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June 2008

Monetary limit for filing of appeal by Income-tax Department

By Pradip Kapasi
Gautam Nayak
Chartered Accountants
Reading Time 12 mins

Controversies

1. Issue for consideration :

1.1 The Income-tax Department, aggrieved by an order of the CIT(A), has the right to appeal u/s.253 to the Income-tax Appellate Tribunal and to the High Court u/s.260A when aggrieved by an order of the Tribunal. An appeal can also be filed before the Supreme Court with the permission of the Court against the decision of the High Court. Every year a large number of appeals are filed by the Income-tax Department, some of which are filed in a routine manner. Prosecuting these appeals, filed as a matter of course, results in a huge annual expenditure, at times exceeding the benefit derived from such prosecution.

1.2 Realising the leakage of substantial revenue and with the intent to avoid litigation, the Government of India, in all its Revenue Departments, has evolved a policy of refraining from filing an appeal before the higher authorities, where the monetary effect of the contentious issues causing grievance, in terms of tax, is less than the acceptable limit. This benevolent policy of the Government prevents the Courts from being flooded with the cases.

1.3 In pursuance of this policy, the Central Board of Direct Taxes issues instructions to the Income-tax authorities, directing them to avoid filing of appeals, where the tax effect of an issue causing a grievance is less than the monetary limit prescribed under such instructions. Presently, Instruction No. 2 of 2005, dated October 24,2005, advises the authorities to refrain from filing appeal before the Tribunal, w.e.f. 31-10-2005, in cases where the tax effect of the disputed issues is Rs.2,00,000 or less and before the High Court where such tax effect is Rs.4,00,000 or less and before the Supreme Court where such tax effect is Rs.10,00,000 or less.

1.4 The said Circular of 2005 is issued in substitution of the Instruction No. 1979, dated 27-3-2000 which provided that no appeal be filed, by the Income-tax Dept. before the Tribunal in cases where the tax effect of the disputed issues is Rs.1,00,000 or less and before the High Court where such tax effect is Rs.2,00,000 or less and before the Supreme Court where such tax effect is Rs.5,00,000 or less. The said Circular of 2000 was in substitution of the Instruction No. 1903, dated 28-10-1992, wherein monetary limits of Rs.25,000 before the Tribunal, Rs.50,000 for filing reference to the High Court and Rs.1,50,000 for filing appeal to the Supreme Court were laid down. The said instruction was in substitution of Instruction No. 1777, dated 4-11-1987.

1.5 It is common to come across cases where the monetary limit, prescribed by the CBDT prevailing at the time of filing an appeal, has undergone an upward revision before the time of the hearing of such appeal. In such cases, the issue that often arises is about the applicability of the upwardly revised limits, relying upon which the defending assessees contend that the appeal by the Income-tax Department is not maintainable. The issue was believed to be settled in favour of the taxpayers by a decision of the Bombay High Court till recently when the validity of the said decision, in the context of Instruction of 2005, has been doubted by another Bench of the same Court.

2. Pithwa Engg. Works’ case :

2.1 The issue first came up for consideration in the case of CIT v. Pithwa Engineering Works, 276 ITR 519 (Bom). The Court examined whether in deciding the maintainability of an appeal by the Income-tax Department, the monetary limit of the tax effect, upwardly revised and prevailing at the time of adjudicating an appeal, should be applied in preference to the limit prevailing a the time of filing an appeal. In the said case, at the time of filing the appeal before the High Court, the Instruction then prevailing, provided for a monetary limit of Rs.50,000. However at the time, when the appeal came up for hearing , this limit was revised to Rs.2,00,000 vide Circular dated 27-3-2000.

2.2 The Court took note of its own decision in the case of CIT v. Camco Colour Co., 254 ITR 565, where-in it was held that the instructions issued by the Central Board of Direct Taxes, New Delhi, dated March 27,2000 were binding on the Income-tax Department. Under the said Instruction, the monetary limit, for filing a reference to the High Court, earlier fixed at Rs.50,000 was revised and fresh instructions were issued to file references only in cases where the tax effect exceeded Rs.2,00,000.

2.3 The Court in the case before them observed that the said instructions dated March 27, 2000 reflected the policy decision taken by the Board, not to contest the orders where the tax effect was less than the amount prescribed in the above Circular with a view to reduce litigation before the High Courts and the Supreme Court. The Court did not find any force in the contention of the Revenue that the said Circular was not applicable to the old referred cases as such a contention was not taken to a logical end.

2.4 The Bombay High Court negatived the submission of the Revenue that so far as new cases were concerned, the said Circular issued by the Board was binding on them and in compliance with the said instructions, they did not file references if the tax effect was less than Rs.2 lakh, however, the same approach was not to be adopted with respect to the old referred cases where the tax effect was less than Rs.2 lakh. The Court did not find any logic behind such an approach. The Court held that the Circular of 2000 issued by the Board was binding on the Revenue.

2.5 The Court further proceeded to observe that the Court could very well take judicial notice of the fact that by passage of time money value had gone down, the cost of litigation expenses had gone up; the assesses on the file of the Department have increased; consequently the burden on the Department had also increased to a tremendous extent; the corridors of the superior Courts were choked with huge pendency of cases. The Court noted that in the aforesaid background, the Board had rightly taken a decision not to file references if the tax effect was less than Rs.2 lakh and the same policy needed to be adopted by the Department even for the old matters.

2.6 Finally the Court held that the Board’s Circular dated March 27, 2000 was very much applicable even to the old references which were still undecided and the Income-tax Department was not justified in proceeding with the old references, wherein the tax impact was minimal and further there was no justification to proceed with decades old references having negligible tax effect.

3. Chhajer Packaging’s case :

3.1 The issue recently came up for consideration, once again, before the same Bombay High Court in the case of CIT v. Chhajer Packaging and Plastics Pvt. Ltd., 300 ITR 180 (Born). In that case, the appeal was filed by the Income-tax Department prior to 24-10-2005, the date when Circular No.2 of 2005 was issue for an upward revision of the monetary limit from Rs.2,OO,OOO to Rs.4,OO,OOO.

3.2 The assessee company in that case, raised the preliminary objection, by relying upon Instruction/ Circular No.2 of 2005, dated October 242005 to plead that since the limit of appeal u/ s.260A of ‘the Act to be preferred was raised to Rs.4 lakh and as the tax effect in its case did not exceed Rs.4 lakh, the Department ought not to have pursued its appeal.

3.3 The above-stated submission of the company was opposed by the Revenue, by contending that the present appeal was filed by the Department in August, 2004, while instruction was issued only on October 24, 2005, which was prospective in nature and therefore, the appeal by the Income-tax Department did not fall within the ambit of the instruction dated October 24, 2005.

3.4 The assessee company in its turn relined upon – the judgment of the Division Bench of the High Court at Bombay, in CIT v. Pithwa Engg. Works, 276 ITR 519, wherein the Court dealt with a similar Circular dated March 27,2000, wherein financial limit for preferring appeals u/ s.260A of the Act before the High Court, was raised to Rs.2 lakh. Reliance was placed on the following observations in the penultimate paragraph (page 521) ; ” In our view, the Board’s Circular dated March 27, 2000, is very much applicable even to the old references which are still undecided” to claim that the Circular was applicable to the appeals which were still pending.

3.5 The  Bombay High Court at the  outset observed that the views of the Court in  Pithwa Engineering’s case  pertained to Circular dated March 27, 2000. Thereafter the Court referred to Instruction  No. 2/2005,  dated  October 24, 2005, paragraph 2 “In partial modification of the above  instruction, it has now been decided by the Board that appeals will henceforth be filed only in cases where the tax effect exceeds  the revised  monetary limits given  hereunder”.

3.6 Taking  into consideration the portion underlined for the purpose of emphasis, the Court held that the Revenue was justified in contending that the Circular was applicable only prospectively and that it made no reference to pending matters. On the basis of the text and considering the applicability of the Circular dated October 24, 2005, the Court declined to follow the view taken by the Court in Pithwa Engineering’ case regarding the earlier circular.

4. Observations:

4.1 The available  statistics  reveal that the number of appeals  filed by the Income-tax  Department  far outnumber  the appeals  filed by the taxpayers.  This simple statistics convey an important  and alarming fact when read with the fact that ninety  per cent of these  appeals  are decided  against  the Income-tax Department.  The emerging  conclusion  is that most of these appeals  are filed as a matter  of course,  in a routine  manner  without  application  of mind as to the viability, efficacy and the cost involved  in prosecuting these appeals. The Government  today, is the biggest litigant.

4.2  The aforesaid  facts when examined  in the light of another  equally  disturbing  fact that  the Courts today  are flooded  with the number  of cases, which if disposed  of at the present  pace,  will be adjudicated  after a scaringly long  period.

4.3  It is realisation    of these  facts and of the enormous  costs involved    therein that  the Government of India  evolved a benevolent policy  of refraining from pursuing appeals where the  tax  effect in monetary terms  was negligible. It also decided to review the prescribed monetary limits from time to time, keeping in mind the  inflation factor. This avowed  policy has been religiously  followed  by the Government  by revising  the said limits periodically.

4.4  It is this policy background   that  was  kept  in mind  by the Bombay High Court  while deciding  in Pithwa  Engineering’s   case that  the  revised  monetary limits should  be applied  at the time of adjudicating  the appeals.  This was done to promote  the said avowed  policy of avoiding  litigation  and promote the breathing  space in the corridors  of Court and was not done to defeat  the power  of an executive to provide  guidelines  for administration   of the law that it is vested  with.  This angle  of the Court, if appreciated,  will enable  the Income-tax  Department to welcome  the said decision  with open arms.

4.5 Unfortunately, in Chaajer Packaging’s case the aspects narrated in the above paragraph were not pressed as is apparent from the reading thereof or the Court was not impressed by the same, if they were brought to the attention of the Court. We are sure that had the avowed policy of the Government and the logic of the Court in Pithwa Engineering’s case been brought to the notice of the Court, the decision in Chhajer Packaging’s case could have been different.

4.6 The Bombay High Court even in Carrico Colour Co.’s case, 254 ITR 565 (Born.), much before the Pithwa Engineering’s case had applied the Circular of 2000 in deciding a reference on 26-11-2001 which was filed in 2000 and pertained to A.y. 1990-91.

4.7 With utmost respect to the Court, attention is invited to Paragraph 7 of the said instruction of 2000 which reads as ‘ This instruction will come into effect from 1st April, 2000.’ The said Circular dated 27-3-2000 was specifically made effective from a later date i.e., 1st April, 2000 and was otherwise prospective. In spite of the said Circular being specified to be prospective in its nature, the Court in Pithwa Engineering’s case had held the same to be retrospective. This fact takes away the logic supplied in Chhajer Packaging’s case wherein relying on the use of the term ‘henceforth’ in paragraph 2 of the instructions of 2005, it was held that the said instructions of 2005 were not prospective.

4.8 The Bombay High Court in our opinion should have followed its own decision in Pithwa Engineering’s case as per the law of precedent, as the facts were the same in both the cases. In case of a disagreement, the later case should have been referred to the full Bench. The said decision needs a reconsideration.

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