Guest Post: Article 142 and Taxation by Judiciary

[This is a guest post by Suhrith Parthasarathy.]


Article 265 of the Constitution states that no tax shall be levied or collected except by authority of law. One would think this serves as a peremptory norm, that the government of India can impose a tax only with express legislative sanction. But in a judgment delivered on 4 May, the Supreme Court (through a bench comprising Justices M.R. Shah and B.V. Nagarathna) in Union of India v. Ashish Agarwal, rendered this norm nugatory and resuscitated notices of reassessment that had been issued by the Income Tax Department without any sanction of law. The bench achieved this by reversing not only the judgment of the Allahabad High Court that had been carried on appeal to it, but also the judgments of at least seven other High Courts, which were, in the first place, not before the court for adjudication. The only reasoning offered, for both resuscitating the notices and for reversing judgments that were not on appeal before the court, was that “complete justice” had to be achieved, that Article 142 of the Constitution granted the Supreme Court the power to revive the dead, and the power to give life to actions that were, even by the court’s own admission, evidently unconstitutional.

Consider the facts leading up to the case. The Income Tax Act, 1961, as it existed prior to 1 April 2021, allowed the Revenue the power to reopen completed assessments under certain exceptional circumstances. The contours of this power were broadly delineated in Sections 147 to 153 of the Act. Simply put, the Revenue could reopen assessments if it had a “reason to believe” that income had escaped assessment. A notice for reopening for a particular assessment year (that is the year immediately succeeding a financial year) had to be issued no later than six years after the end of such an assessment year. A proviso written into the law also stipulated that in cases where four such years had lapsed, and where the revenue had previously subjected the case to a “scrutiny”, the tax officers had to additionally establish that the assessee had failed to disclose fully and truly all material facts—that is, it wasn’t enough if the Revenue had some material or the other in its hand, but its effort at reassessment must emanate out of the assessee’s willful omissions.

In March 2020, when the country was reeling from the effects of the Covid-19 pandemic, the department was unable to issue reopening notices (with, as we can see, quite legitimate reasons) within the timeframe prescribed under the Act. This inability was obviously not limited to cases of reopening, but also extended to a number of other notices and actions that both the department and the assessee were obliged to perform. To resolve this difficulty, the Union government enacted in September of that year the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (let’s call it the “TOLA”).

Section 3(1) of the TOLA effectively stipulated that where a time limit had been specified under the Income Tax Act for the completion or compliance of any action, and where that time limit fell between 20.03.2020 and 31.12.2020 (or such other date after 31.12.2020 as may be notified by the Central Government), and such completion/compliance has not been made, the time limit would stand extended to 31.03.2021 or any other date that the Central Government might, by notification, specify.

In furtherance of this power granted to it by TOLA, the central government issued a series of notifications extending timelines for performing various different actions. These included schedules for the issuance of reopening notices under Section 148 of the Act. Thus, notices for reopening that had to be issued by 31 March 2020 could now be issued on or before 30 June 2021. It was in apparent exercise of this power that the government issued a series of notices to various different assesses under Section 148 of the Income Tax Act between the months of April and June 2021 (the Supreme Court says that there were some 90,000 such notices that had been issued for this period). But what these notices ignored were that the section under which they were issued simply didn’t exist anymore in the same form that it did before 31 March 2020. This is because Parliament had amended the extant scheme of reassessment through the Finance Act, 2021, with effect from 1 April 2021.

Up until 1 April 2021, the Revenue could reopen an assessment only if it had reason to believe that income had escaped assessment. It’s safe to say that the use of the phrase, “reason to believe” together with the various elisions in the existing legislation, has led to endless litigation. At one point, the Supreme Court carved out its own addition to the stipulations in Sections 147 and 148 (G.K.N. Driveshafts (India) Ltd. v. Income Tax Officer & Ors., 259 ITR 19 (SC)). Since the department wasn’t supplying the assessee a copy of the reasons on which assessments were being reopened, the court directed the department to supply those reasons on a request being made by an assessee. It also allowed the assessee the right to object to those reasons, when supplied, through a written explanation. The department was then obligated to dispose of those objections by way of a separate, speaking order. [Let’s call this the “GKN procedure”]. That speaking order would inevitably be challenged in writ proceedings. There’s little doubt that the law’s architecture reaped confusion and chaos—many persons were subjected to harassment on what were long-completed assessments.

In introducing the changes to the reassessment procedure through the Finance Act, 2021, the government claimed to be addressing this chaos. The apparent objective was to streamline the process, by allowing for reopening of assessments only in a very limited set of cases, and thus weed out unnecessary litigation. To achieve this, the law introduced a number of changes. Among other things, it now codified the GKN procedure and inserted it into the legislation. Henceforth, the assessing officer would have to conduct a prior enquiry before issuing a notice for reopening and would have to provide the assessee the information on the basis of which the reopening was sought, and then ask the assessee to show cause why a reopening ought not to be made. What is more, the new law also modified the existing timelines for reopening. A reopening notice could now be issued only up to a period of three years from the end of an assessment year. The Revenue could, however, in certain exceptional cases—where the income that had apparently escaped assessment was represented in the “form of an asset”—reopen an assessment up to a period of ten years from the end of an assessment year. By the government’s own account this procedure for reopening was transformative. If nothing else, it altogether upended the existing law on the subject.

These alterations had entered the legislation by the time the executive issued notifications under the TOLA, extending timelines for issuances of notices under Section 148 of the Act wherever limitation had expired on 31 March 2020. We know, through what is well settled law, that a substitution brought about by legislation has a twin effect: it leads to the deleting and effective repealing of the earlier provision of law and the insertion, in its place, of the new provision. [Ramkanali Colliery of BCCL v. Workmen, (2001) 4 SCC 236]. We also know, through various judgments of the Court, that any repeal of a provision of law, whether express or implied, has the effect of completely obliterating the repealed provision from the statute books.

Here, from 1 April 2021, the erstwhile Sections 148 to 153 had been obliterated from the Income Tax Act, 1961, and had been replaced by a set of new provisions. But the notification issued under TOLA, without legislative amendment, sought to go round these changes. It attempted this through a bizarre device: in an explanation to the notification it “clarified”, apparently to remove any doubts, that “for the purposes of issuance of notice under section 148 as per time-limit specified in section 149 or sanction under section 151 of the Income-tax Act, under this sub-clause, the provisions of section 148, section 149 and section 151 of the Income-tax Act, as the case may be, as they stood as on the 31st day of March 2021, before the commencement of the Finance Act, 2021, shall apply.”

Consider this for a moment: the executive was telling its income tax officers that they could go ahead and issue notices under a provision of law that Parliament had repealed. Remember, under TOLA, the executive could by notification extend timeframes fixed under the Income Tax Act. This, on any reasonable reading of the law, would mean the Income Tax Act as it stands on the date of a notification. After all, it with this in mind that Parliament had even introduced the changes to the scheme for reopening through the Finance Act, 2021. If Parliament at the time had wanted to save the power of the executive to issue notices under the erstwhile law it could have done so through a simple savings clause. But it expressly chose not to do so.

Yet, emboldened by the notifications, tax officers issued notices even after 1 April 2021 under the erstwhile provision of law. Naturally, this led to a series of challenges across the country—assesses, faced with these notices, argued that the notifications were ultra vires both the TOLA and the Constitution, and that the notices by themselves were without authority of law. They had been issued under a provision that had been obliterated from the statute and the Constitution, they argued, does not permit taxation without authority of law. Many High Courts granted interim protection to the assesses and at least eight of them—Bombay, Allahabad, Madras, Delhi and Rajasthan among them—quashed the notices (the Chhattisgarh High Court was the sole court to take a different view).

The Central Board of Direct Taxes filed affidavits before the High Court defending the notices. In these depositions, notably, the department did not plead ignorance. It claimed that the notices were issued validly and that despite the amendments brought to the Income Tax Act, the time available for issuing notices under the old provisions stood “frozen” by the operation of the TOLA. However, if this argument were to be accepted, the High Courts would have wound up allowing a virtual carte blanche to the executive, to resuscitate into life repealed enactments through a mere executive notification. Conscious of the anomalous situation that this might lead to, the High Courts held that the notices had been issued without authority of law, that from 1 April 2021 onwards any action for reassessment had to be predicated on the new scheme. The department, no doubt, still had the power (wherever the limitation prescribed under the new law hadn’t expired) to issue fresh notices under the amended law. But the old notices simply lacked any authority of law and for that reason had to necessarily be quashed.

***

It was only the judgment of the Allahabad High Court that had been taken on appeal to the Supreme Court. The Revenue told the Court that it was in the process of filing appeals against the other judgments. Given the gravity of the issue, and given the number of individuals (and other entities) affected by the issue, you would have thought the court would await the filing of those appeals before it rendered a final verdict, or at the least that the Court would grant reasonable time for interested parties to intervene in these proceedings. Instead, the Court  proceeded to grant leave and reserve judgment immediately after the assessees in the cases on appeal were before it. Having done this, the Court proceeded to reverse the High Court’s judgment, on grounds that were simply not pleaded by the Revenue before the court of first instance.

The only explanation for this conclusion is found in paragraph 8. The High Courts, the judgment holds, were quite correct in concluding that notices issued after 1 April 2021 could have only been issued under the new law. However:

“…At the same time, the judgments of the several High Courts would result in no reassessment proceedings at all, even if the same are permissible under the Finance Act, 2021 and as per substituted sections 147 to 151 of the IT Act. The Revenue cannot be made remediless and the object and purpose of reassessment proceedings cannot be frustrated. It is true that due to a bonafide mistake and in view of subsequent extension of time vide various notifications, the Revenue issued the impugned notices under section 148 after the amendment was enforced w.e.f. 01.04.2021, under the unamended section 148. In our view the same ought not to have been issued under the unamended Act and ought to have been issued under the substituted provisions of sections 147 to 151 of the IT Act as per the Finance Act, 2021. There appears to be genuine non­application of the amendments as the officers of the Revenue may have been under a bonafide belief that the amendments may not yet have been enforced. Therefore, we are of the opinion that some leeway must be shown in that regard which the High Courts could have done so. Therefore, instead of quashing and setting aside the reassessment notices issued under the unamended provision of IT Act, the High Courts ought to have passed an order construing the notices issued under unamended Act/unamended provision of the IT Act as those deemed to have been issued under section 148A of the IT Act as per the new provision section 148A and the Revenue ought to have been permitted to proceed further with the reassessment proceedings as per the substituted provisions of sections 147 to 151 of the IT Act as per the Finance Act, 2021, subject to compliance of all the procedural requirements and the defences, which may be available to the assessee under the substituted provisions of sections 147 to 151 of the IT Act and which may be available under the Finance Act, 2021 and in law.”

Except this wasn’t the argument of the Revenue. The Revenue did not claim—certainly not in the affidavits filed by it in the High Courts—that it had made a bona fide mistake in invoking a dead law. The Revenue’s case was that the substituted provisions were still partly alive, that TOLA had allowed it the power to issue notices under the amended clauses. Indeed, the Court’s assertion that these notices had been issued as a result of some innocent misunderstanding of the law is belied by its own recording in paragraph 4 of the judgment, where it notes that “despite the substituted sections 147 to 151 of the Income Tax Act, 1961 by the Finance Act, 2021 coming into force on 1st April, 2021, according to learned ASG, the Revenue issued approximately 90,000 reassessment notices to the respective assessees under the erstwhile sections 148 to 151 thereof by relying on explanations in the Notifications dated 31st March, 2021 and 27th April, 2021.” But having noted this, the Court doesn’t so much as consider the purport of these explanations—these weren’t cases of assessing officers acting on their own accord; these were cases where the Union executive believed that it could bypass Parliamentary law through pure fiat.

The Supreme Court’s ruling that the notices quashed by the Allahabad High Court ought to be treated as notices issued under the new law comes with a further direction: judgments that were never on appeal before the Supreme Court would also now stand mechanically reversed. This is because the Court apparently cannot be burdened by over 9,000 appeals that the Revenue might have to prefer. That the assessees in those cases might have had something of value to tell the Court wasn’t so much as considered. Or, for that matter, that those assessees who had succeeded before the High Court possess rights of their own: among other things, a right to be heard before a decision touching upon their interests is taken. The Supreme Court is as much bound by principles of natural justice as any other state functionary. Yet, in one fell swoop, judgments of eight different High Courts were reversed without so much as issuing notices to the assessees in those cases. How could this be done? How could judgments not on appeal be reversed? The Supreme Court has one answer: Article 142 of the Constitution of India.

Article 142(1) reads as follows:

The Supreme Court in the exercise of its jurisdiction may pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it, and any decree so passed or orders so made shall be enforceable throughout the territory of India in such manner as may be prescribed by or under any law made by Parliament and, until provision in that behalf is so made, in such manner as the President may by order prescribe.

As is clear from the bare text the Court is allowed to do complete justice in a cause or matter “pending before it.” Here, however, it was only the judgment of the Allahabad High Court that had been carried on appeal before the Supreme Court. Yet, the Court seemingly treats judgments from various other High Courts as matters “pending before it”. And it does so without telling us how it’s entitled to do so under Article 142(1).  

Article 142 has been a source of much misuse. Many have critiqued its use, including in these pages. The Court itself has also, on occasion, pointed out the limitations in the provision. For example, in Prem Chand Garg vs. Excise Commissioner, U.P., Allahabad, (1963) a Constitution Bench held as follows:

“In this connection, it may be pertinent to point out that the wide powers which are given to this court for doing complete justice between the parties, can be used by this court for instance, in adding parties to the proceedings pending before it, or in admitting additional evidence, or in remanding the case, or in allowing a new point to be taken for the first time. It is plain that in exercise these and similar other powers, this Court would not be bound by the relevant provisions of procedure if it is satisfied that a departure from the said procedure is necessary to do complete justice between the parties.”

Similarly, in Supreme Court Bar Association v. Union of India (1998), another Constitution Bench held as follows:

“…the substantive statutory provisions dealing with the subject matter of a given case, cannot be altogether ignored by this court, while making an order under Article 142. Indeed, these constitutional powers cannot, in any way, be controlled by any statutory provisions but at the same time these powers are not meant to be exercised when their exercise may come directly in conflict with what has been expressly provided for in statute dealing expressly with the subject.”

At least two limitations inherent in Article 142 are evident from a reading of these judgments. One, that the clause needs to be restricted to doing complete justice to parties before the court and nothing more. Two, that the provision cannot be deployed to make orders that are in conflict with statutory law. But the judgment in Ashish Agarwal ignores these mandates. It fails to consider the fact that it was reversing judgments rendered by at least seven High Courts despite the fact that the assesses in those cases were not before it. It also seems to scarcely mind that it was resuscitating notices issued under what was effectively a dead law, that its direction is plainly contrary to the terms of the Income Tax Act as they stood on the date on which the notices had been issued.

According to the bench, the upshot of the High Courts’ rulings was to leave the Revenue “remediless.” But what the High Courts were doing was to simply apply the law as it stood on the day. If the executive happened to find itself handicapped by any error of law committed by it, it could look, at best, to Parliament for help. Such a solution would have entailed a retrospective enactment, something which the government—especially on the back of its troubles with Vodafone and Cairn Energy—has claimed it doesn’t believe in. And no doubt, any such law would have also been subject to separate constitutional scrutiny. But in a system built on the principle of separation of powers, worries of this kind ought to play no role in the Court’s effort to deliver justice.


[The author was involved with some of the writ petitions before the High Court of Madras.]

2 thoughts on “Guest Post: Article 142 and Taxation by Judiciary

  1. 1. When SC invokes 142 against the state in many cases, there is no cry for due process especially when they ignore the law

    2. They have not decided merits. That part will come in each case on own merits.

    3. Most important, all these cases are those where there is a reason to believe that tax is evaded which was otherwise due (at least allegedly.) why should tax evaders get a free pass ? especially when matter is not decided on merits but on some legal argument ?
    Let those assessees fight their own merits..
    ( I am not fan of J Shah, he is known to be statist but people indulging in tax evasion should not get free pass at least without dealing with merits)

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