Awarding heavy costs is the only way to prevent Dept from indulging into un-necessary litigation

[C.A. DEV KUMAR KOTHARI]

COMMISSIONER OF INCOME-TAX VERSUS DSL SOFTWARE LTD - [2011 (10) TMI 423 - KARNATAKA HIGH COURT].

Section 10B with archieves.

Earlier articles:

Author has written several articles about un-necessary litigation by the revenue authorities. Author had also expressed that the Tribunal and Courts can award costs of litigation in favor of affected party due to un-necessary, un-desirable and frivolous litigation. However, it is found that rarely costs are awarded and that too for very nominal amount. 

Recent judgment of Karnataka High Court:

Recently Karnataka High Court has come heavily and held that only way to prevent frivolous  litigation is by way of imposing heavy cost.  The case in question is CIT vs. DSL DSoftware Ltd 2011 -TMI - 211006 - KARNATAKA HIGH COURT. The High court observed that the litigation in which department indulged was of frivolous nature and for that the assessee suffered and had to contest litigation. This should be avoided. The Court imposed costs of Rs. one lakh.

A brief analysis of the case before Court:

The assessee set up a 100% EOU unit in AY 1993-94 and claimed 5 year deduction till AY 1997-98 as was then allowable u/s 10B prior to amendment w.e.d. 01.04.1999.

  By the Income Tax (Second Amendment ) Act, 1998, s. 10B was amended w.e.f. 1.4.1999 to allow deduction for 10 years from the date the eligible unit started software development.

  In view of amendment, the assessee claimed s. 10B deduction for AY 1999-2000 to 2001-02.

 The AO denied the deduction under the amended provision taking view that deduction  was allowable only for the “unexpired period”. Therefore,  it was necessary that as on the date of the amendment, there was “unexpired period”. In case of the assessee original  entitlement had ended in AY 1997-98, therefore, it was not eligible for further relief.

 The CIT (A) & Tribunal allowed the claim on the ground that there was nothing in the Act to provide that the units which have fully availed the exemption u/s l0-B will not get the benefit of the amended provision.

Aggrieved from order of Tribunal department preferred appeal. On such  appeal, the High court dismissed  the appeal  and also imposed costs.  The court observed as follows:

It is clear from the amended s. 10B that the benefit of tax holiday is extended for a period of ten consecutive assessment years beginning with the assessment year in which the undertaking begins to manufacture or produce articles.

The object behind the amendment is to give added thrust to exports.

lf the assessee has already availed the benefit under the unamended provision and 10 years have expired as of 01.04.1999, the assessee would not be entitled to the said benefit.

  However, if 10 years from the date of production has not expired prior to 01.04.1999, he would be entitled for the remaining unexpired period.

The department’s stand that if the 5 year period had expired as of the date of the amendment, the benefit is not available runs counter to the intention with which the amended provision was enacted and negates it.  

This case shows how the department is filing appeals without proper application of mind and wasting the precious time of the Court and the tax payer’s money.

Even if the AO was overzealous in passing the assessment order, there was no need to file an appeal to the High Court. This is not an isolated case.

The department is filing appeals mechanically either for the purpose of statistics or to save their skins without application of mind.

 In the process, a person eligible to tax holiday has been denied the benefit and made to contest the proceedings.

If the object of extending the benefits was to give added thrust to exports, the assessee is made to unnecessarily waste his time in fighting the dispute in different forums.

The only way to bring reason to the department is by imposing costs so that appropriate action may be taken against the person who has taken a decision to file the appeal and recover the same after enquiry.

 The department is directed to pay costs of ₹ 1 lakh for wasting the tax payer’s money. lt is open to the authorities to recover the money from the person who has taken a decision to file the frivolous appeal.

The cost awarded is very low:

In view of the subject matter of the case author feels that though awarding costs of Rs. one lakh is a welcome trend, however, in view of difficulties to which assessee was put due to denial of tax benefits, which should have been allowed at assessment stage itself, the assessee might have incurred very high direct and indirect costs and losses. Therefore, the High court could have awarded much higher amount of costs. 

A case for damages:

The costs are awarded in relation to prosecution of case before the Tribunal or Court. However, we find that due to un-necessary litigation, the taxpayers suffer a lot due to payment against disputed dues financial position is impaired, there is difficulty in carrying business, then there is also loss on account of tax paid against disputed demands for the reason that government pays  interest at very low rate. 

The way in which heavy demands are raised and forcibly collected is well known. These tactics are a source of harassment. The power to harass is a major reason of corruption. Therefore, there should be restrictions on such powers which lead to harassment.

The court has also directed that the costs may be recovered from erring officers after an enquiry. However, in ground reality, it is not likely that the department will pay the costs easily to the assessee. Recovery from erring officers is a far- fetched dream in our system.

Further litigation is likely:

It is likely that the revenue may challenge the judgment of Karnataka High Court on merits of the case as well as on the issue of costs awarded. Therefore, there seems scope of further un-necessary litigation by revenue.

CIT vs. DSL DSoftware Ltd 2011 -TMI - 211006 - KARNATAKA HIGH COURT.

Only way to prevent Dept from filing frivolous appeals is by imposing heavy costs

The assessee set up a 100% EOU unit in AY 1993-94 and claimed 5 year deduction till AY 1997-98 as was then allowable u/s 10B.

By the IT (SA) Act, 1998, s. 10B was amended w.e.f. 1.4.1999 to allow deduction for 10 years from the date the eligible unit started software development.

Accordingly, the assessee claimed s. 10B deduction for AY 1999-2000 to 2001-02.

The AO held that as the deduction under the amended provision was allowable only for the “unexpired period”, it was necessary that as on the date of the amendment, there was “unexpired period” and as the assessee’s entitlement had ended in AY 1997-98, it was not eligible for further relief.

The CIT (A) & Tribunal allowed the claim on the ground that there was nothing in the Act to provide that the units which have fully availed the exemption u/s l0-B will not get the benefit of the amended provision. On appeal by the department, HELD dismissing the appeal while passing strictures and imposing heavy costs: 

It is clear from the amended s. 10B that the benefit of tax holiday is extended for a period of ten consecutive assessment years beginning with the assessment year in which the undertaking begins to manufacture or produce articles. The object behind the amendment is to give added thrust to exports. lf the assessee has already availed the benefit under the unamended provision and 10 years have expired as of 01.04.1999, the assessee would not be entitled to the said benefit.

 If 10 years from the date of production has not expired prior to 01.04.1999, he would be entitled for the remaining unexpired period. The department’s stand that if the 5 year period had expired as of the date of the amendment, the benefit is not available runs counter to the intention with which the amended provision was enacted and negates it.  

This case shows how the department is filing appeals without proper application of mind and wasting the precious time of the Court and the tax payer’s money. Even if the AO was overzealous in passing the assessment order, there was no need to file an appeal to the High Court. This is not an isolated case. The department is filing appeals mechanically either for the purpose of statistics or to save their skins without application of mind. In the process, a person eligible to tax holiday has been denied the benefit and made to contest the proceedings. If the object of extending the benefits was to give added thrust to exports, the assessee is made to unnecessarily waste his time in fighting the dispute in different forums.

The only way to bring reason to the department is by imposing costs so that appropriate action may be taken against the person who has taken a decision to file the appeal and recover the same after enquiry.

The department is directed to pay costs of ₹ 1 lakh for wasting the tax payer’s money. lt is open to the authorities to recover the money from the person who has taken a decision to file the frivolous appeal.