[By Sagnik Sarkar]
The author is a student at the Tamil Nadu National Law University.
Introduction
In her 2019 Union Budget speech, Finance Minister Nirmala Sitaram announced the introduction of a ‘faceless e-assessment’ scheme in income tax matters, to curb unsavory practices which arise out of the physical contact traditionally required between the Income Tax Department and taxpayers in assessment proceedings. The highlight of this scheme is the elimination of the human interface through the use of technology: the Assessing Officer and the taxpayer will not interact with each other directly, and the identity of the Assessing Officer will not be revealed to the taxpayer. The scheme was given legislative backing through, amendments to the Income Tax Act, and the subsequent notification of the E-Assessment Scheme, 2019 under the newly inserted Sections of the Act. This scheme was met with widespread approbation and soon became quite successful.
The success of the E-Assessment Scheme seems to have prompted the Central Government to extend the core feature of this scheme, the elimination of the direct human interface between the Department and the taxpayer, to other income tax proceedings. Through amendments to the Income Tax Act, and the subsequent notifications of the Faceless Appeal Scheme, 2020 and the Faceless Penalty Scheme, 2021 under the newly-inserted Sections of the Act, the Central Government has introduced similar mechanisms for dealing with statutory appeals to Appellate Commissioners and adjudicating penalties imposed under the Act. Now, in the 2021 Union Budget speech, the Finance Minister has made a commitment to introduce a similar faceless mechanism for the adjudication of matters before the Income Tax Appellate Tribunal (ITAT).
A common, and central, feature of all the faceless mechanisms in question, the system of ‘dynamic jurisdiction’, seems to suffer from the vice of unconstitutionality due to manifest arbitrariness.
The New System of ‘Dynamic Jurisdiction’
Until the introduction of the system of ‘dynamic jurisdiction’, assessment proceedings, appellate proceedings before Appellate Commissioners, and penalty proceedings, were required to be conducted by designated Department officials with territorial jurisdiction over the taxpayer in question. [i] The Central Government, by notifying the E-Assessment Scheme, the Faceless Appeal Scheme, and the Faceless Penalty Scheme, has now replaced this requirement with a system of ‘dynamic jurisdiction’.
Under the new system, a computerized system randomly allocates every stage of an assessment proceeding, an appeal to the Appellate Commissioner, and a penalty proceeding, to different units across the country. It is no longer necessary for a jurisdictional Department official to conduct the proceedings in question. Hence, by way of example, it is theoretically possible, and quite probable, for the assessment proceeding of a taxpayer resident in Kolkata to commence at a unit in Delhi, continue at a unit in Hyderabad, and conclude at a unit in Chennai. Analogous factual situations can arise in cases of appellate proceedings before Appellate Commissioners, and penalty proceedings, too.
This system of dynamic jurisdiction appears to fall foul of the constitutional guarantee of the right to equality before the law in Article 14 of the Constitution.
The Constitutional Infirmity of ‘Dynamic Jurisdiction’
Earlier, under Section 256 of the Income Tax Act, 1961, Benches of the ITAT could statutorily refer questions of law arising in matters before it to the territorial High Court for adjudication. Now, decisions of ITAT Benches can be statutorily appealed to the jurisdictional High Court only on substantial questions of law, under Section 260A of the Act. Additionally, there is always the possibility of making a constitutional challenge to every stage of an income tax proceeding before the High Court. This has been confirmed by the Supreme Court in Nagendra Nath Bora (1958). Consequently, income tax proceedings, in various stages, are frequently challenged before the jurisdictional High Courts. This was recognized by the Law Commission in its 115th Report of Tax Courts (1986). Thus, the High Courts frequently express their opinion on diverse questions of Income Tax Law.
The decision of a High Court, on a question of Income Tax Law, is binding on the income tax authorities within its jurisdiction: including Assessing Officers, Appellate Commissioners, and the regional Bench of the ITAT. This has been held by the Supreme Court in a number of cases, notably in East India Commercial Co. Ltd. (1962). Similarly, points of law in the decisions of regional Benches of the ITAT, and the Appellate Commissioners, are binding on income-tax authorities subordinate to them in their jurisdiction. This too is a well-established position of law confirmed in a number of cases, notably Kamalakshmi Finance Corporation Ltd. (1991). Thus, in summation, the decision of a High Court on a question of Income Tax Law percolates down and ultimately binds, every income tax authority within its territorial jurisdiction, including the regional Bench of the ITAT. In practice, High Courts frequently take contradictory views on the same, or similar, the question[s] of income Tax Law. This was very astutely recognized by the Law Commission in its 115th Report of Tax Courts (1986). Consequently, income tax authorities in one part of the country are bound to reach a different conclusion compared to their peers in another part of the country, on questions of law in respect of which the territorial High Courts in question differ. This practical reality creates a serious constitutional infirmity in the system of ‘dynamic jurisdiction’.
Article 14 of the Constitution guarantees equality before law. In E.P. Royappa (1973) and Maneka Gandhi (1978), the Supreme Court has held that equality cannot co-exist with arbitrariness. Thus, it has been held by the Supreme Court in Shayara Bano (2017) and Navtej Singh Johar (2018), when a statutory provision is manifestly arbitrary, it will be unconstitutional. In Shayara Bano, the Supreme Court has recognized that the clinching indicator of manifest arbitrariness, is a distinction made without adequate determining principle.
The system of ‘dynamic jurisdiction’ randomly allocates every income tax proceeding, and every stage of them each, to officials across the country. Randomness, by definition, is characterized by the lack of a determining principle. Hence, for no reason at all, taxpayers A and B, residents in the same neighborhood, can receive different decisions on an identical question of law: merely because the income tax authorities considering their case are bound by different High Court decisions on that point. The system of ‘dynamic jurisdiction’ thus appears to be manifestly arbitrary, and hence violative of Article 14 of the Constitution.
This conclusion is substantially supported by the decision of the Supreme Court in K.R. Lakshmanan (1996). In this case, the Court was considering a Tamil Nadu State Act which had authorized the Government to take over a horse-racing club in the public interest, in the backdrop of a line of earlier State Acts that had declared horse-racing illegal on the same ground of public interest. The State failed to provide any reason for this differential treatment of, certain horse-racing activities as opposed to the public interest, and certain other horse-racing activities as in public interest. Consequently, the Court struck down the law because it had the effect of subjecting similar circumstances to very different legal consequences. Admittedly, K.R. Lakshmanan was decided prior to Shayara Bano, the leading case which confirmed the application of the doctrine of manifest arbitrariness as a standard for testing legislation. However, in Sharaya Bano itself, the Supreme Court confirmed K.R. Lakshmanan as a good application of this doctrine. Hence, K.R. Lakshmanan is a relevant authority on the question of deciding whether a statutory provision is manifestly arbitrary. The ratio of K.R. Lakshmanan, as described above, can be extended to the present case to hold that the system of ‘dynamic jurisdiction’ is manifestly arbitrary because it has the effect of subjecting similarly situate persons to very different legal consequences without any reason whatsoever.
Epilogue
The system of ‘dynamic jurisdiction’ is one of the salient features of, the present faceless assessment, appeal (before the Appellate Commissioners), and penalty, schemes, and the proposed faceless mechanism for appeals before the ITAT. The faceless schemes have received much approbation for, their potential to substantially mitigate unsavory practices on the part of income tax officials by eliminating the direct human interface between them and the taxpayer. One of the means to this end is the system of ‘dynamic jurisdiction’: it eliminates the continuous contact between the same income tax official, and the taxpayer, which tends to allow illegitimate practices to thrive. Unfortunately, in the process, the system seems to have thrown the constitutional guarantee of equality before the law by the wayside.
A possible solution to this quagmire could be to introduce a provision that deems the juridical ‘seat’ of the deciding official to be in the local jurisdiction of the taxpayer, regardless of whichever de facto ‘venue’ that official may be present in for the time being. This would remove the constitutional infirmity of the system while preserving its potential to reduce the illegitimate practices of income tax officials.
Endnotes:
[i] See The Income Tax Act, 1961 (Act 43 of 1961), s. 120-126.