‘a matter adjudged’, which is a legal principle that makes a judgment binding on another. The doctrine of res judicata has got the statutory recognition, as defined under Section 11of the Civil Procedure Code, 1908 which proposes that once an issue is finally decided, no party can reopen the same matter in a subsequent litigation. However, it is pertinent to note that it is not considered exhaustive of the general principle of law.[KALIPADA DE AND ORS. VERSUS DWIJAPADA DAS AND ORS. - 1929 (11) TMI 14 - PRIVY COUNCIL] The objective of this doctrine is to alleviate the multiple legal proceedings to avoid waste of time and resources of the country’s legal system and to maintain a consistency in delivering the judgements.

Supreme Court in a number of decisions has said that it would be improper to apply res judicata in tax matters, as the court is of the view that each year’s assessment is final only for that year and cannot be used to adjudicate matters of later years.[INSTALMENT SUPPLY (PRIVATE) LTD. AND ANOTHER VERSUS THE UNION OF INDIA AND OTHERS   - 1961 (5) TMI 53 - SUPREME COURT] But it is pertinent to take into consideration the view of the Bombay High Court on the issue as in the case of SHAH (HA.) AND CO. VERSUS COMMISSIONER OF INCOME-TAX/EXCESS PROFITS TAX - 1955 (9) TMI 53 - BOMBAY HIGH COURT Here the court held that “An earlier decision on the same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due inquiry, if no fresh facts are placed before the Tribunal giving the later decision and if the Tribunal giving the earlier decision has taken into consideration all material evidence."

Further, in the case of AMALGAMATED COALFIELDS LTD. VERSUS JANAPADA SABHA CHHINDWARA - 1962 (9) TMI 60 - SUPREME COURT the court while clarifying the above stance stated that- "In considering this question, it may be necessary to distinguish between the decision on questions of law which directly and substantially arise in any dispute about the liability for a particular year, and questions of law which arise incidentally or in a collateral manner … the effect of legal decisions establishing the law would be a different matter. If, for instance, the validity of a taxing statute is impeached by an assessee who is called upon to pay a tax for a particular year and the matter is taken to the High Court or brought before this Court and it is held that the taxing statute is valid, it may not be easy to hold that the decision on this basic and material issue would not operate as res judicata against the assessee for a subsequent year".

However, the Supreme Court while again upholding the stance that the res-judicata principle is not applicable in taxation cases, gave a landmark decision in the case of RADHASOAMI SATSANG VERSUS COMMISSIONER OF INCOME-TAX - 1991 (11) TMI 2 - SUPREME COURT  "We are aware of the fact that strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year".

A recent judgment of the Allahabad High Court, in the case of M/S JOHN OAKEY AND MOHAN LIMITED VERSUS THE COMMISSIONER COMMERCIAL TAXES U.P. LUCKNOW - 2024 (2) TMI 950 - ALLAHABAD HIGH COURT, held that the principle of res judicata is not strictly applicable in tax matters, while the court reaffirmed the doctrine of finality in such cases to maintain consistency in the judicial decisions. The question here is about the levy of entry tax on the purchase of craft paper, where the court emphasized on the precedents declared by the higher courts, and how lower courts have to mandatorily follow it, unless there is some significant change in fact or circumstances. This also leads us to another “doctrine of finality” used by the Indian judiciary that has been used in tax adjudication in an array of decisions like in BHARAT SANCHAR NIGAM LTD. (BSNL) VERSUS UNION OF INDIA - 2006 (3) TMI 1 - SUPREME COURT, where the Supreme Court observed that as per the theory of precedential value of the earlier decision of the court if there are no new facts and laws in the subsequent year, the judicial bodies cannot take a diverging view in deciding the matter. There should be a finality in the decisions declared by the higher courts on the merits of the case.[PARASHURAM POTTERY WORKS CO. LIMITED VERSUS INCOME-TAX OFFICER, CIRCLE I, WARD A, RAJKOT - 1976 (11) TMI 1 - SUPREME COURT]

Judicial Discipline

Principles of judicial discipline mandate that subordinate authorities must adhere strictly to the orders of higher appellate authorities without any reservations. Judicial discipline must be followed by all level of judicial and adjudicating authorities for delivery of justice.

This principle also traces its roots in Article 141 of the Constitution of India which encompasses the binding value of the law declared by the Supreme Court in the form of judgments. Thus, it can be said to be the general rule that the judgments passed by the higher courts shall be obeyed by the lower courts in India.

Judicial indiscipline can be a challenge in the adjudication of taxation matters that worsens the issue wherein ignorance of settled principles of law is evident.

In cases of Income Tax, the principle of judicial discipline is closely connected with the value of precedents. The court while explaining the importance of consistency that should be followed by judicial authorities i.e. courts, observed that consistency in the interpretation of law by the judiciary can alone boost the public confidence and belief in the judicial system of the country. The court further held that deviation from the precedents can only be made by procedure by law. In this case, Essar Shipping Ports & Logistics v. The Commercial Tax Officer (Fac), the coordinate bench of a court gave a judgment contrary to the judgment declared by another same bench.[JAYASWALS NECO LTD VERSUS COMMISSIONER OF CENTRAL EXCISE, NAGPUR - 2017 (3) TMI 719 - CESTAT MUMBAI] The general rule that was stated is this can be only done by the larger bench. Also, two tribunals should aboid taking two entirely different and diverging views on a same matter to avoid the inconsistency and uncertainity in judiciary’s approach.[M/S GAMMON INDIA LTD. VERSUS COMMISSIONER OF CUSTOMS, MUMBAI - 2011 (7) TMI 17 - SUPREME COURT]

A similar kind of view was also observed by the Supreme Court in NAMIT SHARMA VERSUS UNION OF INDIA - 2012 (9) TMI 809 - SUPREME COURT  that even Information Commissions under the 2005 Act and should not violate the law declared by the high courts and the Supreme Court in the form of precedents. Further, the smaller benches should also follow the precedents of larger benches. The court while referring to the rule of precedence also held that it is applicable in the cases of intra-court appeals too.

Holding the adjudicating officer also under the purview of quasi-judicial authority, the Apex Court in UNION OF INDIA VERSUS KAMLAKSHI FINANCE CORPORATION LTD. - 1991 (9) TMI 72 - SUPREME COURT observed that the adjudicating officer shall also be bound by the judgments delivered by the tribunals or authorities with superior jurisdiction.

C. JUDICIAL TRENDS IN TAX ADJUDICATION

The approach of the Bombay High Court S. MAHENDRAKUMAR DEVICHAND VERSUS THE UNION OF INDIA & ORS. - 2023 (12) TMI 72 - BOMBAY HIGH COURT can be said to be a unique one wherein it strikes a balance between the rights of the petitioner and upholds the process of law. It reflects an illustration of judicial review in tax adjudication matters by the court by recognizing the adjudicating officer’s decision and it’s impact on judicial proceedings in interpreting the Central Goods and Services Tax, 2017.

INSTANCE OF SUPREME COURT AS LAWMAKER RATHER THAN INTERPRETER:

In the case of INCOME TAX OFFICER VERSUS VIKRAM SUJITKUMAR BHATIA - 2023 (4) TMI 296 - SUPREME COURT , the Court ruled that the amended Section 153C of the Income Tax Act would apply retrospectively to searches conducted before its enactment. The argument suggests that the amendment, which included the phrase "pertains or pertains to" a person, broadened the scope of the law with future considerations. By applying this amendment to past searches, the Court is perceived as creating new law rather than interpreting existing law.

Another illustration can be taken from the case of UNION OF INDIA & ORS. VERSUS ASHISH AGARWAL - 2022 (5) TMI 240 - SUPREME COURT, where the court reinstated reassessment notices that had been issued by the Revenue without legal authorization. By overturning the judgments of multiple High Courts and reviving these notices, the argument suggests that the Court assumed the role of a lawmaker. It ignored the High Courts' declarations of the notices' invalidity and effectively conferred new legal validity on them.

This is viewed as the Supreme Court encroaching on legislative functions. By reviving actions without legislative backing and overturning judgments not under its appellate jurisdiction, the Court appears to be overstepping its authority. Notably, the Court’s use of Article 142 of the Constitution, which empowers it to issue orders for "doing complete justice," is significant. Article 265 of the Constitution prohibits taxation without legislation, indicating that if the Supreme Court continues to act like Parliament by creating laws and ignoring legislative processes, the constitutional guarantee against taxation without legislation will be meaningless. Essentially, the Court's actions seem to compromise the separation of powers and the constitutional requirement that taxation must be based on duly enacted laws.

V. CONCLUSION

Taxation is a keystone of any country’s economy. By levying different types of taxes on the its citizens, the government generates revenue to fulfill the demands of public and carry outs it’s functions. There are instances of conflict between the tax levying authorities and tax payers. These matters are meant to be adjudicated by the judicial bodies and it should ensure proper delivery of justice.

The analysis of various case laws and precedents underscores the judiciary's commitment to upholding the rule of law and the principles of natural justice, even in the absence of explicit statutory provisions. Instances of judicial interpretation, such as those seen in landmark Supreme Court rulings, highlight the dynamic nature of judicial intervention in tax matters, occasionally bordering on legislative functions to address ambiguities and ensure justice.

Moreover, the study emphasizes the importance of judicial review and discipline in maintaining the integrity and predictability of tax adjudication. By mandating adherence to higher judicial authorities' decisions, the judiciary ensures a uniform application of tax laws, thereby fostering public confidence in the legal system.

In essence, the judiciary's role in tax adjudication is crucial in balancing the complexities of taxation with the fundamental principles of justice, equity, and transparency, thereby contributing to a robust and fair tax system in India.