In the Indian judicial system, decisions passed by a higher court of any state are binding on the lower courts / appellate forums of that state. This cardinal principle is enshrined in the Indian Constitution and reiterated by the Hon’ble Supreme Court on number of occasions.
The Finance Act, 2020 has introduced the scheme of faceless appeals wherein the appeals before the First Appellate Authority will now be disposed off through faceless e-appeals proceedings. In order to ensure that the appeals are disposed off in an impartial and transparent manner, the scheme for faceless appeals contains measures such as review unit (RU) which shall review the order before the same is passed by the Appeal Unit (AU). Under this new scheme of appeal, the appellate authority located in any jurisdiction can conduct the appeal proceedings of a taxpayer. For example, the appeal of a taxpayer located in Mumbai jurisdiction can be disposed off by the First Appellate Authority located in Hyderabad. However, the order shall be passed by the National Faceless Appeal Centre (NFAC) without the taxpayer knowing which unit has passed the appeal order. The new scheme has given rise to instances where the binding decisions of the jurisdictional court are not followed by the NFAC.
Recently, the Income tax Appellate Tribunal, Agra Bench (Tax Tribunal)1 had an occasion to examine whether NFAC, Delhi is bound by the decision of the High Court having jurisdiction over taxpayer or not. We, at BDO in India, have summarised this ruling and provided our comments on the impact of this decision.
Facts of the case
For the fiscal year (FY) 2017-18 and 2018-19, the Tax Officer disallowed employees’ contribution towards ESI2 and EPF3 paid before the due date of filing return of income under sec 139(1) of the IT Act. Before the NFAC, the taxpayer contended that the expenditure was fully allowable as deduction since the payments had been made before the due date specified under section 139(1) of the IT Act. For this, the taxpayer placed reliance on the jurisdictional Allahabad High Court (HC) ruling in the case of Sagun Foundry (P) Ltd4. The NFAC disregarded the aforesaid submissions of the taxpayer and relied on the ruling of Gujarat HC in the case of Gujarat State Road Transport Corporation4 and held that if the employees’ contributions are not deposited on or before due date prescribed in section 36(1)(va) of the IT Act, the taxpayer shall not be entitled to a deduction of such expenditure under section 43B of the IT Act, even though the amounts were deposited before the due date of filing return of income under section 139(1) of the IT Act.
Aggrieved by the decision of NFAC, the taxpayer filed an appeal before the Tax Tribunal. The taxpayer contended that NFAC had not considered the binding decision of the jurisdictional Allahabad HC (supra)] and had passed the order relying on non-jurisdictional HC ruling. Further, the taxpayer submitted that doctrine of precedents requires the Tax Tribunal to follow the decision of the jurisdictional HC.
Tax Tribunal ruling
Granting the relief to the taxpayer by deleting the addition made by the Tax Officer, the Tax Tribunal observed that the approach of NFAC was not correct and was against the scheme of notification issued by the Central Board of Direct Taxes (CBDT) for creating a centralised NFAC. The Tax Tribunal observed that:
- The Hon’ble Prime Minister on 13 August 2020 launched the platform for “Honouring the Honest” which included a scheme for faceless appeals which has been notified by CBDT through Notifications6 in September 2020. Further, the Finance Act, 2020 amended section 250(6C) of the IT Act to expand the scope of e-assessment to include e-appeals. After perusing the notifications issued by the CBDT, the Tax Tribunal observed that before passing the order in appeal by the NFAC, it passes through various stages of scrutiny. First, a draft order is proposed by Appeal Unit (AU), then it is sent to Review Unit (RU) and if the RU has any suggestion/s then it is assigned to another AU for concurrence or modification and thereafter final appellate order is passed by the NFAC. Hence, enough safeguards have been built into the process with the object of achieving consistency, efficiency, transparency, and accountability. Further, the notification provides that the order passed by NFAC is subject to challenge before the Tax Tribunal having jurisdiction over the jurisdictional Tax Officer.
- Though the centralised NFAC had been created by the notification issued by the CBDT, it should be ensured that whenever any appellate order is passed by NFAC as per notification, either by way of draft order or by way of review of the draft order or Final Appellate Order, the decision of the HC having jurisdiction over the jurisdictional Tax Officer should be followed and applied by the NFAC. Merely because there is some conflicting decision of a non-jurisdictional HC, the relief should not be refused to the taxpayer.
- The decision of the jurisdictional HC shall be binding on the authorities / Tribunals / Courts situated in the jurisdiction of the HC. Hence, even if there are conflicting decisions of jurisdictional HC and non-jurisdictional HC, the jurisdictional HC decisions shall be binding on the quasi-judicial authorities / Courts / Tribunal.
- Further, as per section 160A of the IT Act an appeal against the order of the Tax Tribunal lies before the HC and the HC has been defined under section 269 of the IT Act to mean in relation to any state, the HC for that state. Thus, in the given case, the appeal against the order of the Tax Tribunal (Agra in present case) shall lie with the Hon’ble Allahabad HC and therefore the decision of the HC is not only binding on the Tribunal but also on the NFAC.
- To reiterate the aforesaid principles, the Tribunal has provided reference to the Constitution of India and a number of Supreme Court decisions on this issue7.
This is a welcome ruling as it addresses the issue of jurisdiction under the faceless appeal regime. This Ruling reaffirms the position that the jurisdictional HC’s ruling will prevail over other HC rulings. The Tax Tribunal has taken note that despite having placed checks in the Faceless Appeal Scheme, all the checkpoints have missed the fact that there is a jurisdictional HC Ruling in favour of the taxpayer. The Tax Tribunal has also noted in its order that the CBDT should make use of Artificial Intelligence and data analytics for the smooth functioning of the NFAC and consider the present case as a wake-up call.
1Mahadev Cold Storage vs JAO (ITA No 41 & 42/Agr/2021)
2Employee’s State Insurance
3Employee’s Provident Fund
4Sagan Foundry (P) Ltd vs CIT (97CCH 0160 and 145 DTR 0265)
5State Road Transport Corporation (366 ITR 170)
7East India Commercial Co. Ltd. v. Collector of Customs AIR 1962 SC 1893, Baradakanta Mishra v. Bhimsen Dixit AIR 1972 SC 2466, UOI v. Kamlakshi Finance Corpn. Ltd. AIR 1992 SC 711, CIT v. Ralson Industries Ltd. (288 ITR 322 SC), Tribhovandas Purshottam Thakkar v. Ratilal Motilal Patel (AIR 1968 SC 372), Dwarikesh Sugar Industries Ltd v. Prem Heavy Engineering Works (P) Ltd (AIR 1997 SC 2477), Sundarjas Kanyalal Bhathija v. The Collector, Thane, Maharashtra (AIR 1990 SC 261)