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Apex Court suggests ways to contain Litigation- Rules in favour Mediation And Advance Ruling System in Tax matters

The Apex Court in a Landmark Judgment dated September 11, 2020 in National Co-operative Development Corporation versus Commissioner of Income Tax, Delhi-V has held the Government is the biggest litigant, continuously litigating even with the Local Bodies, Public Sector Undertakings and Public Enterprises. The Court reprimanded the Executive for not taking right and just decisions and also for shirking their responsibilities on the Courts for fear of future administrative action.

The Apex Court has pinpointed the field of Taxation, wherein the Government litigates the most and 87% of Tax litigation in the Apex Court is agitated by the Government alone. The Apex Court has suggested the Government to implement Advance Tax Ruling System. The Court has ruled in favour of this system as a device to mitigate Tax Litigation. The Court advised the Government to avoid litigation with Public Enterprises at different levels.

The Bench comprising of Justice Sanjay Kishan Kaul and Indu Malhotra praised the New Zealand system of Advance Ruling in Tax matters. The Bench has recommended for constituting a committee of legal experts under the chairmanship of a retired Apex Court Judge to recommend such a system to contain unwanted and frivolous litigation. The Apex Court has recommended 'Mediation' to settle Tax disputes. It is pertinent that India has signed the Singapore Convention on Mediation.

The copy of the said judgment has been ordered to be sent to the Ministry of Law and Justice, Department of Revenue and the Ministry of Finance. It is noteworthy the Law Commission had in its 126th Report recommended measures to reduce Litigation. After 28 years of the said recommendations the Government formulated National Litigation Policy in 2010 which has since been further amended in the year 2015 but not much has been achieved in this direction.

The Bench while allowing the Appeal of the Corporation lamented that:
the Indian legal system is reeling under a docket explosion' as is evident from the fact that it had taken 44 long years to finally decide the case. The Court regretted the inordinate long passage of time and the wastage of judicial time to decide the matter. The Court categorically held that 'Government and public authorities are active contributories to this deluge.

The Court expressed displeasure at the number of litigations that arise inter se the Government and its bodies. The Court referred to the judicial innovation in Oil and Natural Gas Commission and Anr. v. Collector of Central Excise 1995 Supp (4) SCC 541 .requiring that such cases must be referred to a Committee to be appointed by the Government to facilitate a resolution of such disputes and that no case should be filed without the approval of this Committee.

The Court found the committee could not live to the expectations and proved an utter failure and held thus:
This system was a failure as is apparent from the facts of the present case, where the SLP filed by the appellant-Corporation was initially dismissed with liberty to revive the same in case the High Powered Committee granted such a permission which was so granted in a meeting held on 14.08.2009.

The said Committee discussed the legal ramifications, and in some way opined in favour of the appellant-Corporation, as is apparent from the discussion aforesaid. But the ball was again lobbed back into the Court to adjudicate the said issue rather than a resolution being reached. The result was only the revival of the appeal, and the consequent decision which has seen the light of the day only now.

The aforesaid failure of the system resulted in the Supreme Court recalling its orders in the ONGC cases vide Electronics Corporation of India v. Union of India (2011) 332 ITR 58 (SC).
The Court expressed discontent over their failure to evolve a litigation policy but on the contrary repeatedly breached the same. The Court categorically commented on the deplorable attitude of the Executive thus:
The approach is one of bringing everything to the highest level before this Court, so that there is no responsibility in the decision-making process an unfortunate situation which creates unnecessary burden on the judicial system.

This aspect has also been commented upon in a judgment of this Court in Union of India and Ors. v. Pirthwi Singh and Ors (2018) 16 SCC 363(2018), albeit between the Government and the private parties, where the question of law had been settled and yet the appeal was filed only to invite a dismissal.

The object appears to be that a certificate for dismissal is obtained from the highest court so that a quietus could be put to the matter in the Government Departments. Undoubtedly, this is complete wastage of judicial time and in various orders of this Court it has been categorized as certificate cases, i.e., the purpose of which is only to obtain this certificate of dismissal.

The Court referred to the Report of the 126th Law Commission of India in 1988 titled 'Government and Sector Undertaking Litigation Policy and Strategies' which dealt with the Government versus Government matters which weighed heavily on the time of the Courts as well as the public exchequer.

The Court lamented that after a very long period the National Litigation Policy was formulated in 2010 for reducing litigation and making the Government an efficient and responsible litigant, nothing has been achieved even though it was suitably amended after 5 years. The Central Government in 2018 strengthened the resolution of commercial disputes of Central Public Sector Enterprises / Port Trusts inter se, as well as between CPSEs and other Government Departments/Organisations.

The mechanism within the Government for promoting a speedy resolution of disputes of this kind excluded disputes relating to Railways, Income Tax, Customs and Excise Departments but in view of the judgment in The Commissioner of Income Tax (Exemptions) v. National Interest Exchange of India SLP (C) Diary No.35567 of 2019 The Commissioner of Income Tax (Exemptions) v. National Interest Exchange of India SLP (C) Diary No.35567 of 2019 the said mechanism has been made applicable to all disputes other than those related to taxation matters.

The Court analysed the latent cause of this undesirable litigation and commented thus:
We are of the opinion that one of the main impediments to such a resolution, plainly speaking, is that the bureaucrats are reluctant to accept responsibility of taking such decisions, apprehending that at some future date their decision may be called into question and they may face consequences post retirement.

In order to make the system function effectively, it may be appropriate to have a Committee of legal experts presided by a retired Judge to give their imprimatur to the settlement so that such apprehensions do not come in the way of arriving at a settlement. It is our pious hope that a serious thought would be given to the aspect of dispute resolution amicably, more so in the post-COVID period.

The Court opined that 'Mediation' has proved to be an efficacious remedy and mediation inter se the Government authorities or Government departments can also work to mitigate unsought litigation. It is noteworthy that our country is signatory to the Singapore Convention on Mediation and a comprehensive legislation to institutionalise mediation is solicited.

The Court pointed out that the petition rate of the tax department before the Supreme Court is at 87%. The taxation matters pertaining to CPSEs and Government authorities have been carved out as a separate category of cases. The Court opined the system of Advance Ruling for reducing taxation litigation. This will minimize the tax disputes not only between Government and CPSEs but also between the taxation department and private persons. This System would be helpful in case there is any ambiguity.

The assessee in the case of any ambiguity/doubt would opt for the Advance Ruling System which will not only facilitate a resolution but also avoid the tiers of litigation and the scope of challenge is completely narrowed down.

The Court referred to the Direct Taxes Enquiry Committee under the Chairmanship of Dr. K.N. Wanchoo which laid down the need for providing Advance Ruling System to give advance rulings to taxpayers or prospective taxpayers with a sole aim to considerably reduce the Revenue's workload and decrease the number of disputes.

A scheme of Advance Ruling being brought into effect in 1993 wherein a quasi-judicial tribunal was established as the Authority for Advance Rulings (for short AAR) to provide certainty and avoid litigation related to taxation of transactions. These rulings are binding both on the Income Tax Department and the applicant, and while there is no statutory right to appeal although the same may be challenged in the High Court and subsequently before the Supreme Court for adjudication. However, due to its low disposal rate in AAR it is taking around four (4) years for adjudication, thereby the very purpose of AAR is defeated.

The Court praised the system of advance rulings in Australia and New Zealand wherein the decisions are statutorily made binding on the revenue authorities. New Zealand has further innovated status rulings under which a taxpayer can apply to the Commissioner for a ruling on how a change in the law impacts an existing ruling. In the United States, there is a mechanism for the Treasury to authorise guidance in the form of revenue rulings, procedures and notices.

In Sweden, both the taxpayer as well as the Swedish Tax Agency can request an advance tax ruling. The advance ruling system has been instrumental in Sweden's positioning as a country with one of the highest tax compliance rates in the world.

The Court with a view to fulfil the mutually beneficial purpose for taxpayers and revenue authorities of bolstering tax compliance and boosting tax morale, consider it appropriate to recommend to the Central Government to consider the efficacy of the advance tax ruling system and make it more comprehensive as a tool for settlement of disputes rather than battling it through different tiers, whether private or public sectors are involved. A council for Advance Tax Ruling based on the Swedish model and the New Zealand system may be a possible way forward.

The Court referred to the legendry Mr. Nani A. Palkhivala who had said that:
the greatest glory of Attorney General was not to win cases for the Government but to ensure that justice is done to the people.

The motto of the Department of Justice in the United States carved out into the Rotunda of the Attorney General Office: The United States wins its case whenever justice is done to one of its citizens in the courts also propound the same theory.

This should ideally be the object of Indian judiciary and the prime objective of Government litigation.
It is imperative on the Government to abide by the recommendations given in this historic case by the Apex Court and to legislate accordingly to usher in an environment of trust between the Government and its people and to contain unwanted and frivolous Litigation.

Written By: Inder Chand Jain
Ph no: 8279945021, Email: [email protected]

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