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.
