Recovery of tax pending stay application – A draconian directive

The Central Board of Excise and Customs (CBEC) has, in supersession of seven previous circulars on the same subject, issued Circular No. 967/01/2013 CX dated 1-1-2013 (the new Circular), directing the departmental officers to initiate recovery action in cases where 30 days have expired after the filing of appeal by an assessee before an appellate authority. This action by CBEC is highly unprecedented and totally unjust and unfair inasmuch as it would not only result in penal consequences for reasons beyond the control of an assessee, but also render the statutory right of appeal nugatory.

While the taxpayer fraternity fully recognises that the Government is empowered under the relevant statutory provisions to collect and recover legitimate taxes due from assessees, at the same time, the taxpayer fraternity does feel that as a good tax administration practice, it is essential that, in regard to tax demands which are pending in appeal before various appellate authorities, the legitimate rights of assessees under the relevant statutory provisions are also recognised, before initiation of coercive action for recovery of tax dues.

Impact

The new Circular which seeks to instruct departmental officers to initiate recovery action, if no stay is granted by the concerned appellate authorities within 30 days of filing of an appeal, is likely to result in severe hardships to taxpayers. Coercive actions for recovery of tax like attachment of bank accounts, assets and properties, etc. of assessees pending disposal of stay applications would adversely impact businesses in a significant way and also cause unprecedented hardships. It is also likely to result in filing of writ petitions before the High Courts across the country in large numbers. In fact, the Honourable Andhra Pradesh High Court has granted interim stay against the operation of the new Circular in a writ petition.

 Reasons for High Level of Tax Litigation

Before issuing such a drastic and draconian circular, the Government needs to appreciate and take cognizance of the fact that, the principal reason for extensive tax litigation is high pitched adjudications which do not fully appreciate the correct legal position in a matter. A perusal of records available with the Government would clearly reveal that, in a high number of tax litigations, the matters are finally decided against the revenue and in favour of tax payers. Statistics (Refer Table) given by the Union Minister of State for Finance, Mr. S.S. Palanimanickam in a written reply to a question in the Lok Sabha on 5-9-2012, regarding the outcome of revenue cases supports the above view.

Table – Revenue Department’s Success Rate (%)

The Minister also mentioned that, even though approx. Rs. 86,000 crore were held up in court cases, it should not create an impression that the Government would get much monies upon finalisation of litigation. It may get only about 10% to 15% of the said amount. In the light of the above stated position, in a scenario where tax demands are unrealistic and sustained in a very small number of cases by the appellate authorities, it is totally unfair, unjust and unwarranted on the part of the Government to pressurise tax payers for no fault on their part.

Unjust and Unfair Circular

The new Circular is unjust and unfair to the taxpayer due to the following reasons, in particular:
a) Initiation of coercive actions to recover the tax dues in regard to which appeal and stay application are pending disposal before the concerned appellate authorities, is not in consonance with the settled principles of natural justice, laid down by the Supreme Court of India from time to time.

b) It also needs to be appreciated that, in a large number of cases, stay applications are not disposed off due to inactions at the end of the concerned appellate authority and for no fault of the assessee.

c) The new Circular refers to a very old Supreme Court ruling in Krishna Sales (P) Ltd (1994) 73 ELT 519 (SC) wherein it was observed as under: “As is well known, mere filing of an Appeal does not operate as a stay or suspension of order appealed against”.

However, the significant observations made by the the Honourable Supreme Court of India in a subsequent ruling in Commissioner of Cus & CE vs. Kumar Cotton Mills Pvt. Ltd. (2005) 180 ELT 434 (SC), have been totally ignored. The relevant observations are reproduced below for ready reference :

Para 6

“The s/s. which was introduced in terrorem cannot be construed as punishing the assessees for matters which may be completely beyond their control. For example, many of the Tribunals are not constituted and it is not possible for such Tribunals to dispose of matters. Occasionally by reason of other admin-istrative exigencies for which the assessee cannot be held liable, the stay applications are not disposed within the time specified. ….

The aforesaid observations need to be appropriately recognised and appreciated by the Government.

d)    There are a large number of judicial decisions including those of various High Courts, to the effect that, no recovery actions should be taken until the disposal of the stay application by the appellate authorities. In this regard, useful reference can be made to the following rulings:

i)    In Legrand (India) vs. UOI (2007) 216 ELT 678 (BOM HC DB), the Asst. Commissioner enforced the bank guarantee even before the expiry of the statutory period of filing appeal, despite a directive of High Court (in another case) not to take coercive action for recovery in such cases. It was held that this was a civil contempt of Court.

ii)    Quoting CBEC Circular, in Shree Cement Ltd vs. UOI (2002) 126 STC 324 (Raj HC DB), it was held that no coercive action for recovery should be taken when stay application is pending.

iii)    A view similar to the view expressed in the above case was expressed in Delhi Acrylic Mfg C6 vs. CC (2002) 144 ELT 24 (DEL HC DB).

It is most inappropriate for the CBEC to issue a circular in disregard to the binding court judgments and showing no respect for judicial precedence on the subject.

Suggestions

The following is suggested so as to ensure that undue hardship is not caused to tax payers:

a)    CBEC Circular No. 967/01/2013 – CX dated 1-1-2013 needs to be immediately withdrawn/appropriately modified to provide that no recovery actions are initiated until the disposal of the stay applications by the appellate authorities.

Reforming Tax Administration – Some Recommendations

In order to promote and encourage good tax administration practices, from a long term perspective, the following measures are recommended:

a)    Establish accountability in tax administration whereby statutory provisions are enacted in tax laws specifically providing for actions against departmental officers passing inappropriate orders.
b)    Install quality reviews/audits of tax administration processes including adjudication process in particular.
c)    Expand the scope of Advance Ruling Mechanism to minimise litigation.
d)    Evolve new speedy dispute redressal mechanisms.
e)    Award costs to the assessees so as to cover litigation expenses.
f)    Increase the existing rate of interest on refunds of pre-deposit pending appeals as well as other refunds so as to be on par with prevailing commercial rate of interest.
g)    Introduce incentive schemes for team of departmental officers, in cases where, demands are sustained at higher judicial levels.

Conclusion

It is projected that by 2030, India is likely to become a World Economic Power. Hence, the entire world is looking at us. As per the taxation policy announced by the Government, it is expected that substantive tax reforms (viz. DTC & GST) are likely to be introduced in the near future. However, the Government needs to expressly recognise and take cognizance of the fact that, from a taxpayer perspective, the need of the hour is reforming tax administration. Employing unfair, unjust and coercive tax administration methods, would only encourage dishonest practices and non-compliances, rather than boosting tax revenues. Government needs to recognise that employing coercive tax administration methods is not the right policy to boost tax revenues. Instead, in order to boost tax revenues, priority focus of the government should be on evolving good tax administration practices.